Item  405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o                    Accelerated filer þ                    Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o     No þ

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of the registrant’s stock, as quoted on the NASDAQ Global Market on December 31, 2006, the last business day of the registrant’s most recently completed second fiscal quarter, was $133,547,841. Shares of common stock held by each officer and director and by each person or group who owns 5% or more of the outstanding common stock have been excluded given that such persons or groups may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of September 7, 2007 was 13,463,995 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain responses to Part III are incorporated by reference to information contained in the Company’s definitive Proxy Statement for its 2007 Annual Meeting to be filed with the Commission within 120 days after the end of the registrant’s 2007 fiscal year.

 

 

PART I

Item 1. Business

General

     Lifecore Biomedical, Inc. (“Lifecore” or the “Company”) designs and markets dental implants and manufactures hyaluronan and medical devices based on hyaluronan for use in various surgical markets. The Company was incorporated in the State of Minnesota in 1965. The Company operates two divisions, the Hyaluronan Division and the Dental Division. Further information about Lifecore can be obtained from Lifecore’s internet website at www.lifecore.com. The contents of the website are not intended to be a part of this Form 10-K and are not incorporated by reference. Also, Lifecore makes available free of charge through its internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

     The Company’s Hyaluronan Division is principally involved in the development and manufacture of products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellar matrix of connective tissues in both animals and humans. In addition, the Company has licensed a sodium hyaluronate cross-linking technology from The Cleveland Clinic Foundation (“CCF”) designed to provide a development vehicle for a product platform to introduce new products for the existing medical segments, as well as potentially new market segments. Furthermore, we are pursuing other development activities to utilize the Company’s fermentation and aseptic filling capabilities for non-hyaluronan based products.

     The Hyaluronan Division primarily sells into three medical segments: 1) Ophthalmic, 2) Orthopedic and 3) Veterinary. Lifecore also supplies hyaluronan to customers pursuing other medical applications, such as aesthetic surgery, medical device coatings, tissue engineering and pharmaceuticals. The Company leverages its hyaluronan manufacturing expertise to provide expanded hyaluronan product offerings and specialized aseptic manufacturing of hyaluronan products.

     The Company’s Dental Division develops and markets precision surgical and prosthetic devices for the restoration of missing dentition. The Company’s dental implants are permanently implanted in the jaw for tooth replacement therapy as long-term support for crowns, bridges and dentures.

     The Dental Division also offers innovative bone regenerative products for the repair of bone defects resulting from periodontal disease and tooth loss. Additionally, the Dental Division provides professional support services to its dental surgery clients through comprehensive education curricula, as provided in the Company’s various Skills Series and Know HOW courses. These professional continuing education programs are designed to train restorative clinicians and their auxiliary teams in the principles of tooth replacement therapy and practice management. The Company’s Increasing Case Acceptance (“ICA”) program offers clients the marketing and consultative tools and training to foster higher patient acceptance of dental implants.

     The Dental Division’s products are marketed in the United States through the Company’s direct sales force. Internationally, the Dental Division’s products are marketed through direct subsidiaries in Italy, Germany, France and Sweden, and through 28 national distributors covering 49 additional countries.

     Financial information by business segment and geographic area is contained in Note H to the Company’s Consolidated Financial Statements.

Trademarks

     The following trademarks are the property of Lifecore: LUROCOAT^® Ophthalmic Solution; ORTHOLURE™ Orthopedic Viscosupplement; PRIMA™, RENOVA^®, RESTORE^® and SUSTAIN^® Dental Implant Systems; STAGE-1^® Single Stage Implant System; Quick-Cap^® Impression System; CALFORMA^® Calcium Sulfate Barrier; CALMATRIX^® Calcium Sulfate Binder; CAPSET^® Calcium Sulfate Bone Graft Barrier; SlowSet™; TefGen^® Regenerative Membrane; and Support Plus^®. U.S. trademark registrations are generally for a term of 10 years, renewable every 10 years as long as the trademark is used in the regular course of trade.

     Viscoat^® Intraocular Viscoelastic is a registered trademark of Alcon, Inc. (“Alcon”); Vitrax^®II Ophthalmic Viscosurgical Device is a registered trademark of Advanced Medical Optics; Hyaluron HEXAL^® is a registered trademark of Novartis AG; HY-50^® is a registered trademark of Bexco Pharma, Inc.; Rayvisc™ Ophthalmic Viscoelastic is a registered trademark of Rayner; and DBX^® Demineralized Bone Matrix is a registered trademark of the Musculoskeletal Transplant Foundation (“MTF”).

Hyaluronan Division

Background

     Hyaluronan, a naturally occurring polysaccharide, is a component of many tissues in the body and of physiological fluids that lubricate or otherwise protect the body’s soft tissues. Due to its widespread presence in tissues, critical role in normal physiology and its high degree of biocompatibility, the Company believes that hyaluronan will continue to be used for an increasing variety of medical applications. The Company produces hyaluronan through a proprietary fermentation process.

     Hyaluronan was first demonstrated to have commercial medical utility as a viscoelastic solution in cataract surgery. In this application, it is used for maintaining the shape of the anterior chamber and protecting corneal tissue during the removal and implantation of intraocular lenses. The first ophthalmic hyaluronan product, produced by extraction from rooster comb tissue, became commercially available in the United States in 1981. Hyaluronan-based products, produced either by rooster comb extraction or by fermentation processes such as the Company’s, have since gained widespread acceptance in ophthalmology and are currently used in the majority of cataract extraction procedures in the world. The Company’s hyaluronan is also used as an aseptic solution which is used as a carrier vehicle for allogeneic freeze-dried demineralized bone provided to orthopedic surgeons, as a component of devices to treat the symptoms of osteoarthritis, and as a component to provide increased lubricity to medical devices. The Company’s hyaluronan has been utilized in veterinary applications as a veterinary drug and device to treat traumatic arthritis and as an embryo cryopreservation media.

Strategy

     The Company intends to use its proprietary fermentation process and aseptic formulation and filling expertise to be a leader in the development of hyaluronan-based products for multiple applications and to take advantage of non-hyaluronan device and drug opportunities which leverage our expertise. Elements of the Company’s strategy include the following:

	•		Establish strategic relationships with market leaders. The Company will continue to develop applications for products with partners who have strong marketing, sales and distribution capabilities to end-user markets. The Company currently has established relationships with the market leading companies Alcon and Advanced Medical Optics in ophthalmology, Novartis AG in generic devices and drugs, and MTF, the world’s largest bone tissue procurement and distribution service.
	•		Expand medical applications for hyaluronan. Due to the growing knowledge of the unique characteristics of hyaluronan and the role it plays in normal physiology, the Company continues to identify and pursue further uses for hyaluronan in other medical applications, such as wound care, aesthetic surgery, adhesion prevention, drug delivery, device coatings and pharmaceuticals. Further applications may involve expanding process development activity and/or additional licensing of technology.

	•		License Hyaluronan Technology from Third Parties. As part of this strategy, Lifecore entered into a world-wide exclusive license and development agreement with CCF to develop and commercialize hyaluronan-based products and related applications. The license is for patented hyaluronan-based cross-linking technology that can be used for products in aesthetics, orthopedics, ophthalmology and other medical fields. Given the broad number of applications, Lifecore anticipates that it will sublicense the technology for certain applications while retaining manufacturing rights.
	•		Utilize manufacturing infrastructure to pursue contract aseptic filling and fermentation opportunities. The Company will continue to evaluate providing contract services for opportunities that are suited for the capital and facility investment related to aseptic filling equipment, fermentation and purification.
	•		Maintain flexibility in product development and supply relationships. The Company’s vertically integrated development and manufacturing capabilities allow it to establish a variety of relationships with global corporate partners. Lifecore’s role in these relationships extends from supplying hyaluronan raw materials to manufacturers of aseptically-packaged, finished sterile products to developing and manufacturing our own proprietary products.

Hyaluronan Division Products

     The following chart summarizes the principal products of the Hyaluronan Division, along with their applications, and the companies with which Lifecore has related strategic relationships:

PRODUCT		DESCRIPTION		MARKET		STATUS+
OPHTHALMIC
Viscoat® Intraocular Viscoelastic		Lifecore supplies hyaluronan powder for inclusion in Alcon’s Viscoat® Opthalmic Viscoelastic.		Cataract surgery		Commercial sales since 1986
LUROCOAT® Ophthalmic Viscoelastic		Lifecore supplies its private label product for marketing on a non-exclusive basis.		Cataract surgery		Commercial sales since June 1997
ORTHOPEDIC
Hyaluronan Solution for DBX® Demineralized Bone Matrix		Lifecore supplies a sterile hyaluronan solution to MTF for use as a carrier vehicle for its allogeneic demineralized, freeze-dried bone.		Grafting material for restoration of bone defects		Commercial sales since 2000
Hyaluron HEXAL® Orthopedic Viscosupplement		Lifecore supplies a finished orthopedic viscosupplement for Novartis AG’s distribution network.		Injections for the local treatment of pain associated with osteoarthritis		Commercial sales began in fiscal 2005
VETERINARY
HY-50®		Lifecore supplies a finished veterinary viscosupplement to Bexco Pharma, Inc. for use as a veterinary orthopedic injectable drug or device.		Veterinary drug/device		Commercial sales since 1993

Ophthalmic Applications

     Cataract Surgery. Currently, a primary commercial application for the Company’s hyaluronan is in cataract surgery. Hyaluronan, in the form of a viscoelastic solution, is used to maintain a deep chamber during anterior segment surgeries (including cataract extraction and intraocular lens implantation) and to protect the corneal endothelium and other ocular tissue. These solutions have been shown to reduce surgical trauma and thereby contribute to more rapid recovery with fewer complications than were experienced prior to the use of viscoelastics. The Company currently sells hyaluronan for this application to Alcon, the leading producer of ophthalmic surgical

products in the world, for inclusion in ViscoatÒ Ophthalmic Viscoelastic. The Company also has distribution agreements with multiple companies to supply its hyaluronan based LUROCOAT^® Opthalmic Viscoelastic (discussed below) under private label outside the United States and Canada.

     The Company’s relationship with Alcon and its predecessors commenced in 1983. Since that time, sales of hyaluronan to Alcon have continued to be made pursuant to supply agreements. The current Alcon supply agreement, as renewed in December 2004, is a non-exclusive agreement for a term of four years through December 31, 2008.

     Hyaluronan-based products are used in the majority of cataract surgeries in the world. The Company estimates that the worldwide market for hyaluronan for cataract surgery, on a hospital cost basis, is approximately $550 million per year.

     The Company has developed its own viscoelastic solution, LUROCOAT^® Ophthalmic Viscoelastic. The Company received CE marking for LUROCOAT Ophthalmic Viscoelastic during 1997, allowing LUROCOAT Ophthalmic Viscoelastic to be marketed and sold outside the United States. The Company supplies LUROCOAT Ophthalmic Viscoelastic under private label agreements. Export shipments of LUROCOAT Ophthalmic Viscoelastic began in 1997.

     The Company signed an agreement with Advanced Medical Optics (“AMO”) to supply Lifecore’s hyaluronan based viscoelastic under private label with sales commencing in fiscal year 2005. After an initial term of three years through May 2007, the AMO agreement has been renewed through May 2009.

     Lifecore estimates that its hyaluronan has been used in over 30 million ophthalmic patients globally since 1983.

Orthopedic Applications

     The Company supplies an aseptic hyaluronan solution to BioCon, Inc., the non-profit controlling affiliate of MTF, which utilizes the solution as a carrier vehicle for its allogeneic demineralized, freeze-dried bone in a final putty composition trademarked as “DBXÒ Demineralized Bone Matrix”. This bone putty is provided by MTF to orthopedic surgeons through MTF’s distribution channels. The Company has a supply agreement with MTF through December 2009.

     The Company also supplies a finished orthopedic viscosupplement for Novartis AG’s distribution network.

Veterinary Applications

     The Company manufactures Bexco Pharma, Inc.’s HY-50^® product, an aseptically packaged hyaluronan solution for use as a veterinary orthopedic device or veterinary orthopedic injectible drug, under a supply agreement expiring June 30, 2010.

     Lifecore estimates that its veterinary hyaluronan product has been used in over 700,000 equine procedures worldwide.

Product Development

     The Hyaluronan Division undertakes its own product development activities for hyaluronan-based applications, as well as on a contract basis with certain clients. The majority of the projects are intended to demonstrate that the Company’s hyaluronan is suitable for a particular medical application. Suitability is often measured by detailed specifications for product characteristics such as purity, stability, viscosity and molecular weight, as well as efficacy for a particular medical application in a clinical setting.

     In addition, the Company has licensed a sodium hyaluronate cross-linking technology from CCF. The development activity with this technology is intended to demonstrate the efficacy in multiple medical applications.

     There can be no assurance that products currently under development by the Company or in partnership with others will be successfully developed or, if so developed, will be successfully and profitably marketed.

Dental Division

Background

     Dental implant systems are increasingly accepted as a replacement for missing or extracted teeth and serve as supports for dentures, crowns and bridges. In comparison to conventional restorative procedures, dental implants are surgically placed in the jawbone, simulating the anchoring of a tooth by its root. The implant maintains underlying bone structure and provides superior fixation of restorations, minimizing loosening of implants against surrounding teeth and gingiva. To further enhance osseointegration, various implant styles may be roughened to create added surface area for bone-to-implant contact. The annual worldwide dental implant market was estimated to be approximately $1.8 billion in 2006.

     Bone graft substitutes and bone regeneration membranes are used for the restoration of deteriorated bone caused by periodontal disease and tooth loss. Historically, autologous bone (self-donated from another part of the patient’s own body) has been used to treat and regenerate deteriorated bone. Cadaver, synthetic and animal-derived bone graft substitutes emerged to address the issues of limited quantity and second surgical site morbidity associated with use of autologous bone. The current annual U.S. market for dental bone augmentation is approximately $111 million. The Company’s TefGen^® Regenerative Membrane, CAPSET^® Calcium Sulfate Bone Graft Barrier, CALFORMA^® Calcium Sulfate Barrier and CALMATRIX^® Calcium Sulfate Binder products, along with additional new product development, target this market opportunity.

Strategy

     The Company is committed to providing the dental community with comprehensive treatment solutions and practice-building support through:

	•		Development or acquisition of a broad line of dental implants, technology and related dental surgery support products that facilitate the transition from competitive systems to the Lifecore system.
	•		Development and delivery of unique customer support programs and materials concentrating on the principles of tooth replacement therapy, practice management techniques, and marketing and consulting skills training to foster higher patient acceptance of dental implants.
	•		Increased penetration of markets by expanded direct selling efforts.
	•		Expansion of international markets and additional distribution agreements.

Dental Division Products

     The following chart summarizes the principal products of the Company’s Dental Division:

PRODUCT		BENEFIT / APPLICATION		STATUS
IMPLANTS
PRIMA™ Implant System with TiLobe™ Technology		A unique, proprietary implant system. PRIMACONNEX™ incorporates TiLobe™ Technology, a six-lobed internal connection. PRIMASOLO™ is a one-piece implant that incorporates the surgical and restorative components in one unit. Both implants are available in either straight or tapered configurations and are placed using one surgical kit.		Commercial sales
RENOVA® Internal Hex Dental Implant System		Major clinical segment utilizing internal hex connection providing increased stability; available in both straight and tapered implant systems offering flexibility of clinical treatment.		Commercial sales

PRODUCT		BENEFIT / APPLICATION		STATUS
RESTORE® External Hex Dental Implant Systems		Time proven external hex implants with industry leading prosthetic fit and familiar surgical/restorative procedures.		Commercial sales
STAGE-1® Single Stage Implant System		Provides the timesaving benefits of a one-stage surgical procedure with the restorative simplicity and reliability of a Morse taper prosthetic connection.		Commercial sales
Quick-Cap® Impression System		Increases the ease and efficiency of the implant restoration process.		Commercial sales
BONE REGENERATION
CALMATRIX® Calcium Sulfate Bone Graft Binder		Combined with bone graft material, CALMATRIX® forms a putty-like composite that fills osseous or periodontal defects to regenerate bone.		Commercial sales
CALFORMA® Calcium Sulfate Bone Graft Barrier		CALFORMA® is a shapeable putty-like containment barrier that covers intra-oral defects and provides protection and undisturbed space for regeneration.		Commercial sales
CAPSET® Calcium Sulfate Bone Graft Barrier, including SlowSet™ Version		For use with natural and synthetic bone graft materials as a resorbable barrier cap and/or binding agent.		Commercial sales
TefGen® Regenerative Membrane		Non-resorbable membrane for assisting the regeneration of bone defects.		Commercial sales

Implant Products

     The PRIMA™ Implant System design offers unprecedented clinical flexibility in a single implant system. With one or two-piece implants, a streamlined surgical kit and an array of advanced features and restorative options, the Lifecore PRIMA Implant System meets exacting standards and delivers superior clinical and esthetic results. The PRIMA Implant System was commercially launched in October 2005.

     The RENOVA^® Internal Hex Implant System design provides the stability of an internal hex connection, while providing surgical treatment flexibility of both straight and tapered implants, improved thread design, indexability, superior esthetics and ease of clinician handling. The RENOVA system was commercially launched in June 2004.

     The RESTORE^® System is based on a classic threaded titanium implant design that pioneered the commercialization of these devices in general dental surgery. In July 1993, the Company acquired this implant design in connection with its acquisition of Implant Support Systems, Inc. (“ISS”), a manufacturer of dental implant products. The Company has since enhanced and expanded the original ISS line into a broad range of implant options. The Company now markets its line of external hex implants, prosthetics and associated instrumentation under the RESTORE System name.

     The STAGE-1^® Single Stage Implant System was designed by the Company to allow for a one-stage surgical procedure. The STAGE-1 Implant design allows placement in a single surgical procedure that reduces treatment time. The system’s reliable Morse taper prosthetic connection simplifies restorative procedures for the dentist. Commercial sales began in September 1999. In March 2001, the Company added the RBM STAGE-1 Single Stage Implant System to this line.

     The Quick-Cap^® Impression System greatly improves the restorative dentist’s ease and accuracy of impressioning for subsequent laboratory construction of the final crown, bridge or denture. This system is available in both the PRIMA™ and STAGE-1^® systems.

     Lifecore has enhanced and expanded its product lines, creating numerous new products with a combination of innovative features from its existing systems. This gives the Company a broad product line which offers practitioners maximum flexibility in choice of treatment modalities and several innovations that enhance ease-of-use by the clinician. Additionally, the Dental Division assists its dental surgery clients by developing comprehensive continuing education curricula, as provided in the Company’s various Skills Series programs, to train restorative

clinicians and their auxiliary teams in the principles of tooth replacement therapy and practice management. The Company’s ICA program offers client personnel the marketing and selling skills training to foster higher patient acceptance of dental implants. The Support Plus Overdentures program teaches a step-by-step approach to obtain predictable and profitable results for attachment retained overdenture implant restorations.

Bone Regeneration Products

     The Company offers products that address various bone and tissue regeneration procedures.

     CALMATRIX^® Calcium Sulfate Bone Graft Binder and CALFORMA^® Calcium Sulfate Bone Graft Barrier received 510(k) clearance and were introduced to the market in fiscal 2005. The first generation of these regeneration products, CAPSET^® Calcium Sulfate Bone Graft Barrier, received 510(k) clearance and was introduced to the market in 1995. CAPSET SlowSet™ Barrier was introduced in July 1999. These products are based on a proprietary medical grade calcium sulfate technology developed by and licensed from Wright Medical Group, Inc., an orthopedic product manufacturer based in Memphis, Tennessee. The products provide guided bone regeneration containment barriers to prevent migration of bone graft materials used to fill oral bone defects.

     TefGen^® Regenerative Membrane technology was acquired by the Company from Bridger Biomed, Inc. in May 1997. This non-resorbable membrane is based on nanoporous PTFE Biomaterials (“nPTFE”) and is competitive with the market’s leading product produced by W.L. Gore. A TefGen Regenerative Membrane allows the dental surgeon to cover treated defects in bone to prevent the invasion of unwanted soft tissue while the slower growing bone tissue underneath the membrane regenerates.

Product Development

     The Dental Division is also involved in product development activities to improve existing components and packaging and to add new components to the dental implant systems. These development activities enhance the suitability and ease-of-use of the products for specific surgical applications and reflect changing trends in dental implant technology. There can be no assurance, however, that products which are currently under development by the Company will be successfully developed, or if so developed, will be successfully and profitably marketed.

Sales and Marketing

Hyaluronan Division Products

     The Company generally markets and distributes its hyaluronan products to end-users through corporate partners. The Company sells hyaluronan to these partners in a variety of forms, including powders, gels and solutions packaged in bulk or single-application units. Sales to Alcon were 13%, 13% and 16% of total consolidated sales in 2007, 2006 and 2005, respectively.

     The Company also sells various forms of medical grade hyaluronan directly to academic and corporate research customers for development and evaluation of new applications.

Dental Division Products

     The Company is focused on expanding its dental product line and developing increased sales and marketing support. The dental implant market is highly specialized. Products are marketed to oral surgeons, periodontists, implantologists, prosthodontists, general dental practitioners and dental laboratories. Accordingly, management believes it must maintain a highly experienced direct sales force in the United States for proper distribution of these products. The Company believes that its sales force offers better customer service, technical support and regulatory control than could be achieved through an independent distributor network in the United States. The Company employs a dedicated sales force in the United States as well as U.S.-based international sales personnel. The Dental Division products are marketed internationally in 49 countries through 28 distributors and in Italy through the Company’s subsidiary, Lifecore Biomedical SpA, in Germany through the Company’s subsidiary, Lifecore Biomedical GmbH, in France through the Company’s subsidiary, Lifecore Biomedical SAS, and in Scandinavia through the Company’s subsidiary, Lifecore Biomedical AB.

     The Company’s marketing activities are designed to support its direct domestic sales force and its international business base, and include advertising and product publicity in trade journals, direct mail, catalogs, newsletters, continuing education programs, telemarketing, and attendance at trade shows and professional

association meetings. Industry estimates indicate a need for replacement of approximately 100 million teeth in the adult population of the United States. That represents a potential implants and accessories market of approximately $20 billion compared to the actual current U.S. market size of approximately $625 million.

Manufacturing

     The commercial production of hyaluronan by the Company requires fermentation, separation and purification capabilities, and aseptic packaging of product in a variety of bulk and single dose configurations.

     The Company produces its hyaluronan through a proprietary fermentation process. Until the introduction of the Company’s medical grade hyaluronan, the only commercial source for medical hyaluronan was through a process of extraction from rooster combs. The Company believes that the fermentation manufacturing approach is superior to rooster comb extraction because of greater efficiency and flexibility, a more favorable long-term regulatory environment, and better economies of scale in producing large commercial quantities.

     The Company’s 110,000 square foot facility is primarily used for the proprietary hyaluronan manufacturing process, formulation and aseptic syringe and bulk filling. The Company believes that the current inventory on-hand, together with its manufacturing capacity, will be sufficient to allow it to meet the needs of its current customers for the foreseeable future.

     The Company provides versatility in the manufacturing of various types of finished products. Currently, the Company supplies several different forms of hyaluronan in a variety of molecular weight fractions as powders, solutions and gels, and in a variety of bulk and single-use finished packages. The Hyaluronan Division continues to conduct development work designed to improve production efficiencies and expand the Company’s capabilities to achieve a wider range of hyaluronan product specifications in order to address the broadening opportunities for using hyaluronan in medical applications.

     The Company’s facility was designed to meet applicable regulatory requirements and has been cleared for the manufacture of both device and pharmaceutical products. The FDA periodically inspects the Company’s manufacturing systems and requires conformance to the FDA’s Quality Systems Regulations (“QSR”). In addition, the Company’s corporate partners conduct intensive quality audits of the facility. The Company also periodically contracts with independent regulatory consultants to conduct audits of the Company’s operations. The Company maintains a Quality System which assures conformance to all applicable current standards (21 CFR820, 21 CFR210-211, ISO 13485:2003, 93/42/EEC, and Canadian Medical Device Regulation:1998). These approvals represent international symbols of quality system assurance and compliance with applicable European Medical Device Directives, which greatly assist in the marketing of the Company’s products in the European Union.

     The Company uses outside metal finishing vendors to produce its dental implant devices and related components. The Company inspects vendors’ quality assurance and control functions and performs its own finished packaging related to the implant product lines.

     The Company purchases raw materials for its production of hyaluronan and calcium sulfate-based products from outside vendors. While these materials are available from a variety of sources, the Company principally uses limited sources for some of its key materials to better monitor quality and achieve cost efficiencies. Wright Medical Group, Inc. exclusively supplies the key raw material for the calcium sulfate-based products. The Company believes Wright Medical Group, Inc. is able to provide adequate amounts of the raw materials and is under a supply agreement with the Company through September 2009. The Company utilizes a supply agreement with Bridger Biomed, Inc. to supply the TefGen^® Regenerative Membrane product line.

Competition

     The competitors of the Company include major chemical, dental, medical and pharmaceutical companies, as well as smaller specialized firms. Many of these companies have significantly greater financial, manufacturing, marketing and research and development resources than the Company.

Hyaluronan Products

     A number of companies produce hyaluronan products and thus directly or indirectly compete with Lifecore or its corporate partners. Several companies produce hyaluronan through a fermentation or extraction process, including Seikagaku, Genzyme Corporation, Savient, Fidia SpA, Kyowa Hakko, Kibun, Advanced Medical Optics, Bayer and others. The Company believes that its fermentation process offers production and regulatory advantages over the traditional rooster comb extraction method. The Company’s competitors have filed or obtained patents covering aspects of fermentation production or uses of hyaluronan. These patents may cover the same applications as the Company’s patents. See “Patents and Proprietary Rights.”

     The Company believes that competition in the ophthalmic and medical grade hyaluronan market is primarily based on product performance, manufacturing capacity and product development capabilities. Future competition may be based on the existence of established supply relationships, regulatory approvals, intellectual property and product price. After a manufacturer has taken a product through the FDA marketing approval process, a change in suppliers can involve costs and delays because supplemental FDA review may be required.

Dental Products

     The dental implant market is also highly competitive. Major market competitors include Nobel Biocare Holding AB Group, Straumann Holding AG, Biomet, Inc., Zimmer Dental, AstraZeneca PLC and Dentsply International, Inc. A number of these competitors are established companies with dominant market shares. The Company believes that competition in the dental implant market is based primarily on product performance and quality, strong sales support and education.

     The Company believes that its broad product line facilitates the conversion of competitive implant users to a Lifecore system. In addition, the Company has developed several innovative education and marketing support programs which are designed to increase the client’s implant business. The Company believes it has established a strong reputation for quality products due to its stringent design and inspection criteria. No assurance can be given, however, that the Company can effectively compete with other manufacturers of dental implant systems.

     The market for the Company’s tissue regeneration products is also competitive. The major competitors include Biomet, Inc., Dentsply International, Inc., Geistlich, W. L. Gore (GORE-TEX), Straumann Holding AG and Zimmer Dental. While the Company believes its product line and experienced sales representation are an advantage in this area, no assurance can be given that it can gain significant market share from its more established competitors.

Patents and Proprietary Rights

     The Company pursues a policy of obtaining patent protection for patentable subject matter in its proprietary technology. In May 1985, the Company received a U.S. patent covering certain aspects of its hyaluronan fermentation process. The Company exclusively licensed patents and patent applications from CCF covering certain hyaluronan cross-linking technologies. The Company licenses two patents covering the dental surgical use of calcium sulfate from Wright Medical Group, Inc. The Company also licenses patented technology used in the production of calcium sulfate from Wright Medical Group, Inc. and the University of North Carolina. In conjunction with the purchase of the TefGen^® Regenerative Membrane product line, the Company obtained the rights to the patent for composition, manufacture and use of the nPTFE material. The Company has received a patent on its dental implant packaging and a patent on a self-tapping dental implant design.

     The Company believes that patent protection is important to its business. However, if other manufacturers were to infringe on its patents, there can be no assurance that the Company would be successful in challenging, or would have adequate resources to challenge, such infringement. The Company also relies upon trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. There can be no assurance that others will not obtain or independently develop technologies which are the same as or similar to the Company’s technologies. The Company pursues a policy of requiring employees, temporary staff, consultants and customers (which have access to some of its proprietary information) to sign confidentiality agreements. There can be no assurance that the Company will be able to adequately protect its proprietary technology through patents or other means.

     The Company is aware that one or more of its competitors have obtained, or are attempting to obtain, patents covering fermentation and other processes for producing hyaluronan. Other patents have been, or may be, issued in the future in product areas of interest to the Company. Although the Company is not aware of any claims

that its current or anticipated products infringe on patents held by others, no assurance can be given that there will not be an infringement claim against the Company in the future. The costs of any Company involvement in legal proceedings could be substantial, both in terms of legal costs and the time spent by management of the Company in connection with such proceedings. It is also possible that the Company may be required to obtain additional licenses to manufacture and market some of its products which may require the payment of initial fees, minimum annual royalty fees and ongoing royalties on net sales. There can be no assurance that the Company would be able to license technology developed by others, on favorable terms or at all, that may be necessary for the manufacture and marketing of its products.

Government Regulation

     Government regulation in the United States and other countries is a significant factor in the marketing of the Company’s products and in the Company’s ongoing research and development activities. The Company’s products are subject to extensive and rigorous regulation by the FDA, which regulates the products as medical devices and which, in some cases, requires Pre-Market Approval (“PMA”), and by foreign countries, which regulate the products as medical devices or drugs. Under the Federal Food, Drug, and Cosmetic Act (“FDC Act”), the FDA regulates the clinical testing, manufacturing, labeling, distribution, sale and promotion of medical devices in the United States.

     Following the enactment of the Medical Device Amendments of 1976 to the FDC Act, the FDA classified medical devices in commercial distribution at the time of enactment (“pre-Amendment devices”) into one of three classes — Class I, II or III. This classification is based on the controls necessary to reasonably assure the safety and effectiveness of medical devices. Class I devices are those whose safety and effectiveness can reasonably be assured through general controls, such as establishment registration and labeling, and adherence to FDA-mandated current QSR requirements for devices. Most Class I devices are exempt from FDA premarket review, but some require premarket notification (“510(k) Notification”). Class II devices are those whose safety and effectiveness can reasonably be assured through the use of special controls, such as performance standards, postmarket surveillance, patient registries and FDA guidelines. Class III devices are devices that require a PMA from the FDA to assure their safety and effectiveness. A PMA ordinarily must contain data from a multi-center clinical study demonstrating the device’s safety and effectiveness for the intended use and patient population. Class III devices are generally life-sustaining, life-supporting or implantable devices, and also include most devices that were not on the market before May 28, 1976 (“new devices”) and for which the FDA has not made a finding of substantial equivalence based upon a 510(k) Notification. A pre-Amendment Class III device does not require a PMA unless and until the FDA issues a regulation requiring submission of a PMA application for the device.

     The FDA requires clinical data for a PMA application and has the authority to require such data for a 510(k) Notification. If clinical data are necessary, the company that sponsors the study must follow the FDA’s Investigational Device Exemption (“IDE”) regulations governing the conduct of human studies. The FDA’s regulations require institutional review board approval of the study and the informed consent of the study subjects. In addition, for a “significant risk” device, the FDA must approve an IDE application before the study can begin. Nonsignificant risk devices do not require FDA approval of an IDE application, and are conducted under the “abbreviated IDE” requirements. Once in effect, an IDE or abbreviated IDE permits evaluation of devices under controlled clinical conditions. After a clinical evaluation process, the resulting data may be included in a PMA application or a 510(k) Notification. The PMA may be approved or the 510(k) Notification may be cleared by the FDA only after a review process that may include FDA requests for additional data, sometimes requiring further studies.

     If a manufacturer or distributor of medical devices can establish to the FDA’s satisfaction through a 510(k) Notification that a new device is substantially equivalent to what is called a “predicate device,” i.e., a legally marketed Class I or Class II medical device or a legally marketed pre-Amendment Class III device for which the FDA has not required a PMA, the manufacturer or distributor may market the new device. In the 510(k) Notification, a manufacturer or distributor makes a claim of substantial equivalence, which the FDA may require to be supported by various types of information, including data from clinical studies, showing that the new device is as safe and effective for its intended use as the predicate device.

     Following submission of the 510(k) Notification, the manufacturer or distributor may not place the new device into commercial distribution until the FDA issues a “substantial equivalence” determination finding the new device to be substantially equivalent to a predicate device. The FDA has a 90 day period in which to respond to a 510(k) Notification (Traditional or Abbreviated 510(k); 30 days for a Special 510(k)). Depending on the specific submission and subsequent agency information requests, the 510(k) Notification process can take significantly

longer to complete. The FDA may agree with the manufacturer or distributor that the new device is substantially equivalent to a predicate device and allow the new device to be marketed in the United States. The FDA may, however, determine that the new device is not substantially equivalent and require the manufacturer or distributor to submit a PMA or require further information, such as additional test data, including data from clinical studies, before it is able to make a determination regarding substantial equivalence. Although the PMA process is significantly more complex, time-consuming and expensive than the 510(k) Notification process, the latter process can also be expensive and substantially delay the market introduction of a product. Modifications to a device that is marketed under a 510(k) Notification might require submission of a new 510(k) prior to their implementation, although some modifications can be made through a “note to file” procedure described in FDA guidance.

     For devices that cannot be found “substantially equivalent” to a predicate device, the manufacturer must submit a PMA application, petition for reclassification, or submit a PMA application via the de novo process. A PMA must contain information on the materials and manufacturing process for the device, results of preclinical testing, clinical data, and labeling for the device. The FDA has 180 days to review a PMA application, but may request additional information, which could include additional studies. The FDA might refer a PMA to an advisory committee of outside experts to review and make recommendation on whether a device should be approved. After considering the data in the PMA application and the recommendations of an advisory committee, the FDA can approve the device, approve the device with conditions or refuse approval. Devices approved by the FDA are subject to periodic reporting requirements, and may be subject to restrictions on sale, distribution or use.

     Hyaluronan products are generally Class III devices. In cases where the Company is supplying hyaluronan to a corporate partner as a raw material or producing a finished product under a license for the partner, the corporate partner will be responsible for obtaining the appropriate FDA clearance or approval. Export of the Company’s hyaluronan products generally requires approval of the importing country and compliance with the export provisions of the FDC Act. The Company’s Dental products are Class I and Class II devices.

     Other regulatory requirements are placed on the manufacture, processing, packaging, labeling, distribution, recordkeeping and reporting of a medical device and on the quality control procedures, such as the FDA’s device QSR regulations. Manufacturing facilities are subject to periodic inspections by the FDA to assure compliance with device QSR requirements. The Company’s facility is subject to inspections as both a device and a drug manufacturing operation. For PMA devices, the Company is required to submit an annual report and to obtain approval of a PMA supplement for modifications to the device or its labeling. Other applicable FDA requirements include the medical device reporting (“MDR”) regulation, which requires that the Company provide information to the FDA regarding deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. The FDA also requires reporting regarding notices of correction and the removal of a medical device.

     If the Company is not in compliance with FDA requirements, the FDA or the federal government can order a recall, detain the Company’s devices, refuse to grant 510(k) Notification clearances or PMA approvals, withdraw or limit product approvals, institute proceedings to seize the Company’s devices, seek injunctions to control or prohibit marketing and sales of the Company’s devices, assess civil money penalties and impose criminal sanctions against the Company, its officers or its employees.

     There can be no assurance that any of the Company’s clinical studies will show safety or effectiveness; that 510(k) Notifications or PMA applications or supplemental applications will be submitted or, if submitted, accepted for filing; that any of the Company’s products that require clearance of a 510(k) Notification or approval of a PMA application or PMA supplement will obtain such clearance or approval on a timely basis, on terms acceptable to the Company for the purpose of actually marketing the products, or at all; or that following any such clearance or approval previously unknown problems will not result in restrictions on the marketing of the products or withdrawal of clearance or approval.

Product Liability

     Product liability claims may be asserted with respect to the Company’s products. In addition, the Company may be subject to product liability claims for the products of its customers that incorporate Lifecore’s materials. The Company maintains product liability insurance coverage in amounts the Company deems to be adequate. Lifecore Biomedical SpA and Lifecore GmbH also carry product liability insurance. There can be no assurance that the Company will have sufficient resources to satisfy product claims if they exceed available insurance coverage.

Seasonality

     The Company’s business is seasonal in nature. Historically, sales in the Dental Division are lower in the first quarter than the rest of the year as a result of European holidays during the summer months.

Employees

     As of August 22, 2007 the Company employed 241 persons on a full-time basis, 14 part-time employees and 4 temporary employees. None of the Company’s employees is represented by a labor organization, and the Company has never experienced a work stoppage or interruption due to labor disputes. Management believes its relations with employees are good.

Executive Officers of the Registrant

     The following sets forth the names of the executive officers of Lifecore, in addition to information about their positions with Lifecore, their periods of service in such capacities, and their business experience for at least the past five years. There are no family relationships among them. All executive officers listed were appointed by the Board of Directors for a term of office from the time of appointment until the next annual meeting of directors (held in conjunction with the annual meeting of shareholders) and until their respective successors are elected and have qualified.

     Dennis J. Allingham. Mr. Allingham, 56 years old, was appointed President and Chief Executive Officer and to the Board of Directors in February 2004. Mr. Allingham previously served as Executive Vice President of the Company from November 1997 to February 2004. He served as Chief Financial Officer of the Company from January 1996 to March 2004. Mr. Allingham also served as General Manager of the Hyaluronan Division from November 1996 to February 2004 and General Manager of the Dental Division from November 1997 to February 2004.

     James G. Hall. Mr. Hall, 44 years old, was appointed Vice President of Technical Operations in July 2006. Mr. Hall served as the Company’s Director of Manufacturing Operations and Engineering from 2001 to July 2006; prior to that he was the Manager of Engineering and Operations at Lifecore. Mr. Hall has over 17 years of drug and device manufacturing experience and was with Protein Design Labs, a biomaterials company, prior to joining Lifecore.

     Larry D. Hiebert. Mr. Hiebert, 52 years old, was appointed Vice President and General Manager of the Hyaluronan Division in July 2006. Mr. Hiebert served as Vice President of Operations from March 2004 to July 2006, Director of Operations from 1997 to March 2004 and held various manufacturing and materials management positions within the Company from 1983 to March 2004.

     David M. Noel. Mr. Noel, 50 years old, was appointed Vice President of Finance and Chief Financial Officer in March 2004. Mr. Noel, a Certified Public Accountant, joined the Company as Controller in February 2002 and served in such position until March 2004. From 1996 to 2001, Mr. Noel was Controller of Nilfisk-Advance, Inc., a manufacturer of floor maintenance equipment.

     Kipling Thacker, Ph.D. Dr. Thacker, 52 years old, was appointed Vice President of New Business Development in November 2004. Dr. Thacker served as Director of New Business Development from 2000 to November 2004 and is the co-inventor of the hyaluronan fermentation and manufacturing process. He held various research and business development positions at the Company from 1981 to 2004.

Item 1A. Risk Factors

     The Company’s business faces many risks. Any of the risks discussed below, or elsewhere in this Form 10-K or the Company’s other filings with the Securities and Exchange Commission, could have a material impact on the Company’s business, financial condition or results of operations. Additional risks and uncertainties not presently known to the Company or that the Company currently believes to be immaterial may also impair the Company’s business operations.

The Company’s business could be adversely affected if it is not able to successfully compete against competitors in the human health care products industry.

     Competitors of the Hyaluronan and Dental Divisions in the United States and elsewhere are numerous and include major chemical, dental, medical, and pharmaceutical companies, as well as smaller specialized firms. Many of these competitors have substantially greater capital resources, marketing experience, and research and development resources than the Company. These companies may succeed in developing products that are more effective than any that have been or may be developed by Lifecore and may also prove to be more successful than Lifecore in producing and marketing these products. In addition, the Dental Division is competing against a number of large established competitors. In order to increase sales, the Dental Division may need to gain market share from its competitors. There can be no assurance that Lifecore will be able to continue to compete successfully against these competitors.

     Several companies produce hyaluronan through a fermentation or extraction process, including Seikagaku, Genzyme Corporation, Savient, Fidia SpA, Kyowa Hakko, Kibun, Advanced Medical Optics, Bayer and others. In addition, several companies manufacture hyaluronan by using rooster comb extraction methods. These companies primarily include Anika Therapeutics, Inc., Genzyme Corporation, Fidia SpA, AMO, Seikagaku and others. The Company’s competitors have filed or obtained patents covering aspects of fermentation production or uses of hyaluronan. These patents may cover the same applications as the Company’s applications. Although the Company believes that it does not infringe the patents of its competitors, there can be no assurance that the Company will not receive claims of infringement from third parties.

     In addition, negative announcements regarding any competitor’s products may have a negative impact on the public’s perception of the market potential for all similar products, including the Company’s products. There can be no assurance that product introductions by present or future competitors or future technological or health care innovations will not render Lifecore’s products and processes obsolete.

If Lifecore is unable to successfully protect its proprietary technology or if it is unable to maintain a competitive technological position in its product areas, its business could be adversely affected.

     While certain of Lifecore’s patents have been allowed or issued, there can be no assurance that, to the extent issued, the Company’s patents will effectively protect its proprietary technology. If other manufacturers were to infringe on its patents, there can be no assurance that the Company would be successful in challenging, or would have adequate resources to challenge, such infringement. Lifecore also relies upon trade secrets, proprietary know-how and continuing technological innovation to develop and maintain its competitive position. There can be no assurance that others will not independently develop such know-how or otherwise obtain access to the Company’s technology. While Lifecore’s employees, temporary staff, consultants and corporate partners with access to proprietary information are required to enter into confidentiality agreements, there can be no assurance that these agreements will provide the Company with adequate protection from loss of proprietary technology or know-how.

     Under current law, patent applications in the United States are maintained in secrecy until patents are issued, and patent applications in foreign countries are maintained in secrecy for a period after filing. The right to a device patent in the United States is attributable to the first to invent the device, not the first to file a patent application. Accordingly, the Company cannot be sure that its products or technologies do not infringe patents that may be granted in the future pursuant to pending patent applications. The Company has not received any notices alleging, and is not aware of any infringement by the Company of any other entity’s patents relating to the Company’s current or anticipated products. There can be no assurance, however, that its products do not infringe any patents or proprietary rights of third parties. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from selling its products or could be required to obtain licenses from the owners of such patents or be required to redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. The Company’s failure to obtain these licenses or to redesign its products or processes would have a material adverse effect on the Company’s business, financial condition, and results of operations.

The Company’s business could be adversely affected if it is unable to obtain regulatory approval for new product introductions or to expand sales of existing products into new markets.

     The Company’s products under development are considered to be medical devices and, therefore, require clearance or approval by the FDA before commercial sales can be made in the United States. The products also

require the approval of foreign government agencies before sales may be made in many other countries. The process of obtaining these clearances or approvals varies according to the nature and use of the product. It can involve lengthy and detailed laboratory and clinical testing, sampling activities and other costly and time-consuming procedures. There can be no assurance that any of the required clearances or approvals will be granted on a timely basis, if at all.

     In addition, most of the existing products being sold by the Company and its customers are subject to continued regulation by the FDA, various state agencies and foreign regulatory agencies which regulate manufacturing, labeling and record keeping procedures for such products. Marketing clearances or approvals by these agencies can be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval. These agencies can also limit or prevent the manufacture or distribution of the Company’s products. A determination that the Company is in violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls or product seizures, injunctions, and, in extreme cases, criminal sanctions.

The Company is exposed to the risks of operating a global business, including risks associated with exchange rate fluctuations, legal and regulatory changes and the impact of regional and global economic disruptions, which could have an adverse effect on the Company’s business.

     International shipments accounted for 50% of net sales in fiscal 2007. We expect that international shipments will continue to represent a significant percentage of net sales in the future. Our non-U.S. sales, purchases and operations are subject to risks inherent in conducting business abroad, many of which are outside our control, including the following:

	•		Periodic local or geographic economic downturns and unstable political conditions;
	•		Price and currency exchange controls;
	•		Fluctuation in the relative values of currencies;
	•		Difficulties protecting intellectual property;
	•		Local labor disputes;
	•		Shipping delays and disruptions;
	•		Increases in shipping costs, caused by increased fuel costs or otherwise, which we may not be able to pass on to our customers;
	•		Unexpected changes in trading policies, regulatory requirements, tariffs and other barriers; and
	•		Difficulties in managing a global enterprise, including staffing, collecting accounts receivable, managing suppliers, distributors and representatives, and repatriation of earnings.

     Our business and operating results are subject to uncertainties arising out of the possibility of regional or global economic disruptions (including those resulting from natural disasters and outbreaks of infectious disease), the economic consequences of military action or terrorist activities and associated political instability, and the impact of heightened security concerns on domestic and international travel and commerce. In particular, due to these uncertainties we are subject to:

	•		The risk of more frequent instances of shipping delays; and
	•		The risk that demand for our products may not increase or may decrease.

The development of new hyaluronan products entails substantial risk of failure and uncertainty related to timing, and a significant amount of the Company’s anticipated growth is dependent on its ability to develop, manufacture and market new product applications for hyaluronan.

     A significant amount of the Company’s anticipated growth is dependent on its ability to develop, manufacture and market new product applications for hyaluronan. Such formulations must be developed, tested and, in most cases, approved for use by appropriate government agencies. Once approved as products, they must be manufactured in commercial quantities and marketed successfully. Each of these steps involves significant amounts of time and expense. There can be no assurance that any of these products, if and when fully developed and tested,

will perform in accordance with the Company’s expectations, that necessary regulatory approvals will be obtained in a timely manner, if at all, or that these products can be successfully and profitably produced and marketed.

The Company is dependent on the marketing and development support from corporate partners for the sales growth of the Hyaluronan Division, and the Company’s business could be adversely affected if the Company’s strategic alliances fail to develop or market products as planned.

     The Company has historically developed, manufactured and marketed its Hyaluronan Division products through long-term strategic alliances with corporate partners. In the case of such relationships, the speed and other aspects of the development project are sometimes outside of the Company’s control as the other party to the relationship often has priorities that differ from those of the Company. Thus, the timing of commercialization of the Company’s products under development may be subject to unanticipated delays.

     Further, the Company currently has limited direct sales capabilities in the Hyaluronan Division and generally relies upon its corporate partners for marketing and distribution to end-users. The market success of the Company’s hyaluronan products generally will depend upon the size and skill of the marketing organizations of the Company’s corporate partners, as well as the level of priority assigned to the marketing of the Company’s products by these entities, which may differ from the Company’s priorities. Should one or more of the Company’s strategic alliances fail to develop or market products as planned, the Company’s business may be adversely affected. No assurance can be given that the Company will be able to negotiate acceptable strategic alliances in the future or that current strategic alliances will continue.

     The development contracts into which the Company enters with corporate partners are long-term agreements that are subject to development milestones, product specifications and other terms. Consequently, future agreement often is required regarding the course and nature of continued development activities. Contractual issues requiring resolution between the parties have arisen in the past and are expected to arise in the ordinary course of the Company’s future development activities. There can be no assurance that all such issues will be successfully resolved.

If the Company is unable to scale up manufacturing operations in the event of a significant increase in customer demand, the Company’s business could be adversely affected.

     The Company has designed its modular facility to permit the production of hyaluronan at levels exceeding current levels of production. However, in the event of a sudden significant increase in demand for any of the Company’s hyaluronan products, the Company will be required to scale-up operations, including the acquisition and validation of additional equipment and training of additional personnel. No assurance can be given that the Company will be able to adequately meet any such demands on a timely basis.

An interruption in the Company’s manufacturing activities could adversely affect the Company’s relations with its customers.

     The Company’s manufacturing requires extensive specialized equipment. In addition, the Company manufactures its hyaluronan products at one facility. Although the Company has contingency plans in effect for certain natural disasters, as well as other unforeseen events that could damage the Company’s facilities or equipment, no assurance can be given that any such events will not materially interrupt the Company’s business. In the event of such an occurrence, the Company has business interruption insurance to cover lost revenues and profits. However, such insurance would not compensate the Company for the loss of opportunity and potential adverse impact on relations with existing customers created by an inability to produce its products.

The markets for the Company’s dental products are very competitive, and the Company’s results of operations and financial condition could be adversely affected if it cannot maintain or increase the market share of these products.

     The Dental Division markets its products through a direct sales force and a distribution network. Continued growth of the Company’s revenues from dental products will depend on the ability of this sales and distribution network to increase the Company’s market share by convincing practitioners to use the Company’s products over competing established products. No assurance can be given that the sales and distribution network will be successful in increasing or maintaining the Company’s market share or sales levels. Failure to maintain and increase the market share of these products would adversely affect the Company’s results of operations and financial condition.

The Company may be subject to product liability claims and other legal proceedings which could have a material adverse effect on the Company’s business, financial condition and results of operations.

     The manufacture and sale of the Company’s products entails a risk of product liability claims. In addition to product liability exposure for its own products, the Company may be subject to claims for products of its customers which incorporate Lifecore’s materials. The Company maintains product liability insurance coverage in amounts it deems adequate. However, there can be no assurance that the Company will have sufficient resources if claims exceed available insurance coverage. In addition, other types of claims may arise that are not covered by such insurance.

     Lifecore was named as a defendant in 81 product liability lawsuits, all of which alleged that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. On September 20, 2006, settlement documents relating to all but one of the lawsuits remaining at that date were executed on behalf of the parties. The terms of the settlement do not call for any cash payment by the Company. Since the execution of the settlement documents, Lifecore has been sued in two additional lawsuits, one filed in Nebraska and one in Colorado, and the one remaining lawsuit from the original 81 has been settled. Although the vast majority of the INTERGEL Solution claims have been resolved, there can be no assurance that other related claims will not arise. In addition, on September 25, 2006, Vital Pharma, Inc. (“Vital Pharma”) and its insurer, Noetic Specialty Insurance Company (“Noetic”), sued the Company and its insurer, Federal Insurance Company, for failing to fully defend and indemnify Vital Pharma in the INTERGEL Solution lawsuits. It is the Company’s understanding that Federal Insurance Company has paid Vital Pharma what Federal believes is the reasonable portion of the legal fees and expenses submitted to it for reimbursement. Vital Pharma and Noetic are seeking reimbursement of all of the legal fees and expenses incurred in the INTERGEL Solution litigation. The Company believes that Vital Pharma’s and Noetic’s claims have no merit, however there is no assurance that this will be the outcome.

     There can be no assurance that these pending claims, other new product liability claims, claims with respect to uninsured liabilities or claims in excess of insured liabilities, will not have a material adverse effect on the business, financial condition and results of operations of the Company. In addition, there can be no assurance that insurance will continue to be available to the Company and that, if available, the insurance will be available on commercially acceptable terms.

Failure to maintain effective internal controls could have a material adverse effect on the Company’s business, operating results and stock price.

     In connection with our fiscal 2007 audit, we documented and tested our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information and the trading price of our stock could drop significantly.

The Company’s tax rates are subject to fluctuation, which could impact its financial position, and its estimates of tax liabilities may be subject to audit, which could result in additional assessments.

     Our effective tax rates are subject to fluctuation as the income tax rates for each year are a function of: (a) the effects of a mix of profits (losses) earned by Lifecore and its subsidiaries in numerous tax jurisdictions with a broad range of income tax rates, (b) our ability to utilize recorded deferred tax assets, and (c) changes in tax laws or the interpretation of such tax laws. Changes in the mix of these items may cause our effective tax rates to fluctuate between periods, which could have a material adverse effect on our financial position.

     We are subject to income taxes in both the United States and foreign jurisdictions. During the ordinary course of business there are many transactions and calculations for which the ultimate tax determination is uncertain. Significant judgment is exercised in determining our world wide provisions for income taxes.

The Company’s business could be adversely affected if it were to lose the services of its key management employees.

     The Company’s success depends in large part upon the services of its executive officers. The executive officers consist of Dennis J. Allingham, President and Chief Executive Officer; David M. Noel, Vice President of Finance and Chief Financial Officer; Larry Hiebert, Vice President and General Manager of the Hyaluronan Division; James G. Hall, Vice President of Technical Operations; and Kipling Thacker, Ph.D., Vice President of New Business Development. The loss of any one of these individuals may have a material adverse effect on the Company’s business and operations. The Company does not have employment agreements with, or life insurance on, its officers.

Market prices for securities of medical technology companies are highly volatile, and the trading price of the Company’s Common Stock is subject to significant fluctuations.

     Market prices in the United States for securities of medical technology companies can be highly volatile, and the trading price of the Company’s Common Stock could be subject to significant fluctuations in response to quarterly variations in operating results, announcements of the status or results of development projects or technological innovations by the Company or its competitors, government regulation and other events or factors. The volatility in market prices may be unrelated to the operating performance of particular companies. These market fluctuations have in the past materially adversely affected the market price of the Company’s Common Stock, and may have such an effect in the future.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     The Company’s operations are all conducted in its 110,000 square foot building in Chaska, Minnesota, which is owned by the Company and subject to a Mortgage and Security Agreement. The Company completed an expansion of its facility during fiscal 1998. The Company leases local office space for its four foreign subsidiaries.

Item 3. Legal Proceedings

     The Company has been named as a defendant in 81 product liability lawsuits. The lawsuits alleged that the plaintiffs suffered injuries due to the defective nature of GYNECARE INTERGEL Adhesion Prevention Solution (“INTERGEL Solution”) which was manufactured by the Company and marketed by ETHICON, Inc. (“ETHICON”). The other defendants in these lawsuits were ETHICON, which was the Company’s exclusive worldwide marketing partner for INTERGEL Solution through its division, GYNECARE Worldwide, and Johnson & Johnson, the parent company of ETHICON. Many of the lawsuits also named Vital Pharma, Inc. (“Vital Pharma”) as a defendant; Vital Pharma acted as the contract packager for the INTERGEL Solution. The plaintiffs in these actions were individuals who were patients in medical procedures during which INTERGEL Solution was used and who were allegedly injured due to the defective nature of INTERGEL Solution.

     On September 20, 2006, settlement documents relating to all but one of the lawsuits remaining at that date were executed on behalf of the parties. The terms of the settlement do not call for any cash payment by the Company. Since the execution of the settlement documents, Lifecore has been sued in two additional lawsuits, one filed in Nebraska and one in Colorado, and the one remaining lawsuit from the original 81 has been settled. As of this date, there are two cases remaining: Brandy R. Kreifel and Tammy Lynder v. Gynecare, Inc., Ethicon, Inc., Lifecore Biomedical, Inc. and Johnson & Johnson Company in the District Court of Lancaster County, Nebraska, and Margaret S. Madden v. Gynecare Worldwide, et al. in U.S. District Court, District of Colorado. Although the vast majority of the INTERGEL Solution claims have been resolved, there can be no assurance that other related claims will not arise.

     ETHICON defended the Company in all of these lawsuits and is defending the Company in the two remaining lawsuits. Under the terms of the Company’s Conveyance, License, Development and Supply Agreement dated August 8, 1994 with ETHICON, ETHICON is obligated to indemnify and hold the Company harmless from all claims related to the sale and use of INTERGEL Solution, unless it is ultimately determined that a plaintiff’s injuries were caused by a breach of the Company’s limited contractual warranty to ETHICON under that agreement.

The Company believes that ETHICON will be obligated to fully indemnify the Company in connection with any remaining claims relating to INTERGEL Solution sold prior to its voluntary market withdrawal in March 2003.

     On September 25, 2006, Vital Pharma and its insurer, Noetic Specialty Insurance Company (“Noetic”), sued the Company and its insurer, Federal Insurance Company, in Palm Beach County, Florida. Federal Insurance Company has removed the case to federal court and the Company has filed an answer denying the claims. Vital Pharma and Noetic contend that the Company has breached the terms of the Supply Agreement between the Company and Vital Pharma by failing to fully defend and indemnify Vital Pharma in the INTERGEL Solution lawsuits. Vital Pharma and Noetic are seeking reimbursement of legal fees and expenses incurred in the INTERGEL Solution litigation, and a declaration that the Company and Federal Insurance Company are obligated to fully indemnify and hold Vital Pharma harmless with respect to the INTERGEL Solution litigation.

     The Company believes that Vital Pharma’s and Noetic’s claims have no merit. The Company complied with its obligations under the Supply Agreement. The Company agreed to pay for the costs of Vital Pharma’s defense, subject to a reservation of rights. It is the Company’s understanding that Federal Insurance Company has paid Vital Pharma what Federal believes is the reasonable portion of the legal fees and expenses submitted to it for reimbursement. Although Vital Pharma did complain, during the course of the INTERGEL Solution litigation, that Federal Insurance Company did not pay all of the costs and expenses incurred, Vital Pharma did not provide any basis to challenge the amounts not paid by Federal Insurance Company pursuant to Federal Insurance Company’s bill auditing process. The Company has tendered the defense of this matter to Federal Insurance Company. Federal Insurance Company has agreed, subject to a reservation of rights, to defend the Company. Federal Insurance Company has also agreed to pay any verdict or settlement except to the extent that Vital Pharma is allowed to recover under the Supply Agreement amounts that are deemed “unreasonable” under Federal’s policy.

     ETHICON began marketing INTERGEL Solution outside the United States in June 1998 for reducing the incidence of post-surgical adhesions. INTERGEL Solution was approved by the FDA for the U.S. market in November 2001. INTERGEL Solution was voluntarily withdrawn from the market by ETHICON in March 2003 in order to assess information obtained from postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies).

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

     None.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     The Company’s Common Stock is traded on the NASDAQ Global Market under the symbol LCBM. The following table sets forth for each quarter of fiscal 2007 and 2006 the range of high and low closing sale prices of the Common Stock on the NASDAQ Global Market.

		Low				High
Fiscal year
2007
First Quarter		$	13.32			$	17.19
Second Quarter			14.01				17.83
Third Quarter			16.18				18.99
Fourth Quarter			15.79				19.75
2006
First Quarter			10.60				13.97
Second Quarter			11.65				16.51
Third Quarter			11.36				15.99
Fourth Quarter			11.69				16.16