##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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Form 10-Q


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

For the quarterly period ended December 31, 2003

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 O-4136

Lifecore Biomedical, Inc.
(Exact name of Registrant as specified in its charter)

Minnesota
    
    41-0948334(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)3515 Lyman BoulevardChaska, Minnesota
    
    55318(Address of principal executive
    
    (Zip Code)offices)


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

Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No

Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes X No

The number of shares outstanding of the registrants Common Stock, $.01 par
value, as of January 30, 2004 was 12,891,417 shares.

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TABLE OF CONTENTS



|                                             |                                                                                               |                                                                                                                  |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. Financial Information               
|                                             | Item 1. Financial Statements                                                                 
|                                             |                                                                                               | Condensed Consolidated Balance Sheets at December 31, 2003 and June 30, 2003                                    
|                                             |                                                                                               | Condensed Consolidated Statements of Operations for Three Months and Six Months Ended December 31, 2003 and 2002
|                                             |                                                                                               | Condensed Consolidated Statements of Cash Flows for Six Months Ended December 31, 2003 and 2002                 
|                                             |                                                                                               | Notes to Condensed Consolidated Financial Statements                                                            
|                                             | Item 2. Managements Discussion and Analysis of Results of Operations and Financial Condiiton
|                                             | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                             | Item 4. Controls and Procedures                                                              
|Part II. Other Information                  
|                                             | Item 1. Legal Proceedings                                                                    
|                                             | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                             | Item 6. Exhibits and Reports on Form 8-K                                                     
|                                             |                                                                                               | a. Exhibits and Exhibit Index                                                                                   
|                                             |                                                                                               | b. Reports on Form 8-K                                                                                          
|SIGNATURES                                  
|Certification of CEO Pursuant to Section 302
|Certification of CFO Pursuant to Section 302
|Certification of CEO Pursuant to Section 906
|Certification of CFO Pursuant to Section 906



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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsCondensed Consolidated Balance Sheets at December 31, 2003 and June 30, 2003
    
    
    3Condensed Consolidated Statements of Operations for Three Months and Six Months Ended December 31, 2003 and 2002
    
    
    4Condensed Consolidated Statements of Cash Flows for Six Months Ended December 31, 2003 and 2002
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6-10Item 2.
    
    Managements Discussion and Analysis of Results of
 Operations and Financial Condition
    
    
    11-15Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4.
    
    Controls and Procedures
    
    
    16Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 6.
    
    Exhibits and Reports on Form 8-Ka.     Exhibit Index
    
    
    17-18b.     Reports on Form 8-K
    
    
    18Signatures
    
    
    
    
    
    
    19


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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

December 31,
    
    
    June 30,ASSETS
    
    2003
    
    
    2003Current AssetsCash and cash equivalents
    
    $
    5,011,000
    
    
    $
    4,211,000Accounts receivable, less allowances
    
    
    7,767,000
    
    
    
    7,795,000Inventories
    
    
    9,695,000
    
    
    
    9,728,000Prepaid expenses
    
    
    548,000
    
    
    
    766,000Total current assets
    
    
    23,021,000
    
    
    
    22,500,000Property, plant and equipmentLand, building and equipment
    
    
    44,924,000
    
    
    
    44,732,000Less accumulated depreciation
    
    
    (21,042,000
    )
    
    
    (19,820,000
    )23,882,000
    
    
    
    24,912,000Other AssetsIntangibles
    
    
    4,560,000
    
    
    
    4,643,000Security deposits
    
    
    847,000
    
    
    
    843,000Inventories
    
    
    4,639,000
    
    
    
    4,639,000Other
    
    
    653,000
    
    
    
    815,00010,699,000
    
    
    
    10,940,000$
    57,602,000
    
    
    $
    58,352,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesCurrent maturities of long-term obligations
    
    $
    145,000
    
    
    $
    156,000Accounts payable
    
    
    1,480,000
    
    
    
    1,880,000Accrued compensation
    
    
    1,136,000
    
    
    
    1,113,000Accrued expenses
    
    
    875,000
    
    
    
    840,000Total current liabilities
    
    
    3,636,000
    
    
    
    3,989,000Long-term obligations
    
    
    5,902,000
    
    
    
    5,969,000Shareholders equity
    
    
    48,064,000
    
    
    
    48,394,000$
    57,602,000
    
    
    $
    58,352,000


See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

Three months ended December 31,
    
    
    Six months ended December 31,2003
    
    
    2002
    
    
    2003
    
    
    2002Net sales
    
    $
    11,558,000
    
    
    $
    10,262,000
    
    
    $
    21,505,000
    
    
    $
    19,234,000Cost of goods sold
    
    
    4,863,000
    
    
    
    4,165,000
    
    
    
    9,632,000
    
    
    
    9,074,000Gross profit
    
    
    6,695,000
    
    
    
    6,097,000
    
    
    
    11,873,000
    
    
    
    10,160,000Operating expensesResearch and development
    
    
    1,245,000
    
    
    
    1,011,000
    
    
    
    2,504,000
    
    
    
    1,968,000Marketing and sales
    
    
    3,301,000
    
    
    
    3,057,000
    
    
    
    6,474,000
    
    
    
    5,905,000General and administrative
    
    
    1,690,000
    
    
    
    1,545,000
    
    
    
    3,251,000
    
    
    
    2,704,0006,236,000
    
    
    
    5,613,000
    
    
    
    12,229,000
    
    
    
    10,577,000Operating income (loss)
    
    
    459,000
    
    
    
    484,000
    
    
    
    (356,000
    )
    
    
    (417,000
    )Other income (expense)Interest income
    
    
    6,000
    
    
    
    6,000
    
    
    
    12,000
    
    
    
    35,000Interest expense
    
    
    (154,000
    )
    
    
    (262,000
    )
    
    
    (309,000
    )
    
    
    (428,000
    )Currency transaction gains
    
    
    274,000
    
    
    
    42,000
    
    
    
    398,000
    
    
    
    98,000Other
    
    
    12,000
    
    
    
    42,000
    
    
    
    9,000
    
    
    
    (22,000
    )138,000
    
    
    
    (172,000
    )
    
    
    110,000
    
    
    
    (317,000
    )Net income (loss)
    
    $
    597,000
    
    
    $
    312,000
    
    
    $
    (246,000
    )
    
    $
    (734,000
    )Net income (loss) per shareBasic
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )Diluted
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )Weighted average shares outstandingBasic
    
    
    12,891,083
    
    
    
    12,882,313
    
    
    
    12,890,098
    
    
    
    12,878,471Diluted
    
    
    12,938,352
    
    
    
    12,949,904
    
    
    
    12,890,098
    
    
    
    12,878,471


See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six months ended December 31,2003
    
    
    2002Cash flows from operating activities:Net loss
    
    $
    (246,000
    )
    
    $
    (734,000
    )Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:Depreciation and amortization
    
    
    1,310,000
    
    
    
    1,490,000Allowance for doubtful accounts
    
    
    (77,000
    )
    
    
    40,000Accumulated currency translation adjustment
    
    
    (108,000
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    105,000
    
    
    
    (191,000
    )Inventories
    
    
    33,000
    
    
    
    (844,000
    )Prepaid expenses
    
    
    218,000
    
    
    
    83,000Accounts payable
    
    
    (400,000
    )
    
    
    (1,663,000
    )Accrued liabilities
    
    
    58,000
    
    
    
    (73,000
    )Net cash provided by (used in) operating activities
    
    
    893,000
    
    
    
    (1,892,000
    )Cash flows from investing activities:Purchases of property, plant and equipment
    
    
    (192,000
    )
    
    
    (382,000
    )Purchases of intangibles
    
    
    
    
    
    
    (40,000
    )Increase in security deposits
    
    
    (4,000
    )
    
    
    (11,000
    )Decrease in other assets
    
    
    158,000
    
    
    
    108,000Net cash used in investing activities
    
    
    (38,000
    )
    
    
    (325,000
    )Cash flows from financing activities:Advances on line of credit
    
    
    
    
    
    
    550,000Payments on long-term obligations
    
    
    (79,000
    )
    
    
    (56,000
    )Proceeds from stock issuance
    
    
    24,000
    
    
    
    107,000Net cash provided by (used in) financing activities
    
    
    (55,000
    )
    
    
    601,000Net increase (decrease) in cash and cash equivalents
    
    
    800,000
    
    
    
    (1,616,000
    )Cash and cash equivalents at beginning of period
    
    
    4,211,000
    
    
    
    2,528,000Cash and cash equivalents at end of period
    
    $
    5,011,000
    
    
    $
    912,000Supplemental disclosure of cash flow information:Cash paid during the period for:Interest
    
    $
    362,000
    
    
    $
    381,000


See accompanying notes to condensed consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003

NOTE A  FINANCIAL INFORMATION

Lifecore Biomedical, Inc. (the Company) develops, manufactures and markets
biomaterials and medical devices for use in various surgical markets through
two divisions, the Hyaluronan Division and the Oral Restorative Division. The
Companys manufacturing facility is located in Chaska, Minnesota. The
Hyaluronan Division conducts its business through OEM and contract
manufacturing alliances in the gynecologic, ophthalmic, orthopedic and
veterinary surgery fields. The Oral Restorative Division conducts its dental
surgery business through direct sales and marketing in the United States,
Germany, Italy and Sweden and through 23 distributors in 35 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. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
of America 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 as of December
31, 2003, and the results of operations for the three and six month periods
ended December 31, 2003 and 2002 and cash flows for the six month periods ended
December 31, 2003 and 2002. The results of operations for the six months ended
December 31, 2003 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, 2003 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. The portion of finished hyaluronan powder inventory not expected to be
consumed within the next twelve months is classified as a long-term asset.
Finished good inventories include hyaluronan, packaged aseptic, and oral
restorative products. Inventories consist of the following:

December 31,
    
    
    June 30,2003
    
    
    2003Raw materials
    
    $
    3,275,000
    
    
    $
    2,756,000Work in progress
    
    
    307,000
    
    
    
    344,000Finished goods
    
    
    10,752,000
    
    
    
    11,267,000$
    14,334,000
    
    
    $
    14,367,000


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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

December 31, 2003

NOTE C  INTANGIBLE ASSETS

The Company does not amortize goodwill and technology and regulatory rights.
The customer list is amortized on the straight-line method over 5 years. On an
ongoing basis the Company reviews the valuation of intangibles to determine
possible impairment by comparing the carrying value to projected undiscounted
future cash flows of the related assets. As a result of such review, there was
no impairment recorded for the six month period ended December 31, 2003.

Intangibles consisted of the following at:

December 31,
    
    
    June 30,2003
    
    
    2003Goodwill
    
    $
    4,301,000
    
    
    $
    4,301,000Customer list
    
    
    725,000
    
    
    
    725,000Patents
    
    
    387,000
    
    
    
    387,000Accumulated amortization
    
    
    (853,000
    )
    
    
    (770,000
    )$
    4,560,000
    
    
    $
    4,643,000


NOTE D  AGREEMENTS

Lifecore and ETHICON have entered into a Conveyance, License, Development and
Supply Agreement (the ETHICON Agreement) whereby ETHICON transferred to
Lifecore its ownership in certain technology related to research and
development previously conducted on the Companys sodium hyaluronan material.
The technology transferred to Lifecore includes written technical documents
related to ETHICONs research and development of a product to inhibit the
formation of postsurgical adhesions. These documents include product
specifications, methods and techniques, technology, know-how and certain
patents. Lifecore assumed responsibility for continuing the anti-adhesion
development project including conducting a human gynecology clinical trial on
GYNECARE INTERGEL * Adhesion Prevention Solution (INTERGEL Solution), a
second-generation ferric hyaluronan-based product. Lifecore has granted ETHICON
exclusive worldwide marketing rights through 2008 to the products developed by
Lifecore within defined fields of use. On March 27, 2003, the Company
announced that ETHICON voluntarily suspended global marketing and sales of
INTERGEL Solution and has voluntarily withdrawn the product from the market in
order to assess information obtained from postmarketing experience with the
device. The assessment will include a review of technical issues, surgical
techniques and circumstances associated with the postmarketing events,
including reports from off-label use. Since the launch of the product in
August of 1998 to February 2003, the worldwide complaint rate has been 0.29
percent of units sold. The contribution of the device to these events is
unknown. Management does not believe there has been an impairment of
hyaluronan assets as of December 31, 2003.

*Trademark of ETHICON, INC.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

December 31, 2003

NOTE E  LINE OF CREDIT

The Company has a $5,000,000 credit facility with a bank which has a maturity
date of December 31, 2005. The agreement allows for advances against eligible
accounts receivable, subject to a borrowing base certificate. Interest is
accrued at the prime rate which was 4.00% at December 31, 2003. At December
31, 2003 and June 30, 2003, there were no balances outstanding under the line
of credit. 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 profitability. At December 31, 2003 and June
30, 2003, the Company was in compliance with all covenants.

NOTE F  STOCK PLAN INFORMATION

The Company has various stock option plans that provide for the granting of
stock options to officers, employees and directors. The Company accounts for
stock-based compensation using the intrinsic value method whereby the options
are granted at market price, and therefore no compensation costs are
recognized. If compensation expense for the Companys various stock option
plans had been determined based upon the projected fair values at the grant
dates for awards under those plans, the Companys pro-forma net loss, and basic
and diluted loss per common share would have been as follows:

Three months ended December 31,
    
    
    Six months ended December 31,2003
    
    
    2002
    
    
    2003
    
    
    2002Net income (loss), as reported
    
    $
    597,000
    
    
    $
    312,000
    
    
    $
    (246,000
    )
    
    $
    (734,000
    )Deduct: Total stock-based employee compensation expense
determined under fair value method for awards, net of
related tax effects
    
    
    (3,000
    )
    
    
    (26,000
    )
    
    
    (93,000
    )
    
    
    (59,000
    )Pro forma net income (loss)
    
    $
    594,000
    
    
    $
    286,000
    
    
    $
    (339,000
    )
    
    $
    (793,000
    )Net income (loss) per common equivalent share:Basic and diluted  as reported
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.02
    )
    
    $
    (0.06
    )Basic and diluted  pro-forma
    
    $
    0.05
    
    
    $
    0.02
    
    
    $
    (0.03
    )
    
    $
    (0.06
    )


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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

December 31, 2003

NOTE G  NET INCOME (LOSS) PER SHARE

The Companys basic net income (loss) per share amounts have been computed by
dividing net income (loss) by the weighted average number of outstanding common
shares. The Companys diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the three month periods ended December 31, 2003 and 2002 the Company
reported net income and as a result, 47,269 and 67,591 common share
equivalents, respectively, were included in the computation of diluted net
income per share. For the six month periods ended December 31, 2003 and 2002
the Company reported a net loss and as such, no common share equivalents were
included in the computation of diluted net loss per share. However, if the
Company would have reported net income in the six month periods ended December
31, 2003 and 2002, 38,720 and 93,956 common share equivalents, respectfully,
would have been included in the computation of diluted net income per share.

Options to purchase 2,435,416 and 2,437,791 shares of common stock with a
weighted average exercise price of $12.29 and $12.29 for the three-month and
six-month periods ended December 31, 2003 and options to purchase 2,499,970 and
1,949,418 shares of common stock with a weighted average exercise price of
$12.71 and $14.11 for the three-month and six-month periods ended December 31,
2002, respectively, were outstanding but were not included in the calculation
of diluted net loss 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  SEGMENT INFORMATION

The Company operates two business segments. The Hyaluronan Division develops,
manufactures, and markets products containing hyaluronan. The Oral Restorative
Division develops, manufactures and/or markets various oral restorative
products to the area of implant dentistry. Currently, products containing
hyaluronan are sold primarily to customers pursuant to ongoing supply
agreements. The Companys Oral Restorative Division markets products directly
to clinicians and dental laboratories in the United States, Germany, Italy and
Sweden and primarily through distributorship arrangements in other foreign
locations. The operations of the Companys subsidiaries, Lifecore Biomedical
GmbH, Lifecore Biomedical SpA, and Lifecore Biomedical AB have not been
material to the consolidated financial statements.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(cont.)

December 31, 2003

NOTE H  SEGMENT INFORMATION (CONT)

Segment assets and the basis of segmentation are consistent with that reported
at June 30, 2003. Segment information for sales and income (loss) from
operations are as follows:

Three months ended December 31,
    
    
    Six months ended December 31,2003
    
    
    2002
    
    
    2003
    
    
    2002Net salesHyaluronan products
    
    $
    3,545,000
    
    
    $
    3,411,000
    
    
    $
    7,103,000
    
    
    $
    7,109,000Oral restorative products
    
    
    8,013,000
    
    
    
    6,851,000
    
    
    
    14,402,000
    
    
    
    12,125,000$
    11,558,000
    
    
    $
    10,262,000
    
    
    $
    21,505,000
    
    
    $
    19,234,000Income (loss) from operationsHyaluronan products
    
    $
    (62,000
    )
    
    $
    572,000
    
    
    $
    (636,000
    )
    
    $
    137,000Oral restorative products
    
    
    521,000
    
    
    
    (88,000
    )
    
    
    280,000
    
    
    
    (554,000
    )$
    459,000
    
    
    $
    484,000
    
    
    $
    (356,000
    )
    
    $
    (417,000
    )


NOTE I  NEW ACCOUNTING PRONOUNCEMENTS

In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 148, Accounting for
Stock-Based CompensationTransition and Disclosure. SFAS No. 148 amends SFAS
No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of Accounting Principles Board (APB)
Opinion No. 28, Interim Financial Reporting, to require pro-forma disclosure in
interim financial statements by companies that elect to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25.
The Company continues to use the intrinsic value method of accounting for
stock-based compensation. As a result, the transition provisions will not have
an effect on the Companys consolidated financial statements.

NOTE J  SUBSEQUENT EVENT

On February 10, 2004, James W. Bracke, Ph.D. resigned his position as
President, Chief Executive Officer and a director of the Company. In
accordance with the separation agreement with Dr. Bracke, the Company is
obligated to pay a severance equal to 100% of his base salary or approximately
$300,000.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION

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s revenues are recognized when products are shipped to or otherwise
accepted by unaffiliated customers. The Securities and Exchange Commission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 its 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 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, Intangible and Other Long-Lived Assets:

Intangible 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 a regular basis, at least
annually.

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

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (cont.)

Recently Issued Accounting Pronouncements:

The notes to the consolidated financial statements included in this Form 10-Q
include a discussion regarding recently issued accounting pronouncements. The
effects on the Companys financial statements from these pronouncements are not
expected to be material.

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 Oral Restorative Division.

The Companys performance continues to be positively effected by growth in the
Oral Restorative Division and the related financial leverage on operating
results. Continued unused manufacturing capacity charges resulting from
reduced hyaluronan production levels and ongoing expenses associated with the
market withdrawal of INTERGEL Solution are negatively impacting the Hyaluronan
Division operating results. The above factors are applicable to both the three
month and six month periods ended December 31, 2003.

Results of Operations

Three Months Ended December 31, 2003 Compared to Three Months Ended December
31, 2002:

Hyaluronan
    
    
    Oral RestorativeDivision
    
    
    Division
    
    
    Consolidated2003
    
    
    2002
    
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002Net sales
    
    $
    3,545,000
    
    
    $
    3,411,000
    
    
    $
    8,013,000
    
    
    $
    6,851,000
    
    
    $
    11,558,000
    
    
    $
    10,262,000Cost of goods sold
    
    
    1,903,000
    
    
    
    1,289,000
    
    
    
    2,960,000
    
    
    
    2,876,000
    
    
    
    4,863,000
    
    
    
    4,165,000Gross profit
    
    
    1,642,000
    
    
    
    2,122,000
    
    
    
    5,053,000
    
    
    
    3,975,000
    
    
    
    6,695,000
    
    
    
    6,097,000Operating expensesResearch and development

    
    975,000
    
    
    
    794,000
    
    
    
    270,000
    
    
    
    217,000
    
    
    
    1,245,000
    
    
    
    1,011,000Marketing and sales
    
    
    136,000
    
    
    
    179,000
    
    
    
    3,165,000
    
    
    
    2,878,000
    
    
    
    3,301,000
    
    
    
    3,057,000General and administrative
    
    
    593,000
    
    
    
    577,000
    
    
    
    1,097,000
    
    
    
    968,000
    
    
    
    1,690,000
    
    
    
    1,545,0001,704,000
    
    
    
    1,550,000
    
    
    
    4,532,000
    
    
    
    4,063,000
    
    
    
    6,236,000
    
    
    
    5,613,000Operating income (loss)
    
    $
    (62,000
    )
    
    $
    572,000
    
    
    $
    521,000
    
    
    $
    (88,000
    )
    
    $
    459,000
    
    
    $
    484,000


Net sales for the quarter ended December 31, 2003 increased $1,296,000 or 13%
as compared to the same quarter of last fiscal year. Hyaluronan product sales
for the current quarter increased $134,000 or 4% as compared to the same
quarter of last fiscal year, due to increased veterinary sales. Oral
restorative product sales for the current quarter increased $1,162,000 or 17%
compared to the same quarter of last fiscal year. Domestic sales increased 5%
and international sales increased 30% as compared to the same quarter of last
fiscal year. Favorable foreign currency comparisons increased international
sales by $365,000 over the same quarter of last fiscal year.

Consolidated gross margin decreased to 58% for the current quarter from 59% for
the same quarter of last fiscal year. The gross margin for the Hyaluronan
Division decreased to 46% from a gross margin of 62% due to product mix and
increased unused manufacturing capacity charges associated with reduced
hyaluronan production. The

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (cont.)

gross margin for the Oral Restorative Division
increased to 63% for the current quarter from 58% for the same quarter of last
fiscal year. The gross margin increase is due to sales mix and reduced
material costs.

Research and development expenses increased $234,000 or 23% in the current
quarter as compared to the same quarter of last fiscal year. The increase is
due to consulting and professional fees associated with the market withdrawal
of INTERGEL Solution.

Marketing and sales expenses increased $244,000 or 8% in the current quarter as
compared to the same quarter of last fiscal year due to increased costs
associated with expansion of oral restoratives domestic sales force and
international operations.

General and administrative expenses increased $145,000 or 9% for the current
quarter as compared to the same quarter of last fiscal year. The increase
resulted from increased legal expenses, insurance premiums and higher personnel
related expenses.

Net other expense, as shown on the Condensed Consolidated Statements of
Operations, decreased $310,000 for the current quarter as compared to the same
quarter of last fiscal year. The decrease is due to the $232,000 increase in
currency transaction gains realized on Euro denominated intercompany
transactions and reduced interest expenses.

Six Months Ended December 31, 2003 Compared to Six Months Ended December 31,
2002:

Hyaluronan
    
    
    Oral RestorativeDivision
    
    
    Division
    
    
    Consolidated2003
    
    
    2002
    
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002Net sales
    
    $
    7,103,000
    
    
    $
    7,109,000
    
    
    $
    14,402,000
    
    
    $
    12,125,000
    
    
    $
    21,505,000
    
    
    $
    19,234,000Cost of goods sold
    
    
    4,272,000
    
    
    
    4,088,000
    
    
    
    5,360,000
    
    
    
    4,986,000
    
    
    
    9,632,000
    
    
    
    9,074,000Gross profit
    
    
    2,831,000
    
    
    
    3,021,000
    
    
    
    9,042,000
    
    
    
    7,139,000
    
    
    
    11,873,000
    
    
    
    10,160,000Operating expensesResearch and development
    
    
    1,994,000
    
    
    
    1,503,000
    
    
    
    510,000
    
    
    
    465,000
    
    
    
    2,504,000
    
    
    
    1,968,000Marketing and sales
    
    
    263,000
    
    
    
    353,000
    
    
    
    6,211,000
    
    
    
    5,552,000
    
    
    
    6,474,000
    
    
    
    5,905,000General and administrative
    
    
    1,210,000
    
    
    
    1,028,000
    
    
    
    2,041,000
    
    
    
    1,676,000
    
    
    
    3,251,000
    
    
    
    2,704,0003,467,000
    
    
    
    2,884,000
    
    
    
    8,762,000
    
    
    
    7,693,000
    
    
    
    12,229,000
    
    
    
    10,577,000Operating income (loss)
    
    $
    (636,000
    )
    
    $
    137,000
    
    
    $
    280,000
    
    
    $
    (554,000
    )
    
    $
    (356,000
    )
    
    $
    (417,000
    )


Net sales for the six months ended December 31, 2003 increased $2,271,000 or
12% as compared to the same period of last fiscal year. Hyaluronan product
sales were flat as compared to the same period of last fiscal year. Veterinary
and ophthalmic sales increased, which offset reduced gynecologic sales. Oral
restorative product sales for the current period increased $2,277,000 or 19%
compared to the same period of last fiscal year. Domestic sales increased 10%
and international sales increased 30% as compared to the same period of last
fiscal year. Favorable foreign currency comparisons increased international
sales by $552,000 over the same period of last fiscal year.

Consolidated gross margin increased to 55% for the current period from 53% for
the same period of last fiscal year. The gross margin for the Hyaluronan
Division decreased to 40% from a gross margin of 42% due to increased unused
manufacturing capacity charges associated with reduced hyaluronan production,
partially offset by a more favorable product mix. The gross margin for the
Oral Restorative Division increased to 63% for the current period

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (cont.)

from 59% for
the same quarter of last fiscal year. The gross margin increase is due to
sales mix and reduced material costs.

Research and development expenses increased $536,000 or 27% in the current
period as compared to the same period of last fiscal year. The increase is
primarily due to consulting and professional fees associated with the market
withdrawal of INTERGEL Solution.

Marketing and sales expenses increased $569,000 or 10% in the current period as
compared to the same period of last fiscal year due to increased costs
associated with expansion of oral restoratives domestic sales force and
international operations.

General and administrative expenses increased $547,000 or 20% for the current
period as compared to the same period of last fiscal year. The increase
resulted from higher legal expenses, insurance premiums, international
operations and higher personnel related expenses.

Net other expense, as shown on the Condensed Consolidated Statements of
Operations, decreased $427,000 for the current period as compared to the same
period of last fiscal year. The decrease is due to the $300,000 increase in
other income from currency transaction gains realized on Euro denominated
intercompany transactions and reduced interest expenses.

Liquidity and Capital Resources

The Companys Annual Report on Form 10-K for the year ended June 30, 2003
contains a detailed discussion of Lifecores liquidity and capital resources.
In conjunction with this Quarterly Report on Form 10-Q, investors should read
the 2003 Form 10-K.

For the six month period ended December 31, 2003, the Company had positive cash
flow from operations of $893,000. Cash flow from operations was positive in
fiscal years 2003, 2002 and 2001. Charges for unused manufacturing capacity
associated with the Companys hyaluronan production and additional costs
associated with the withdrawal of INTERGEL Solution from the market have
negatively impacted operating results in the current fiscal year. Prior to the
current fiscal year, charges for unused capacity were due to an unanticipated
delay in receiving INTERGEL Solution marketing approval in the U.S. from the
FDA. Also, marketing and sales expenses for the oral restorative products are
expected to continue at a high level with continued international expansion and
increased personnel costs.

The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Companys Chaska, Minnesota
facility was amended in May 2003 to waive the fixed charge coverage ratio and
the cash flow coverage ratio through June 30, 2004. With respect to certain of
these covenants, the Company may be required to obtain further waivers for
fiscal 2005. There can be no assurance that future waivers will be granted to
the Company.

The Company has a $5,000,000 credit facility with a bank which has a maturity
date of December 31, 2005. The agreement allows for advances against eligible
accounts receivable, subject to a borrowing base certificate. Interest is
accrued at the prime rate at December 31, 2003, which was 4.00%. At December
31, 2003 and June 30, 2003, there were no balances outstanding under the line
of credit. 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 profitability. At December 31, 2003 and June
30, 2003, the Company was in compliance with all covenants.

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LIFECORE BIOMEDICAL, INC. AND SUBSIDIARIES
PART I  FINANCIAL INFORMATION
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (cont.)

On February 10, 2004, James W. Bracke, Ph.D. resigned his position as
President, Chief Executive Officer and a director of the Company. In
accordance with the separation agreement with Dr. Bracke, the Company is
obligated to pay a severance equal to 100% of his base salary or approximately
$300,000.

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 oral restorative businesses. Growth in the
Hyaluronan Division is unpredictable due to the uncertainty associated with the
future market status of
INTERGEL Solution, the complex governmental regulatory environment for new
medical products and the early stage of certain of these markets. Similarly,
expansion of the Companys Oral Restorative 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 cash generated from
anticipated operations and the availability 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.

Cautionary Statement

Certain statements in this Form 10-Q are forward-looking statements as defined
in the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements, which refer to the likelihood of return of INTERGEL Solution to the
market and the timing of such return; the extent of the impact on Hyaluronan
Division margins from increased unused manufacturing capacity charges; the
level of expenditures related to the process associated with the assessment of
information obtained from postmarketing experience with the device; the
likelihood of adequate cash flow and access to financial markets; expected
production levels; and the future marketing and sales success of Oral
Restorative Division products, are subject to change. These statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results and those presently anticipated or
projected, such as, unforeseen difficulties or delays in assessing information
obtained from postmarketing experience with INTERGEL Solution, unforeseen
difficulties or delays in interactions with the FDA, and lack of cooperation or
marketing success from marketing partners for the hyaluronan products.
Investors are referred to a more detailed discussion of those risks presented
in Managements Discussion and Analysis of Financial Condition and Results of
Operations section in the Companys Annual Report on Form 10-K for the year
ended June 30, 2003 as well as Exhibit 99.1 to such Form 10-K.

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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 highly
rated corporate debt securities. 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 and Lifecore Biomedical GmbH 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 our
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.

The Companys outstanding long-term debt carries interest at a fixed rate.
There is no material market risk relating to the Companys long-term debt.




ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of our management, including
the Companys Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a  15(e) under the Exchange Act) as of the
end of the period covered by this report. 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, our disclosure controls and
procedures are adequately designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities and Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in applicable rules
and forms.

(b) Changes in internal controls.

During the fiscal period covered by this report, there have not been any
significant changes in the Companys internal control over financial reporting
(as defined in Rule 13a  15(f) under the Exchange Act) that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

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

Item 1. Legal Proceedings

Lifecore is a party in three pending lawsuits, all of which allege that the
plaintiffs suffered injuries due to the defective nature of the Intergel
product manufactured by Lifecore and marketed by ETHICON. Lifecore believes
ETHICON is obligated to defend and indemnify Lifecore for all of these
lawsuits. Lifecore also has products liability insurance that it believes will
cover these claims.



|1. |  | Contratto v. ETHICON, Inc., Johnson & Johnson, Lifecore Biomedical, Inc.,
and Vital Pharma, Inc. (N.D. California). This case was originally filed
on August 14, 2003, and an amended complaint was filed on September 8,
2003. The complaint alleges claims of negligence, strict products
liability, products liability: defect in design; products liability:
failure to warn; breach of warranty; breach of implied warranty of
merchantability; breach of implied warranty of fitness for a particular
use; intentional misrepresentation; negligent misrepresentation; and
violation of California Code Section 17200.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2. |  | Powers v. Gynecare through ETHICON, Inc., Johnson & Johnson, Lifecore
Biomedical, Inc., and PSS World Medical, Inc. (Orleans Parish, Louisiana).
This case was filed on November 5, 2003. Powers Complaint alleges
generally claims of negligence, failure to warn, and defective design.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Manning v. Lifecore Biomedical, Inc., Johnson & Johnson, ETHICON, Inc.,
and Gynecare Worldwide (Carver County, Minnesota). Lifecore was served
with this action on December 29, 2003. Manning alleges claims of failure
to warn, design defect, breach of implied warranty, and unjust enrichment.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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

On November 13, 2003, the Company held its Annual Meeting of Shareholders. At
the meeting, the shareholders elected director Orwin L. Carter, Ph.D. (with
11,945,715 affirmative votes and 304,297 votes withheld).

The shareholders also ratified and approved (i) the Companys 2003 Stock
Incentive Plan (with 3,981,143 affirmative votes, 3,086,053 negative votes,
30,264 votes abstained and 5,152,552 broker non-votes) and (ii) the appointment
of Grant Thornton LLP as independent certified public accountants of the
Company for the current fiscal year ending June 30, 2004 (with 12,076,801
affirmative votes, 156,658 negative votes, 16,553 votes abstained and no broker
non-votes).




Item 6. Exhibits and Reports on Form 8-K




a. Exhibits and Exhibit Index

3.1
    
    Restated Articles of Incorporation, as amended (incorporated
by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated
July 13, 1988, to Form 10-Q for the quarter ended December 31,
1987), as amended by Amendment No. 2, (incorporated by reference to
Exhibit 3.1 to Form 10-K for the year ended June 30, 1997)3.2
    
    Amended Bylaws, (incorporated by reference to Exhibit 3.2 to
Form 10-K/A for the year ended June 30, 1995)3.3
    
    Form of Rights Agreement, dated as of May 23, 1996, between
the Company and Norwest Bank Minnesota, National Association
(incorporated by reference to Exhibit 1 to the Companys Form 8-A
Registration Statement dated May 31, 1996)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 200231.2
    
    Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002


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LIFECORE BIOMEDICAL INC. AND SUBSIDIARIES
PART II  OTHER INFORMATION

32.1
    
    Certification of the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002





b. Reports on Form 8-K

A report on Form 8-K was filed on October 31, 2003 (dated October
29, 2003) to report under item 9 that the Company had signed an
exclusive distribution agreement with Bardo-Biotech SAS (BBS) of
Toulouse, France, to distribute Lifecores oral restorative products
in France.

A report on Form 8-K was filed on January 15, 2004 (dated January
13, 2004) to report under Item 12 the Companys Fiscal 2004 second
quarter financial results.

A report on Form 8-K was filed on January 21, 2004 (dated January
20, 2004) to report under Item 9 that the Company signed an
exclusive agreement with HEXAL AG, a pharmaceutical company based in
Holzkirchen, Germany, to supply Lifecores generic hyaluronan
knee-injection therapeutic product in Europe.

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




SIGNATURES

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

LIFECORE BIOMEDICAL, INC.Dated: February 13, 2004
    
    /s/ Dennis J. AllinghamDennis J. AllinghamChief Executive Officer, Chief Financial Officerand President


19