UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2007


o		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: 0-4136

Lifecore Biomedical, Inc.

(Exact name of registrant as specified in its charter)


Minnesota		41-0948334

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

3515 Lyman Boulevard Chaska, Minnesota		55318

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 952-368-4300

Not Applicable
(Former name, former address and former fiscal year,
if changed since last report.)

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 þ No 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 Exchange Act).

Yes o No þ

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of May 3, 2007 was 13,414,220 shares.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS


		Page
Part I.	Financial Information

Item 1.	Financial Statements — Unaudited

	Condensed Consolidated Balance Sheets at March 31, 2007 and June 30, 2006		2

	Condensed Consolidated Statements of Operations for Three Months and Nine Months Ended March 31, 2007 and 2006		3

	Condensed Consolidated Statements of Cash Flows for Nine Months Ended March 31, 2007 and 2006		4

	Notes to Condensed Consolidated Financial Statements		5-10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11-19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		20

Item 4.	Controls and Procedures		20

Part II.	Other Information

Item 1.	Legal Proceedings		21

Item 1A.	Risk Factors		22

Item 6.	Exhibits		23

Signatures			24

Exhibit Index			25
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of Chief Executive Officer
906 Certification of Chief Financial Officer

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	March 31,			June 30,
	2007			2006
ASSETS
Current Assets
Cash and cash equivalents	$	33,283,000		$	26,638,000
Accounts receivable, less allowances		15,830,000			12,564,000
Inventories		12,550,000			12,217,000
Deferred income taxes, net		3,816,000			4,865,000
Prepaid expenses		1,448,000			1,084,000

Total current assets		66,927,000			57,368,000

Property, plant and equipment
Land, building and equipment		50,767,000			49,388,000
Less accumulated depreciation		(27,688,000	)		(26,138,000	)

		23,079,000			23,250,000
Other Assets
Intangibles, net		5,119,000			5,201,000
Inventories		943,000			1,406,000
Deferred income taxes, net		603,000			1,694,000
Other		346,000			319,000

		7,011,000			8,620,000

	$	97,017,000		$	89,238,000


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current maturities of long-term obligations	$	290,000		$	290,000
Accounts payable		3,441,000			3,212,000
Accrued compensation		1,476,000			1,847,000
Accrued expenses		1,643,000			1,549,000

Total current liabilities		6,850,000			6,898,000

Long-term obligations		4,582,000			4,804,000

Shareholders’ equity		85,585,000			77,536,000

	$	97,017,000		$	89,238,000

See accompanying notes to condensed consolidated financial statements.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended March 31,						Nine months ended March 31,
	2007			2006			2007			2006

Net sales	$	18,865,000		$	16,775,000		$	50,427,000		$	45,409,000
Cost of goods sold		7,189,000			6,208,000			19,259,000			17,399,000

Gross profit		11,676,000			10,567,000			31,168,000			28,010,000

Operating expenses
Research and development		1,269,000			881,000			3,382,000			2,878,000
Marketing and sales		5,126,000			4,525,000			15,279,000			12,661,000
General and administrative		1,852,000			1,720,000			5,653,000			5,275,000

		8,247,000			7,126,000			24,314,000			20,814,000


Operating income		3,429,000			3,441,000			6,854,000			7,196,000

Other income (expense)
Interest income		394,000			203,000			1,078,000			495,000
Interest expense		(66,000	)		(65,000	)		(201,000	)		(181,000	)
Currency transaction gains (losses)		72,000			—			156,000			(73,000	)
Other		(5,000	)		5,000			11,000			(14,000	)

		395,000			143,000			1,044,000			227,000


Income before income tax expense		3,824,000			3,584,000			7,898,000			7,423,000

Income tax expense		1,491,000			1,391,000			3,060,000			2,794,000


Net income	$	2,333,000		$	2,193,000		$	4,838,000		$	4,629,000


Net income per share
Basic	$	0.17		$	0.17		$	0.36		$	0.35

Diluted	$	0.17		$	0.16		$	0.35		$	0.34


Weighted average shares outstanding
Basic		13,383,088			13,180,859			13,289,156			13,134,280

Diluted		13,859,948			13,572,205			13,756,762			13,505,079

See accompanying notes to condensed consolidated financial statements.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended March 31,
	2007			2006
Cash flows from operating activities:
Net income	$	4,838,000		$	4,629,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,642,000			1,470,000
Allowance for doubtful accounts		(60,000	)		106,000
Deferred income taxes		2,140,000			2,511,000
Stock-based compensation		1,166,000			786,000
Tax benefit related to stock-based compensation plan		200,000			56,000
Accumulated currency translation adjustment		191,000			90,000
Changes in operating assets and liabilities, net of effects of acquisition:
Accounts receivable		(3,206,000	)		(1,986,000	)
Inventories		130,000			(2,058,000	)
Prepaid expenses		(364,000	)		(251,000	)
Accounts payable		229,000			(409,000	)
Accrued liabilities		(277,000	)		(413,000	)

Net cash provided by operating activities		6,629,000			4,531,000

Cash flows from investing activities:
Purchases of property, plant and equipment		(1,379,000	)		(1,287,000	)
Acquisition, net of cash acquired		—			(346,000	)
Change in other assets		(37,000	)		(75,000	)

Net cash used in investing activities		(1,416,000	)		(1,708,000	)

Cash flows from financing activities:
Payments on long-term obligations		(222,000	)		(187,000	)
Proceeds from stock options exercised		1,488,000			990,000
Excess tax benefit related to stock-based compensation		166,000			—

Net cash provided by financing activities		1,432,000			803,000

Net increase in cash and cash equivalents		6,645,000			3,626,000
Cash and cash equivalents at beginning of period		26,638,000			18,508,000

Cash and cash equivalents at end of period	$	33,283,000		$	22,134,000


Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	201,000		$	166,000
Taxes		285,000			253,000

See accompanying notes to condensed consolidated financial statements.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)

NOTES TO CONDENSED CONSOLIDATED STATEMENTS — UNAUDITED

March 31, 2007

NOTE A — FINANCIAL INFORMATION

Lifecore Biomedical, Inc. (referred to in this report as “Lifecore” or the “Company”) manufactures biomaterials and surgical devices for use in various surgical markets and provides specialized contract aseptic manufacturing services through its two divisions, the Hyaluronan Division and the Dental Division. The Company’s manufacturing facility is located in Chaska, Minnesota. The Hyaluronan Division markets its products through original equipment manufacturers and contract manufacturing alliances in ophthalmologic, orthopedic surgery and veterinary medicine fields. The Dental Division markets its products through direct sales in the United States, Italy, Germany, Sweden and France and through distributors in other foreign countries.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of March 31, 2007, the results of operations for the three month and nine month periods ended March 31, 2007 and 2006, and cash flows for the nine month periods ended March 31, 2007 and 2006. The results of operations and cash flows for the nine months ended March 31, 2007 are not necessarily indicative of the results for the full year or of the results for any future periods. The unaudited condensed consolidated balance sheet as of June 30, 2006 has been derived from audited financial statements as of that date.

In preparation of the Company’s consolidated financial statements, management is required to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses during the reporting periods. Actual results could differ from the estimates used by management.

NOTE B — INVENTORIES

Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist mainly of finished hyaluronan powder, aseptic units and dental products and related raw materials. The Company’s inventory has been reduced to lower of cost or market for obsolete, excess or unmarketable inventory. The lower of cost or market adjustment is based on management’s review of inventories on hand compared to estimated future usage and sales. The portion of finished hyaluronan powder inventory not expected to be consumed within the next 12 months is classified as a long-term asset. The finished hyaluronan inventory is maintained in a frozen state and has a shelf life of ten years. Inventories consist of the following:


	March 31,		June 30,
	2007		2006
Raw Materials	$	4,478,000	$	3,973,000
Work-in-process		1,213,000		708,000
Finished goods-current		6,859,000		7,536,000

		12,550,000		12,217,000
Finished goods-long term		943,000		1,406,000

	$	13,493,000	$	13,623,000

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

March 31, 2007

NOTE C — INTANGIBLE ASSETS

Intangibles consist primarily of the cost of goodwill related to acquisitions, patents and distribution rights and licenses. All intangibles relate to the Dental Division.

Also included within intangibles are costs incurred to register patents and trademarks, which are capitalized as incurred. Amortization of these costs commences when the related patent or trademark is granted. The costs are amortized over the estimated useful life of the patent or trademark.

Goodwill is tested for impairment on an annual basis, or when there is an indication that an impairment has occurred, and is written down when impaired by applying a fair value based test. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. There was no impairment recorded for the nine month period ended March 31, 2007.

Intangibles consisted of the following at:


	March 31,			June 30,
	2007			2006
Goodwill	$	4,783,000		$	4,783,000
Patents		387,000			387,000
Distribution rights and licenses		350,000			350,000
Customer List		80,000			80,000
Accumulated amortization		(481,000	)		(399,000	)

	$	5,119,000		$	5,201,000

NOTE D — LINE OF CREDIT

On December 19, 2006, the Company renewed its $5,000,000 credit facility with a bank to extend the maturity date to December 31, 2008. The agreement allows for advances against eligible accounts receivable, subject to compliance with covenants. Under the renewed credit facility, interest will accrue at the prime rate minus 1% or LIBOR plus 1.75%, at the Company’s option. At March 31, 2007 and June 30, 2006, there were no balances outstanding under the line of credit.

NOTE E — STOCK-BASED COMPENSATION

Commencing July 1, 2005, the Company adopted Statement of Financial Accounting Standard No. 123R, “Share-Based Payment” (“SFAS 123R”), which requires all share-based payments, including grants of stock options, to be recognized in the income statement as an operating expense, based on their fair values over the requisite service period. The Company recorded $295,000 and $262,000 of related compensation expense for the three month periods ended March 31, 2007 and 2006, respectively, and $951,000 and $633,000 of related compensation expense for the nine month periods ended March 31, 2007 and 2006, respectively.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

March 31, 2007

NOTE E — STOCK-BASED COMPENSATION — (continued)

The Company recognized and classified stock-based compensation expense related to employee and non-employee options as follows:


	Three months ended March 31,				Nine months ended March 31,
	2007		2006		2007		2006
Cost of goods sold	$	14,000	$	11,000	$	52,000	$	32,000
Research and development		75,000		14,000		223,000		43,000
Marketing and sales		55,000		125,000		295,000		231,000
General and administrative		151,000		112,000		381,000		327,000

Total stock-based compensation expense	$	295,000	$	262,000	$	951,000	$	633,000

The Company classifies stock option expense based on option holders’ salary expense classification.

During the nine month period ended March 31, 2007, the Company granted 3,500 restricted common stock awards to a new officer at a price of $15.91 and 742 restricted common stock awards to one of the Company’s non-employee directors at a price of $16.16. Stock compensation expense recognized related to restricted stock awards totaled $71,000 and $73,000 during the three month periods ended March 31, 2007 and 2006, respectively, and stock compensation expense recognized related to restricted stock awards totaled $215,000 and $153,000 during the nine month periods ended March 31, 2007 and 2006, respectively.

NOTE F — ACCUMULATED OTHER COMPREHENSIVE INCOME

The Company has $261,000 of accumulated currency translation adjustment which reduces shareholders’ equity at March 31, 2007. Total comprehensive income was $2,313,000 and $2,246,000 for the three month periods ended March 31, 2007 and 2006, respectively, and total comprehensive income was $5,029,000 and $4,719,000 for the nine month periods ended March 31, 2007 and 2006, respectively.

NOTE G — NET INCOME PER SHARE

The Company’s basic net income per share amounts have been computed by dividing net income by the weighted average number of outstanding common shares. The Company’s diluted net income per share is computed by dividing net income by the weighted average number of outstanding common shares and common share equivalents relating to stock options and restricted stock, when dilutive. For the three and nine month periods ended March 31, 2007, 476,860 and 467,606 common share equivalents, respectively, were included in the computation of diluted net income per share. For the three and nine month periods ended March 31, 2006, 391,346 and 370,799 common share equivalents, respectively, were included in the computation of diluted net income per share.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

March 31, 2007

NOTE G — NET INCOME PER SHARE — (continued)

Options to purchase 76,000 and 135,500 shares of common stock with a weighted average exercise price of $19.84 and $18.50 for the three month and nine month periods ended March 31, 2007, respectively, and options to purchase 517,043 shares of common stock with a weighted average exercise price of $16.27 for the three month and nine month periods ended March 31, 2006 were outstanding but were not included in the calculation of diluted net income per share because the options’ exercise prices were greater than the average market price of the Company’s common stock during those periods. Although these options were antidilutive for the periods presented, they may be dilutive in future period calculations.

NOTE H — INCOME TAXES

Provision for income taxes was $1,491,000 at an effective rate of 39.0% and $1,391,000 at an effective rate of 38.8% for the three month periods ended March 31, 2007 and 2006, respectively. Provision for income taxes was $3,060,000 at an effective rate of 38.7% and $2,794,000 at an effective rate of 37.6% for the nine month periods ended March 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully utilized on its tax returns.

NOTE I — SEGMENT INFORMATION

The Company operates in two business segments. The Hyaluronan Division manufactures, markets and sells products containing hyaluronan and provides contract aseptic packaging services. The Dental Division produces and markets various dental products to the area of implant dentistry. Currently, products containing hyaluronan are sold primarily to customers pursuant to ongoing supply agreements. The Company’s Dental Division markets products directly to clinicians and dental laboratories in the United States, Germany, Italy, Sweden and France and primarily through distributorship arrangements in other foreign locations.

Segment assets and the basis of segmentation are consistent with that reported at June 30, 2006. Segment information for sales and income from operations are as follows:


	Three months ended March 31,				Nine months ended March 31,
	2007		2006		2007		2006
Net sales
Hyaluronan products	$	6,145,000	$	5,347,000	$	15,243,000	$	14,639,000
Dental products		12,720,000		11,428,000		35,184,000		30,770,000

	$	18,865,000	$	16,775,000	$	50,427,000	$	45,409,000

Income from operations
Hyaluronan products	$	1,608,000	$	1,493,000	$	3,067,000	$	3,547,000
Dental products		1,821,000		1,948,000		3,787,000		3,649,000

	$	3,429,000	$	3,441,000	$	6,854,000	$	7,196,000

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

March 31, 2007

NOTE J — ACQUISITION OF BARDO-BIOTECH SAS

On August 12, 2005, the Company acquired 100% of the stock of Bardo-Biotech SAS, a privately-owned distributor of the Company’s dental products located in Beauzelle, France. The Company included the operating results of Bardo-Biotech SAS in the financial statements from August 1, 2005, the effective date.

In conjunction with this acquisition, the consideration paid was $401,000 in cash and $362,000 in debt forgiveness. The acquisition resulted in goodwill of $431,000 and intangible assets of $80,000, a portion of which is deductible for tax purposes.

NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” — an interpretation of FASB Statement No. 109, “Accounting for Income Taxes” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize in the financial statements the impact of a tax position. Recognition is allowed if the tax position is more likely than not to be sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006 with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The adoption of this statement is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements and is effective for fiscal years ending after November 15, 2006. SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures. This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. The initial application of SAB 108 is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

On February 15, 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial position or results of operations.

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurement but does not require any new fair value measurements. SFAS No. 157 is effective for financial statement issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact this pronouncement will have on its consolidated financial position or results of operations.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED (continued)

March 31, 2007

NOTE L — LEGAL PROCEEDINGS

Lifecore was named as a defendant in 80 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 Lifecore and marketed by ETHICON, Inc (“ETHICON”). The other defendants in these lawsuits were ETHICON, which was Lifecore’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.

ETHICON accepted Lifecore’s tender of the defense of these lawsuits under the Conveyance, License, Development and Supply Agreement between the parties, subject to a reservation of rights, and ETHICON defended Lifecore in all of these matters. Lifecore accepted Vital Pharma’s tender of the defense of these lawsuits under the Supply Agreement between Lifecore and Vital Pharma, subject to a reservation of rights. Lifecore’s insurer, Federal Insurance, has paid for Vital Pharma’s defense. Lifecore has also asserted that ETHICON is obligated to pay for Vital Pharma’s defense costs, pursuant to the agreement between ETHICON and Lifecore.

On September 25, 2006, Vital Pharma and its insurer, Noetic Specialty Insurance Company (“Noetic”), sued the Company and its insurer, Federal Insurance Company. It is the Company’s understanding that Federal Insurance Company has paid Vital Pharma for 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 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.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

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

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the Company’s financial statements. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition:

The Company recognizes revenue when the product is shipped or otherwise accepted by unaffiliated customers, pursuant to customers’ orders, the price is fixed and collection is reasonably assured. The SEC’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition,” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Allowance for Uncollectible Accounts Receivable:

Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company extends credit to customers in the normal course of business but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of the Company’s customers and bases the estimated allowance on these evaluations.

Inventories:

Inventories are stated at the lower of cost (first-in, first-out method) or market and have been reduced to the lower of cost or market for obsolete, excess or unmarketable inventory. The lower of cost or market adjustment is based on management’s review of inventories on hand compared to estimated future usage and sales.

Goodwill, Intangibles and Other Long-Lived Assets:

Intangibles and certain other long-lived assets with a definite life are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue.

The Company reviews goodwill for impairment on an annual basis or upon a triggering event.

Management has reviewed goodwill and other intangibles for impairment and has concluded that such assets are appropriately valued at the financial statement dates.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Accounting for Income Taxes:

Income taxes are accounted for under the provisions of Statement of Financial Accounting Standards No. 109 (“SFAS 109”), “Accounting for Income Taxes.” Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, hence giving rise to a net deferred tax asset or liability. Management must then assess the likelihood that deferred tax assets will be recovered from future taxable income and, to the extent that recovery is not likely, a valuation allowance must be established.

Stock-Based Compensation:

On July 1, 2005, the Company adopted SFAS 123R, which requires the fair values of all share-based payment transactions, including grants of stock options, to be recognized in the income statement as an operating expense, based on the fair values at date of issue over the requisite service period. The computation of fair value and the related stock compensation expense involves numerous estimates and assumptions based on historical experience and utilizes valuation models which are designed to produce estimated fair value based on these estimates and assumptions.

Overview

The Company manufactures biomaterials and medical devices for use in various surgical markets and provides related specialized contract aseptic manufacturing services. The Company operates through two business units, the Hyaluronan Division and the Dental Division.

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 extracellular matrix of connective tissues in both animals and humans.

The Hyaluronan Division primarily sells into four medical segments: 1) Ophthalmic, 2) Orthopedic, 3) Veterinary, and 4) Aesthetic. In addition, the Company has an exclusive license agreement to develop and commercialize hyaluronan-based products based on a patented cross-linking technology.

The Company also supplies hyaluronan to customers pursuing other medical applications, such as wound care, medical device coatings, tissue engineering, drug delivery and pharmaceuticals. The Company leverages its hyaluronan manufacturing expertise to provide expanded hyaluronan product offerings and specialized aseptic manufacturing of hyaluronan products.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The Company’s Dental Division develops and markets precision surgical and prosthetic devices for the restoration of missing dentition and associated support tissues. 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 clients through comprehensive education curricula provided in the Company’s various Lifecore Skills SeriesÔ programs. These professional continuing education programs are designed to train surgical and restorative clinicians and their auxiliary teams in the principles of tooth replacement therapy and practice development.

The Dental Division’s products are marketed in the United States through the Company’s direct sales force. Internationally, the Division’s products are marketed through direct sales subsidiaries in Italy, Germany, France and Sweden, and through 29 international distributors covering 54 additional countries.

Acquisition of Bardo-Biotech SAS

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Results of Operations

Three Months Ended March 31, 2007 Compared to Three Months Ended March 31, 2006:


	Hyaluronan				Dental
	Division				Division				Consolidated
	2007		2006		2007		2006		2007		2006

Net sales	$	6,145,000	$	5,347,000	$	12,720,000	$	11,428,000	$	18,865,000	$	16,775,000
Cost of goods sold		2,760,000		2,449,000		4,429,000		3,759,000		7,189,000		6,208,000

Gross profit		3,385,000		2,898,000		8,291,000		7,669,000		11,676,000		10,567,000

Operating expenses
Research and development		880,000		516,000		389,000		365,000		1,269,000		881,000
Marketing and sales		194,000		149,000		4,932,000		4,376,000		5,126,000		4,525,000
General and administrative		703,000		740,000		1,149,000		980,000		1,852,000		1,720,000

		1,777,000		1,405,000		6,470,000		5,721,000		8,247,000		7,126,000

Operating income	$	1,608,000	$	1,493,000	$	1,821,000	$	1,948,000	$	3,429,000	$	3,441,000

Net Sales. Net sales for the quarter ended March 31, 2007 increased $2,090,000 or 12% as compared to the same quarter of last fiscal year. Hyaluronan Division sales increased $798,000 or 15% and Dental Division sales increased $1,292,000 or 11%.

Hyaluronan Division sales for the quarter ended March 31, 2007 increased to $6,145,000 from $5,347,000 in the same quarter of last fiscal year due to increased sales to ophthalmic customers related to inventory build and customer sell-through and to orthopedic customers due to increased demand.

Dental Division sales for the quarter ended March 31, 2007 increased to $12,720,000 from $11,428,000 in the same quarter of last fiscal year. Domestic sales increased 12% due to sales of the Prima^TM Implant System and the addition of 11 sales representatives. International sales increased 11% due to sales of the Prima™ Implant System and sales growth by our subsidiaries. Favorable foreign currency comparisons increased international sales by $271,000 over the same quarter of last fiscal year.

Gross profit. Consolidated gross profit, as a percentage of net sales, was 62% in the quarter ended March 31, 2007 and 63% in the same quarter of last fiscal year.

The gross profit for the Hyaluronan Division increased to 55% in the quarter ended March 31, 2007 from 54% in the same quarter of last fiscal year due to product mix.

Gross profit for the Dental Division decreased to 65% in the quarter ended March 31, 2007 from 67% in the same quarter of last fiscal year as a result of sales mix and cost increases.

Research and development. Consolidated research and development expenses consist of personnel costs, contract services, facility and equipment charges and materials consumed in the development of new products or the research and testing of enhancements to existing products. Research and development activities include: pilot plant operations, development of new formulations, design and testing of new products, regulatory services and clinical evaluation. Research and development expenses increased $388,000 or 44% in the quarter ended March 31, 2007 as compared to the same quarter of last fiscal year. The increase is due to increases in product development costs and stock-based compensation.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Marketing and sales. Consolidated marketing and sales expenses increased by $601,000 or 13% in the quarter ended March 31, 2007 as compared to the same quarter of last fiscal year. The increase was due mainly to the addition of 11 domestic sales representatives, expanded marketing activities and increased expenses at the Company’s French subsidiary compared to the same quarter of last fiscal year.

General and administrative. Consolidated general and administrative expenses increased by $132,000 or 8% in the quarter ended March 31, 2007 as compared to the same quarter of last fiscal year. The increase was primarily due to increased subsidiary expenses.

Other income (expense). Net other income, as shown on the Consolidated Statements of Operations, increased $252,000 for the quarter ended March 31, 2007 as compared to the same quarter of last fiscal year. The increase was due to an increase in interest income of $191,000 resulting from a higher cash balance and higher interest rates and an increase in currency transaction gains realized on Euro-denominated intercompany transactions of $72,000.

Provision for income taxes. Provision for income taxes was $1,491,000 at an effective rate of 39.0% and $1,391,000 at an effective rate of 38.8% for the three month periods ended March 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully utilized on its tax returns.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Nine Months Ended March 31, 2007 Compared to Nine Months Ended March 31, 2006:


	Hyaluronan				Dental
	Division				Division				Consolidated
	2007		2006		2007		2006		2007		2006

Net sales	$	15,243,000	$	14,639,000	$	35,184,000	$	30,770,000	$	50,427,000	$	45,409,000
Cost of goods sold		7,144,000		6,858,000		12,115,000		10,541,000		19,259,000		17,399,000

Gross profit		8,099,000		7,781,000		23,069,000		20,229,000		31,168,000		28,010,000

Operating expenses
Research and development		2,284,000		1,728,000		1,098,000		1,150,000		3,382,000		2,878,000
Marketing and sales		591,000		433,000		14,688,000		12,228,000		15,279,000		12,661,000
General and administrative		2,157,000		2,073,000		3,496,000		3,202,000		5,653,000		5,275,000

		5,032,000		4,234,000		19,282,000		16,580,000		24,314,000		20,814,000


Operating income	$	3,067,000	$	3,547,000	$	3,787,000	$	3,649,000	$	6,854,000	$	7,196,000

Net Sales. Net sales for the nine months ended March 31, 2007 increased $5,018,000 or 11% as compared to the same period of last fiscal year. Hyaluronan Division sales increased $604,000 or 4% and Dental Division sales increased $4,414,000 or 14%.

Hyaluronan Division sales for the nine months ended March 31, 2007 increased to $15,243,000 from $14,639,000 in the same period of last fiscal year due to increased revenue from new customers resulting from product development activities and increased sales to orthopedic customers, offset partially by decreased sales to ophthalmic customers.

Dental Division sales for the nine months ended March 31, 2007 increased to $35,184,000 from $30,770,000 in the same period of last fiscal year. Domestic sales increased 15% due to sales of the Prima^TM Implant System and the addition of 11 sales representatives. International sales increased 13% due to sales of the Prima^TM Implant System and strong subsidiary sales. Favorable foreign currency comparisons increased international sales by $587,000 over the same period of last fiscal year.

Gross profit. Consolidated gross profit, as a percentage of net sales, was 62% in the nine months ended March 31, 2007 and 62% in the same period of last fiscal year.

The gross profit for the Hyaluronan Division was 53% in the nine months ended March 31, 2007 and 53% in the same period of last fiscal year.

Gross profit for the Dental Division was 66% in the nine months ended March 31, 2007 and 66% in the same period of last fiscal year.

Research and development. Consolidated research and development expenses consist of personnel costs, contract services, facility and equipment charges and materials consumed in the development of new products or enhancements to existing products. Research and development activities include: pilot plant operations, development of new formulations, design and testing of new products, regulatory services and clinical evaluation. Research and development expenses increased $504,000 or 18% for the nine months ended March 31, 2007 as compared to the same period last fiscal year. The increase is due to increases in product development costs and stock-based compensation.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Marketing and sales. Consolidated marketing and sales expenses increased by $2,618,000 or 21% for the nine months ended March 31, 2007 as compared to the same period of last fiscal year. The increase was due mainly to the addition of 11 domestic sales representatives, expanded marketing activities and increased expenses at the Company’s French subsidiary compared to the same period of last fiscal year.

General and administrative. Consolidated general and administrative expenses increased by $378,000 or 7% for the nine months ended March 31, 2007 as compared to the same period of last fiscal year. The increase was due to increased subsidiary expenses, increased information systems expenses and an increase in stock-based compensation.

Other income (expense). Net other income, as shown on the Consolidated Statements of Operations, increased $817,000 for the nine months ended March 31, 2007 as compared to the same period of last fiscal year. The increase was primarily due to an increase in interest income of $583,000 resulting from a higher cash balance and higher interest rates and an increase in currency transaction gains realized on Euro-denominated intercompany transactions of $229,000.

Provision for income taxes. Provision for income taxes was $3,060,000 at an effective rate of 38.7% and $2,794,000 at an effective rate of 37.6% for the nine month periods ended March 31, 2007 and 2006, respectively. With the exception of the Alternative Minimum Tax and certain state taxes, the Company will not use cash for domestic income taxes until its net operating losses are fully utilized on its tax returns.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

Liquidity and Capital Resources

As of March 31, 2007, the Company had $33.3 million of cash and cash equivalents and working capital of $60.1 million. Cash and cash equivalents increased during the nine month period ended March 31, 2007 by $6.6 million.

Cash Provided by Operating Activities. Operating cash flow for the nine month period ended March 31, 2007 was primarily the result of operational profitability. Net cash provided by operations was approximately $6.6 million, attributable to net income of $4.8 million and adjustments for non-cash charges related to the changes in deferred tax assets of $2.1 million, depreciation and amortization of $1.6 million and stock-based compensation of $1.2 million. Accounts receivable increased $3.2 million.

Net cash provided by operations in the same period of last fiscal year was approximately $4.5 million, attributable to net income of $4.6 million and adjustments for non-cash charges related to the changes in deferred tax assets of $2.5 million, depreciation and amortization of $1.5 million and stock-based compensation of $0.8 million. Inventories increased $2.1 million and accounts receivable increased by $2.0 million.

Cash Used in Investing Activities. Net cash used in investing activities was $1.4 million and $1.7 million in the nine month periods ended March 31, 2007 and 2006, respectively. Cash used in investing activities reflected purchases of property and equipment of $1.4 million and $1.3 million in the nine month periods ended March 31, 2007 and 2006, respectively. Net cash of $0.3 million was used for the acquisition of the stock of the Company’s French distributor in the same period of last fiscal year.

Cash Provided by Financing Activities. Net cash provided by financing activities was $1.4 million and $0.8 million in the nine month periods ended March 31, 2007 and 2006, respectively. Cash provided was attributable to proceeds from the exercise of stock options of $1.5 million and $1.0 million in the nine month periods ended March 31, 2007 and 2006, respectively.

On August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds was $5,630,000, and the bonds bear interest at a variable rate set weekly by the bond remarketing agent (3.85% as of March 31, 2007). In addition, the Company pays an annual remarketing fee equal to 0.125% and an annual letter of credit fee of 1.0%. The bonds are collateralized by a bank letter of credit which is secured by a first mortgage on the facility. The terms of the agreement require the Company to comply with various financial covenants including minimum tangible net worth, liabilities to tangible net worth ratio and net income (loss). As of March 31, 2007 and June 30, 2006, the Company was in compliance with all covenants.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)

The Company’s ability to generate positive cash flow from operations and achieve ongoing profitability is dependent upon the continued expansion of revenue from its hyaluronan and dental businesses. Growth in the Hyaluronan Division is unpredictable due to the complex governmental regulatory environment for new medical products, the early stage of certain of these markets and the uncertainty associated with the future market status of the Company’s adhesion prevention product. Similarly, expansion of the Company’s Dental Division sales is also dependent upon increased revenue from new and existing customers, as well as successfully competing in a more mature market. The Company expects its current cash balance, cash generated from anticipated operations and the available funds under the line of credit to satisfy cash flow needs in the near term. No assurance can be given that the Company will maintain positive cash flow from operations. While the Company’s capital resources appear adequate today, the Company may seek additional financing in the future. If additional financing is necessary, no assurance can be given that such financing will be available and, if available, will be on terms favorable to the Company and its shareholders.

The Company does not have any material “off-balance sheet” financing activities. See Note K for a discussion of recent accounting pronouncements.

Seasonality

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

Cautionary Statement

Statements included in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-Q, in future filings by the Company with the SEC and in the Company’s press releases and oral statements made with the approval of authorized executive officers, that are not historical or current facts, should be considered “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may, among other things, relate to market acceptance and demand for the Company’s products, future product development plans and timing, the results of clinical trials, FDA clearances and the related timing of such, the potential size of the markets for the Company’s products, future product introductions, future revenues, expense levels, tax rates and capital needs and the Company’s ability to successfully negotiate acceptable agreements with its corporate partners. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected or in the future could affect the Company’s actual results and could cause its actual financial performance to differ materially from that expressed in any forward-looking statement: (1) obtaining the necessary regulatory approvals for new hyaluronan and dental products; (2) the Company’s reliance on corporate partners to develop new products on a timely basis and to market the Company’s existing and new hyaluronan products effectively; (3) intense competition in the markets for the Company’s principal products; and (4) the uncertainty associated with the future market status of the Company’s adhesion prevention product. Investors are referred to a more detailed discussion of the risks presented in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and in Part II, Item 1A of this report on Form 10-Q.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I — FINANCIAL INFORMATION

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company invests its excess cash in money market mutual funds and bank certificates of deposits. All investments are held to maturity. The market risk on such investments is minimal.

Receivables from sales to foreign customers are denominated in U.S. dollars. Transactions at the Company’s foreign subsidiaries are denominated in European Euros at Lifecore Biomedical SpA, Lifecore Biomedical GmbH and Lifecore Biomedical SAS and are denominated in Swedish Krona at Lifecore Biomedical AB. The Company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business from sales to its foreign subsidiaries. Because the Company’s products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. The Company does not use derivative financial instruments to manage foreign currency fluctuation risk.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective.

(b) Changes in internal control over financial reporting.

During the fiscal period covered by this report, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a — 15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company was named as a defendant in 80 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 one additional lawsuit, filed in Nebraska. 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 Stephanie and Michael Stibor and Wisconsin Physicians Service Insurance Corporation v. Ethicon, Inc., Lifecore Biomedical, Inc. and Krista Jacobson in U.S. District Court, District of Wisconsin. 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 for 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).

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION

ITEM 1A. RISK FACTORS

The discussion of the Company’s business and operations should be read together with the risk factors contained in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006 filed with the SEC, which describe various risks and uncertainties to which the Company is or may become subject. These risks and uncertainties have the potential to affect the Company’s business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. The Company is updating the risk factors set forth in the Company’s Annual Report on Form 10-K by amending the following risk factor:

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 80 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. Since the execution of the settlement documents, Lifecore has been sued in one additional lawsuit, filed in Nebraska. In addition, on September 25, 2006, Vital Pharma, Inc. and its insurer, Noetic Specialty Insurance Company, 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 for 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. Although the vast majority of the INTERGEL Solution claims have been resolved, there can be no assurance that other related claims will not arise.

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 continue to be on commercially acceptable terms.

LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART II — OTHER INFORMATION

ITEM 6. EXHIBITS

3.1		Amended and Restated Articles of Incorporation, as adopted on January 18, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 24, 2006)

3.2		Amended Bylaws, as adopted on April 19, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2007)

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970])

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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


	LIFECORE BIOMEDICAL, INC.

	By:

Dated: May 10, 2007	/s/ Dennis J. Allingham
	Dennis J. Allingham
	President, Chief Executive Officer, Secretary and Director (duly authorized officer)


Dated: May 10, 2007	/s/ David M. Noel
	David M. Noel
	Vice President of Finance and Chief Financial Officer (principal financial and accounting officer)

Exhibit Index

3.1		Amended and Restated Articles of Incorporation, as adopted on January 18, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on January 24, 2006)

3.2		Amended Bylaws, as adopted on April 19, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2007)

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970])

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

LIFECORE BIOMEDICAL INC 10-Q