UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





Form
10-K





þ ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934:For the fiscal year ended December 31,
2007





£ 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:  0-19890





LifeCell
Corporation


(Exact
name of registrant as specified in its charter)





Delaware
            76-0172936(State
      or other jurisdiction of Incorporation or organization)
            (I.R.S. employer
      identification no.)





One Millennium Way,
Branchburg, New Jersey 08876


(Address
of principal executive offices, including zip code)





Registrant’s
telephone number, including area code:   (908)
947-1100





Securities
registered pursuant to Section 12(b) of the Act:None





Securities
      registered pursuant to Section 12(g) of the Act:
            Common
      Stock, par value $.001 per share(Title
      of Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as


defined
in Rule 405 of
the Securities Act.  Yes þ.   No £.





Indicate
by check mark if the registrant is not required to file reports pursuant
to


Section
13 or Section 15(d) of the Act.   Yes £.   No þ.





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 £.





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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definition of "large accelerated filer" "accelerated filer", and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
 
 Large
      accelerated filer  þ
                Accelerated
      filer  £Non-accelerated
      filer £
      (Do
      not check if a smaller reporting company)
                Smaller
      reporting Company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).





Yes £.   No þ.





The
aggregate market value of voting Common Stock held by non-affiliates of
registrant, based upon the last sale price of the Common stock reported on the
NASDAQ Stock Market as of the last business day of the registrant’s most
recently completed second fiscal quarter ended June 30, 2007 was approximately
$1,012,824,000.




The
number of shares of registrant’s Common Stock outstanding as of February 25,
2008:  34,183,000.










Table of Contents





PART
      I
            PageItem 1.
            
            Business
            1Company Overview
            1Industry Overview
            1Our Products
            2Industry and Market Data
            3Marketing and Distribution
            3Human Tissue Procurement
            4Government Regulation
            4Research and Development
            6Patents, Proprietary Information &
      Trademarks
            6Competition
            7Employees
            8Item 1A.
            
            Risk Factors and Forward-Looking
Statements
            8Item 1B.
            
            Unresolved Staff Comments
            14Item 2.
            
            Properties
            14Item 3.
            
            Legal Proceedings
            14Item 4.
            
            Submission of Matters to a Vote of Security
      Holders
            15PART
      IIItem 5.
            
            Market
      for Registrant's Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities
            16Dividend Policy
            17Item 6.
            
            Selected Financial Data
            17Item 7.
            
            Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            18Overview
            18Results of Operations
            19Liquidity and Capital Resources
            22Critical Accounting Policies /
    Estimates
            23Item 7A.
            
            Quantitative and Qualitative Disclosures About Market
      Risk
            24Item 8.
            
            Financial Statements and Supplementary Data
            24Item 9.
            
            Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure
            24Item 9A.
            
            Controls and Procedures
            25Item 9B.
            
            Other Information
            25PART
      IIIItem 10.
            
            Directors, Executive Officers and Corporate
      Governance
            26Item 11.
            
            Executive Compensation
            30Item 12.
            
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            46Item 13.
            
            Certain Relationships and Related Transactions, and Director
      Independence
            47Item 14.
            
            Principal Accounting Fees and Services
            47PART
      IVItem 15.
            
            Exhibits, Financial Statement Schedules
            48


Table of Contents





PART
I





This
Annual Report on Form 10–K contains, in addition to historical information,
“forward-looking statements” (within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of  1934, as amended) that involve risks and uncertainties. See
“Business—Special Note Regarding Forward-Looking Statements.”





Item
      1.
            
            Business




COMPANY OVERVIEW





We
develop, process and market biological soft tissue repair products made from
human (“allograft”) and animal (“xenograft”) tissue.  Surgeons use our
products to restore structure, function and physiology in a variety of
reconstructive, orthopedic and urogynecologic surgical
procedures.  Our allograft products include: AlloDerm®, for plastic
reconstructive, general surgical, burn and periodontal procedures; GraftJacket®,
for orthopedic applications and lower extremity wounds; AlloCraft®DBM, for bone
grafting procedures; and Repliform®, for urogynecologic surgical procedures. In
June 2007, we received clearance from the U.S Food and Drug Administration
(“FDA”) for a new xenograft product, StratticeTM, which is an animal based
product and is intended for certain plastic reconstructive and general surgical
procedures.  We commenced marketing Strattice during the first quarter
of 2008.  Our research and development initiatives include programs
designed to support the use of our products in current clinical applications,
extend their use into new surgical applications and to expand our product line
in the rapidly growing biosurgery market.





We were
incorporated in the State of Delaware in 1992 as the successor to a Delaware
corporation that was incorporated in 1986.  Our address is One
Millennium Way, Branchburg, New Jersey 08876, our phone number is (908)
947-1100, and our website address is www.lifecell.com.  The
information contained on our website does not constitute a part of this
report.








INDUSTRY OVERVIEW





Soft
tissue, such as dermis, heart valves, blood vessels and nerve connective tissue,
contains a complex, three-dimensional structure consisting of multiple forms of
collagen, elastin, proteoglycans, other proteins and blood vessels (the “tissue
matrix”).  As part of the body’s natural remodeling process, cells
within a tissue continuously degrade and, in the process, replace the tissue
matrix.  However, in the event that a large portion of the tissue
matrix is destroyed or lost because of trauma or surgery, the body cannot
regenerate the damaged portion, resulting in scar formation.  In such
situations, surgeons face a number of treatment options for restoring structure,
function and physiology, including the use implant materials. Alternatives
include transplants from one part of the patient’s body to another
(“autograft”), processed allograft tissue, processed xenograft tissue and
synthetic products.





We
believe the use of autograft tissue is disadvantageous due to the creation of a
separate donor site wound and the associated pain, morbidity and scarring from
this additional wound.  We also believe there are disadvantages of
using synthetic materials and certain other biologic materials including their
susceptibility to infection, resorption, encapsulation (i.e., scarring),
movement away from the transplanted area (i.e., mobility), and erosion through
the skin (i.e., extrusion).  Some biologic materials may include
bovine collagen, which requires patient sensitivity testing.





We
believe that our allograft and xenograft products may provide surgeons with
benefits over other implant materials.  Our tissue matrices undergo
non-damaging proprietary processing, resulting in intact acellular matrices that
are strong and support tissue regeneration by way of rapid revascularization
(i.e., blood supply is restored).  Our proprietary tissue processes
remove cells from biological tissues to minimize the potential for specific
rejection of the transplanted tissue.  Our tissue matrix products also
offer ease of use and minimize risk of some complications, including adhesions
to the implant.


1
 Table of Contents




OUR PRODUCTS





Reconstructive
Tissue Products





AlloDerm
Regenerative Tissue Matrix.AlloDerm is donated allograft
human dermis that has been processed with our non-damaging proprietary
processing resulting in an intact acellular tissue matrix.  AlloDerm
supports the repair of damaged tissue by providing a foundation for regeneration
of normal human soft tissue.  Following transplant, AlloDerm is
revascularized and repopulated with the patient’s own cells becoming engrafted
into the patient. AlloDerm is a versatile scaffold and has multiple surgical
applications.  AlloDerm is marketed to plastic reconstructive and
general surgeons as an “off-the-shelf” alternative to other implant
materials.  AlloDerm is predominately used in plastic reconstructive,
general surgical, burn and periodontal procedures:





·
            as
      an implant for soft tissue reconstruction or tissue deficit
      correction;


·
            as
      a graft for tissue coverage or closure;
and


·
            as
      a sling to provide support to tissue following nerve or muscle
      damage.








AlloDerm
was first used in 1994 for the treatment of third-degree and deep second-degree
burns requiring skin grafting to replace lost dermis.  The use of
AlloDerm in burn grafting has clinically shown performance equivalent to
autograft in reducing the occurrence and effects of scar contracture, the
progressive tightening of scar tissue that can cause joint immobility, while
significantly reducing donor site trauma.  We believe that AlloDerm
provides significant therapeutic value when used in burn grafting over a
patient’s mobile joints.





Today,
AlloDerm is predominately used as a subcutaneous implant for the replacement of
soft tissue in reconstructive surgical procedures in various areas of the
body.  For example, in surgical repair of abdominal wall defects,
AlloDerm is used to repair defects resulting from trauma, previous surgery,
hernia repair, infection, tumor resection or general failure of the
musculofascial tissue.  We believe that AlloDerm provides an
alternative to other implant materials because of its functional, biomechanical
and regenerative properties. AlloDerm is also used in cancer reconstruction
procedures, including breast reconstruction following mastectomy
procedures.





Periodontal
surgeons use AlloDerm to increase the amount of attached gum tissue supporting
the teeth as an alternative to autologous connective tissue grafts excised from
the roof of the patient’s mouth and then transplanted to the
gum.  BioHorizons Implant Systems, Inc. is our exclusive distributor
of AlloDerm  for use in periodontal applications in the United States
and certain international markets.





Strattice
Reconstructive Tissue Matrix.In June 2007, we received
clearance from FDA for a new xenograft product, StratticeTM.  Strattice
is porcine dermis that has been processed with our non-damaging proprietary
processing that removes cells and significantly reduces a component believed to
play a major role in the xenogeneic rejection response.  Strattice
supports the repair of damaged tissue by allowing rapid revascularization and
cell repopulation required for tissue regeneration.  In pre-clinical
studies, Strattice demonstrated rapid revascularization and cell repopulation
and strong healing.  We commenced marketing Strattice during the first
quarter of 2008 to plastic reconstructive and general surgeons as an implant to
reinforce soft tissue where weakness exists and for the surgical repair of
damaged or ruptured soft tissue membranes.





Orthopedic
Tissue Products





GraftJacket
Regenerative Tissue Matrix.GraftJacket is the trade name for
our proprietary human allograft tissue products intended for use in repairing
damaged or inadequate integumental tissue in orthopedic surgical procedures,
such as for rotator cuff tendon reinforcement.  GraftJacket is also
used by podiatrists for the treatment of lower extremity
wounds.  Wright Medical Group, Inc. is our exclusive distributor for
GraftJacket in the United States and certain international markets.





AlloCraft
DBM.AlloCraft DBM is a proprietary human allograft
bone-grafting product that combines demineralized bone and micronized acellular
human dermal matrix to form a putty-like material.  AlloCraft DBM is
intended for use as a bone void filler in various orthopedic surgical
procedures.  Stryker Corporation is our exclusive distributor for
AlloCraft DBM in the United States.





Urogynecologic
Tissue Products





Repliform
Regenerative Tissue Matrix.Repliform is the trade name for
our proprietary human allograft tissue matrix product intended for use in
repairing damaged or inadequate integumental tissue in urogynecologic surgical
procedures.  Since 1997, surgeons have used Repliform in
urogynecologic procedures as a bladder sling in the treatment of stress urinary
incontinence and for the repair of pelvic floor defects.


2
 Table of Contents




Currently,
materials used for slings and pelvic floor repair surgeries include autologous
tissue, synthetic materials, biologic materials and cadaveric
fascia.  The autologous tissue often is taken from the patient’s thigh
or abdomen resulting in a painful donor site.  We believe that
Repliform used as a sling for urinary incontinence or pelvic floor repair
provides a safe and effective alternative that eliminates the need for a donor
site and will repopulate as the patient’s own tissue.  Boston
Scientific Corporation is our exclusive worldwide sales and marketing
representative for Repliform.








INDUSTRY AND MARKET DATA





The table
below contains estimated market data for our major product applications in the
United States. The estimates were derived from statistical data, market
research, company estimates, industry publications and other publicly available
information.  While we believe that the data sources we used to
develop our target market estimates are reliable, we have not independently
verified the data, and we do not make any representation as to the accuracy of
the information.  Additionally, we have not sought consent to identify
the sources of such information in our report.





Product
      /  Clinical Applications
            
            Targeted
      U.S. Annual Procedures (1)
            
            Revenue
      per Procedure (2)Reconstructive
      Tissue ProductsHead
      and neck
            
            70,000
            
            $   200
      - $   800Abdominal
      wall
            
            150,000
            
            $
      2,500 - $10,000Breast
      reconstruction
            
            60,000
            
            $1,500
      - $4,000Orthopedic
      Tissue ProductsTendon
      and ligament repair
            
            220,000
            
            $300
      - $1,000Lower
      extremity wounds
            
            200,000
            
            $400
      - $   550Spine
      procedures
            
            200,000
            
            $150
      - $650Urogynecologic
      Tissue ProductsBladder
      sling
            
            100,000
            
            $350
      - $   650Pelvic
      floor reconstruction
            
            55,000
            
            $650
      - $1,300





1.
            The
      targeted annual procedures represent our estimate of the number of
      procedures in the United States where our products could be used, not the
      actual number of procedures where our products are
  used.


2.
            Revenue
      per procedure represents our estimate of the product revenue per procedure
      that could be recognized by us in each of the targeted
      applications.








MARKETING AND DISTRIBUTION





We
currently market AlloDerm in the United States for plastic reconstructive,
general surgical and burn applications through our direct sales and marketing
organization.  We also commenced marketing Strattice through our
direct sales and marketing organization during the first quarter of
2008.  As of December 31, 2007, we had a sales, marketing and customer
service staff of 117 persons, including 89 in our domestic sales
organization.  Our sales representatives are responsible for
interacting with plastic surgeons; general surgeons; ear, nose and throat
surgeons; and burn surgeons to educate them regarding the use and potential
benefits of our reconstructive tissue products.  We also participate
in numerous national fellowship programs, national and international conferences
and trade shows, and sponsor medical education symposia.





BioHorizons
Implant Systems, Inc., is our exclusive distributor in the United States and
certain international markets of AlloDerm for use in periodontal
applications.  Wright Medical Group is our exclusive distributor in
the United States and certain international markets for
GraftJacket.  Stryker Corporation is our exclusive distributor in the
United States for AlloCraft DBM. Boston Scientific Corporation is our exclusive
worldwide sales and marketing agent for Repliform for use in
urogynecology.


3
 Table of Contents





HUMAN TISSUE PROCUREMENT





In 2007,
we obtained all of our donated human cadaveric tissue from tissue banks and
organ procurement organizations in the United States. These tissue banks and
organ procurement organizations are subject to Federal and state
regulations.  In addition, we require supplying tissue banks and organ
procurement organizations to comply with voluntary procedural guidelines
outlined by the American Association of Tissue Banks (“AATB”).  The
AATB is recognized for the development of industry standards and its program of
inspection and accreditation.  The AATB provides a standards-setting
function and has procedures for accreditation similar to the International
Standards Organization (“ISO”) standards. We are accredited by the
AATB.





We
believe that we have established adequate sources of donated human tissue to
satisfy the expected demand for our allograft tissue based products in the
foreseeable future.  To date, we have not experienced any material
difficulty in procuring adequate donated cadaveric tissue.








GOVERNMENT REGULATION





Overview





Government
regulation, both domestic and foreign, is a significant factor in the
processing, marketing and distribution of our current products and products that
we are developing.  In the United States, our  products are
subject to regulation by the FDA.  The FDA administers the Federal
Food, Drug and Cosmetic Act (“FDC Act”) and the Public Health Service Act (“PHS
Act”).  These statutes and implementing regulations govern the design,
testing, manufacturing, labeling, storage, record keeping, approval, advertising
and promotion of our products.





Once our
products are on the market, they are subject to pervasive and continuing
regulation by the FDA.  We are subject to inspection at any time by
the FDA and state agencies for compliance with regulatory
requirements.  The FDA may impose a wide range of enforcement
sanctions if we fail to comply, including:




•
    fines;
            • total or
      partial suspension of production;•
      injunctions;
            •
      refusal of the government to authorize the marketing of
    new• civil
      penalties;
            products or to allow
      us to enter into supply contracts; and•
      recall or seizure of our products;
            •
      criminal prosecution.




FDAClassification
of Our Products





We
believe that AlloDerm, GraftJacket and Repliform satisfy the FDA’s requirements
to be considered HCT/P’s eligible for regulation solely as human tissue and
therefore, we have not obtained prior FDA clearance or approval for commercial
distribution of these products.  AlloCraft DBM is regulated as an
HCT/P and medical device and received 510(k) clearance from the FDA in December
2005.





Strattice
is regulated as a medical device and received 510(k) clearance from the FDA in
June 2007 for use as a soft tissue patch to reinforce tissue where weakness
exists (e.g., hernias) and for surgical repair of damaged or ruptured soft
tissue membranes.  In October 2007, we received an additional 510(k)
clearance for the use of Strattice for soft tissue reinforcement in surgical
procedures intended to repair rotator cuff tissue.








FDA’s
Human Tissue Regulation





The FDA’s
regulatory requirements for human allografts are complex and constantly
evolving.  In 2001, the FDA issued a final rule requiring
manufacturers of human cellular and tissue-based products to register their
establishments and list their products with the FDA.  The 2001 final
rule sets forth the FDA’s test for determining whether an HCT/P is eligible for
tissue regulation (as opposed to medical device or biologic
regulation).  A product containing human tissue may be regulated
solely as a human cellular and tissue-based product or it may also be subject to
regulation as a medical device or biologic.  The FDA will apply human
tissue regulation to an HCT/P that is: (i) minimally manipulated; (ii) intended
for homologous use; (iii) is not combined with a device, drug or biologic (with
limited exceptions); and (iv) does not have a systemic effect and is not
dependent upon metabolic activity for its primary function (with certain
exceptions).  HCT/Ps generally may be commercially distributed without
prior FDA clearance or approval.


4
 Table of Contents




The FDA
has also issued regulations that require tissue donors to be screened and tested
for relevant communicable diseases and require manufacturers of HCT/Ps to follow
good tissue practice (“GTP”) in their recovery, processing, storage, labeling,
packaging and distribution of HCT/Ps in order to prevent the introduction,
transmission or spread of communicable diseases.  Moreover, the FDA
has the authority to inspect our facilities and to detain, recall or destroy our
products and order us to cease manufacturing if we fail to comply with these
requirements.  The new regulations also require us to report adverse
reactions and deviations from donor screening and other applicable
requirements.





FDA’s
Medical Device Regulation





A medical
device generally may be marketed in the United States only with the FDA’s prior
authorization.  Devices classified by the FDA as posing less risk are
placed in class I or class II.  Class II devices (and some class I
devices) generally require the manufacturer to seek “510(k) clearance” from the
FDA prior to marketing by filing a "premarket notification," unless the device
is exempt from this requirement by regulation.  Such clearance
generally is granted based upon a finding that a proposed device is
substantially equivalent in intended use and safety and effectiveness to a
predicate device.  This refers to a legally marketed class I or II
device that already has 510(k) clearance or that is a pre-amendment class III
device (in commercial distribution prior to May 28, 1976 and for which the FDA
has not called for PMA applications (defined below)).  Even if a
device receives 510(k) clearance, any modification that could significantly
affect its safety or effectiveness or that would constitute a major change in
the intended use of the device will require a new 510(k) submission or,
possibly, a PMA application.  In addition to 510(k) clearance
requirements, class II devices can be subject to special controls (e.g.,
performance standards, post-market surveillance, patient registries and FDA
guidelines) that do not apply to class I devices.





A medical
device that does not qualify for 510(k) clearance is placed in class III, which
is reserved for devices classified by the FDA as posing the greatest risk (e.g.,
life-sustaining, life-supporting or implantable devices, or devices that are not
substantially equivalent to a predicate device).  A class III device
generally must undergo the premarket approval (“PMA”) process, which requires
the manufacturer to prove the safety and effectiveness of the device to the
FDA’s satisfaction.  A PMA application must provide extensive
preclinical and clinical trial data and information about the device and its
components regarding manufacturing, labeling and promotion.





A
clinical study in support of a PMA application or 510(k) submission for a
“significant risk” device requires an Investigational Device Exemption (“IDE”)
application approved in advance by the FDA for a limited number of
patients.  The IDE application must be supported by appropriate data,
such as animal and laboratory testing results.  The clinical study may
begin only with approval from the FDA and the appropriate Institutional Review
Board (“IRB”) at each clinical study site.  If the device presents a
“non-significant risk” to the patient, a sponsor may begin the clinical study
after obtaining IRB approval without the need for FDA approval.  In
all cases, the clinical study must be conducted under the auspices of an IRB
pursuant to the FDA’s regulatory requirements intended for the protection of
subjects and to assure the integrity and validity of the data.





Our
medical device products are subject to pervasive and continuing post-market
regulation, including labeling regulations, the Quality System
Regulation,  medical device reporting regulations (which require that
a manufacturer report to the FDA certain types of adverse events involving its
products) and the FDA’s general prohibitions against promoting products for
unapproved or “off label” uses and against making false or misleading statements
to promote products.








National
Organ Transplant Act





Procurement
of certain human organs and tissue for transplantation is subject to the
restrictions of the National Organ Transplant Act (“NOTA”), which prohibits the
acquisition of certain human organs, including skin and related tissue for
valuable consideration, but permits the reasonable payment of costs associated
with the removal, transportation, implantation, processing, preservation,
quality control and storage of human tissue and skin.  We reimburse
tissue banks and organ procurement organizations for their expenses associated
with the recovery, storage and transportation of donated human skin that they
provide to us for processing.  We include in our pricing structure the
fees paid to tissue banks to reimburse them for their expenses associated with
the recovery and transportation of the tissue, in addition to certain costs
associated with processing, preservation, quality control and storage of the
tissue, marketing and medical education expenses, and costs associated with
development of tissue processing technologies.  NOTA does not apply to
xenograft tissue products.





State
and Local Regulation





A few,
but increasing number of states including Florida, California, Oklahoma,
Illinois,  New York and Maryland impose their own regulatory
requirements on establishments involved in the processing, handling, storage and
distribution of human tissue.  Noncompliance with state requirements
may include some or all of the risks associated with noncompliance with FDA
regulation, as well as other risks.


5
 Table of Contents





We are
also subject to various federal, state and local laws, regulations and
requirements relating to such matters as safe working conditions, laboratory and
manufacturing practices, and the use, handling and disposal of hazardous or
potentially hazardous substances used and produced in connection with our
research and development work.





International
Regulation





The
regulation of our products outside the United States varies by country and is
complex and constantly evolving.  A limited amount of our human tissue
products are currently distributed in several countries
internationally.  Certain countries regulate our human tissue products
as pharmaceutical products, requiring us to make extensive filings and obtain
regulatory approvals before selling our product.  Certain countries
classify our products as human tissue for transplantation, but may restrict its
import or sale.  Certain foreign countries have laws similar to
NOTA.  These laws may restrict the amount that we can charge for our
products and may restrict our ability to export or distribute our products to
licensed not-for-profit organizations in those countries. Other countries have
no applicable regulations regarding the import or sale of human tissue products
similar to our products, creating uncertainty as to what standards we may be
required to meet.





We plan
to pursue clearance to distribute Strattice in certain countries outside the
United States. Additionally, we may pursue clearance to distribute other
products in certain other countries in the future.  The uncertainty of
the regulations in each country may delay or impede the marketing of our
products in the future or impede our ability to negotiate distribution
arrangements on favorable terms.  Noncompliance with foreign country
requirements may include some or all of the risks associated with noncompliance
with FDA regulation as well as other risks.








RESEARCHAND DEVELOPMENT





Our
research and development is focused on leveraging our core understanding of
biological tissues in order to develop biosurgery products that fulfill unmet
clinical needs.  Our strategy balances our investment in research,
product development and clinical studies aimed at enhancing our current products
and ensuring a future stream of innovative new products.  Our research
and development and clinical initiatives include programs designed to support
the marketing of our products in current clinical applications and potentially
extend their use into new surgical.  In 2008, we intend to focus a
significant amount of effort on clinical trials to support potential marketing
claims for our products and on the development of potential new surgical
applications for Strattice.  Additionally, we have a variety of
programs designed to expand our product line in the rapidly growing biosurgery
market.  Such programs include the investigation of novel
biomaterials, alone or in combination with our tissue matrix
products.  Products that we develop in the future may be regulated by
the FDA as HCT/P’s, medical devices or biologics.





Our
research activities are funded by current operations, as well as research grants
obtained through external organizations, including the National Institutes of
Health and the Department of Defense.  Our research and development
costs in 2007, 2006 and 2005 for all programs were approximately $23.5 million,
$16.5 million and $10.3 million, respectively.  Research grant
revenues recognized during 2007, 2006 and 2005 were $612,000, $1.0 million and
$1.1 million, respectively.  See “Management’s Discussion and Analysis
of Financial Condition and Results of Operations — Liquidity and Capital
Resources.”








PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS





Our
ability to compete effectively with other companies is dependent materially upon
the proprietary nature of our technologies.  We rely primarily on
patents, trade secrets and confidentiality agreements to protect our
technologies.





There are
certain primary patents and patent applications that we rely upon to protect our
technology.  Two issued United States patents and one allowed United
States patent application cover methods of producing our tissue-based products
and products made by some of these methods. Eight additional United States
patents and twelve pending United States patent applications supplement these
patents and cover methods and apparatus for preparation, preservation and
freeze-drying without the damaging effects of ice crystal
formation.   Additionally, we license rights to additional
technologies, some of which are protected by patents owned by
others.





We also
have applied for patent protection in several foreign
countries.  Because of the differences in patent laws and laws
concerning proprietary rights, the extent of protection provided by United
States patents or proprietary rights owned by or licensed to us may differ from
that of their foreign counterparts.


6
 Table of Contents




In
general, the patent position of medical technology companies is highly uncertain
and involves complex legal, scientific and factual questions.  There
is risk that future patents may not be granted with respect to the patent
applications filed by us.  Furthermore, there is risk that one or more
patents issued or licensed to us will not provide commercial benefit to us or
will be infringed, invalidated or circumvented by others.  The United
States Patent and Trademark Office currently has a significant backlog of patent
applications, and the approval or rejection of patents may take several
years.





The
contents of United States patent applications are generally published 18 months
after the initial filing date.  Once published or issued, a United
States patent application or patent would constitute prior art from its filing
date, which might predate the filing date of one of our patent
applications.  Conceivably, the publication or issuance of such a
prior art patent application or patent, or the discovery of “prior art” of which
we are currently unaware, could invalidate a patent of ours or our licensor or
discourage commercialization of a product claimed within such
patent.  No assurances may be given that our products or planned
products may not be the subject of infringement actions by third
parties.  Any successful patent infringement claim relating to any
products or planned products could have a material adverse effect on our
financial condition and results of operations.  Further, there can be
no assurance that any patents or proprietary rights owned by or licensed to us
will not be challenged, invalidated, circumvented or rendered unenforceable
based on, among other things, subsequently discovered prior art, lack of
entitlement to the priority of an earlier, related application or failure to
comply with the written description, best mode, enablement or other applicable
requirements.





We
generally conduct a cursory review of issued patents prior to engaging in
research or development activities.  If others already have issued
patents covering new products that we develop, we may be required to obtain a
license from others to commercialize such future products.  There can
be no assurance that any such license that may be required could be obtained on
favorable terms or at all.





We may
decide for business reasons to retain certain knowledge that we consider
proprietary as confidential and elect to protect such information as a trade
secret, as business confidential information, or as know-how.  In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our competitive position.  There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to or disclose such
information.





We have
federal trademark or service mark registrations that we currently use for
LifeCell, which concern processing and preserving tissue samples; for AlloDerm,
which concerns our human allograft tissue matrix products; for Strattice, our
xenograft tissue matrix product; and for Repliform, the version of AlloDerm for
urology and gynecology.  GraftJacket is a registered trademark of
Wright Medical Group.  AlloCraft DBM is a registered trademark of
Stryker Corporation.








COMPETITION





The
medical technology field is undergoing rapid and significant technological
change.  Our success depends upon our ability to develop and
commercialize efficient and effective products based on our
technologies.  Our products compete with autologous tissue and various
commercially available products made from synthetic materials or biologic
materials of human or animal tissue origin.





Our
tissue matrix products compete with synthetic surgical mesh products marketed by
such large medical device companies as Johnson & Johnson; C.R. Bard; W.L.
Gore & Associates; and Integra Life Sciences Holdings
Corporation.  They also compete with animal-derived products marketed
by companies such as C.R. Bard; Cook, Inc.; and Tissue Science Laboratories,
plc.  Two tissue processors, Musculoskeletal Transplant Foundation
(“MTF”) and Tutogen, distribute human tissue-based products that compete with
our products.  MTF distributes its products through a direct sales
force and through Synthes, Inc. and Johnson & Johnson.  Tutogen
distributes its products through C.R. Bard and Mentor.





Our
AlloCraft DBM product competes with other similar bone repair products produced
by companies such as Regeneration Technologies, Inc.; Osteotech, Inc.;
AlloSource; Wright Medical Group; Isotis Orthobiologics; and MTF.





We
believe that there are many companies, academic institutions, tissue banks,
organ procurement organizations and tissue processors, including those
identified above, that are capable of developing products which may be
competitive with our current products. Additionally, some of these organizations
are well-established and may have substantially greater financial and other
resources, research and development capabilities and more experience in
conducting clinical trials, obtaining regulatory approvals, manufacturing and
marketing than we do, and accordingly may succeed in developing competing
products which may render our products or technology uncompetitive, uneconomical
or obsolete.


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 Table of Contents




EMPLOYEES





At
December 31, 2007, we had 443 employees, of which 117 were employed in sales,
marketing and customer service; 217 in production and quality assurance; 71 in
research and development; and 38 in administration and accounting.








Item
      1A.
            
            Risk Factors





You
should carefully consider these risk factors in addition to our financial
statements and notes to such financial statements.  In addition to the
following risks, there may also be risks that we do not yet know of or that we
currently think are immaterial that may also impair our business
operations.  If any of the following risks occur, our business,
financial condition or operating results could be adversely
affected.





We
are highly dependent on our revenues from AlloDerm.  If we are unable
to maintain, increase or replace our AlloDerm revenues, our financial condition
and results of operations could be materially and adversely
affected.





During
the years ended December 31, 2007, 2006 and 2005, revenues from the distribution
of AlloDerm represented approximately 88%, 85% and 79%, respectively, of our
product revenues.  Surgeons will not use our products unless they
determine that the clinical benefits to the patient are greater than those
available from competing products or therapies.  Even if the advantage
of our products is established as clinically significant, surgeons may not elect
to use such products for any number of reasons.  Consequently,
surgeons, health care payers and patients may not accept our current products or
products under development.  Broad market acceptance of our products
may require the training of numerous surgeons and clinicians, as well as
conducting or sponsoring clinical studies to demonstrate the benefits of such
products.  The amount of time required to complete such training and
studies could result in a delay or dampening of such market
acceptance.  If we are unable to maintain or increase our revenues
from the distribution of our AlloDerm products, our financial condition and
results of operations would be materially and adversely
affected.  Additionally, if we were unable to replace such revenue
from existing or new products, the market price of our stock could be negatively
affected.





Failure
to comply with government regulations applicable to our products could adversely
affect the marketing of such products and therefore our financial condition and
results of operations could be materially and adversely affected.





Once our
products are on the market, they are subject to pervasive and continuing
regulation by the FDA.  We are subject to inspection at any time by
the FDA and state agencies for compliance with regulatory
requirements.  Failure to comply with any applicable regulatory
requirements could result in civil and criminal enforcement actions, as well as
fines and other penalties.  Moreover, the FDA has the authority to
detain, recall or destroy our products and order us to cease manufacturing and
distribution if we fail to comply with these requirements. A few, but increasing
number of states including Florida, California, Illinois, New York and Maryland,
impose their own regulatory requirements on transplanted human
tissue.  Our financial condition and results of operations and cash
flows could be materially and adversely affected by a finding of noncompliance
with governmental regulations and the imposition of fines or penalties, recalls
or any disruption in our ability to market our current products.





FDA
could disagree with our conclusion that AlloDerm, GraftJacket and Repliform
products satisfy the FDA’s requirements for regulation solely as human
tissue.  If FDA were to impose medical device or biologic regulation
on one or more of these products, it would adversely affect their marketing and
therefore our financial condition and results of operations would be materially
and adversely affected.





We
believe that our AlloDerm, GraftJacket and Repliform products satisfy the FDA’s
requirements to be considered HCT/P’s eligible for regulation solely as human
tissue, and therefore, we have not obtained prior FDA clearance or approval for
commercial distribution of these products.  If FDA were to disagree
with our determination as to any of these products, or were to prospectively
alter the requirements for HCT/P eligibility, the agency could prohibit the
marketing of these products until we met stringent medical device or biologic
premarket clearance or approval requirements, which could include obtaining
extensive supporting clinical data.  In that event, our financial
condition and results of operations and cash flows could be materially and
adversely affected.





We
may not be able to obtain required premarket clearance or approval of our
products for new intended uses, resulting in an adverse impact on our financial
condition and results of operations.


8
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Our
determination that AlloDerm, GraftJacket and Repliform products are eligible for
regulation as HCT/P’s is limited to their current intended uses.  In
the future, we may wish to market AlloDerm, GraftJacket and Repliform for new
intended uses.  Based on such new uses, our products may also be
regulated as medical devices or biologics, requiring premarket clearance or
approval and adherence to the FDA’s medical device or biologic
regulations.  Additionally, the FDA could prohibit distribution of our
existing products for new uses until clearance or approval is
obtained.  We do not know if clearance or approval for new uses of
existing products, or new products could be obtained in a timely fashion, or at
all.  Such clearance or approval process could include a requirement
to provide extensive supporting clinical data.





Even if a
device receives 510(k) clearance, such as Strattice, any modification we wish to
make that could significantly affect its safety or effectiveness or that would
constitute a major change in the intended use of the device will require a new
510(k) submission or, possibly, a PMA application.  The FDA could
prohibit distribution of the modified product until clearance or approval is
obtained.  We do not know if clearance or approval could be obtained
in a timely fashion, or at all.  Such clearance or approval process
could include a requirement to provide extensive supporting clinical
data.





Our
financial condition and results of operations and cash flows could be materially
and adversely affected by a change in the regulatory classification of our
products resulting in a disruption in our ability to market such products and
the expense associated with providing extensive clinical data, if required by
the FDA.





The
National Organ Transplant Act (“NOTA”) could be interpreted in a way that could
reduce our revenues and income in the future.





Procurement
of certain human organs and tissue for transplantation is subject to the
restrictions of NOTA, which prohibits the acquisition of certain human organs,
including skin and related tissue for valuable consideration, but permits the
reasonable payment of costs associated with the removal, transportation,
implantation, processing, preservation, quality control and storage of human
tissue, including skin.  We reimburse tissue banks for expenses
incurred that are associated with the recovery and transportation of donated
cadaveric human skin that we process and distribute.  In addition to
amounts paid to tissue banks to reimburse them for their expenses associated
with the procurement and transportation of human skin, we include in our pricing
structure certain costs associated with:





·
            tissue
      processing;


·
            tissue
      preservation;


·
            quality
      control and storage of the tissue;
and


·
            marketing
      and medical education expenses.





NOTA
payment allowances may be interpreted to limit the amount of costs and expenses
that we may recover in our pricing for our products, thereby negatively
impacting our future revenues and profitability.  If we are found to
have violated NOTA’s prohibition on the sale of human tissue, we also are
potentially subject to criminal enforcement sanctions which may materially and
adversely affect our results of operations.





Certain
of our products contain donated human cadaveric tissue and therefore have the
potential for disease transmission which may result in patient
claims.





AlloDerm,
GraftJacket, AlloCraft DBM and Repliform contain donated human cadaveric
tissue.  The implantation of tissue products derived from donated
cadaveric tissue creates the potential for transmission of communicable
disease.  Although we comply with Federal and state regulations and
voluntary AATB guidelines intended to prevent communicable disease transmission,
and our tissue suppliers are also required  to comply with
such  regulations, there can be no assurance that:





·
            our
      tissue suppliers will comply with such regulations intended to prevent
      communicable
  disease   transmission;


·
            even
      if such compliance is achieved, that our products have not been or will
      not be associated with transmission of disease;
  or


·
            a
      patient otherwise infected with disease would not erroneously assert a
      claim that the use of our products resulted in disease
      transmission.





Any
actual or alleged transmission of communicable disease could result in patient
claims, litigation, distraction of management’s attention and potentially
increased expenses.  As a result, such actions or claims could
potentially harm our reputation with our customers and disrupt our ability to
market our products, which may materially and adversely affect our results of
operations, financial condition and the market price of our
stock.


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We
are exposed to product liability claims for which our product liability
insurance may be inadequate and therefore could materially and adversely affect
our revenues and results of operations.





Our
business exposes us to product liability risks inherent in the testing,
manufacturing, marketing and use of medical products.  We are
currently named as a defendant in a number of lawsuits that are related to the
distribution of our products.  Although we intend to vigorously defend
against these actions, there can be no assurance that we will
prevail.   We maintain product liability insurance; however, we
cannot be certain that:





·
            the
      level of our insurance will provide adequate coverage against potential
      liabilities;


·
            the
      type of claim will be covered by the terms of the insurance
      coverage;


·
            adequate
      product liability insurance will continue to be available in the future;
      or


·
            our
      insurance can be maintained on acceptable
terms.





The legal
expenses associated with defending against product liability claims and the
obligation to pay a product liability claim in excess of available insurance
coverage would increase our operating expenses and could materially and
adversely affect our results of operations and cash flows.





We depend heavily
upon a limited number of sources of human cadaveric tissue, and any interruption
in the availability of
human tissue would interfere with our ability to process and market our
products.





Our
business is dependent on the availability of donated human cadaveric
tissue.  We currently receive human tissue from United States tissue
banks and organ procurement organizations.  Over the past few years,
demand for our products has increased substantially and our requirements for
donor tissue have also increased substantially.  Although we have met
such demand and have established what we believe to be adequate sources of
donated human tissue to satisfy the expected demand for our human tissue
products in the foreseeable future, we cannot be sure that donated human
cadaveric tissue will continue to be available at current levels or will be
sufficient to meet our future needs.  If our current sources can no
longer supply human cadaveric tissue or our requirements for human cadaveric
tissue exceed their current capacity, we may not be able to locate other sources
on a timely basis, or at all.  Any significant interruption in the
availability of human cadaveric tissue would likely cause us to slow down the
processing and distribution of our human tissue products, which could adversely
affect our ability to supply the needs of our customers and materially and
adversely affect our results of operations and our relationships with our
customers.





Negative
publicity concerning the use of donated human tissue in medical procedures could
reduce the demand for our products and negatively impact the supply of available
donor tissue.





Negative
publicity concerning the use and method of obtaining donated human tissue that
is used in medical procedures could reduce the demand for our products or
negatively impact the willingness of families of potential donors to agree to
donate tissue, or tissue banks to provide tissue to us. In such event, we might
not be able to obtain adequate tissue to meet the needs of our customers and our
results of operations and our relationships with our customers could be
materially and adversely affected.





Changes
in third-party payer reimbursement practices regarding the procedures performed
with our products could adversely affect the market acceptance of our products
and materially and adversely affect our revenues and results of
operations.





Generally,
hospitals, surgeons and other health care providers purchase products, such as
the products being sold or developed by us, for use in providing care to their
patients.  These parties typically rely on third-party payers,
including Medicare, Medicaid, private health insurance, and managed care plans
to reimburse all or part of the costs of acquiring those products and costs
associated with the medical procedures performed with those
products.  Third-party payers have adopted cost control measures in
recent years that have had and may continue to have a significant effect on the
purchasing practices of many health care providers, generally causing them to be
more selective in the purchase of medical products.  Significant
uncertainty exists as to the reimbursement status of newly approved health care
products.  We believe that certain third-party payers provide
reimbursement for medical procedures at a specified rate without additional
reimbursement for products, such as those being sold or developed by us, used in
such procedures.  Adequate third-party payer reimbursement may not be
available for us to maintain price levels sufficient for realization of an
appropriate return on our investment in developing new products.  The
FDA generally permits human tissue for transplantation to be commercially
distributed without obtaining prior FDA approval of the product.  In
contrast, products regulated as medical devices or biologics usually require
such approval.  Certain government and other third-party payers
refuse, in some cases, to provide any coverage for uses of products for
indications for which the FDA has not granted marketing
approval.  Further, certain of our products are used in medical
procedures that typically are not covered by third-party payers or for which
patients sometimes do not obtain coverage.  These and future changes
in third-party payer reimbursement practices regarding the procedures performed
with our products could adversely affect the market acceptance of our products
and therefore, also materially and adversely affect our revenues and results of
operations.


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 Table of Contents





All
of our operations are currently conducted at a single location and any
disruption at our facility could materially and adversely affect our revenues
and results of operations.





All of
our operations are currently conducted at a single location in Branchburg, New
Jersey.  We take precautions to safeguard our facility including
security, health and safety protocols and off-site backup and storage of our
electronic data.  Additionally, we maintain property insurance that
includes coverage for business interruption. However, a natural disaster such as
a fire or flood could affect our ability to maintain ongoing operations and
cause us to incur additional expenses.  Our insurance coverage may not
be adequate to fully cover our losses in any particular
case.  Accordingly, damage to our facility or other property due to
fire, flood or other natural disaster or casualty event could materially and
adversely affect our revenues and results of operations.





The
medical technology field is highly competitive and such competition could
adversely affect our revenues and results of operations.





The
medical technology field is undergoing rapid and significant technological
change.  Our success depends upon our ability to develop and
commercialize efficient and effective products based on our
technologies.  Our products compete with autologous tissue and various
commercially available products made from synthetic materials or biologic
materials of human or animal tissue origin.





Our
tissue matrix products compete with synthetic surgical mesh products marketed by
such large medical device companies as Johnson & Johnson; C.R. Bard; W.L.
Gore & Associates; and Integra Life Sciences Holdings
Corporation.  They also compete with animal-derived products marketed
by companies such as C.R. Bard; Cook, Inc.; and Tissue Science Laboratories,
plc.  Two tissue processors, Musculoskeletal Transplant Foundation
(“MTF”) and Tutogen, distribute human tissue-based products that compete with
our products.  MTF distributes its products through a direct sales
force and through Synthes, Inc. and Johnson & Johnson.  Tutogen
distributes its products through C.R. Bard and Mentor.





Our
AlloCraft DBM product competes with other similar bone repair products produced
by companies such as Regeneration Technologies, Inc.; Osteotech, Inc.;
AlloSource; Wright Medical Group; Isotis Orthobiologics; and MTF.





We
believe that there are many companies, academic institutions, tissue banks,
organ procurement organizations and tissue processors, including those
identified above, that are capable of developing products that may be
competitive with our current products. Additionally, many of these organizations
are well established and may have substantially greater financial and other
resources, research and development capabilities and more experience in
conducting clinical trials, obtaining regulatory approvals, manufacturing and
marketing than we do, and accordingly may succeed in developing competing
products which may render our products or technology uncompetitive, uneconomical
or obsolete.





Our
success depends on the scope of our intellectual property rights and not
infringing the intellectual property rights of others.  The validity,
enforceability and commercial value of these rights are highly
uncertain.





Our
ability to compete effectively with other companies is materially dependent upon
the proprietary nature of our technologies.  We rely primarily on
patents and trade secrets to protect our technologies.  Third parties
may seek to challenge, invalidate, circumvent or render unenforceable any
patents or proprietary rights owned by or licensed to us based on, among other
things:





·
            subsequently
      discovered prior art;


·
            lack
      of entitlement to the priority of an earlier related application;
      or


·
            failure
      to comply with the written description, best mode, enablement or other
      applicable requirements.





In
general, the patent position of biotechnology and medical product firms are
highly uncertain, still evolving and involves complex legal, scientific and
factual questions.  We are at risk that:





·
            patents
      may be granted to others that preclude granting patents on patent
      applications filed by us; and


·
            any
      patents issued or licensed to us may not provide commercial benefit to us
      or will be infringed, invalidated or circumvented by
    others.





The
United States Patent and Trademark Office currently has a significant backlog of
patent applications, and the approval or rejection of patents may take several
years.   The contents of United States patent applications are
generally published 18 months after the initial filing date.  Once
published or issued, a United States patent application or patent would
constitute prior art from its filing date, which might predate the filing date
of one of our patent applications.  Conceivably, the publication or
issuance of such a prior art patent application or patent, or the discovery of
“prior art” of which we are currently unaware, could invalidate a patent of ours
or our licensor or discourage commercialization of a product claimed within such
patent.


11
 Table of Contents




We
generally conduct a cursory review of issued patents prior to engaging in
research or development activities.  If others already have issued
patents covering new products that we develop, we may be required to obtain a
license from them to commercialize such new products.  There can be no
assurance that any necessary license could be obtained on favorable terms or at
all.





There can
be no assurance that we will not be required to resort to litigation to protect
our patented technologies or other proprietary rights or that we will not be the
subject of additional patent litigation to defend our existing or proposed
products or processes against claims of patent infringement or other
intellectual property claims.  Any of such litigation could result in
substantial costs and diversion of our financial and management
resources.





We also
have applied for patent protection in several foreign
countries.  Because of the differences in patent laws and laws
concerning proprietary rights, the extent of protection provided by United
States patents or proprietary rights owned by or licensed to us may differ from
that of their foreign counterparts.





We may
decide for business reasons to retain certain knowledge that we consider
proprietary as confidential and elect to protect such information as a trade
secret, as business confidential information or as know-how.  In that
event, we must rely upon trade secrets, know-how and continuing technological
innovation to maintain our competitive position.  There can be no
assurance that others will not independently develop substantially equivalent
proprietary information or otherwise gain access to or disclose such
information.





We
rely upon independent sales and marketing agents and distributors to generate
part of our revenues.





Our
independent sales and marketing agents and distributors generated 12% of our
total product revenue in the year ended December 31, 2007.  Wright
Medical Group, our exclusive distributor for GraftJacket, represented 5% of our
total product revenues in 2007.  No other individual independent sales
agent or distributor generated more than 5% of our total product revenues in the
year ended December 31, 2007.





If any of
our independent sales and marketing agents or distributors fails to adequately
market our products, our revenues could be adversely affected until a
replacement agent or distributor could be retained by us.  Finding
replacement agents and distributors could be a time-consuming process, and we
may not be able to find replacement agents and distributors on terms acceptable
to us, or at all.  If we are unable to find replacement agents and
distributors, our revenues and results of operations could be materially and
adversely affected.




Increasing
our revenues and profitability in the future may depend on our ability to
develop and commercialize new products.





Product
development is subject to risks and uncertainties.  We may be required
to undertake time-consuming and costly development activities and seek
regulatory clearance or approval for new clinical applications for current
products and new products.  The completion of development of any new
products, including obtaining regulatory approval, remains subject to all the
risks associated with the commercialization of new products based on innovative
technologies, including:





·
            unanticipated
      technical problems;


·
            obtaining
      regulatory approval of such products, if
  required


·
            manufacturing
      difficulties;


·
            the
      possibility of significantly higher development costs than anticipated,
      and


·
            gaining
      customer acceptance.





In June
2007, we received 510(k) clearance from the FDA for Strattice, a new xenograft
tissue product developed by us.  In pre-clinical studies, Strattice
demonstrated rapid revascularization and cell repopulation and strong
healing.   A significant amount of our research and development
initiatives in 2008 include clinical programs designed to support the marketing
of Strattice in current clinical applications and to potentially extend its use
into new surgical applications.  The results of our pre-clinical and
clinical studies may not be sufficient to gain surgeon customer acceptance of
this new product.


12
 Table of Contents




Additionally,
health care payers' approval of reimbursement for new products in development
may be an important factor in establishing market acceptance.  If we
are unable to successfully develop and commercialize new products, including
Strattice, our future revenues and profitability could be materially and
adversely affected.





We
may need additional capital to acquire complementary products or businesses, and
it is uncertain whether such capital will be available.





We
believe that our current cash resources, together with anticipated cash from
ongoing operating activities, will be sufficient to fund our planned operations,
research and development programs and fixed asset additions in the foreseeable
future.  However, we may determine that we require additional funds to
meet our long-term objectives, including the completion of potential
acquisitions, and there can be no assurance that our financial sources will be
sufficient and, as a result, we may need additional funding.  We have
no commitments for any future funding, and there can be no assurance that we
will be able to obtain additional financing in the future from debt or equity
financings, collaborative arrangements or other sources on terms acceptable to
us, or at all.  Any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may involve significant
restrictive covenants.  Collaborative arrangements, if necessary to
raise additional funds, may require us to relinquish our rights to certain of
our technologies, products or marketing territories.








SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 under Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.





Forward-looking
statements include statements with respect to our beliefs, plans, objectives,
goals, expectations, anticipations, assumptions, estimates, intentions and
future performance, and involve known and unknown risks, uncertainties and other
factors, which may be beyond our control, and which may cause our actual
results, performance or achievements to be materially different from future
results, performance or achievements expressed or implied by such
forward-looking statements.





All
statements other than statements of historical fact are statements that could be
forward-looking statements. You can identify these forward-looking statements
through our use of words such as “may,” “will,” “can,” “anticipate,” “assume,”
“should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,”
“estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,”
“intend,” “target,” “potential” and other similar words and expressions of the
future.





Forward-looking
statements may not be realized due to a variety of factors, including, without
limitation:





·
            the
      failure to maintain, increase, or replace revenues from the sale of our
      AlloDerm products;


·
            the
      failure to comply with government regulations, including the
      FDA;


·
            changes
      in the regulatory classification of our
  products;


·
            our
      inability to obtain required premarket clearance or approval of our
      products for new intended uses;


·
            limitations
      on the pricing of our allograft
products;


·
            potential
      for disease transmission by our
products;


·
            claims
      for damages by third parties, including product liability
      claims;


·
            our
      dependence on a limited number of sources for human cadaveric
      tissue;


·
            negative
      publicity about the use of donated human tissue in medical
      procedures;


·
            changes
      in third-party reimbursement
practices;


·
            disruption
      to our operations;


·
            the
      effects of competition;


·
            our
      inability to protect our intellectual
property;


·
            reliance
      on independent sales and marketing agents and distributors to generate
      part of our revenues;


·
            our
      inability to develop and commercialize new products;
  and


·
            the
      other factors listed under “Risk Factors” in this annual report on Form
      10-K.





All
forward-looking statements are expressly qualified in their entirety by this
cautionary notice.  You are cautioned not to place undue reliance on
any forward-looking statements, which speak only as of the date of this report
or the date of the document incorporated by reference into this
report.  We have no obligation, and expressly disclaim any obligation,
to update, revise or correct any of the forward-looking statements, whether as a
result of new information, future events or otherwise.  We have
expressed our expectations, beliefs and projections in good faith and we believe
they have a reasonable basis.  However, we cannot assure you that our
expectations, beliefs or projections will result or be achieved or
accomplished.


13
 Table of Contents




SUPERVISION
AND REGULATION – SECURITIES AND EXCHANGE COMMISSION





We
maintain a website at www.lifecell.com.  We make available on our
website free of charge all electronic filings with the SEC (including proxy
statements and reports on Forms 8-K, 10-K and 10-Q and any amendments to these
reports) as soon as reasonably practicable after such material is electronically
filed with or furnished to the SEC.  The SEC maintains an internet
site (http://www.sec.gov) that contains reports, proxy and information
statements, as well as other information regarding issuers that file
electronically with the SEC.





We have
also posted policies, codes and procedures that outline our corporate governance
principles, including the charters of the board’s audit and nominating
committees, and our Code of Ethics covering directors and all employees and the
Code of Ethics for senior financial officers on our website. These materials
also are available free of charge in print to shareholders who request them in
writing.  The information contained on our website does not constitute
a part of this report.








Item
      1B.
            
            Unresolved Staff Comments





None.








Item
      2.
            
            Properties





Our
headquarters are located in Branchburg, New Jersey.  The facility,
which includes office, laboratory, manufacturing and warehouse space, consists
of approximately 120,000 square feet of space under an operating lease agreement
that expires in November 2015 and contains one five-year renewal
option.  We believe that our current facility will be sufficient to
meet our anticipated needs for the next several years.








Item
      3.
            
            LegalProceedings





In
September 2005, we recalled certain human-tissue based products because the
organization that recovered the tissue, Biomedical Tissue Services, Ltd.
(“BTS”), may not have followed the FDA’s requirements for donor consent and/or
screening to determine if risk factors for communicable diseases
existed.  We promptly notified the FDA and all relevant hospitals and
medical professionals.  The FDA subsequently determined that patients
who received tissue implants prepared from BTS donor tissue might be at a
heightened risk of communicable disease transmission, and recommended those
patients receive appropriate testing.  We have worked closely with the
FDA to execute the product recall and to set up a LifeCell-sponsored testing
program.  We did not receive any donor tissue from BTS after September
2005.





We have
been named, along with BTS and many other defendants, in lawsuits that relate to
this matter.  With the exception of the individual plaintiff cases
discussed below, the suits purport to serve as class actions for persons
receiving transplants who are not physically injured, but instead seek medical
monitoring and/or damages for emotional distress.  All of these cases
are venued in New Jersey as part of a Multi-District Litigation
(“MDL”).  We have been successful in obtaining a voluntarily dismissal
of every such class action, with the exception of one case that purports to only
involve our products (“Watling”).





In
addition, several suits, including two class actions have been filed in Federal
Court in Rochester, New York and Philadelphia Court of Common Pleas that seek
compensatory damages from BTS and all processing defendants that received and
used BTS-originated tissue, including us.  Plaintiffs are the
next-of-kin of the donors who did not authorize BTS to remove the tissue at
issue.  The cases which have been transferred to the MDL will be the
subject of motions to dismiss.





There has
also been approximately 30 individual plaintiff cases filed in which those
persons also seek compensatory damages for emotional distress and/or future
medical monitoring.  None of the individual plaintiffs claim any
present physical injury.  With the exception of twelve cases that were
filed in the State Court in New Jersey and four cases in the State Court in
Pennsylvania, all of the individual cases have been transferred to the
MDL.





Finally,
we have been named in two cases filed in the State Court of New Jersey in which
those plaintiffs allege to have contracted a disease from our product (“Turpyn”
and “Guzman”).  Those cases are in the earliest stages of discovery
and it is not presently confirmed that either plaintiff has been diagnosed with
a disease nor is it known whether there is any causal relationship to our
product.


14
 Table of Contents





We intend
to vigorously defend each case.  We will pursue dismissal of all cases
which do not involve our product being at issue.  We believe it is not
currently possible to estimate the likelihood of an unfavorable outcome and/or
the impact, if any, the ultimate resolution of these cases could have on our
operations, financial position or cash flow. We maintain insurance coverage for
events and in amounts that it deems appropriate.  There can be no
assurance that the level of insurance maintained will be sufficient to cover the
claims or that the all of the claims will be covered by the terms of any
insurance.








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





None.


15
 Table of Contents




PART
II





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





Our
common stock is listed on the NASDAQ Global Market under the symbol
“LIFC.”  On February 25, 2008, the last reported sale price for our
common stock on the National Market was $36.80 per share.  The
following table sets forth the high and low sales information for our common
stock for the periods indicated, as reported by the NASDAQ Global
Market.





Price
      Range2007
            
            
            2006High
            
            
            Low
            
            
            High
            
            
            LowFirst
      Quarter
            
            $
            25.82
            
            
            $
            21.88
            
            
            $
            24.05
            
            
            $
            18.09Second
      Quarter
            
            
            32.66
            
            
            
            24.41
            
            
            
            31.98
            
            
            
            20.95Third
      Quarter
            
            
            38.75
            
            
            
            29.70
            
            
            
            33.00
            
            
            
            24.78Fourth
      Quarter
            
            
            48.28
            
            
            
            37.50
            
            
            
            33.39
            
            
            
            20.94





As of
February 25, 2007, there were approximately 255 registered holders of our common
stock.





Stockholder
Return Performance Graph





The graph
below summarizes the total cumulative return experienced by LifeCell’s
stockholders during the five-year period ended December 31, 2007, compared to
the NASDAQ Pharmaceuticals Index and the NASDAQ Market Index. The changes for
the periods shown in the graph and table are based on the assumption that
$100.00 had been invested in LifeCell Common Stock and in each index below on
January 1, 2002, and that all cash dividends were reinvested.





The
following graph is not to be deemed “soliciting material” or deemed to be filed
with the Securities and Exchange Commission or subject to Regulation 14A of the
Securities Exchange Act of 1934, except to the extent specifically requested by
the Company or incorporated by reference in documents otherwise
filed.








16
 Table of Contents




DividendPolicy





We have
not paid a cash dividend to holders of shares of common stock and do not
anticipate paying cash dividends to the holders of our common stock in the
foreseeable future.








Item
      6.
            
            Selected Financial Data





The
following table sets forth certain selected financial data of LifeCell for each
of the years in the five-year period ended December 31, 2007, derived from the
audited financial statements.  This information should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and the Financial Statements and notes thereto
included elsewhere in this Annual Report on Form 10-K.


Year
      Ended December 31,(In
      thousands, except for per share data)
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Operating
      Results:Revenues:Product
      revenues
              
              $
              190,518
              
              
              $
              140,647
              
              
              $
              93,326
              
              
              $
              58,751
              
              
              $
              38,577Research
      grant revenues
              
              
              612
              
              
              
              1,033
              
              
              
              1,072
              
              
              
              2,376
              
              
              
              1,672Total
      revenues
              
              
              191,130
              
              
              
              141,680
              
              
              
              94,398
              
              
              
              61,127
              
              
              
              40,249Costs
      and expenses:Costs
      of products sold
              
              
              56,090
              
              
              
              40,856
              
              
              
              29,205
              
              
              
              17,755
              
              
              
              12,241Research
      and development
              
              
              23,547
              
              
              
              16,500
              
              
              
              10,349
              
              
              
              7,860
              
              
              
              5,396General
      and administrative
              
              
              24,580
              
              
              
              18,618
              
              
              
              11,945
              
              
              
              8,214
              
              
              
              5,594Selling
      and marketing
              
              
              43,480
              
              
              
              32,376
              
              
              
              24,736
              
              
              
              20,311
              
              
              
              14,940Total
      costs and expenses
              
              
              147,697
              
              
              
              108,350
              
              
              
              76,235
              
              
              
              54,140
              
              
              
              38,171Income
      from operations
              
              
              43,433
              
              
              
              33,330
              
              
              
              18,163
              
              
              
              6,987
              
              
              
              2,078Interest
      and other income (expense),net
              
              
              4,028
              
              
              
              2,793
              
              
              
              1,013
              
              
              
              222
              
              
              
              (28
              )Income
      before income taxes
              
              
              47,461
              
              
              
              36,123
              
              
              
              19,176
              
              
              
              7,209
              
              
              
              2,050Income
      tax provision (benefit)
              
              
              20,578
              
              
              
              15,654
              
              
              
              7,132
              
              
              
              25
              
              
              
              (16,622
              )Net
      income
              
              $
              26,883
              
              
              $
              20,469
              
              
              $
              12,044
              
              
              $
              7,184
              
              
              $
              18,672Net
      income per common share:Basic
              
              $
              0.81
              
              
              $
              0.62
              
              
              $
              0.39
              
              
              $
              0.26
              
              
              $
              0.85Diluted
              
              $
              0.78
              
              
              $
              0.60
              
              
              $
              0.36
              
              
              $
              0.22
              
              
              $
              0.70Shares
      used in computing net income per common share:Basic
              
              
              33,345
              
              
              
              32,769
              
              
              
              30,887
              
              
              
              27,553
              
              
              
              22,094Diluted
              
              
              34,534
              
              
              
              34,007
              
              
              
              33,348
              
              
              
              31,974
              
              
              
              26,632Balance
      Sheet:Cash
      and cash equivalents
              
              $
              26,819
              
              
              $
              10,000
              
              
              $
              21,272
              
              
              $
              10,084
              
              
              $
              7,387Investments
              
              
              71,103
              
              
              
              67,846
              
              
              
              26,795
              
              
              
              17,002
              
              
              
              11,133Working
      capital
              
              
              128,331
              
              
              
              94,711
              
              
              
              73,209
              
              
              
              38,911
              
              
              
              23,283Total
      assets
              
              
              216,998
              
              
              
              157,121
              
              
              
              106,998
              
              
              
              72,093
              
              
              
              58,273Retained
      earnings (deficit)
              
              
              20,694
              
              
              
              (5,972
              )
              
              
              (26,441
              )
              
              
              (38,485
              )
              
              
              (45,669
              )Total
      stockholders’ equity
              
              
              171,202
              
              
              
              129,299
              
              
              
              92,070
              
              
              
              63,448
              
              
              
              52,379


17
 Table of Contents




Item
      7.
            Management’sDiscussion and Analysis of Financial Condition
      and Results of Operations





The
following discussion of financial condition and results of operations should be
read in conjunction with our financial statements and notes thereto included
elsewhere in this Annual Report on Form 10-K.





Special
Note: Certain statements set forth below constitute forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.  See “Risk Factors” and “Risk Factors - Special
Note Regarding Forward-Looking Statements.”  In the following
discussions, most percentages and dollar amounts have been rounded to aid the
presentation.  As a result, all such figures are
approximations.








OVERVIEW





We
develop, process and market biological soft tissue repair products made from
allograft and xenograft  tissue.  Surgeons use our products
to restore structure, function and physiology in a variety of reconstructive,
orthopedic and urogynecologic surgical procedures.  Our allograft
products include: AlloDerm, for plastic reconstructive, general surgical, burn
and periodontal procedures; GraftJacket, for orthopedic applications and lower
extremity wounds; AlloCraftDBM, for bone grafting procedures; and Repliform, for
urogynecologic surgical procedures.  In June 2007, we received
clearance from FDA for a new xenograft product, Strattice, which is intended for
certain plastic reconstructive and general surgical procedures.  We
commenced marketing Strattice during the first quarter of 2008.  Our
research and development initiatives include programs designed to support the
marketing of our products in current clinical applications, potentially extend
their use into new surgical applications and to expand our product line in the
rapidly growing biosurgery market.








Revenue
and Expenses





Revenues.  We market
AlloDerm for plastic reconstructive, general surgical and burn applications
through our direct sales organization.  AlloDerm is primarily sold to
hospitals for use by general and plastic surgeons.  Our products for
orthopedic and urogynecologic procedures are marketed through independent sales
agents and distributors.  Our strategic sales and marketing partners
include: Wright Medical Group, Inc. for GraftJacket and GraftJacket Xpress;
Stryker Corporation for AlloCraftDBM; Boston Scientific for Repliform; and
BioHorizons for periodontal applications of AlloDerm.  In 2008, we
expect our revenues to increase as we introduce Strattice and further penetrate
the reconstructive market.





Stock-based
compensation.  Effective January
1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), electing the modified
prospective transition method as provided by SFAS 123R and, accordingly,
financial statement amounts for the prior periods presented in this Form 10-K
have not been restated.   Stock-based compensation is included in
the same financial statement captions as an employee’s salary.





Cost of products
sold.  Cost of products
sold consists primarily of fees paid to tissue recovery organizations, tissue
procurement support costs, labor, overhead and supplies costs related to the
processing of our tissue-based products.  Cost of products sold also
includes depreciation, freight, handling and packaging costs.  In
2008, we expect cost of products sold to remain at approximately the same
percentage of revenue as in 2007.





Research and
development.  Research and
development, or R&D, expenses consist primarily of personnel costs within
our research, product development and clinical functions, as well as the costs
associated with pre-clinical and clinical studies and other product development
related costs.  We expense all R&D costs in the period
incurred.  R&D expenditures are expected to increase as a same
percentage of revenue in 2008.





General and
administrative.  General and
administrative, or G&A, expenses consist primarily of salaries and other
related costs for personnel serving the executive, finance, information
technology, human resources and regulatory affairs functions, as well as legal
fees, accounting fees and insurance costs.  In 2008, we expect G&A
costs to increase as we add personnel to support the growth in the company,
however, we anticipate a slight decrease in G&A costs as a percentage of
total revenue.





Selling and
marketing.  Selling and
marketing expenses consist primarily of personnel costs within our sales,
marketing and customer support functions, commissions paid to our sales
representatives and costs associated with medical education, market research and
promotional activities.  In 2008, we expect sales and marketing
expenses to increase due to the expansion of our sales force by 14 at the end of
2007, and higher marketing costs associated with the product launch of
Strattice.


18
 Table of Contents




RESULTS OF OPERATIONS





The
following table includes information from our Statements of Operations, the
relative percentage that those amounts represent to total revenue and the
percentage change in those amounts from period to period.




12 Months Ended
              
              
              
              
              
              % of Total Revenue
              
              
              %
      Increase (Decrease)2007
              
              
              2006vs.
              
              
              vs.2007
              
              
              2006
              
              
              2005
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2006
              
              
              2005Net
      Revenues:Reconstructive
      revenues
              
              $
              170,411
              
              
              $
              122,802
              
              
              $
              78,394
              
              
              
              89
              %
              
              
              87
              %
              
              
              83
              %
              
              
              39
              %
              
              
              57
              %Orthopedic
      revenues
              
              
              12,286
              
              
              
              9,695
              
              
              
              7,785
              
              
              
              6
              %
              
              
              7
              %
              
              
              8
              %
              
              
              27
              %
              
              
              25
              %Urogynecologic
      revenues
              
              
              7,821
              
              
              
              8,150
              
              
              
              7,147
              
              
              
              4
              %
              
              
              6
              %
              
              
              8
              %
              
              
              (4
              %)
              
              
              14
              %Product
      Revenues
              
              
              190,518
              
              
              
              140,647
              
              
              
              93,326
              
              
              
              99
              %
              
              
              99
              %
              
              
              99
              %
              
              
              35
              %
              
              
              51
              %Research
      Grant Revenues
              
              
              612
              
              
              
              1,033
              
              
              
              1,072
              
              
              
              1
              %
              
              
              1
              %
              
              
              1
              %
              
              
              (41
              %)
              
              
              (4
              %)Total
      Net Revenues
              
              
              191,130
              
              
              
              141,680
              
              
              
              94,398
              
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %
              
              
              35
              %
              
              
              50
              %Costs
      and Expenses:Cost
      of Products Sold
              
              
              56,090
              
              
              
              40,856
              
              
              
              29,205
              
              
              
              29
              %
              
              
              29
              %
              
              
              31
              %
              
              
              37
              %
              
              
              40
              %Research
      and Development
              
              
              23,547
              
              
              
              16,500
              
              
              
              10,349
              
              
              
              12
              %
              
              
              12
              %
              
              
              11
              %
              
              
              43
              %
              
              
              59
              %General
      and Administrative
              
              
              24,580
              
              
              
              18,618
              
              
              
              11,945
              
              
              
              13
              %
              
              
              13
              %
              
              
              13
              %
              
              
              32
              %
              
              
              56
              %Selling
      and Marketing
              
              
              43,480
              
              
              
              32,376
              
              
              
              24,736
              
              
              
              23
              %
              
              
              23
              %
              
              
              26
              %
              
              
              34
              %
              
              
              31
              %Total
      Costs and Expenses
              
              
              147,697
              
              
              
              108,350
              
              
              
              76,235
              
              
              
              77
              %
              
              
              76
              %
              
              
              81
              %
              
              
              36
              %
              
              
              42
              %Income
      from Operations
              
              
              43,433
              
              
              
              33,330
              
              
              
              18,163
              
              
              
              23
              %
              
              
              24
              %
              
              
              19
              %
              
              
              30
              %
              
              
              84
              %


Share-Based
Payments





Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123
(revised 2004), “Share-Based Payment,” (“SFAS 123R”) which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to our employees and directors, including stock options and
restricted stock based on estimated fair values.   Stock-based
compensation expense recognized under SFAS 123R for the years ended December 31,
2007 and 2006 was $9.7 million and $8.6 million, respectively.  Detail
of the stock-based compensation expense by financial statement caption,
including the stock-based compensation as a percentage of revenue, was as
follows:





Year Ended
              December 31, 2007
            
            
            Year Ended
              December 31, 2006(dollars
      in thousands)
            
            Dollars
            
            
            %
      of revenue
            
            
            Dollars
            
            
            %
      of revenueCost
      of products sold
            
            $
            871
            
            
            
            *
            
            
            $
            1,476
            
            
            
            1
            %Research
      and development
            
            
            2,673
            
            
            
            1
            %
            
            
            2,015
            
            
            
            1
            %General
      and administrative
            
            
            3,956
            
            
            
            2
            %
            
            
            3,761
            
            
            
            3
            %Selling
      and marketing
            
            
            2,230
            
            
            
            1
            %
            
            
            1,363
            
            
            
            1
            %Total
      stock-based compensation
            
            $
            9,730
            
            
            
            5
            %
            
            $
            8,615
            
            
            
            6
            %


* less
than 1%





At
December 31, 2007, there was $12.6 million of total unrecognized compensation
costs related to non-vested stock options and restricted stock, which is
expected to be recognized over a weighted average period of 1.8
years.


19
 Table of Contents





Years
Ended December 31, 2007 and 2006





Revenues





Total
revenues for the year ended December 31, 2007 increased by $49.5 million, or
35%, to $191.1 million compared to $141.7 million for the same period in
2006.  The increase was primarily attributable to a 35% increase in
product revenues to $190.5 million in the current period as compared to $140.6
million in the prior year.





Revenues
generated from the use of our products in reconstructive surgical procedures
increased by $47.6 million, or 39%, to $170.4 million in the year ended December
31, 2007 compared to $122.8 million in the same period in 2006.  The
growth was primarily driven by increased demand for AlloDerm in complex hernia
repair and breast reconstruction procedures.  AlloDerm revenues
increased 40% to $167.1 million in the year ended December 31, 2007 compared to
$119.4 million in the same period of 2006.





Orthopedic
product revenue grew by $2.6 million, or 27%, to $12.3 million in the year ended
December 31, 2007 from $9.7 million in 2006.  This revenue growth
resulted primarily from increased demand for our GraftJacket
products.  GraftJacket revenues were $10.3 million in 2007 compared to
$8.0 million in the same period in 2006.





Our
independent sales and marketing agents and distributors generated 12% of our
total product revenue in the year ended December 31, 2007 compared to 15% in
2006.  Wright Medical Group represented 5% of our total product
revenues in 2007 compared to 6% for the same period in 2006.  No other
individual independent sales agent or distributor generated more than 5% of our
total product revenues in the year ended December 31, 2007.





Research
grant revenues were $612,000 in 2007 compared to $1.0 million in
2006.





Costs
and expenses





Cost of
products sold for the year ended December 31, 2007 was $56.1 million, or 29% of
product revenues, compared to cost of products sold of $40.9 million, or 29% of
product revenue for the same period in 2006.





Total
research and development expenses increased by $7.0 million, or 43%, to $23.5
million in the year ended December 31, 2007 compared to $16.5 million for the
same period in 2006.  The increase was primarily attributable to
higher: (i) professional fees and expenses related to pre-clinical studies, (ii)
compensation expenses and (iii) operating supplies.





General
and administrative expenses increased by $6.0 million, or 32%, to $24.6 million
in the year ended December 31, 2007 compared to $18.6 million for the same
period in 2006.  The increase was primarily attributable to
higher:  (i) compensation expenses (ii) consulting fees (iii) legal
fees (iv) employee recruitment expenses and (v) losses on disposal of fixed
assets.





Selling
and marketing expenses increased by $11.1 million, or 34%, to $43.5 million for
the year ended December 31, 2007 compared to $32.4 million for the same period
in 2006.  The increase was primarily attributable to
higher:  (i) selling expenses, principally payroll, commissions and
travel and entertainment resulting from the expansion of our direct sales force,
(ii)  marketing and medical education program expenses for AlloDerm
and (iii) professional fees primarily related to marketing of
product.  Selling and marketing expenses included agent fees of $3.6
million and $3.7 million, respectively, in the years ended December 31, 2007 and
2006.





Interest
and other income, net




Interest
and other income, net increased by $1.2 million, or 44%, to $4.0 million in the
year ended December 31, 2007 compared to $2.8 million in the same period in 2006
due to an increase in interest income resulting from a higher level of invested
cash and higher rate of return.




Income
tax provision




The
provision for income taxes increased by $4.9 million, or 31%, to $20.6 million
in the year ended December 31, 2007 compared to $15.7 million in the same period
in 2006 resulting in an effective income tax rate of 43.4% in 2007 and 43.3% in
2006.




20
 Table of Contents





Years
Ended December 31, 2006 and 2005





Revenues





Total
revenues for the year ended December 31, 2006 increased by $47.3 million, or 50%
to $141.7 million compared to $94.4 million for the same period in
2005.  The increase was primarily attributable to a 51% increase in
product revenues to $140.6 million in the current period as compared to $93.3
million in the prior year.





Revenues
generated from the use of our products in reconstructive surgical procedures
increased by $44.4 million, or 57% to $122.8 million in the year ended December
31, 2006 compared to $78.4 million in the same period in 2005.  The
growth was primarily driven by increased demand for AlloDerm in complex hernia
repair and breast reconstruction procedures.  AlloDerm revenues
increased 62% to $119.4 million in the year ended December 31, 2006 compared to
$73.8 million in the same period of 2005.





Orthopedic
product revenue grew by $1.9 million, or 25% to $9.7 million in the year ended
December 31, 2006 from $7.8 million in 2005.  This revenue growth
resulted primarily from increased demand for our GraftJacket
products.  GraftJacket revenues were $8.0 million in 2006 compared to
$6.3 million in the same period in 2005.





Revenues
generated from the use of our Repliform product in urogynecologic surgical
procedures increased by $1.0 million, or 14% to $8.1 million in the year ended
December 31, 2006 compared to $7.1 million for the same period in
2005.





Our
independent sales and marketing agents and distributors generated 15% of our
total product revenue in the year ended December 31, 2006 compared to 20% in
2005.  Boston Scientific and Wright Medical Group each represented 6%
of our total product revenues in 2006 compared to 8% and 7%, respectively, for
the same period in 2005.  No other individual independent sales agent
or distributor generated more than 5% of our total product revenues in the year
ended December 31, 2006.





Research
grant revenues were $1.0 million in 2006 compared to $1.1 million in
2005.  As of December 31, 2006, approximately $853,000 of approved
grant funding was available for future research and development expenses through
the end of 2007.





Costs
and expenses





Cost of
products sold for the year ended December 31, 2006 was $40.9 million, or 29% of
product revenues, compared to cost of products sold of $29.2 million, or 31% of
product revenue for the same period in 2005.  Cost of products sold in
2005 was negatively impacted by a $1.4 million write-off of inventory associated
with a previously announced product recall.  In addition, a $469,000
reserve was established to cover estimated product returns and other costs
related to the product recall.





Total
research and development expenses increased by $6.2 million, or 59% to $16.5
million in the year ended December 31, 2006 compared to $10.3 million for the
same period in 2005.  The increase was primarily attributable to
higher: (i) payroll and related expenses associated with increased headcount and
annual merit increases, (ii) stock-based compensation expense, (iii)
professional fees and expenses related to pre-clinical studies, and (iv)
operating supplies.





General
and administrative expenses increased by $6.7 million, or 56% to $18.6 million
in the year ended December 31, 2006 compared to $11.9 million for the same
period in 2005.  The increase was primarily attributable to
higher:  (i) stock-based compensation expense, (ii) payroll and
related expenses associated with increased headcount and annual merit increases,
(iii) employee recruitment expenses and (iv) professional fees primarily related
to business development activities.





Selling
and marketing expenses increased by $7.7 million, or 31% to $32.4 million for
the year ended December 31, 2006 compared to $24.7 million for the same period
in 2005.  The increase was primarily attributable to
higher:  (i) selling expenses, principally payroll, commissions and
travel and entertainment resulting from the expansion of our direct sales force,
(ii) stock-based compensation expense and (iii) marketing and medical education
program expenses for AlloDerm.  Selling and marketing expenses
included agent fees of $3.7 million and $3.4 million, respectively, in the years
ended December 31, 2006 and 2005.





Interest
and other income, net




Interest
and other income, net increased by $1.8 million, or 176% to $2.8 million in the
year ended December 31, 2006 compared to $1.0 million in the same period in 2005
due to an increase in interest income resulting from a higher level of invested
cash and higher rate of return.


21
 Table of Contents




Income
tax provision




The
provision for income taxes increased by $8.6 million, or 119% to $15.7 million
in the year ended December 31, 2006 compared to $7.1 million in the same period
in 2005 resulting in an effective income tax rate of 43.3% and 37.2%,
respectively.  The increase in the effective tax rate was primarily
due to the recognition of stock-based compensation expense for incentive stock
options, which currently cannot be recognized for tax purposes.  In
addition, during 2005, we recognized deferred tax benefits of $481,000 resulting
from a change in the projected federal tax rate that reduced our effective tax
rate.  Although we recorded a tax provision in 2006 and 2005, we were
not required to pay regular federal income taxes due to the utilization of our
net operating loss carry forwards.








LIQUIDITY AND CAPITAL RESOURCES





At
December 31, 2007, we had $26.8 million in cash and cash equivalents, $64.2
million in short-term marketable securities and $6.9 million in long-term
marketable securities.  Working capital increased to $128.3 million at
December 31, 2007 from $94.7 million at December 31, 2006.  The
increase in working capital resulted primarily from increases in inventories,
cash and cash equivalents and prepayments partially offset by an increase in
accrued liabilities and accounts payable.




We
generated $29.2 million of positive cash flow from operating activities for the
year ended December 31, 2007 compared to $35.6 million for the same period in
2006.  The positive cash flow from operating activities in 2007 was
principally due to higher net income after adjustments for non-cash items and
accrued liabilities associated with our growth, partially offset by a planned
increase in inventories to support anticipated growth and an increase in
prepayments and other assets.





Our net
cash used in investing activities for the year ended December 31, 2007 was $17.3
million compared to $54.8 million for the year ended December 31,
2006.  The decrease was primarily due to a decrease in the purchase of
investments in 2007.  Capital expenditures were $12.4 million in 2007
compared to $13.8 million in 2006 and consisted primarily of leasehold
improvements related to a facility expansion and the purchase of manufacturing
and computer equipment.





Our
financing activities generated $4.9 million for the year ended December 31, 2007
compared to $7.9 million for the same period in 2006.  In 2007 and
2006, the cash generated from financing activities resulted from cash proceeds
received from the exercise of common stock options and the related excess tax
benefits realized.





The
following table reflects a summary of our contractual cash obligations as of
December 31, 2007:





Payments
      Due by Period(dollars
      in thousands)
            
            Total
            
            
            Less
      than 1 year
            
            
            1 –
      3 years
            
            
            3 –
      5 years
            
            
            More
      than 5 yearsOperating
      leases
            
            $
            8,615
            
            
            $
            1,141
            
            
            $
            2,275
            
            
            $
            2,114
            
            
            $
            3,085Licensing
      agreement
            
            
            10,500
            
            
            
            750
            
            
            
            2,000
            
            
            
            2,500
            
            
            
            5,250Total
      contractual cash obligations
            
            $
            19,115
            
            
            $
            1,891
            
            
            $
            4,275
            
            
            $
            4,614
            
            
            $
            8,335





Purchase
orders or contracts for the purchase of raw materials and other goods and
services are not included in the table above.  We are not able to
determine the aggregate amount of such purchase orders that represent
contractual obligations, as purchase orders may represent authorizations to
purchase rather than binding agreements.  Although we have entered
into contracts for services, the obligations under these contracts were not
significant, and the contracts generally contain clauses allowing for
cancellation without significant penalty.





We have
also entered into employment agreements with certain executive officers that
provide for potential payments and benefits upon employment
termination.  Such payments and benefits have not been included in the
table above since potential payments are contingent upon uncertain future
events.





At the
end of 2005, we commenced a multi-year facility expansion at our Branchburg, New
Jersey facility to increase office space, research labs and processing
capacity.  Capital expenditures associated with the ongoing facility
project are estimated to be approximately $13.1 million in 2008.





We
believe that our current cash resources, together with anticipated product
revenues and committed research and development grant funding, will be
sufficient to finance our planned operations, research and development programs
and capital expenditure requirements in the foreseeable
future.  However, we may need additional funds to meet our long-term
strategic objectives, including the completion of potential
acquisitions.  We have no commitments for any future funding, and
there can be no assurance that we will be able to obtain additional funding in
the future  through debt or equity financings, collaborative
arrangements or other sources on terms acceptable to us, or at
all.  Any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve significant restrictive
covenants.




22
 Table of Contents





Inflation





We do not
believe that inflation has had a material impact on our results of operations
for the years ended December 31, 2007, 2006 and 2005.








CRITICAL ACCOUNTING POLICIES / ESTIMATES





We have
identified the policies below as critical to the understanding of our financial
statements. The application of these policies requires management to make
estimates and assumptions that affect the valuation of assets and expenses
during the reporting period.  There can be no assurance that actual
results will not differ from these estimates.  The impact and any
associated risks related to these estimates on our business operations are
discussed below.





Revenue
Recognition.  We recognize
revenue for product sales when title to products and risk of loss are
transferred to customers, which is generally when product is shipped to the
customer.  Additional conditions for recognition of revenue are that
collection of sales proceeds is reasonably assured and we have no further
performance obligations.  We utilize independent sales and marketing
agents to supplement our direct sales organization.  For products
marketed through our independent sales and marketing agents, we recognize
revenue when the products are delivered to the third-party customer, as this is
when title and risk of loss to the product transfers.  Amounts billed
to customers for shipping and handling are included in revenue at the time the
related product revenue is recognized with the related expenses recorded in cost
of products sold.  Research grant revenues are recognized at the time
qualified expenses are incurred, unless we have continuing performance
obligations, in which case revenue is recognized upon the satisfaction of such
obligations.





Accounts
receivable.  We maintain an
allowance for estimated bad debt losses on our accounts receivable based upon
our historical experience and any specific customer collection issues that we
have identified.  Since our accounts receivable are not concentrated
within a relatively few number of customers, we believe that a significant
change in the liquidity or financial position of any one customer would not have
a material adverse impact on the collectability of our accounts receivable and
therefore our future operating results.  While bad debt losses depend
to a large degree on future economic conditions affecting our customers, we do
not anticipate significant bad debt losses in 2008.





Inventories.  We value our
inventory at the lower of cost or market, with cost being determined on a
first-in, first-out basis. We record a provision for excess and obsolete
inventory based primarily on inventory quantities on hand, our historical
product sales, and estimated forecast of future product demand and production
requirements.  Although we believe that our current inventory reserves
are adequate, any significant change in demand or technological developments
could have a significant impact on the value of our inventory and, therefore,
our future operating results.





Income
Taxes.  Significant
judgment is required in determining our income tax provision.  In the
ordinary course of business, there are many transactions and calculations where
the ultimate tax outcome is uncertain.  Although we believe that our
estimates are reasonable, no assurance can be given that the final outcome of
these matters will not be different than that which is reflected in our
historical income tax provisions and accruals.  Such differences could
have a material effect on our income tax provision and net income in the period
in which such determination is made.


We apply
an asset and liability approach to accounting for income
taxes.  Deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to
reverse.   The recoverability of deferred tax assets is dependent
upon our assessment of whether it is more likely than not that sufficient future
taxable income will be generated to utilize the deferred tax
asset.   In the event we determine that future taxable income
will not be sufficient to utilize the deferred tax asset, a valuation allowance
is recorded.  Interest related to income taxes is included in the
financial caption interest and other income, net.  Tax penalties are
included in the financial caption general and administrative
expense.





Share-Based
Compensation.  Effective January
1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards No. 123R, “Share-Based Payment” (“SFAS 123R”) which establishes
accounting for equity instruments exchanged for employee service. We utilize the
Black-Scholes option pricing model to estimate the fair value of employee
share-based compensation at the date of grant, which requires the input of
highly subjective assumptions, including expected volatility and expected life.
Further, as required under SFAS 123R, we now estimate forfeitures for options
granted, which are not expected to vest. Changes in these inputs and assumptions
can materially affect the measure of estimated fair value of our share-based
compensation.  These assumptions are subjective and generally require
significant analysis and judgment to develop.  When estimating fair
value, some of the assumptions will be based on, or determined from, external
data and other assumptions may be derived from our historical experience with
stock-based payment arrangements.  The appropriate weight to place on
historical experience is a matter of judgment, based on relevant facts and
circumstances.




23
 Table of Contents





We
estimated volatility by considering both implied volatility derived from
publicly traded options to purchase LifeCell common stock and historical stock
volatility.  As allowed by Staff Accounting Bulletin (SAB) No. 107,
Share-Based Payment, we have opted to use the simplified method for estimating
expected term equal to the midpoint between the vesting period and the
contractual term.  We estimate forfeitures using historical employee
turn-over rates.  Our estimates of forfeitures will be adjusted over
the requisite service period based on the extent to which actual forfeitures
differ, or are expected to differ, from their estimate.








NEW
ACCOUNTING PRONOUNCEMENTS





In July
2006, FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in
Income Taxes”, an interpretation of FASB Statement No. 109 (“FIN 48”), which
clarifies the accounting for uncertainty in income taxes recognized in
accordance with SFAS 109, “Accounting for Income Taxes.” FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position. FIN 48 indicates that an
enterprise shall initially recognize the financial statement effects of a tax
position when it is more likely than not of being sustained on examination,
based on the technical merits of the position. In addition, FIN 48 indicates
that the measurement of a tax position that meets the more likely than not
threshold shall consider the amounts and probabilities of the outcomes that
could be realized upon ultimate settlement. This interpretation is effective for
fiscal years beginning after December 15, 2006.  Our adoption of
adopting FIN 48 on January 1, 2007 did not have a material impact on our results
of operations, financial position or cash flows.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 establishes a single definition of fair value and a framework for
measuring fair value, sets out a fair value hierarchy to be used to classify the
source of information used in fair value measurements, and requires new
disclosures of assets and liabilities measured at fair value based on their
level in the hierarchy. SFAS No. 157 is effective for all fiscal years beginning
after November 15, 2007 (January 1, 2008 for 3M) and is to be applied
prospectively. In February 2008, the FASB issued Staff Positions No. 157-1 and
No. 157-2 which partially defer the effective date of SFAS No. 157 for one year
for certain non-financial assets and liabilities and remove certain leasing
transactions from its scope.  The implementation of SFAS 157 is not
expected to have a material impact on our results of operations, financial
position or cash flows.








Item
      7a.
            
            Quantitative and Qualitative Disclosure About Market
      Risk





We are
exposed to changes in interest rates primarily from our investments in certain
marketable securities, consisting principally of fixed income debt
securities.  A change in interest rates would not have a material
impact on our results of operations.  Although our investments are
available for sale, we generally hold such investments to
maturity.  Our investments are stated at fair value, with net
unrealized gains or losses on the securities recorded as accumulated other
comprehensive income (loss) in shareholders’ equity.  Net unrealized
gains and losses were not material at December 31, 2007 or 2006.








Item
      8.
            
            FinancialStatements and Supplementary Data





Financial
statements and the financial statement schedules specified by this Item,
together with the report thereon of PricewaterhouseCoopers LLP, are presented
following Item 15 of this report.








Item
      9.
            Changesin and Disagreements with Accountants on Accounting
      and Financial Disclosure





None.




24
 Table of Contents





Item
      9a.
            
            Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





During
the fourth quarter of 2007, our management, including the principal executive
officer and principal financial officer, evaluated our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) related to the recording, processing, summarization and
reporting of information in our reports that we file with the SEC. These
disclosure controls and procedures have been designed to ensure that material
information relating to us, including our subsidiaries, is made known to our
management, including these officers, by other of our employees, and that this
information is recorded, processed, summarized, evaluated and reported, as
applicable, within the time periods specified in the SEC’s rules and forms. Due
to the inherent limitations of control systems, not all misstatements may be
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures can only provide
reasonable, not absolute, assurance that the above objectives have been
met.





Based on
their evaluation as of December 31, 2007, our principal executive officer and
principal financial officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective.





Management’s
Report on Internal Control over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control –
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2007.





Changes
in Internal Control over Financial Reporting





There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.








Item
      9b.
            
            Other Information





None.




25
 Table of Contents


PART
III





Item
      10.
            
            Directors, Executive Officers and Corporate
      Governance





Background
of Directors




The
persons listed below served as our directors during the year ended December 31,
2007.




Nominee
            Age
            Position
      with the Company
            Director
      SincePaul
      G. Thomas
            52
            Chairman
      of the Board, President and Chief Executive Officer
            1998Michael
      E. Cahr (1)
            67
            Director
            1991David
      Fitzgerald (2) (3) (4)
            74
            Director
            2001James
      G. Foster  (4) (5)
            61
            Director
            1995David
      W. J. McGirr  (6)
            53
            Director
            2007Michael
      R. Minogue  (2)
            40
            Director
            2005Robert
      P. Roche, Jr. (3)
            52
            Director
            2005Martin
      P. Sutter (7)
            52
            Director
            2003





(1) Chairman
of the Audit Committee until November 12, 2007 when he retired from the Board of
Directors.


(2) Member
of the Nominating and Corporate Governance Committee.


(3) Member
of the Compensation Committee.


(4) Member
of the Audit Committee.


(5) Chairman
of the Compensation Committee.


(6) Chairman
of the Audit Committee effective November 12, 2007.


(7) Chairman
of the Nominating and Corporate Governance Committee and Presiding
Director.





All
directors hold office until the next annual meeting of stockholders or until
their successors are elected and qualified; vacancies and any additional
positions created by board action are filled by action of the existing Board of
Directors.





Paul G.
Thomas.  Mr. Thomas has served as Director, President and Chief
Executive Officer of LifeCell since October 1998.  Mr. Thomas was
elected Chairman of the Board in June 1999.  Prior to joining
LifeCell, Mr. Thomas was President of the Pharmaceutical Products Division of
Ohmeda Inc., a world leader in inhalation anesthetics and acute care
pharmaceuticals.  Mr. Thomas was responsible for the overall
operations of Ohmeda’s Pharmaceutical Division, which had worldwide sales of
approximately $200 million in 1997.  Mr. Thomas received his M.B.A.
degree with an emphasis in Marketing and Finance from Columbia University
Graduate School of Business and completed his postgraduate studies in Chemistry
at the University of Georgia Graduate School of Arts and Science.  He
received his B.S. degree in Chemistry from St. Michael’s College in Vermont,
where he graduated Cum Laude.  Mr. Thomas serves as a director of
Innovative Spinal Technologies, Inc., a privately held medical technology
company focused on developing minimally invasive treatments for spinal disorders
and Orthovita, Inc., (NASDAQ: VITA) a company specializing in biomaterial
products for the restoration of the human skeleton.





Michael E.
Cahr. Mr. Cahr was a director of LifeCell from July 1991 to
November 2007, when he retired from the Board of Directors of
Lifecell.  At the time of his retirement from the Board, Mr. Cahr was
President of Saxony Consultants, an Illinois-based company that provides
financial and marketing expertise to organizations in the United States and
abroad. From February 2000 through March 2002, Mr. Cahr was President and Chief
Executive Officer of IKADEGA, Inc., a Northbrook, Illinois server technology
company developing products and services for the health care, data storage and
hospitality fields. He also served as Chairman of Allscripts, Inc., a leading
developer of hand-held device technology that provides physicians real-time
access to health, drug and other critical information, from September 1997
through March 1999 and as President, Chief Executive Officer and Chairman from
June 1994 to September 1997. Prior to Allscripts, Mr. Cahr was Venture Group
Manager for Allstate Venture Capital where he oversaw investments in technology
and biotech from 1987 to June 1994. Mr. Cahr serves as a director of Pacific
Health Laboratories, a publicly traded nutritional products firm that develops
and commercializes functionally unique nutritional products. Mr. Cahr received
his undergraduate degree in Economics from Colgate University and his M.B.A.
degree from Fairleigh Dickinson University.


26
 Table of Contents





David
Fitzgerald.    Mr.
Fitzgerald has been a director of LifeCell since December 2001. Mr. Fitzgerald
served as President and Chief Executive Officer of Howmedica, Inc. from 1980
until his retirement in 1996. In 1988, he was named Executive Vice President of
Pfizer Hospital Products Group, a $1.3 billion group of medical device companies
including Howmedica. In 1992, he was also named Vice President of Pfizer Inc.
Mr. Fitzgerald serves as a director of Arthrocare Corp., (NASDAQ: ARTC) a
company specializing in soft tissue surgical technology and Orthovita, Inc.,
(NASDAQ: VITA) a company specializing in biomaterial products for the
restoration of the human skeleton.





James G.
Foster.Mr.
Foster has been a director of LifeCell since March 1995. Mr. Foster was employed
by Medtronic,Inc., a medical technology company, from 1971 to
2001.  From December 1994 through his retirement in June 2001, he was
Vice President and General Manager of Medtronic Heart Valves. From February 1984
to December 1994, Mr. Foster held various officer positions with Medtronic
including Vice President of Cardiac Surgery Sales & Strategic Planning in
1994, Vice President and General Manager of Medtronic Neurological Implantables
from 1992 through 1994, Vice President and General Manager of Medtronic
Interventional Vascular from 1990 through 1992 and Vice President and General
Manager of Medtronic Blood Systems from 1983 through 1989. Mr. Foster received
his undergraduate degree in English from St. Joseph’s University in Philadelphia
and an M.S.  degree in Management from the Sloan School at
M.I.T.  Currently, Mr. Foster serves as a director of Arthrocare
Corp., (NASDAQ: ARTC) a company specializing in soft tissue surgical
technology.





David W. J.
McGirr.Mr.
McGirr has been a director of LifeCell since November 2007.  Mr.
McGirr is Senior Vice President and CFO at Cubist Pharmaceuticals, Inc. (Nasdaq:
CBST) and has served in his current position since November 2002. He also served
as Treasurer of Cubist from November 2002 until January 2003. From 1999 to 2002,
Mr. McGirr was the President and Chief Operating Officer of hippo, inc., an
internet technology, venture-financed company. Mr. McGirr served as a member of
hippo's Board of Directors from 1999 to 2003. From 1996 to 1999, he was the
President of GAB Robins North America, Inc., a risk management company, serving
also as Chief Executive Officer from 1997 to 1999. Mr. McGirr was a private
equity investor from 1995 to 1996. From 1978 to 1995, Mr. McGirr served in
various positions within the S.G. Warburg Group, ultimately as Chief Financial
Officer, Chief Administrative Officer and Managing Director of S.G. Warburg
& Co., Inc., a position he held from 1992 to 1995. Mr. McGirr received a
B.Sc. in Civil Engineering from the University of Glasgow and received an M.B.A.
from the Wharton School at the University of Pennsylvania.





Michael R.
Minogue.Mr.
Minogue has been a director of LifeCell since October 2005.  Mr.
Minogue currently serves as Chairman of the Board, Chief Executive Officer and
President of ABIOMED, Inc. (NASDAQ: ABMD), a leading developer, manufacturer and
marketer of medical device products designed to assist or replace the pumping
action of failing hearts.  Prior to joining ABIOMED in April 2004, he
held various senior management positions during a 12 year career at GE Medical
Systems. Prior to joining GE, Mr. Minogue served four years on active duty in
the U.S. Army, including completion of Army Ranger training.  Mr.
Minogue received his B.S. degree in Engineering from the United States Military
Academy at West Point and his M.B.A degree from the University of
Chicago.





Robert P. Roche,
Jr.Mr.
Roche has been a director of LifeCell since October
2005.  Mr. Roche currently serves as Executive Vice President,
Worldwide Pharmaceutical Operations of Cephalon, Inc. (NASDAQ: CEPH), a
biopharmaceutical company specializing in drugs to treat and manage neurological
diseases, sleep disorders, cancer and pain.  Prior to joining Cephalon
in 1995, he served as Director and Vice President, Worldwide Strategic Product
Development, for SmithKline Beecham's central nervous system and
gastrointestinal products business.  Mr. Roche joined SmithKline in
1982, and during his career there held various senior marketing and management
positions, including several international assignments. Mr. Roche graduated
from Colgate University and received his M.B.A  degree from The
Wharton School, University of Pennsylvania.





Martin P.
Sutter.Mr.
Sutter has been a director of LifeCell since December 2003.  Mr.
Sutter is a founder and a Managing Director at Essex Woodlands Health Ventures,
one of the oldest and largest venture capital organizations focused exclusively
on health care since 1994.  Mr. Sutter began his career in management
consulting with Peat Marwick, Mitchell & Co. in 1977 and shortly thereafter
moved to Mitchell Energy & Development Corporation where he held various
positions in operations, engineering and marketing. He founded the Woodlands
Venture Capital Company in 1984 and Woodlands Venture Partners, an independent
venture capital partnership, in 1988. Mr. Sutter merged his venture practice
with Essex Venture Partners to form Essex Woodlands Health Ventures in
1994.  He currently serves on the board of directors of LaJolla
Pharmaceutical Company (NASDAQ: LJPC), a biopharmaceutical company developing
treatments for lupus and other autoimmune diseases; and BioForm Medical, Inc.
(NASDAQ: BFRM), a publicly held company developing soft tissue augmentation
products.


27
 Table of Contents





Committees
of the Board of Directors





Composition of
the Board of Directors.Since
the adoption of the Sarbanes-Oxley Act in July 2002, there has been a growing
public and regulatory focus on the independence of directors.  The
Board of Directors has determined that the members of the Audit Committee, the
Nominating and Corporate Governance Committee and the Compensation Committee
satisfy all such definitions of independence and that six of our seven directors
satisfy the NASDAQ definition of independence.  Our Board of Directors
has a standing Audit Committee, Nominating and Corporate Governance Committee
and Compensation Committee.





Audit
Committee.  The Audit Committee is empowered by the Board of
Directors to, among other functions, serve as an independent and objective party
to monitor our financial reporting process, internal control system and
disclosure control system; review and appraise the audit efforts of our
independent registered public accounting firm; assume direct responsibility for
the appointment, compensation, retention and oversight of the work of the
independent registered public accounting firm; and for the resolution of
disputes between the independent registered public accounting firm and our
management regarding financial reporting issues; and provide an open avenue of
communication among the independent registered public accounting firm, financial
and senior management, and our Board of Directors.  The Audit
Committee operates pursuant to a charter, available through a hyperlink located
on the corporate governance page of our website, at http://www.lifecell.com/corporate/19/.





Audit Committee
Financial Expert.  The Board of
Directors has determined that David McGirr is an “audit committee financial
expert,” as such term is defined by the SEC. As noted above, Mr. McGirr, as well
as the other members of the Audit Committee, have been determined to be
“independent” within the meaning of SEC and NASDAQ regulations.





Independence of
Audit Committee Members.Our common stock is
listed on the NASDAQ Global Market, and we are governed by the listing standards
applicable thereto. All members of the Audit Committee have been determined to
be “independent directors” pursuant to the definition contained in Rule
4200(a)(15) of the National Association of Securities Dealers’ Marketplace Rules
and under the SEC’s Rule 10A-3.





Nominating and
Corporate Governance Committee.The Nominating and
Corporate Governance Committee is empowered by the Board of Directors to, among
other functions:  identify qualified individuals for membership on the
Board; recommend to the Board the director nominees for election at the next
annual meeting of stockholders; make recommendations to the Board regarding the
size and composition of the Board and its committees; monitor the effectiveness
of the Board; and develop and implement corporate governance principles and
policies.  All members of the Nominating and Corporate Governance
Committee have been determined to be “independent directors” pursuant to the
definition contained in Rule 4200(a)(15) of the National Association of
Securities Dealers’ Marketplace Rules and under the SEC’s Rule
10A-3.  The Nominating and Corporate Governance Committee operates
pursuant to a charter, available through a hyperlink located on the corporate
governance page of our website, at http://www.lifecell.com/corporate/19/.  In
addition, we have established principles of corporate governance that are
available through a hyperlink located on the corporate governance page of our
website, at http://www.lifecell.com/corporate/19/.





Compensation
Committee.   The Compensation Committee is empowered by
the Board of Directors to, among other functions, to assist the Board in
carrying out their responsibilities relating to compensation of our
officers.  The Compensation Committee has overall responsibility for
evaluating and approving our compensation plans, policies and
programs.  The Compensation Committee operates pursuant to a charter,
available through a hyperlink located on the corporate governance page of our
website, at http://www.lifecell.com/corporate/19/.





Background
of Executive Officers





The
following sets forth certain information regarding our executive
officers.





Name
            
            Offices
      Held
            
            Date
      of First Election
            
            AgePaul
      G. Thomas
            
            Chairman,
      President and Chief Executive Officer
            
            October
      1998
            
            52Lisa
      N. Colleran
            
            Senior
      Vice President, Commercial Operations
            
            December
      2002
            
            50Bruce
      Lamb, Ph.D.
            
            Senior
      Vice President, Development & Regulatory Affairs
            
            April
      2005
            
            52Steven
      T. Sobieski
            
            Vice
      President, Finance and Administration&
      Chief Financial Officer
            
            June
      2000
            
            51





All
executive officers serve at the discretion of the Board of
Directors.




28
 Table of Contents





Paul G.
Thomas.  For further
background information regarding Mr. Thomas, see “Background of
Directors.”





Lisa N.
Colleran.Ms. Colleran joined
LifeCell in December 2002 as Vice President, Marketing and Business Development
and was named Senior Vice President, Commercial Operations in July
2004.  She has over 20 years of marketing experience.  Prior
to joining LifeCell, Ms. Colleran served as Vice President/General Manager –
Renal Pharmaceuticals for Baxter Healthcare Corporation, a worldwide
manufacturer and distributor of diversified products, systems and services used
primarily in the health care field, from 1997 until December 2002, and served in
various other sales and marketing positions at Baxter from 1983 through
1997.  Ms. Colleran received her B.S. degree from Molloy College and
her M.B.A. degree from Loyola University of Chicago.





Bruce Lamb,
Ph.D.  Dr. Lamb joined LifeCell in April 2005 as Senior Vice
President, Development and Regulatory Affairs.  He has 20 years of health
care-related experience.  Prior to joining LifeCell, Dr. Lamb was Vice
President, Biosurgical Research and Development at Ethicon, Inc., a division of
Johnson & Johnson, where he served in positions of increasing responsibility
from 1999 through 2005.  From 1991 through 1999, Dr. Lamb held
multiple positions including Director, Chronic Care Research and Innovation at
ConvaTec, a subsidiary of Bristol-Myers Squibb.  From 1985 through
1991, Dr. Lamb was a research scientist at Pfizer Hospital Products group and
advanced to Manager, Polymer Technology at Valleylab Inc.  Dr. Lamb
received his B.S. degree in Chemistry from Bradley University, his M.S. degree
in Chemistry from the University of Wisconsin and his Ph.D. in Polymer Chemistry
from the State University of New York, College of Environmental Science and
Forestry, in Syracuse.





Steven T.
Sobieski.Mr. Sobieski joined
LifeCell in June 2000 as Vice President, Finance and Chief Financial
Officer.  He has over 20 years of financial management experience in a
variety of roles in the medical technology field and public
accounting.  Prior to joining LifeCell, Mr. Sobieski was Vice
President, Finance at Osteotech, Inc., a public company focused on developing
and marketing orthopedic products, where he served in various positions from
1991 to 2000.  From 1981 through 1991, he served in various positions
of increasing responsibility with Coopers & Lybrand, a public accounting
firm.  Mr. Sobieski received his B.S. degree in Business
Administration from Monmouth University and his M.B.A. degree with a
concentration in Accounting from Rutgers University.  He is a
Certified Public Accountant.  Currently, Mr. Sobieski serves as a
director of Insulet Corporation,(NASDAQ:PODD) a medical device company
specializing in insulin infusion systems.





Section 16(a)
Beneficial Ownership Reporting Compliance





Section
16 (a) of the Securities Exchange Act of 1934 ("Section 16 (a)") requires that
our officers, directors and persons who own more than 10% of a registered class
of our equity securities to file statements on Form 3, Form 4 and Form 5 of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, directors and greater than 10% stockholders are required by the
regulation to furnish us with copies of all Section 16(a) reports that they
file.





Based
solely on a review of reports on Forms 3 and 4 and amendments thereto furnished
to us during our most recent fiscal year, reports on Form 5 and amendments
thereto furnished to us with respect to our most recent fiscal year and written
representations from reporting persons that no report on Form 5 was required, we
believe that no person who, at any time during 2007, was subject to the
reporting requirements of Section 16 (a) with respect to us failed to meet such
requirements on a timely basis.





Code
of Ethics





We have
adopted a Code of Ethics, as required by NASDAQ listing standards and the rules
of the SEC, for Senior Financial Officers that applies to our principal
executive officer, principal financial officer, principal accounting officer and
controller. A copy of our Code of Ethics for Senior Financial Officers has been
filed as Exhibit 14.1 to our Annual Report on Form 10-K for the year ended
December 31, 2003, and is available through a hyperlink located on the corporate
governance page of our website, at http://www.lifecell.com/corporate/19/.  If
we make substantive amendments to the Code of Ethics or grant any waiver,
including any implicit waiver, that applies to anyone subject to the Code of
Ethics, we will disclose the nature of such amendment or waiver on the website
or in a report on Form 8-K in accordance with applicable NASDAQ and SEC
rules.





Code
of Conduct





We have
adopted a general Code of Conduct, as required by NASDAQ listing standards and
the rules of the SEC, which applies to all of our employees. The Code of Conduct
is publicly available through a hyperlink located on the corporate governance
page of our website, at http://www.lifecell.com/corporate/19/.




29
 Table of Contents





Item
      11.
            
            Executive Compensation





Compensation
Committee Report





Under
the rules of the SEC, this Compensation Committee Report is not deemed to be
incorporated by reference by any general statement incorporating this Annual
Report by reference into any filings with the SEC.





The
Compensation Committee has reviewed and discussed the following Compensation
Discussion and Analysis with management. Based on this review and these
discussions, the Compensation Committee recommended to the Board of Directors
that the following Compensation Discussion and Analysis be included in this
Annual Report on Form 10-K.





Submitted
by the Compensation Committee


James G.
Foster, Chairman


David
Fitzgerald


Robert P.
Roche





Compensation
Discussion and Analysis





Introduction





This
discussion presents the principles underlying our executive officer compensation
program.  Our goal in this discussion is to provide the reasons why we
award compensation as we do and to place in perspective the data presented in
the tables that follow this discussion.  The focus is primarily on our
executive’s 2007 compensation, but some historical and forward-looking
information is also provided to put 2007 information in context. The information
we present relates to Paul G. Thomas, our chief executive officer, Steven T.
Sobieski, our chief financial officer, and our two other most highly compensated
“executive officers,” who are sometimes referred to in this section as our
“named executive officers.”





Compensation Philosophy and
Objectives





We
attempt to apply a consistent philosophy to compensation for all employees,
including senior management.  This philosophy is based on the premises
that our success results from the efforts of each employee and that a
cooperative, team-oriented environment is an essential part of our
culture.  We believe in the importance of rewarding employees for our
successes, which is why we emphasize pay-for-performance incentive
compensation.  Particular emphasis is placed on broad employee equity
participation through the use of stock options and restricted stock awards, as
well as on annual cash bonuses linked to achievement of our corporate
performance goals and the personal objectives established for our
employees.





Our
compensation programs for our named executive officers are designed to achieve a
variety of goals including to:





•
            attract
      and retain talented and experienced executives in the highly competitive
      biological products industry;


•
            motivate
      and reward executives whose knowledge, skills and performance are critical
      to our success;


•
            align
      the interests of our executives and stockholders by motivating executives
      to increase stockholder value in a sustained manner;
  and


•
            provide
      a competitive compensation package which rewards achievement of both
      company and individual performance
goals.





Employment
Agreements





During
2005, we were concerned about retaining key management on a long-term basis and
in providing our executive team appropriate severance benefits to assure their
retention through the process of any potential change-in-control
situation.  Accordingly, we entered into new employment agreements
with certain executive officers during 2005, including Mr. Thomas, Chairman of
the Board, President and Chief Executive Officer; Mr. Sobieski, Vice President,
Finance and Chief Financial Officer; and Ms. Colleran, Senior Vice President,
Commercial Operations.  We also entered into a change-in-control
agreement with Dr. Lamb, Senior Vice President, Development and Regulatory
Affairs.




30
 Table of Contents





In
approaching new employment agreements for Mr. Thomas and other executive
officers in 2005 as well as executive compensation in general, the Compensation
Committee viewed compensation of executives as having three distinct
parts:





•
            a
      current compensation program;


•
            a
      set of standard benefits; and


•
            a
      long-term benefits program.





The
current compensation element focuses on the executive officer's salary and
eligibility for annual bonuses based upon performance, and is designed to
provide competitive compensation for services rendered.  Our standard
benefits package consists primarily of health insurance benefits and
participation in a 401(k) plan with matching employer
contributions.  The long-term benefits element is reflected in the
grants of stock options and restricted stock awards.  The terms of
each employment agreement are discussed under “Change-in-control and Severance
Agreements” below.  Any decisions about future levels of executive
compensation with respect to these individuals must be consistent with our
contractual obligations to them.





Elements of Executive
Officer Compensation





Overview.  Total
compensation paid to our executive officers is influenced significantly by the
need to attract and retain management employees with a high level of expertise
and to motivate and retain key executives for our long-term
success.  Some of the components of compensation, such as salary, are
generally fixed and do not vary based on our financial and other
performance.  Some components, such as bonus, stock options and stock
award grants, are dependent upon the achievement of certain goals jointly agreed
upon by our management and the Compensation Committee.  Furthermore,
the value of certain of these components, such as stock options and restricted
stock, is dependent upon our future stock price.





We
compensate our executive officers in these different ways in order to achieve
different goals.  Cash compensation, for example, provides our
executive officers a minimum base salary.  Incentive bonus
compensation is generally linked to the achievement of short-term financial and
business goals, and is intended to reward our executive officers for our overall
performance, as well as their individual performance in reaching annual goals
that are agreed to in advance by management and the Compensation
Committee.  Stock options and grants of restricted stock are intended
to link our executive officers’ longer-term compensation with the performance of
our stock and to build executive ownership positions in the Company’s
stock.  This encourages our executive officers to remain with us, to
act in ways intended to maximize stockholder value, and to penalize them if we
and/or our stock fails to perform to expectations.





We view
the three components of our executive officer compensation as related but
distinct.  Although our Compensation Committee does review total
compensation, we do not believe that compensation derived from one component of
compensation necessarily should negate or reduce compensation from other
components.  We determine the appropriate level for each compensation
component based in part, but not exclusively, on our historical practices with
the individual and our view of individual performance and other information we
deem relevant, such as the data we receive from the consultant hired by our
Compensation Committee.  Our Compensation Committee has not adopted
any formal or informal policies or guidelines for allocating compensation
between long-term and currently paid out compensation, between cash and non-cash
compensation, or among different forms of compensation, except that we have
historically used a 2-to-1 ratio for the grant of stock options compared to
restricted stock awards.  Commencing in 2008, we intend to use a
2.5-to-1 ratio with the intent to re-assess this ratio as the Company
grows.  During 2007, we did review wealth and retirement accumulation
as a result of employment with us in connection with the review of compensation
packages.





To advise
us on executive compensation in general, our Compensation Committee has engaged
the services of Radford Surveys & Consulting (“Radford”), a business unit of
Aon Consulting (“Aon”).  Radford is heavily focused in the Life
Sciences area.  They have produced data for us comparing our executive
officer compensation with that of peer group companies that we selected  in
2007 with Radford’s assistance, including:  American Medical Systems
Holdings, ArthroCare Corporation, Biosite Incorporated, Cubist Pharmaceuticals,
Inc., Cytyc Corporation, Digene Corporation, Foxhollow Technologies, Inc.,
Gen-Probe, Inc., Integra Lifesciences Holdings, Kyphon, Inc., Meridian
Bioscience, Inc., Molecular Devices Corporation, Myriad Genetics, Inc., OraSure
Technologies, Inc., OSI Pharmaceuticals, Inc., Palomar Medical Technologies,
Inc., Pharmion Corporation, Savient Pharmaceuticals, Inc., Sciele Pharma, Inc.,
Surmodics, Inc., Thoratec Corporation, United Therapeutics Corporation, Ventana
Medical System, Inc. and Wright Medical Group. The peer group is periodically
modified to account for our increased size, revenues, growth and maturity as a
company.  Our Compensation Committee realizes that benchmarking our
compensation against the compensation earned at comparable companies may not
always be appropriate, but believes that engaging in a comparative analysis of
our compensation practices is useful.




31
 Table of Contents




Base
Salary.  We pay our executives a base salary, which we review
and determine annually.  We believe that a competitive base salary is
a necessary element of any compensation program.  We believe that
attractive base salaries can motivate and reward executives for their overall
performance.  Base salaries are established in part based on the
individual position, responsibility, experience, skills and expected
contributions during the coming year of the executives and their performance
during the prior year.  We also have sought to align base compensation
levels comparable to our competitors and other companies in similar stages of
development.  We do not view base salaries as primarily serving our
objective of paying for performance, but in attracting and retaining the most
qualified executives necessary to run our business.





Based on
all of the factors described above, including base salary (which historically
lagged the marketplace based on the peer group established by Radford and
reviewed by our Compensation Committee), our performance and individual
performance reviews, in December 2006, effective for 2007, the Chief Executive
Officer and each of the other named executive officers received, on average, a
5% increase.  A similar process occurred in December
2007.  Again, after reviewing first performance and then benchmarking
data based on our peer group, the Committee granted the Chief Financial Officer
an 18% increase and the Chief Executive Officer and each of the other executive
officers a salary increase of approximately 5% for 2008.  We believe
that our salary levels are now within our peer group and generally sufficient to
retain our existing executive officers and to hire new executive officers when
and as required.





Cash Incentive
Bonuses.Consistent with our emphasis on pay-for-performance
incentive compensation programs, our executives are eligible to receive annual
cash incentive bonuses primarily based upon their performance during the year as
measured against predetermined company and personal performance goals
established by us, including financial measures and the achievement of strategic
objectives.  The primary objective of our annual cash incentive
bonuses is to motivate and reward our employees, including our named executive
officers, for meeting our short-term objectives using a pay-for-performance
program with objectively determinable performance goals.





At the
end of each year, our management, particularly the Chief Executive Officer, sets
various company goals for the following year, which are reviewed and approved by
the Compensation Committee.  The goals include both financial elements
and achievement of product development and other company business
objectives.  Each goal is assigned a particular weighing in the
overall bonus formula.  The amount of the awards to be paid is
conditioned upon achievement of the predetermined targets.  We may not
make any payments if we fail to achieve a minimum level of
performance.  The target payment amount may also be adjusted upward
for performance above the target level.  For example, the 2007
financial goals represented approximately 50% of the total weight for all
company goals and included target measures for product revenue, operating income
and diluted net income per share.  Specifically, the target level for
2007 was based on achieving year over year growth of 28% in product revenue, 34%
in operating income and 27% in diluted net income per
share.  Non-financial goal measures in 2007 included achieving various
product development milestones, such as obtaining FDA clearance for Strattice,
and other operational metrics such as production volumes.





In
addition, at the end of each year, each executive officer meets with our Chief
Executive Officer to establish the individual’s specific goals for the upcoming
year, which are dependent on that person’s job responsibilities.  The
Chief Executive Officer’s goals are the same as our overall company
goals.  Individual goals and corporate goals each affect 50% of the
bonus.  As previously noted, goals are set at laddered levels and
attaining the highest level is intended to be a stretch goal.  We
design the cash incentive bonuses for each of our executive officers to focus
the executive officer on achieving key operational and financial objectives
within a yearly time horizon.





We next
establish the target amount of our annual cash incentive bonuses for each
executive at a level that represents a meaningful portion of our executives’
currently paid out cash compensation, and set additional threshold and maximum
performance levels above and below these target levels.  For instance,
for 2007, the Chief Executive Officer’s target bonus was 60% of his base salary
and the other named executive officers had targets ranging from 30-35% of their
base salaries.  Then depending on the achievement of the corporate and
individual goals, each officer could earn between 0 and 150% of the target bonus
amount.  In addition to considering the incentives that we want to
provide to our executives in establishing these levels, we also consider the
bonus levels for comparable positions at our peer group of companies, as
reported by Radford, our historical practices and any contractual commitments
that we have relating to executive bonuses.





As a
result of our performance and the performance of our executive officers, for
2007 our Chief Executive Officer received a bonus equal to 80% of his base
salary and our other named executive officers received bonuses ranging from 35%
to 47% of their base salaries.  For 2008, the Chief Executive
Officer’s target bonus is 70% of his base salary and the other named executive
officers have targets ranging from 30% to 40% of their base
salaries.





We
do not have a formal policy on the effect on bonuses of a subsequent
restatement or other adjustment to the financial statements, other than the
penalties provided by law.




32
 Table of Contents





Equity
Compensation.  We believe that stock options and restricted
stock awards are an important long-term incentive for our executive officers and
employees and that our stock option and restricted stock award program has been
effective in aligning officer and employee interests with that of our
stockholders.  We review our equity compensation plan
annually.  Employees are eligible for annual stock option and
restricted stock award grants based on targeted levels.  These options
and grants are intended to produce value for each executive officer if: our
stock performance is outstanding; shareholders derive significant sustained
value; and the executive officer remains with us.





To
establish target levels, the Committee uses data supplied by Radford for peer
group companies and its Biotechnology survey and then seeks to deliver long-term
incentive value at the 50th to 75th percentiles blended with the market 50th to
75th percentiles number of options irrespective of value.  The
Committee also considered comparable company data on the relationship of stock
options and restricted stock granted to our outstanding shares and the number of
awards available for future grant under our equity compensation
plan.  The Committee then sets targeted levels of equity to be
awarded.  The actual number of restricted shares and options granted
to an executive is based on performance as measured by the performance goals set
for the year just ended.  The same process occurred in December 2006
and 2007 for equity grants in January 2007 and 2008, respectively.





Once a
target value is established for an executive, the Committee grants stock options
to that executive with a Black-Scholes value of approximately half the target
value, and then grants a number of restricted shares that is approximately half
of the number of option shares, based on a recommendation by
Radford.  Commencing in 2008, we intend to use a 2.5-to-1 ratio of
stock options compared to restricted stock awards.  Stock options are
believed to be a superior vehicle to encourage executives to focus on
increasing shareholder value and to respond to shareholder demand for
performance linkage, while grants of restricted shares are better linked to
executive retention, increasing executive ownership of the Company and
minimizing shareholder dilution.  By dividing equity compensation into
both types of awards, the Committee hopes to achieve multiple
goals.





At its
December 2007 meeting, the Compensation Committee, in consultation with Radford,
considered equity grants to be made effective January 2008 for 2007
performance.  The number of options and restricted shares granted to
and held by our executive officers and the prices of these options and grants of
restricted stock are reflected in the “Summary Compensation Table” and the
“Grants of Plan-Based Awards” table below.





We do not
have any program, plan or obligation that requires us to grant equity
compensation to any executive officer on specified dates.  The
practice has been to approve grants in December, effective at the beginning of
January of the following year.  The authority to make equity grants to
executive officers rests with our Compensation Committee (subject to
ratification by the full Board of Directors), although, as noted above, the
Compensation Committee does consider the recommendations of our Chairman and
Chief Executive Officer in setting the compensation of our other executive
officers.




In
addition, from time to time, our Compensation Committee has approved additional
performance share programs in addition to our normal grants of equity
compensation.  As disclosed in our Current Report on Form 8-K filed
with the SEC in January 2008, our Compensation Committee approved equity grants
for our executive officers that will vest only if we are able to achieve stretch
revenue and operating income growth targets for the period between January 1,
2008 and December 31, 2010.


Severance and
Change-in-Control Benefits.Mr. Thomas, Mr. Sobieski
and Ms. Colleran each have a provision in their respective employment agreements
providing for certain severance benefits in the event of termination or
retirement, as well as a provision providing for a higher payment in the event
of termination or retirement following a change-in-control as defined in the
employment agreements.  Dr. Lamb has a separate change-in-control
agreement that only provides for a severance benefit following a
change-in-control.  These severance provisions are described in the
“Change-in-Control and Severance Agreements” section below, and certain
estimates of these change of control benefits are provided in “Estimated
Payments and Benefits Upon Various Employment Termination Scenarios”
below.





In
determining the severance provisions that we have provided to our executive
officers, the Compensation Committee took into account that the only pension
plan or other retirement plan that we provide for these executive officers is
our 401(k) plan.  We provide the opportunity for certain of our named
executive officers to be protected under the severance and change-in-control
provisions contained in their employment agreements.  Such agreements
contain change-in-control arrangements, which are triggered upon both a
change-in-control and termination of employment.  We provide this
opportunity to attract and retain an appropriate caliber of talent for the
position.  Our severance and change-in-control provisions for the
named executive officers are summarized in the “Change-in-Control and Severance
Agreements” and “Estimated Payments and Benefits Upon Various Employment
Termination Scenarios” sections below, but generally provide that on a “trigger
event” within a period of time before or after a change-in-control, the
increased change-in-control benefit is paid.  A trigger event is a
termination of employment by us without cause or a termination by the executive
for good reason.  We believe that our severance and change-in-control
provisions are consistent with the provisions and benefit levels of other
companies disclosing such provisions as reported in public SEC
filings.





Benefits.  Our
executive officers participate in all of our employee benefit plans, such as
medical, group life and disability insurance and our 401(k) plan, on the same
basis as our other employees.  Our 401(k) plan provides for matching
payments by us.




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 Table of Contents





Perquisites.  Our
Chief Executive Officer receives an automobile allowance.  Our use of
perquisites as an element of compensation is very limited.  We do not
view perquisites as a significant element of our comprehensive compensation
structure.





Stock Ownership
Guidelines





We have
adopted stock ownership guidelines for our executive officers and directors in
December 2006.  The purpose of the guidelines is to encourage officers
and directors to maintain a significant equity ownership in the Company and
thereby, complement our policy of awarding equity compensation so as to align
their interests with those of shareholders.  The policy became
effective on January 1, 2007.  The policy suggests that as a
guideline, the officers and directors maintain equity positions in our common
stock (not including stock options or unvested restricted shares) as
follows:





Title
            
            Equity
      PositionChief
      Executive Officer
            
            3
      times annual base salaryChief
      Financial Officer
            
            2
      times annual base salaryOther
      Executive Officers
            
            Annual
      base salaryDirectors
            
            3
      times annual cash compensation





The Board
has suggested that the individuals covered by the policy reach the equity
position suggested by the guidelines within five years of adoption.





The Compensation Committee
Process





Compensation
Committee meetings typically have included, for all or a portion of each
meeting, a representative of Radford, as well as preliminary discussion with our
Chairman and Chief Executive Officer prior to our Compensation Committee
deliberating without any members of management present.  Our
Compensation Committee has also involved outside counsel in its deliberations as
needed.  For compensation decisions, including decisions regarding the
grant of equity compensation relating to executive officers (other than our
Chairman and Chief Executive Officer), the Compensation Committee considers the
recommendations of our Chairman and Chief Executive Officer and includes him in
its discussions.





Regulatory
Considerations





We
account for the equity compensation expense for our employees under the rules of
SFAS 123R, which requires us to estimate and record an expense for each award of
equity compensation over the service period of the award.  Accounting
rules also require us to record cash compensation as an expense at the time the
obligation is accrued.





With
respect to change-in-control payments for Mr. Thomas, Mr. Sobieski and Ms.
Colleran, in the event that any payment or benefit that they would receive upon
termination would otherwise constitute a “parachute payment” under Section 280G
of the Internal Revenue Code and be subject to the excise tax imposed by Section
4999 of the Code, such payment and benefits will be reduced to an amount equal
to either (a) the largest portion of the payment and benefits that would result
in no portion of the payment and benefits being subject to the excise tax or (b)
the largest portion of the payment, up to and including the total, whichever
amount, after taking into account all taxes and the excise tax, results in such
person’s receipt, on an after tax basis, of the greater amount of the payment
and benefits.  If Dr. Lamb is notified that the payments and benefits
to be paid would be nondeductible by us because of Section 280G of the Internal
Revenue Code, such payments and benefits shall be reduced to the minimum extent
necessary so that all payments made are deductible under Section
280G.  Dr. Lamb has the discretion as to which payments and benefits,
and the amounts thereof, shall be reduced.




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 Table of Contents





Cash
and Other Compensation





The
following table, which should be read in conjunction with the explanations
provided above, provides certain compensation information concerning our Chief
Executive Officer, Chief Financial Officer and our two most highly compensated
executive officers (the "Named Executive Officers"), other than the Chief
Executive Officer and Chief Financial Officer, for the fiscal year ended
December 31, 2007.





Summary
      Compensation TableName
      and
                principal
      position
              Year
              
              Salary
              
              
              Stock
                awards(1)
              
              
              Option
                awards(1)
              
              
              Non-equity
                incentive
      plan
                compensation
                ($)(2)
              
              
              All
      other
                compensation
                ($)
              
              
              Total
      ($)Paul
      G. Thomas
              2007
              
              $
              500,000
              
              
              $
              2,002,159
              
              
              $
              323,883
              
              
              $
              397,500
              
              
              $
              17,000
              (3)
              
              $
              3,240,542Chairman,
      President and
              2006
              
              $
              477,750
              
              
              $
              1,904,847
              
              
              $
              304,255
              
              
              $
              390,417
              
              
              $
              16,500
              (3)
              
              $
              3,093,769Chief
      Executive Officer
              2005
              
              $
              416,042
              
              
              $
              641,793
              
              
              $
              264,702
              
              
              $
              368,550
              
              
              $
              10,000
              (3)
              
              $
              1,701,087Steven
      T. Sobieski
              2007
              
              $
              257,975
              
              
              $
              433,345
              
              
              $
              178,009
              
              
              $
              120,629
              
              
              $
              -
              
              
              $
              989,958Vice
      President,
    Finance  and  Administration,
              2006
              
              $
              246,850
              
              
              $
              337,298
              
              
              $
              141,765
              
              
              $
              112,490
              
              
              $
              -
              
              
              $
              838,403Chief
      Financial Officer
              2005
              
              $
              232,000
              
              
              $
              126,447
              
              
              $
              96,990
              
              
              $
              104,748
              
              
              $
              -
              
              
              $
              560,185Lisa
      N. Colleran
              2007
              
              $
              285,850
              
              
              $
              738,975
              
              
              $
              118,066
              
              
              $
              130,162
              
              
              $
              -
              
              
              $
              1,273,053Senior
      Vice President,
              2006
              
              $
              272,225
              
              
              $
              711,720
              
              
              $
              131,423
              
              
              $
              130,913
              
              
              $
              -
              
              
              $
              1,246,281Commercial
      Operations
              2005
              
              $
              260,750
              
              
              $
              239,715
              
              
              $
              97,825
              
              
              $
              117,729
              
              
              $
              -
              
              
              $
              716,019Bruce
      S. Lamb, Ph.D.
              2007
              
              $
              255,900
              
              
              $
              63,294
              
              
              $
              224,246
              
              
              $
              88,286
              
              
              $
              -
              
              
              $
              631,726Senior
      Vice President, Development and
              2006
              
              $
              246,050
              
              
              $
              25,087
              
              
              $
              193,080
              
              
              $
              88,578
              
              
              $
              -
              
              
              $
              552,795Regulatory
      Affairs
              2005
              
              $
              176,250
              
              
              $
              -
              
              
              $
              119,968
              
              
              $
              92,637
              
              
              $
              -
              
              
              $
              388,855
 
 (1)
              Represents
      the expense to us pursuant to FAS 123(R) for the respective year for
      restricted stock or stock options awards granted as long-term incentives
      pursuant to our Equity Compensation Plan.  See Note 7 of our
      Financial Statements for the fiscal years ended December 31, 2007, 2006
      and 2005 for the assumptions used for valuing the expense under FAS
      123(R).
 (2)
              Represents
      bonus paid for such fiscal year.
 (3)
              Includes
      $15,000 of car allowance paid by us in 2007 and 2006 and $8,750 in
      2005.  The remaining amount represents our match on our 401(k)
      Plan.
  35
 Table of Contents




Plan-Based
Awards
 
 Option
and Stock Award Grants
 
 The
following table provides certain information with respect to restricted stock
awards and options granted to our Named Executive Officers during the fiscal
year ended December 31, 2007 based on 2006 performance.
 
 Grants
      of Plan-Based AwardsName
              
              Grant
      Date
              
              Approval
                Date
      (1)
              
              All
      Other
                Stock
      Awards: Number of
                Shares
      of Stock or
                Units
      (#) (2)
              
              
              All
      Other
                Stock Awards:
                Number
      of
                Shares
      of Options (#) (3)
              
              
              Exercise
      or
                Base
                Price
      of
                Option
                Awards
                ($
      per share)
              
              
              Grant
      Date
                Fair
      Value of
                Stock
      and Option AwardsPaul
      G. Thomas
              
              1/3/07
              
              12/10/06
              
              
              19,068
              
              
              
              
              
              
              
              
              $
              447,1451/3/07
              
              12/10/06
              
              
              
              
              
              
              37,456
              
              
              $
              23.45
              
              
              $
              492,977Steven
      T. Sobieski
              
              1/3/07
              
              12/10/06
              
              
              11,720
              
              
              
              
              
              
              
              
              
              
              $
              274,8341/3/07
              
              12/10/06
              
              
              
              
              
              
              22,784
              
              
              $
              23.45
              
              
              $
              299,872Lisa
      N. Colleran
              
              1/3/07
              
              12/10/06
              
              
              6,184
              
              
              
              
              
              
              
              
              
              
              $
              145,0151/3/07
              
              12/10/06
              
              
              
              
              
              
              11,680
              
              
              $
              23.45
              
              
              $
              153,726Bruce
      S. Lamb, Ph.D.
              
              1/3/07
              
              12/10/06
              
              
              4,400
              
              
              
              
              
              
              
              
              
              
              $
              103,1801/3/07
              
              12/10/06
              
              
              
              
              
              
              9,600
              
              
              $
              23.45
              
              
              $
              126,350
 (1)
              In
      accordance with its normal practice, the Compensation Committee approved
      the grant of these awards effective on January 3, 2007 at a meeting of the
      Compensation Committee held on December 10,
  2006.
 (2)
              These
      awards vest in three equal installments beginning one year after the date
      of grant.
 (3)
              These
      awards vest in four equal installments beginning one year after the date
      of grant.
 
 Based on
our performance and the performance of our Chief Executive Officer and other
executive officers in 2007, our Compensation Committee and Board of Directors,
approved the grants of stock options and restricted stock awards set forth
below:
 
 Grants
      of Plan-Based AwardsName
              
              
              Grant
      Date
              
              
              Approval
                Date
      (1)
              
              
              All
      Other
                Stock
      Awards: Number of
                Shares
      of Stock or
                Units
      (#) (2)
              
              
              All
      Other
                Stock Awards:
                Number
      of
                Shares
      of Options (#) (3)
              
              
              Exercise
      or
                Base
                Price
      of
                Option
                Awards
                ($
      per share)
              
              
              Grant
      Date
                Fair
      Value of
                Stock
      and Option AwardsPaul
      G. Thomas
              
              
              1/2/08
              
              
              12/10/07
              
              
              
              18,552
              
              
              
              
              
              
              
              
              $
              805,7131/2/08
              
              
              12/10/07
              
              
              
              
              
              
              
              36,436
              
              
              $
              43.43
              
              
              $
              760,084Steven
      T. Sobieski
              
              
              1/2/08
              
              
              12/10/07
              
              
              
              12,024
              
              
              
              
              
              
              
              
              
              
              $
              522,2021/2/08
              
              
              12/10/07
              
              
              
              
              
              
              
              23,380
              
              
              $
              43.43
              
              
              $
              487,726Lisa
      N. Colleran
              
              
              1/2/08
              
              
              12/10/07
              
              
              
              5,856
              
              
              
              
              
              
              
              
              
              
              $
              254,3261/2/08
              
              
              12/10/07
              
              
              
              
              
              
              
              11,060
              
              
              $
              43.43
              
              
              $
              230,720Bruce
      S. Lamb, Ph.D.
              
              
              1/2/08
              
              
              12/10/07
              
              
              
              4,600
              
              
              
              
              
              
              
              
              
              
              $
              199,7781/2/08
              
              
              12/10/07
              
              
              
              
              
              
              
              9,200
              
              
              $
              43.43
              
              
              $
              191,919
 (1)
              In
      accordance with its normal practice, the Compensation Committee approved
      the grant of these awards effective on January 2, 2008 at a meeting of the
      Compensation Committee held on December 10,
  2007.
 (2)
              These
      awards vest in three equal installments beginning one year after the date
      of grant.
 (3)
              These
      awards vest in four equal installments beginning one year after the date
      of grant.
  36
 Table of Contents




Stock
Option Exercises and Vesting of Restricted Stock Awards





The
following table provides certain information with respect to option exercises
and stock vesting for each of our Named Executive Officers during the fiscal
year ended December 31, 2007.





Option
      Exercises and Stock VestedOption
      Awards
            
            
            Stock
      AwardsName
            
            Number
      of Shares Acquired on Exercise (#)
            
            
            Value
      Realized on Exercise ($) (1)
            
            
            Number
      of Shares Acquired on Vesting (#)
            
            
            Value
      Realized on Vesting ($) (2)Paul
      G. Thomas
            
            
            72,254
            
            
            $
            2,620,199
            
            
            
            103,500
            
            
            $
            4,206,078Steven
      T. Sobieski
            
            
            27,525
            
            
            $
            885,006
            
            
            
            19,570
            
            
            $
            600,253Lisa
      N. Colleran
            
            
            83,908
            
            
            $
            2,375,701
            
            
            
            38,543
            
            
            $
            1,591,300Bruce
      S. Lamb, Ph.D.
            
            
            27,376
            
            
            $
            672,296
            
            
            
            1,314
            
            
            $
            30,813




(1)
              Represents
      the difference between the market price of the underlying securities at
      exercise and the exercise price of the
option.
 (2)
              Represents
      the number of shares vested multiplied by the market value of the
      underlying shares on the vesting
date.
  37
 Table of Contents




Outstanding
Equity Awards at Fiscal Year End





The
following table provides certain information concerning outstanding equity
awards held by each of our Named Executive Officers at December 31,
2007.




Outstanding
      Equity Awards at Fiscal Year-EndOption
      Awards
            
            Stock
      AwardsName
            
            Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
            
            
            Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
            
            
            Option
      Exercise Price ($)
            
            Option
      Expiration Date
            
            Number
      of Shares or Units of Stock That Have Not Vested (#)
            
            
            Market
      Value of Shares or Units of Stock That Have Not Vested ($) (1)
            
            
            Equity
      Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights
      That Have Not Vested (#)
            
            
            Equity
      Incentive Plan Awards: Market Value of Unearned Shares, Units or Other
      Rights That Have Not Vested ($)(1)Paul
      G. Thomas
            
            
            -
            
            
            
            26,250
            
            
            $
            19.25
            
            01/02/16-
            
            
            
            37,456
            
            
            $
            23.45
            
            01/02/17113,739
            
            
            $
            4,903,28822,628
            
            
            $
            975,49315,000
            
            
            $
            646,65019,068
            
            
            $
            822,021Steven
      T. Sobieski
            
            
            5,644
            
            
            
            16,932
            
            
            $
            19.25
            
            01/02/16-
            
            
            
            22,784
            
            
            $
            23.45
            
            01/02/1716,667
            
            
            $
            718,5148,709
            
            
            $
            375,44511,720
            
            
            $
            505,249Lisa
      N. Colleran
            
            
            26,092
            
            
            
            -
            
            
            $
            5.27
            
            12/11/132,741
            
            
            
            8,223
            
            
            $
            19.25
            
            01/02/16-
            
            
            
            11,680
            
            
            $
            23.45
            
            01/02/1744,967
            
            
            $
            1,938,5277,114
            
            
            $
            306,6854,353
            
            
            $
            187,6586,184
            
            
            $
            266,592Bruce
      S. Lamb, Ph.D.
            
            
            22,624
            
            
            
            50,000
            
            
            $
            8.84
            
            03/31/152,628
            
            
            
            7,884
            
            
            $
            19.25
            
            01/02/16-
            
            
            
            9,600
            
            
            $
            23.45
            
            01/02/173,942
            
            
            $
            169,9404,800
            
            
            $
            206,928




(1)
              Based
      on $43.11 per share, the closing price of the Common Stock, as reported on
      the NASDAQ Global Market, on December 31,
2007.
  38
 Table of Contents




Compensation
of Directors





Non-employee
directors are paid $25,000 per year, payable monthly, regardless of the number
of Board meetings attended, as well as $1,500 per meeting
attended.  Non-employee directors who serve on the Compensation
Committee, the Nominating and Corporate Governance Committee and the Audit
Committee are also paid $3,000, $3,000 and $5,000 per year, respectively,
regardless of the number of committee meetings attended.  The Chairman
of the Audit Committee receives an annual retainer of $10,000 and the Chairman
of the Compensation Committee and the Nominating and Corporate Governance
Committee each receive an annual retainer of $6,000 per
year.  Directors are reimbursed for their expenses for attendance at
such meetings.  Mr. Sutter has declined to accept any cash
compensation for his service on the Board.  Our directors who are
employees of LifeCell receive no director fees.





In 2007,
newly elected non-employee directors were entitled to receive an option to
purchase 15,000 shares of common stock at an exercise price equal to the fair
market value of a share of common stock on such election
date.    Additionally in 2007 and 2006, each non-employee
director was entitled to receive a restricted stock award of 3,500 shares of
common stock on the date of our Annual Meeting of Stockholders whereas in 2005,
each non-employee director received an option grant to purchase 10,000 shares of
common stock on the date of our Annual Meeting of Stockholders at an exercise
price equal to the fair market value of a share of common stock on such
date.  The restricted stock awards granted to non-employee directors
in 2007 and 2006 vest in equal installments over a three-year period commencing
on the first anniversary of the date of grant.  Options granted in
2005 vested one year after the date of grant and expire ten years after the date
of grant.





The
following table provides certain information with respect to the compensation
paid to our non-employee directors during the fiscal year ended December 31,
2007.





Directors
      CompensationName
            
            Fees
      earned or paid in cash ($)
            
            
            Stock
      awards ($) (1)
            
            
            Option
      awards ($) (2)
            
            
            Total
      ($)Michael
      E. Cahr (3)
            
            $
            41,667
            
            
            $
            196,354
            
            
            $
            -
            
            
            $
            238,021David
      Fitzgerald (4)
            
            $
            42,000
            
            
            $
            53,736
            
            
            $
            -
            
            
            $
            95,736James
      G. Foster (4)
            
            $
            47,749
            
            
            $
            53,736
            
            
            $
            -
            
            
            $
            101,485David
      W. J. McGirr (4)
            
            $
            6,264
            
            
            $
            -
            
            
            $
            15,188
            
            
            $
            21,452Michael
      R. Minogue (4)
            
            $
            34,000
            
            
            $
            53,736
            
            
            $
            -
            
            
            $
            87,736Robert
      P. Roche, Jr. (4)
            
            $
            34,000
            
            
            $
            53,736
            
            
            $
            -
            
            
            $
            87,736Martin
      P. Sutter (4)
            
            $
            -
            
            
            $
            53,736
            
            
            $
            -
            
            
            $
            53,736




(1)
              Represents
      the compensation expense recognized in 2007 pursuant to FAS 123(R) for
      restricted stock awards granted as long-term incentives pursuant to our
      Equity Compensation Plan.
 (2)
              Represents
      the compensation expense recognized in 2007 pursuant to FAS 123(R) for
      stock options granted as long-term incentives pursuant to our Equity
      Compensation Plan.
 (3)
              Mr.
      Cahr retired from LifeCell’s Board of Directors effective November 12,
      2007.  Vesting of restricted stock awards held by Mr. Cahr was
      accelerated pursuant to the Company’s non-employee director retirement
      plans.
 (4)
              At
      December 31, 2007, Mr. Fitzgerald had options to purchase 65,000 shares
      and 5,834 restricted stock awards; Mr. Foster had options to purchase
      85,000 shares and 5,834 restricted stock awards; Mr. McGirr had options to
      purchase 15,000 shares; Mr. Minogue had options to purchase 25,000 shares
      and 5,834 restricted stock awards; Mr. Roche had options to purchase
      25,000 shares and 5,834 restricted stock awards; and Mr. Sutter had
      options to purchase 25,000 shares and 5,834 restricted stock
      awards.


Change-in-Control
and Severance Agreements





In
September 2005, we entered into employment agreements of Paul G. Thomas,
LifeCell’s Chairman, President and Chief Executive Officer; Steven T. Sobieski,
Vice President Finance and Chief Financial Officer; and Lisa N. Colleran, Senior
Vice President, Commercial Operations.  We entered into a severance
arrangement with Bruce Lamb, Ph.D., Senior Vice President, Product Development
and Quality in February 2005, and a change-in-control agreement with Dr. Lamb in
April 2005.





We have
entered into such agreements with our executive officers to ensure that we will
have their continued dedication as executives, notwithstanding the possibility
of termination of their employment without cause, or the possibility, threat or
occurrence of a defined “change-in-control.”  Following are details of
the agreements with each executive officer.




39
 Table of Contents




Paul
G. Thomas





Term
and Termination.





Mr.
Thomas’ employment under the employment agreement continues until the agreement
is terminated (a) as a result of his death or physical or mental disability that
prevents him from performing his duties under the employment agreement for a
period of at least 90 consecutive days or 120 non-consecutive days in any
12-month period, (b) by LifeCell with or without “cause” (as defined below), (c)
by Mr. Thomas with or without “good reason” (as defined below), or (d) by mutual
agreement.





The term
“cause” is defined in Mr. Thomas’ employment agreement as (a) a conviction for a
crime involving moral turpitude, including, but not limited to, fraud, theft,
embezzlement or any crime that results in or is intended to result in personal
enrichment at our expense, (b) a material breach by Mr. Thomas of the employment
agreement or of his confidentiality and non-compete agreements with us, or (c)
acts that, in the judgment of the Board, constitute willful misconduct to the
material detriment of us.





In Mr.
Thomas’ agreement, the term “good reason” refers to our doing any of the
following without Mr. Thomas’ consent (except actions during the period
beginning six months prior to and ending 18 months following a
“change-in-control” as defined below):  (i) assign to Mr. Thomas any
duties inconsistent with his position and authority, (ii) remove Mr. Thomas
from, or fail to re-elect or appoint him to, any position that was held
immediately after the date of the employment agreement,(iii) reduce Mr. Thomas’
annual base salary, (iv) fail to provide Mr. Thomas benefits substantially
similar to those he currently receives, (v) fail to provide him office space,
related facilities and support personnel or (vi) require Mr. Thomas to be
relocated to an office that will necessitate his commuting more than 25
additional miles each way.





Severance
Payments.





If Mr.
Thomas is terminated as a result of his death or disability, in addition to
accrued compensation and vested benefits, he is entitled to a bonus (based upon
the greater of the prior year’s bonus or the target bonus for the year of
termination), pro-rated based on the number of days he was employed during the
year of termination and payable as follows over 18 months.





If Mr.
Thomas is terminated without “cause” or he resigns for “good reason” (as defined
above), in addition to accrued compensation and vested benefits and the pro-rata
bonus described above, he is entitled to continuation of his salary and bonus
(based on the greater of the prior year’s bonus or his target bonus for the year
of termination) for 18 months and 18 months of subsidized COBRA
coverage.  Separation payments and benefits are conditioned upon the
execution of a general release by Mr. Thomas in favor of LifeCell and related
parties.





Payments
upon Change-in-Control.





Under Mr.
Thomas’ employment agreement, if there occurs either of the following
events:  (i) termination of his employment at any time during the
period beginning six (6) months prior to the effective date of a
“change-in-control” (as defined below) and ending eighteen (18) months after the
change-in-control, other than (x) a termination by Mr. Thomas for “cause” (as
defined below) or (z) a termination by Mr. Thomas without “good reason” (as
defined below), (ii) termination of his employment as a result of the failure,
upon a change-in-control, of either us or any successor to all or a substantial
portion of our business and/or or assets to continue his employment as an
executive officer for a period of at least twelve (12) months after the
effective date of the change-in-control, with a salary at least equal to his
annual base salary and a bonus each year equal to not less than the bonus that
Mr. Thomas received attributable to performance during the full fiscal year
immediately preceding the effective date of the change-in-control, or (iii)
following a change-in-control, termination of employment by Mr. Thomas after
failure of us or our successor to acknowledge or assume in writing the
obligations to Mr. Thomas set forth in his employment agreement; then Mr. Thomas
will be entitled to receive, in addition to accrued compensation and vested
benefits: (a) a lump sum payment equal to 2.9 times the sum of his base salary
and bonus (based upon the greater of his bonus for the year prior to the event
or his target bonus for the year in which the event occurred); and (b)
subsidized COBRA coverage for 18 months.





If any of
the above-mentioned events occur on or after July 1 in any calendar year, Mr.
Thomas will also be entitled to receive 50% of his target bonus for the year in
which the event occurred. Payments and benefits upon any of the above-mentioned
events are in lieu of the severance payments described in the paragraph above
captioned “Severance Payments.”


40
 Table of Contents




A
“change-in-control” has occurred under the terms of Mr. Thomas’ employment
agreement discussed herein when:  (a) any person, firm or corporation
acquires directly or indirectly the beneficial ownership (as defined in Section
13(d) of the Securities Exchange Act of 1934, as amended) of any voting security
of us and immediately after such acquisition, the acquirer has beneficial
ownership of voting securities representing 50% or more of the total voting
power of all our then-outstanding voting securities; (b) the individuals (x)
who, as of the date of each agreement, served on the Board of Directors or (y)
who thereafter are elected to the Board and whose election, or nomination for
election, to the Board was approved by a vote of at least 2/3 of the directors
in office, cease for any reason to constitute a majority of the members of the
Board; (c) our stockholders shall approve a merger, consolidation,
recapitalization or reorganization (or consummation of any such transaction if
stockholder approval is not sought or obtained), other than any such transaction
in which at least 66% of the total voting power of the surviving entity after
such transaction is beneficially owned by our stockholders; or (d) our
stockholders shall approve a plan of complete liquidation or an agreement for
the sale, lease or disposition by us of all or a substantial portion of our
assets (i.e., 50% or more in value of the total assets) other than to a
subsidiary or affiliate.





Under the
terms of Mr. Thomas’ employment agreement only, and for purposes of this
subsection “Payments upon Change-in-Control” only, the term “cause” is defined
as (a) conviction of any crime that constitutes a felony or a criminal offense
involving moral turpitude, or (b) intentionally engaging in conduct that is
materially injurious to us or our successor that is not cured by us within a
reasonable period of time after notice is given.





Further,
under the terms of Mr. Thomas’ employment agreement only, and for purposes of
this subsection “Payments upon Change-in-control” only, the term “good reason”
is defined as (a) the failure of us or our successor, without Mr. Thomas’
consent, to pay any amounts due to Mr. Thomas or to fulfill any other material
obligations to Mr. Thomas under the employment agreement, (b) the failure of us
or our successors, without Mr. Thomas’ consent, to maintain his position as an
executive officer with duties consistent with that of an executive officer, and
given our overall size and structure or our successor, Mr. Thomas neither is the
functional head of the functional business unit to which he is assigned, nor
reports to the functional head of the functional business unit to which he is
assigned, (c) any decrease, without Mr. Thomas’ consent, in his base salary,
annual bonus (based upon the annual bonus that Mr. Thomas received for the full
fiscal year immediately preceding the effective date of the change-in-control),
or in the level or in the value of Mr. Thomas’ benefits (unless the benefit(s)
changes are applicable to all executive level employees), (d) any relocation of
our offices or our successor, without Mr. Thomas’ consent, such that he would be
required to commute more than 25 additional miles each way, or (e) continued
employment of Mr. Thomas by us or our successor would be substantially likely to
cause Mr. Thomas to breach a material obligation that he reasonably believes is
owed to any prior employer or any other third party.





Additionally,
unless otherwise provided in a separate stock option agreement, restricted stock
purchase agreement or stock award agreement entered into after September 21,
2005, upon a change-in-control, all stock options and any other equity-based
compensation granted to Mr. Thomas shall become immediately vested and
exercisable for the longer of the exercise period in effect immediately prior to
the change-in-control or the period ending 90 days after the
change-in-control.  However, with respect to the restricted stock
awards consisting of a retention stock award and a performance stock award
granted to Mr. Thomas on July 20, 2005, upon a change-in-control prior to the
“vesting date,” the restrictions applicable to all of the retention shares and
75,862 of the performance shares granted to Mr. Thomas shall lapse.





Modification
for 280G Parachute Payments.





In the
event that any payment or benefit that Mr. Thomas would receive upon termination
would otherwise constitute a “parachute payment” under Section 280G of the
Internal Revenue Code and be subject to the excise tax imposed by Section 4999
of the Code, such payment and benefits will be reduced to an amount equal to
either (a) the largest portion of the payment and benefits that would result in
no portion of the payment and benefits being subject to the excise tax or (b)
the largest portion of the payment, up to and including the total, whichever
amount, after taking into account all taxes and the excise tax, results in Mr.
Thomas’ receipt, on an after-tax basis, of the greater amount of the payment and
benefits.





Steven
T. Sobieski





Term
and Termination.





Mr.
Sobieski’s employment under the employment agreement continues until the
agreement is terminated (a) as a result of his death or physical or mental
disability that prevents him from performing his duties under the employment
agreement for a period of at least 90 consecutive days or 120 non-consecutive
days in any 12-month period, (b) by us with or without “cause” (as defined
below), (c) by Mr. Sobieski for any reason or no reason, or (d) by mutual
agreement.


41
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The term
“cause” is defined in Mr. Sobieski’s employment agreement as (a) a conviction of
a felony or a criminal act involving moral turpitude, (b) commission of a
fraudulent, illegal or dishonest act in respect of us, (c) willful misconduct or
gross negligence that reasonably could be expected to be injurious to our
business, operations or reputation, (d) a material violation of our internal
policies, unless cured, (e) material failure to perform his duties as assigned,
unless cured, (f) breach of the terms of his confidentiality and non-compete
agreements with us, or (g) any other material breach of the representations,
warranties and covenants under the employment agreement, unless
cured.





Severance
Payments.





If Mr.
Sobieski is terminated as a result of his death or disability, in addition to
accrued compensation and benefits, he is entitled to a bonus (based upon the
greater of the prior year’s bonus or the target bonus for the year of
termination), pro-rated based on the number of days he was employed during the
year of termination and payable over 12 months.





If Mr.
Sobieski is terminated without cause, in addition to accrued compensation and
benefits and the pro-rata bonus described above, he is entitled to continuation
of his salary and bonus (based on the greater of the prior year’s bonus or the
target bonus for the year of termination) for 12 months, 12 months of subsidized
COBRA coverage, and an additional six months of COBRA coverage at our sole
expense.  In addition, if Mr. Sobieski is terminated without cause,
(a) with respect to stock options granted prior to September 21, 2005, such
options will continue to vest in accordance with the vesting schedule set forth
in the applicable stock option agreement for a period of 12 months following the
termination, and he will have until the earlier of (1) the 10 year anniversary
of the date of the grant, or (2) the 12-month anniversary of the termination of
his employment, to exercise such options (to the extent vested), (b) with
respect to stock options granted on or after September 21, 2005, he shall have
until the earlier of (1) the 10 year anniversary of the date of the grant, or
(2) 1 day less than the 3 month anniversary of his termination, to exercise such
number of options as would have become exercisable had he continued to be
employed for a period of 12 months after termination, and (c) with respect to
only the restricted stock award covering 50,000 shares of Common Stock granted
to Mr. Sobieski on July 20, 2005, the restrictions that would have otherwise
lapsed had he continued to be employed for a period of 12-months following the
date of termination shall be deemed to have lapsed on the date of
termination.  Separation payments and benefits are conditioned upon
the execution of a general release by Mr. Sobieski in favor of us and related
parties.





Payments
upon Change-in-Control.





Under Mr.
Sobieski’s employment agreement, if there occurs any of the following
events:  (i) termination of his employment at any time during the
period beginning six (6) months prior to the effective date of a
“change-in-control” (as defined below) and ending twelve (12) months after the
change-in-control, other than (y) a termination by us for reason of conviction
for a felony or a criminal offense involving moral turpitude or intentional
engagement in conduct that is materially injurious to us or our successor or (z)
a termination by Mr. Sobieski without “good reason” (as defined below), (ii)
termination of his employment as a result of the failure, upon a
change-in-control, of either us or any successor to all or a substantial portion
of our business and / or our assets to continue his employment as an executive
officer for a period of at least twelve (12) months after the effective date of
the change-in-control, with a salary at least equal to his annual base salary
and a bonus each year equal to not less than the bonus that Mr. Sobieski
received attributable to performance during the full fiscal year immediately
preceding the effective date of the change-in-control, or (iii) following a
change-in-control, termination of employment by Mr. Sobieski after failure of us
or our successor to acknowledge or assume in writing the obligations set forth
in the employment agreement; then, in addition to accrued compensation and
vested benefits, Mr. Sobieski will be entitled to receive: (a) a lump sum
payment equal to two times the sum of his base salary and bonus (based upon the
greater of his bonus for the year prior to the event or his target bonus for the
year in which the event occurred); and (b) subsidized COBRA coverage for 12
months and COBRA coverage at the sole cost of LifeCell for an additional six
months.





If any of
the above-mentioned events occur on or after July 1 of any calendar year, Mr.
Sobieski also will be entitled to receive 50% of his target bonus for the year
in which the event occurred.  Payments and benefits upon any of the
above-mentioned events are in lieu of the severance payments described in the
paragraph above captioned “Severance Payments.”





The
definition of “change-in-control” in Mr. Sobieski’s agreement is exactly the
same as the definition in Mr. Thomas’ agreement above.





In Mr.
Sobieski’s employment agreement, the term “good reason” is defined as (a) the
failure of us to pay any amounts due to the executive or to fulfill any other
material obligations under the employment agreement, unless cured; (b) the
failure of us to maintain Mr. Sobieski’s position as an executive officer; (c)
any decrease in Mr. Sobieski’s base salary, his annual bonus or level of
benefits; (d) any relocation of our offices such that Mr. Sobieski would be
required to commute more than 25 additional miles each way; or (e) if continued
employment by us would be substantially likely to cause Mr. Sobieski to breach a
material obligation to any prior employer or any third party.




42
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Additionally,
unless otherwise provided in a separate stock option agreement, restricted stock
purchase agreement or stock award agreement entered into after September 21,
2005, upon a change-in-control all stock options and any other equity-based
compensation granted to Mr. Sobieski shall become immediately vested and
exercisable for the longer of the exercise period in effect immediately prior to
the change-in-control or the period ending 90 days after the
change-in-control.





Modification
for 280G Parachute Payments.





In the
event that any payment or benefit that Mr. Sobieski would receive upon
termination would otherwise constitute a “parachute payment” under Section 280G
of the Internal Revenue Code and be subject to the excise tax imposed by Section
4999 of the Code, such payment and benefits will be reduced to an amount equal
to either (a) the largest portion of the payment and benefits that would result
in no portion of the payment and benefits being subject to the excise tax or (b)
the largest portion of the payment, up to and including the total, whichever
amount, after taking into account all taxes and the excise tax, results in Mr.
Sobieski’s receipt, on an after tax-basis, of the greater amount of the payment
and benefits.





Lisa
N. Colleran





Term
and Termination.





Lisa
Colleran’s employment under the employment agreement continues until the
agreement is terminated (a) as a result of her death or physical or mental
disability that prevents Ms. Colleran from performing her duties under the
employment agreement for a period of at least 90 consecutive days or 120
non-consecutive days in any 12-month period, (b) by us with or without “cause”
(as defined below), (c) by the executive for any reason or no reason, or (d) by
mutual agreement.





Ms.
Colleran’s employment agreement defines the term “cause” exactly the same as Mr.
Sobieski’s agreement above.





Severance
Payments.





If Ms.
Colleran is terminated as a result of her death or disability, in addition to
accrued compensation and vested benefits, she is entitled to a bonus (based upon
the greater of the prior year’s bonus or the target bonus for the year of
termination), pro-rated based on the number of days she was employed during the
year of termination and payable over 12 months.





If Ms.
Colleran is terminated without cause, in addition to accrued compensation and
benefits and the pro-rata bonus described above, she is entitled to continuation
of her salary and bonus (based on the greater of the prior year’s bonus or the
target bonus for the year of termination) for 12 months, 12 months of subsidized
COBRA coverage, and an additional six months of COBRA coverage at our sole
expense.  Separation payments and benefits are conditioned upon Ms.
Colleran’s execution of a general release in favor of LifeCell and related
parties.





Payments
upon Change-in-Control.





Under Ms.
Colleran’s employment agreement, if there occurs either of the following
events:  (a) termination of her employment at any time during the
period beginning six (6) months prior to the effective date of a
“change-in-control” (as defined below) and ending twelve (12) months after the
change-in-control, other than (x) a termination by Ms. Colleran for cause, (y) a
termination as a result of Ms. Colleran’s death or disability, as described
above, or (z) a termination by Ms. Colleran without good reason, or (b)
following a change-in-control, termination of employment by Ms. Colleran after
failure of us or our successor to acknowledge or assume in writing the
obligations to her set forth in her employment agreement; then, in addition to
accrued compensation and vested benefits, Ms. Colleran will be entitled to
receive: (a) payments in an aggregate amount equal to the product of: (i) either
(y) 1.5, if the event occurs prior to September 21, 2006, or (z) 2.0, if the
event occurs on or after September 21, 2006; and (ii) the sum of her base salary
and bonus (based upon the greater of her bonus for the year prior to the event
or her target bonus for the year in which the event occurred), payable over 18
months or 24 months, as applicable; and (b) subsidized COBRA coverage for 12
months and COBRA coverage at the sole cost of LifeCell for an additional 6
months.





The
definition of “change-in-control” in Ms. Colleran’s agreement is exactly the
same as the definition in Mr. Thomas’ agreement above.


43
 Table of Contents




In Ms.
Colleran’s agreement, “good reason” is defined as (a) the failure of us to pay
any amounts due to Ms. Colleran or to fulfill any other material obligations
under the employment agreement, unless cured; (b) the failure of us to maintain
Ms. Colleran’s position as an executive officer; (c) any decrease in Ms.
Colleran’s base salary; (d) any relocation of our offices such that Ms. Colleran
would be required to commute more than 25 additional miles each
way.





If any of
the above-mentioned events occur on or after July 1 of any calendar year, Ms.
Colleran will also be entitled to receive 50% of her target bonus for the year
in which the event occurred.  Payments and benefits upon any of the
above-mentioned events are in lieu of the severance payments described in the
paragraph above captioned “Severance Payments.”





Additionally,
unless otherwise provided in a separate stock option agreement, restricted stock
purchase agreement or stock award agreement entered into after September 21,
2005, upon a change-in-control all stock options and any other equity-based
compensation granted to Ms. Colleran shall become immediately vested and
exercisable for the longer of the exercise period in effect immediately prior to
the change-in-control or the period ending 90 days after the
change-in-control.  However, with respect to the restricted stock
awards consisting of a retention stock award and a performance stock award
granted to Ms. Colleran on July 20, 2005, upon a change-in-control prior to the
“vesting date,” the restrictions applicable to all of the retention shares and
29,978 of the performance shares granted to Ms. Colleran shall
lapse.





Modification
for 280G Parachute Payments.





In the
event that any payment or benefit that Ms. Colleran would receive upon
termination would otherwise constitute a “parachute payment” under Section 280G
of the Internal Revenue Code and be subject to the excise tax imposed by Section
4999 of the Code, such payment and benefits will be reduced to an amount equal
to either (a) the largest portion of the payment and benefits that would result
in no portion of the payment and benefits being subject to the excise tax or (b)
the largest portion of the payment, up to and including the total, whichever
amount, after taking into account all taxes and the excise tax, results in Ms.
Colleran’s receipt, on an after-tax basis, of the greater amount of the payment
and benefits.





Bruce
Lamb





Severance
Payments.





Pursuant
to the terms of the severance agreement with Bruce Lamb, Dr. Lamb is entitled to
receive 12 months continuance of his base salary and 12 months subsidized
COBRA coverage if he is terminated by us for any reason other than for “cause”
(as defined below).  These payments and benefits are conditioned upon
the execution by Dr. Lamb of a general release acceptable to
LifeCell.





The term
“cause” is defined in Dr. Lamb’s severance agreement as (a) a conviction of a
felony or a criminal act involving moral turpitude, (b) commission of a
fraudulent, illegal or dishonest act in respect of us, (c) willful misconduct or
gross negligence that reasonably could be expected to be materially injurious to
our business, operations or reputation, (d) a material violation of our
policies, unless cured, (e) material failure to perform his duties as assigned,
unless cured, (f) breach of the terms of his confidentiality and non-compete
agreement, (g) physical or mental disability that prevents him from performing
his duties under the employment agreement for a period of at least 90
consecutive days or 120 non-consecutive days in any 12-month period, or (h)
death.





Payments
upon Change-in-Control.





Under the
change-in-control agreement with Dr. Lamb, if there occurs either (i)
termination of his employment with us or any successor at any time during the
period beginning (3) three months prior to the effective date of a
“change-in-control” (as defined in Mr. Thomas’ employment agreement above) and
ending twelve (12) months after the change-in-control, other than a termination
for “cause” (as defined below) or termination of his employment by without “good
reason” (as defined below) during such period, or (ii) termination of employment
by Dr. Lamb after failure of us or such successor to acknowledge or assume in
writing the obligations to him set forth in the severance arrangement after
requested by Dr. Lamb, Dr. Lamb will be entitled to receive all then-accrued
compensation and fringe benefits, subsidized COBRA coverage for a period of 18
months and cash payments in the aggregate amount equal to 1.5 times his
annualized base salary immediately prior to the change-in-control, payable over
an 18 month period.  Additionally, all stock options shall immediately
become vested and exercisable for the longer of the remainder of the exercise
period or 90 days following the effective date of the
change-in-control.


44
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In Dr.
Lamb’s change-in-control agreement, “good reason” is defined as (a) the failure
of us to pay any amounts due to Dr. Lamb or to fulfill any other material
obligations under the employment agreement, unless cured; (b) any material
diminution, without Dr. Lamb’s consent, in his duties and responsibilities as an
executive officer of LifeCell; (c) any material decrease in Dr. Lamb’s base
salary; (d) any relocation of our offices such that Dr. Lamb would be required
to commute more than 50 additional miles each way.





The term
“cause” is defined in Dr. Lamb’s change-in-control agreement as (a) a conviction
of a felony or a criminal act involving moral turpitude, (b) commission of a
fraudulent, illegal or dishonest act in respect of us, (c) willful misconduct or
gross negligence that reasonably could be expected to be materially injurious to
our business, operations or reputation, (d) a violation of our policies, unless
cured, (e) material failure to perform his duties as assigned, unless cured, (f)
material violation of the terms of our other agreements with Dr. Lamb, (g)
physical or mental disability that prevents him from performing his duties under
the employment agreement for a period of at least 90 consecutive days or 120
non-consecutive days in any 12-month period, or (h) death.





Payments
and benefits upon any of the above-mentioned events are in lieu of the severance
payments described in the paragraph above captioned “Severance Payments” and are
conditioned upon Dr. Lamb’s execution of a general release in favor of LifeCell
and related parties.





Modification
for 280G Parachute Payments.





If,
within 15 days of an event described above, Dr. Lamb is notified by our
independent certified accountants in writing that the payments and benefits to
be paid would be nondeductible by us because of Section 280G of the Internal
Revenue Code, such payments and benefits shall be reduced to the minimum extent
necessary so that all payments and benefits made are deductible under Section
280G.  Dr. Lamb shall have the discretion as to which payments and
benefits, and the amounts thereof, shall be reduced.





Estimated
Payments and Benefits upon Various Employment Termination Scenarios





The
following table describes the potential payments and benefits upon employment
termination for each of our Named Executive Officers pursuant to applicable law
and the terms of their employment and other agreements with us, as if their
employment had terminated on December 31, 2007 (the last business day of the
fiscal year) under the various scenarios described in the column headings as
explained in the footnotes below.





Name
            
            Death
      or Disability (1)
            
            
            Resignation
      for Good Reason (2)
            
            
            Termination
      without Cause (2)
            
            
            Change-in-control
      Trigger Event (3)Paul
      G. Thomas
            
            $
            390,000
            
            
            $
            1,350,000
            
            
            $
            1,350,000
            
            
            $
            3,932,000Steven
      T.  Sobieski
            
            $
            112,000
            
            
            
            ----
            
            
            $
            560,000
            
            
            $
            1,603,000Lisa
      N.  Colleran
            
            $
            131,000
            
            
            
            ----
            
            
            $
            429,000
            
            
            $
            1,263,000Bruce
      S. Lamb, Ph.D.
            
            
            ----
            
            
            
            ----
            
            
            $
            263,000
            
            
            $
            767,000




(1)
            Includes
      pro-rata bonus only based on such Named Executive Officer’s bonus for the
      fiscal year ended December 31, 2006, since it was higher than the target
      bonus for the year ended December 31,
2007.





(2)
            Includes
      (a) a multiple of salary and bonus, based on such Named Executive
      Officer’s salary for the year ended December 31, 2007 and bonus for the
      fiscal year ended December 31, 2006, (b) pro-rata bonus based on such
      Named Executive Officer’s bonus for the fiscal year ended December 31,
      2006, (c) subsidized COBRA payments and (d) with respect to Mr. Sobieski
      only, “in the money”  value on December 31, 2007 of certain
      stock options and restricted stock awards that would have vested within 12
      months of the date of termination.  The calculated amounts in
      (a) above for Dr. Lamb are based exclusively on salary and do not include
      any amount for a pro-rata bonus.





(3)
            Includes
      (a) a multiple of salary and bonus, based on such Named Executive
      Officer’s salary for the year ended December 31, 2007 and bonus for the
      fiscal year ended December 31, 2006, (b) pro-rata bonus based on such
      Named Executive Officer’s bonus for the fiscal year ended December 31,
      2006, (c) subsidized COBRA payments and (d) “in the
      money”  value on December 31, 2007 of all unvested stock options
      and certain restricted stock awards.  The calculated amounts in
      (a) above for Dr. Lamb are based exclusively on salary and do not include
      any amount for a pro-rata bonus.


45
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Item
      12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder
Matters





The
following table sets forth information as of February 27, 2008, with respect to:
(i) persons known to us to be beneficial holders of five percent or more of the
outstanding shares of our common stock; (ii) each of our executive officers and
directors and; (iii) all of our executive officers and directors as a
group.  Unless otherwise indicated, the address of each such person is
c/o LifeCell Corporation, One Millennium Way, Branchburg, New Jersey
08876.





Amount
      and Nature of Beneficial Ownership(1)Common
      StockBeneficial
      Owner
            
            
            Shares
            
            
            %Barclays
      Global Investors, NA. (2)
              45
      Fremont Street
              San
      Francisco, California 94105
            
            
            2,042,032
            
            
            
            6.0
            %Paul
      G. Thomas (3)
              Chairman
      of the Board, President & Chief Executive Officer
            
            
            193,388
            
            
            
            *David
      Fitzgerald (4)
              Director
            
            
            68,500
            
            
            
            *James
      G. Foster (5)
              Director
            
            
            88,500
            
            
            
            *Michael
      R. Minogue(6)
              Director
            
            
            28,500
            
            
            
            *Robert
      P. Roche, Jr.(6)
              Director
            
            
            28,500
            
            
            
            *Martin
      P. Sutter (7)
              Director
            
            
            98,130
            
            
            
            *Steven
      T. Sobieski (8)
              Senior Vice President Finance & Chief Financial
Officer
            
            
            54,586
            
            
            
            *Lisa
      N. Colleran (9)
              Senior
      Vice President, Commercial Operations
            
            
            151,963
            
            
            
            *Bruce
      Lamb, Ph.D. (10)
              Senior
      Vice President, Development, Regulatory Affairs and
Quality
            
            
            62,094
            
            
            
            *All
      executive officers and directors as a group (11)
            
            
            774,161
            
            
            
            2.2
            %





Notes to
Security Ownership table


*Less
than 1%.
 (1)
              Each
      beneficial owner’s percentage ownership of common stock is determined by
      assuming that options and restricted stock units that are held by such
      person (but not those held by any other person) and that are exercisable
      or convertible within 60 days of February 27, 2008 have been exercised or
      converted.  Options and restricted stock units that are not
      exercisable within 60 days of February 27, 2008 have been
      excluded.  Unless otherwise noted, we believe that all persons
      named in the above table have sole voting and investment power with
      respect to all shares of common stock beneficially owned by
      them.
 (2)
              Represents
      2,042,032 shares of common stock.  The shares are beneficially
      owned by Barclays Global Investors, NA., Barclays Global Fund Advisors,
      Barclays Global Investors, Ltd., Barclays Global Investors Japan Trust and
      Banking Company Limited, Barclays Global Investors Japan Limited, Barclays
      Global Investors Canada Limited, Barclays Global Investors Australia
      Limited, and Barclays Global Investors Deutschland AG, which are deemed to
      beneficially own these shares by virtue of their mutual
      affiliation.  Information with respect to the ownership of such
      stockholders was obtained from a Schedule 13G filed on February 5,
      2008.
 (3)
              Includes
      5,194 shares underlying stock options and 32,638 shares of restricted
      stock.
 (4)
              Includes
      65,000 shares underlying stock options and 3,500 shares of restricted
      stock.


(5)
              Includes
      85,000 shares underlying stock options and 3,500 shares of restricted
      stock.


(6)
              Includes
      25,000 shares underlying stock options and 3,500 shares of restricted
      stock.


46
 Table of Contents




(7)
            Includes
      78,130 shares of Common stock, 20,000 shares underlying stock options and
      3,500 shares of restricted stock, but excludes 1,300,000 shares of common
      stock owned by Essex Woodlands Health Ventures V LP.   Mr.
      Sutter is a managing director of the general partner of the Essex
      Woodlands Health Ventures Fund V LP; however, he disclaims beneficial
      ownership of the shares owned by the
  partnership.


(8)
            Includes
      16,984 shares underlying stock options and 22,473 shares of restricted
      stock.


(9)
            Includes
      34,494 shares underlying stock options and 10,016 shares of restricted
      stock.


(10)
            Includes
      55,280 shares underlying stock options and 2,628 shares of restricted
      stock.


(11)
            See
      notes (3) through (10).





Equity
Compensation Plan Information





The
following table gives information about our common stock that may be issued upon
the exercise of options under our Equity Compensation Plan as of December 31,
2007.  This plan was our only equity compensation plan in existence as
of December 31, 2007.








Plan
      Category
            
            (a)
              Number
      of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
      and Rights
            
            
            (b)
              Weighted-Average
      Exercise
              Price
      of Outstanding Options,
              Warrants
      and Rights
            
            
            (c)
              Number
      of Securities Remaining Available for Future Issuance
              Under
      Equity Compensation Plans Excluding Securities Reflected in Column
      (a)Equity
      Compensation Plans Approved by Shareholders
            
            
            1,812,810
            
            
            $
            17.61
            
            
            
            1,308,527








Item
      13.
            
            Certain Relationships and Related Transactions, and Director
      Independence





We have
entered into change-in-control and severance agreements with our executive
officers.  See “Item 11.  Executive Compensation
Change-in-control and Severance Agreements.”





Any
transactions involving related parties in the future will be reviewed and
approved by our Audit Committee of the Board of Directors.








Item
      14.
            
            Principal Accounting Fees and Services





In
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the Audit
Committee's charter, all audit and audit-related work and all non-audit work
performed by our independent registered public accounting firm,
PricewaterhouseCoopers LLP (“PwC”) is approved in advance by the Audit
Committee, including the proposed fees for such work. The Audit Committee is
informed of each service actually rendered.





Audit Fees. Audit fees billed
or expected to be billed to us by PwC for the audit of the financial statements,
management’s assessment of the effectiveness of internal control over financial
reporting included in our Annual Reports on Form 10-K, and reviews of the
financial statements included in our Quarterly Reports on Form 10-Q, for the
years ended December 31, 2007 and 2006 totaled approximately $412,000 and
$380,000, respectively.





All Other Fees. We did not
incur any fees for the fiscal years ended December 31, 2007 and 2006 for
permitted non-audit services.





Other Matters. The Audit
Committee has considered whether the provision of the Audit-Related Fees and Tax
Fees are compatible with maintaining the independence of our principal
accountant.





Applicable
law and regulations provide an exemption that permits certain services to be
provided by our independent registered public accounting firm even if they are
not pre-approved. We have not relied on this exemption at any time since the
Sarbanes-Oxley Act was enacted.


47
 Table of Contents




PART
IV





Item
      15.
            
            Exhibits,Financial Statement Schedules





( A )
DOCUMENTS INCLUDED IN THIS REPORT:

















Financial
      Statements
              PageReport
      of Independent Registered Public Accounting Firm
              F-1Balance
      Sheets as of December 31, 2007 and 2006
              F-3Statements
      of Operations for the years ended December 31, 2007, 2006 and
      2005
              F-4Statements
      of Stockholders’ Equity for the years ended December 31, 2007, 2006 and
      2005
              F-5Statements
      of Cash Flows for the years ended December 31, 2007, 2006 and
      2005
              F-6Notes
      to Financial Statements
              F-7





Financial
Statement Schedules


All other
schedules are omitted because they are not applicable, not required, or because
the required information is contained in the Company’s financial statements and
the notes thereto.





( B )
EXHIBITS:





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





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





3.1
            
            Restated
      Certificate of Incorporation, as amended (incorporated by reference to
      Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the period
      ended June 30, 1998, filed with the Securities and Exchange Commission
      ("the Commission") on August 10, 1998).3.2
            
            Amended
      and Restated By-laws (incorporated by reference to Exhibit 3.1 to the
      Company’s Form 8-K filed with the Commission on October 24,
      2007).10.1
            
            LifeCell
      Corporation Amended and Restated 1992 Stock Option Plan, as amended
      (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
      Report on Form 10-Q for the period ended June 30, 1998, filed with the
      Commission on August 10, 1998).10.2
            
            LifeCell
      Corporation Second Amended and Restated 1993 Non-Employee Director Stock
      Option Plan, as amended (incorporated by reference to Exhibit 10.4 to the
      Company's Annual Report on Form 10-K for the fiscal year ended December
      31, 1996).10.3
            
            Employment
      Agreement dated as of September 21, 2005 by and between LifeCell
      Corporation and Paul G. Thomas (incorporated by reference to Exhibit 10.1
      of the Company’s Form 8-K filed with the Commission on September 27,
      2005).


48
 Table of Contents




10.4
            
            Employment
      Agreement dated as of September 21, 2005 by and between LifeCell
      Corporation and Steven T. Sobieski (incorporated by reference to Exhibit
      10.2 of the Company’s Form 8-K filed with the Commission on September 27,
      2005).10.5
            
            Employment
      Agreement dated as of September 21, 2005 by and between LifeCell
      Corporation and Lisa N. Colleran (incorporated by reference to Exhibit
      10.3 of the Company’s Form 8-K filed with the Commission on September 27,
      2005).10.6
            
            Lease
      Agreement by and between Maurice M. Weill, Trustee for Branchburg Property
      and LifeCell Corporation dated June 17, 1999 (incorporated by reference to
      Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q filed with the
      Commission on November 15, 1999).10.7
            
            Amendment
      dated September 21, 1999 to Lease Agreement by and between Maurice M.
      Weill, Trustee for Branchburg Property and LifeCell Corporation
      (incorporated by reference to Exhibit 10.16 to the Company's Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2000).10.8
            
            Amendment
      dated April 7, 2000 to Lease Agreement by and between Maurice M. Weill,
      Trustee for Branchburg Property and LifeCell Corporation (incorporated by
      reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for
      the fiscal year ended December 31, 2000).10.9
            
            LifeCell
      Corporation Equity Compensation Plan (incorporated by reference to Annex B
      to the Company’s Definitive Proxy Statement on Schedule 14A filed on June
      17, 2005).10.10
            
            First
      Amendment to the LifeCell Corporation Equity Compensation Plan
      (incorporated by reference to Exhibit 10.12 to the Company's Annual Report
      on Form 10-K for the fiscal year ended December 31,
  2006).10.11*
            
            Amendment
      dated November 6, 2007 to Lease Agreement by and between Maurice M. Weill,
      Trustee for Branchburg Property and LifeCell14.1
            
            LifeCell
      Corporation Code of Ethics for Senior Financial Officers (incorporated by
      reference to Exhibit 14.1 of the Company’s Form 10-K filed with the
      Commission on March 15, 2004.)23.1*
            
            Consent
      of PricewaterhouseCoopers LLP31.1*
            
            Certification
      of the Registrant’s Chief Executive Officer, Paul G. Thomas, pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
            
            Certification
      of the Registrant’s Chief Financial Officer, Steven T. Sobieski, pursuant
      to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
            
            Certification
      of the Registrant’s Chief Executive Officer, Paul G. Thomas, and Chief
      Financial Officer, Steven T. Sobieski, pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


49
 Table of Contents




Signatures





In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




LIFECELL
      CORPORATION(Registrant)








By
            /s/ Paul G.
      ThomasPaul
      G. ThomasPresident,
      Chief Executive Officer andChairman
      of the Board of Directors





Dated:  February
27, 2008





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:





Signature
            
            Title
            
            Date/s/
      Paul G. Thomas
            
            President,
      Chief Executive
            
            February
      27, 2008Paul
      G. Thomas
            
            Officer
      (Principal Executive Officer) and Chairman of the Board of
      Directors/s/
      Steven T. Sobieski
            
            Vice
      President and Chief Financial
            
            February
      27, 2008Steven
      T. Sobieski
            
            Officer
      (Principal Financial Officer)/s/
      Bradly C. Tyler
            
            Controller
            
            February
      27, 2008Bradly
      C. Tyler
            
            (Principal
      Accounting Officer)/s/
      James G. Foster
            
            Director
            
            February
      27, 2008James
      G. Foster/s/
      David Fitzgerald
            
            Director
            
            February
      27, 2008David
      Fitzgerald/s/
      David W. J. McGirr
            
            Director
            
            February
      27, 2008David
      W. J. McGirr/s/
      Michael R. Minogue
            
            Director
            
            February
      27, 2008Michael
      R. Minogue/s/
      Robert P. Roche, Jr.
            
            Director
            
            February
      27, 2008Robert
      P. Roche, Jr./s/
      Martin P. Sutter
            
            Director
            
            February
      27, 2008Martin
      P. Sutter


50
 Table of Contents




Report
      of Independent Registered Public Accounting
Firm








To the
Board of Directors and Shareholders of LifeCell Corporation:





In our
opinion, the financial statements listed in the index appearing under Item 15
(a) (1) present fairly, in all material respects, the financial position of
LifeCell Corporation at December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in
the United States of America.  Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).  The Company's
management is responsible for these financial statements, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting.  Our
responsibility is to express opinions on these financial statements and on the
Company's internal control over financial reporting based on our integrated
audits.  We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects.  Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk.  Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.





As
discussed in note 2 to the financial statements, effective January 1, 2006, the
Company changed its method of accounting for share-based payment, to conform
with FASB Statement of Financial Accounting Standards No. 123 (revised 2004),
"Share-based Payment."





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.








PricewaterhouseCoopers
LLP


Florham
Park, NJ


February
22, 2008


F-1
 Table of Contents





LifeCell
      Corporation Balance Sheets








December
      31,(dollars
      in thousands)
            
            2007
            
            
            2006ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            26,819
            
            
            $
            10,000Short-term
      investments
            
            
            64,217
            
            
            
            60,972Receivables,
      less allowance of  $278 in 2007 and $279 in 2006
            
            
            25,734
            
            
            
            22,286Inventories,
      net
            
            
            44,267
            
            
            
            23,801Prepayments
      and other
            
            
            10,706
            
            
            
            1,309Deferred
      tax assets
            
            
            2,384
            
            
            
            4,165Total
      current assets
            
            
            174,127
            
            
            
            122,533Investments
      in marketable securities
            
            
            6,886
            
            
            
            6,874Fixed
      assets, net
            
            
            27,706
            
            
            
            19,914Deferred
      tax assets
            
            
            4,950
            
            
            
            6,102Other
      assets, net
            
            
            3,329
            
            
            
            1,698Total
      assets
            
            $
            216,998
            
            
            $
            157,121LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
            
            $
            20,748
            
            
            $
            15,181Accrued
      liabilities
            
            
            25,048
            
            
            
            12,641Total
      current liabilities
            
            
            45,796
            
            
            
            27,822Commitments
      and contingenciesStockholders’
      equityUndesignated
      preferred stock, $.001 par value, 1,817,795 shares authorized; none issued
      and outstanding
            
            
            —
            
            
            
            —Common
      stock, $.001 par value, 48,000,000 shares authorized; 34,180,000 and
      33,709,000 shares issued and outstanding in 2007 and 2006
            
            
            34
            
            
            
            34Additional
      paid-in capital
            
            
            150,379
            
            
            
            135,214Accumulated
      other comprehensive income
            
            
            95
            
            
            
            23Retained
      Earnings (accumulated deficit)
            
            
            20,694
            
            
            
            (5,972
            )Total
      stockholders’ equity
            
            
            171,202
            
            
            
            129,299Total
      liabilities and stockholders’ equity
            
            $
            216,998
            
            
            $
            157,121





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


F-2
 Table of Contents




LifeCell
      Corporation Statements of
Operations








For
      the Year Ended December 31,(dollars
      in thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2005Revenues:Product
      revenues
            
            $
            190,518
            
            
            $
            140,647
            
            
            $
            93,326Research
      grant revenues
            
            
            612
            
            
            
            1,033
            
            
            
            1,072Total
      revenues
            
            
            191,130
            
            
            
            141,680
            
            
            
            94,398Costs
      and expenses:Cost
      of products sold
            
            
            56,090
            
            
            
            40,856
            
            
            
            29,205Research
      and development
            
            
            23,547
            
            
            
            16,500
            
            
            
            10,349General
      and administrative
            
            
            24,580
            
            
            
            18,618
            
            
            
            11,945Selling
      and marketing
            
            
            43,480
            
            
            
            32,376
            
            
            
            24,736Total
      costs and expenses
            
            
            147,697
            
            
            
            108,350
            
            
            
            76,235Income
      from operations
            
            
            43,433
            
            
            
            33,330
            
            
            
            18,163Interest
      and other income, net
            
            
            4,028
            
            
            
            2,793
            
            
            
            1,013Income
      before income taxes
            
            
            47,461
            
            
            
            36,123
            
            
            
            19,176Income
      tax provision, net
            
            
            20,578
            
            
            
            15,654
            
            
            
            7,132Net
      income
            
            $
            26,883
            
            
            $
            20,469
            
            
            $
            12,044Net
      income per common share:Basic
            
            $
            0.81
            
            
            $
            0.62
            
            
            $
            0.39Diluted
            
            $
            0.78
            
            
            $
            0.60
            
            
            $
            0.36Shares
      used in computing net income per common share:Basic
            
            
            33,345
            
            
            
            32,769
            
            
            
            30,877Diluted
            
            
            34,534
            
            
            
            34,007
            
            
            
            33,348





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




F-3
 Table of Contents




LifeCell
      Corporation Statements of Stockholders'
Equity




Common
      Stock
              
              
              Additional
              
              
              Accumulated
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Warrants
              
              
              Paid-in
              
              
              Comprehensive
              
              
              Retained
              
              
              Stockholders’(dollars
      and shares in thousands)
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Capital
              
              
              Income
              
              
              Earnings
              
              
              EquityBalance
      at December 31, 2004
              
              
              29,126
              
              
              
              29
              
              
              $
              1,519
              
              
              $
              2,590
              
              
              $
              99,310
              
              
              $
              4
              
              
              $
              (38,485
              )
              
              $
              63,448Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              12,044
              
              
              
              12,044Unrealized
      securities gains, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1
              
              
              
              —
              
              
              
              1Total
      Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              12,045Stock
      options exercised
              
              
              1,822
              
              
              
              2
              
              
              
              —
              
              
              
              —
              
              
              
              7,004
              
              
              
              —
              
              
              
              —
              
              
              
              7,006Warrants
      exercised
              
              
              1,247
              
              
              
              1
              
              
              
              (1,519
              )
              
              
              (2,590
              )
              
              
              2,589
              
              
              
              —
              
              
              
              —
              
              
              
              —Issuance
      of restricted stock
              
              
              646
              
              
              
              1
              
              
              
              —
              
              
              
              —
              
              
              
              1,537
              
              
              
              —
              
              
              
              —
              
              
              
              1,538Excess
      tax benefit stock-based compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,033
              
              
              
              —
              
              
              
              —
              
              
              
              8,033Balance
      at December 31, 2005
              
              
              32,841
              
              
              
              33
              
              
              
              —
              
              
              
              —
              
              
              
              118,473
              
              
              
              5
              
              
              
              (26,441
              )
              
              
              92,070Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              20,469
              
              
              
              20,469Unrealized
      securities gains, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              18
              
              
              
              —
              
              
              
              18Total
      Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              20,487Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              8,757
              
              
              
              —
              
              
              
              —
              
              
              
              8,757Stock
      options exercised
              
              
              769
              
              
              
              1
              
              
              
              —
              
              
              
              —
              
              
              
              3,297
              
              
              
              —
              
              
              
              —
              
              
              
              3,298Issuance
      of restricted stock, net
              
              
              99
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Excess
      tax benefit stock-based compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,687
              
              
              
              —
              
              
              
              —
              
              
              
              4,687Balance
      at December 31, 2006
              
              
              33,709
              
              
              
              34
              
              
              
              —
              
              
              
              —
              
              
              
              135,214
              
              
              
              23
              
              
              
              (5,972
              )
              
              
              129,299Comprehensive
      income:Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              26,883
              
              
              
              26,883Unrealized
      securities gains, net of taxes
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              72
              
              
              
              —
              
              
              
              72Total
      Comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              26,955Reserve
      for uncertain tax positions
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (217
              )
              
              
              (217
              )Stock-based
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              10,197
              
              
              
              —
              
              
              
              —
              
              
              
              10,197Stock
      options exercised
              
              
              564
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,859
              
              
              
              —
              
              
              
              —
              
              
              
              3,859Stock
      forfeited to pay tax obligations, net
              
              
              (93
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (3,482
              )
              
              
              —
              
              
              
              —
              
              
              
              (3,482
              )Excess
      tax benefit stock-based compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              4,591
              
              
              
              —
              
              
              
              —
              
              
              
              4,591Balance
      at December 31, 2007
              
              
              34,180
              
              
              $
              34
              
              
              
              —
              
              
              $
              —
              
              
              $
              150,379
              
              
              $
              95
              
              
              $
              20,694
              
              
              $
              171,202


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


F-4
 Table of Contents





LifeCell
      Corporation Statements of Cash
Flows








For
      the Year Ended December 31,(dollars
      in thousands)
            
            2007
            
            
            2006
            
            
            2005Cash
      flows from operating activities:Net
      income
            
            $
            26,883
            
            
            $
            20,469
            
            
            $
            12,044Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            4,498
            
            
            
            3,174
            
            
            
            2,681Deferred
      taxes
            
            
            7,468
            
            
            
            13,144
            
            
            
            5,775Excess
      tax benefit from stock-based compensation
            
            
            (4,532
            )
            
            
            (4,645
            )
            
            
            —Stock-based
      compensation
            
            
            9,731
            
            
            
            8,616
            
            
            
            1,537Provision
      for bad debt
            
            
            103
            
            
            
            223
            
            
            
            103Inventory
      write-off
            
            
            —
            
            
            
            —
            
            
            
            1,402Inventory
      net realizable value provision
            
            
            686
            
            
            
            641
            
            
            
            381Reserve
      for product returns
            
            
            —
            
            
            
            203
            
            
            
            63Loss
      on disposal of fixed assets
            
            
            237
            
            
            
            2
            
            
            
            15Changes
      in operating assets and liabilities:Receivables
            
            
            (3,551
            )
            
            
            (6,926
            )
            
            
            (6,712
            )Inventories
            
            
            (20,686
            )
            
            
            (11,764
            )
            
            
            (5,424
            )Prepayments
      and other
            
            
            (9,397
            )
            
            
            (424
            )
            
            
            (573
            )Accounts
      payable and accrued liabilities
            
            
            17,757
            
            
            
            12,894
            
            
            
            7,537Net
      cash provided by operating activities
            
            
            29,197
            
            
            
            35,607
            
            
            
            18,829Cash
      flows from investing activities:Proceeds
      from maturities and sale of investments
            
            
            26,713
            
            
            
            4,699
            
            
            
            7,028Purchases
      of investments
            
            
            (29,843
            )
            
            
            (45,739
            )
            
            
            (16,830
            )Capital
      expenditures
            
            
            (12,408
            )
            
            
            (13,782
            )
            
            
            (3,595
            )Intangible
      assets
            
            
            (1,750
            )
            
            
            —
            
            
            
            (1,250
            )Net
      cash used in investing activities
            
            
            (17,288
            )
            
            
            (54,822
            )
            
            
            (14,647
            )Cash
      flows from financing activities:Net
      proceeds from issuance of common stock
            
            
            378
            
            
            
            3,298
            
            
            
            7,006Excess
      tax benefit from stock-based compensation
            
            
            4,532
            
            
            
            4,645
            
            
            
            —Net
      cash provided by financing activities
            
            
            4,910
            
            
            
            7,943
            
            
            
            7,006Net
      increase (decrease) in cash and cash equivalents
            
            
            16,819
            
            
            
            (11,272
            )
            
            
            11,188Cash
      and cash equivalents at beginning of period
            
            
            10,000
            
            
            
            21,272
            
            
            
            10,084Cash
      and cash equivalents at end of period
            
            $
            26,819
            
            
            $
            10,000
            
            
            $
            21,272Supplemental
      disclosure of cash flow information:Cash
      paid during the period for interest
            
            $
            —
            
            
            $
            —
            
            
            $
            3Cash
      paid during the period for income taxes
            
            $
            18,980
            
            
            $
            870
            
            
            $
            525





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




F-5
 Table of Contents





LifeCell
      Corporation Notes To Financial
Statements





(December
31, 2007)








1.
            Organization





LifeCell
Corporation (“LifeCell” or “the Company”) develops and markets innovative
biological products for soft tissue repair.  Surgeons use the
Company’s products to restore structure, function and physiology in a variety of
reconstructive, orthopedic and urogynecologic surgical
procedures.  The Company’s products are subject to regulation by the
United States Food and Drug Administration.  LifeCell was incorporated
in Delaware in 1992 for the purpose of merging with its predecessor entity,
which was formed in 1986.  The Company began commercial sales of its
first tissue product during 1993.








2.
            Accounting
      Policies





Use of
Estimates





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





Cash and Cash Equivalents
and Investments in Marketable Securities





The
Company considers all highly liquid investments with an original maturity of
three months or less, when purchased, to be cash
equivalents.  Investments with maturities in excess of three months,
but less than one year, are classified as short-term investments and are stated
at cost, net of any unamortized premiums or discounts, which approximates fair
value.





The
Company classifies its marketable securities as available for sale. The
securities consist of fixed income debt securities, which are stated at fair
value, with net unrealized gains or losses on the securities recorded as
accumulated other comprehensive income (loss) in shareholders’ equity. Net
unrealized gains and losses were not material at December 31, 2007 or
2006.   Realized gains and losses are included in earnings and
are derived using the specific identification method for determining the cost of
the securities. Realized gains and losses were not material in 2007, 2006 or
2005.





Inventories





Inventories
are stated at the lower of cost or market, with cost being determined on a
first-in, first-out basis.  Inventories on hand include the cost of
materials, freight, direct labor and manufacturing overhead.  The
Company records a provision for excess and obsolete inventory based primarily on
inventory quantities on hand, the historical product sales and estimated
forecast of future product demand and production requirements.  In
addition, the Company records a provision for tissue that will not meet tissue
standards based on historic rejection rates.





Fixed
Assets





Fixed
assets are stated at cost less accumulated depreciation.  Major
expenditures that improve or extend the life of the assets are capitalized,
whereas maintenance and repairs are expensed as incurred.  The cost of
assets retired and the related accumulated depreciation are removed from the
accounts, and any gain or loss is included in the results of
operations.  Depreciation of computer equipment and furniture and
fixtures is computed on the straight-line method based on the estimated useful
lives of the assets of three to five years.  Depreciation of machinery
and equipment is computed on the straight-line method based on the estimated
useful lives of the assets of three to seven years.  The cost of
leasehold improvements is depreciated over the shorter of the lease term,
including renewal options, or the estimated useful life of the
asset.




F-6
 Table of Contents





Intangible
Assets





Intangible
assets amounted to $3,180,000 at December 31, 2007, net of $468,000 of
accumulated amortization, and are included in other assets, net in the
accompanying balance sheet.  Intangible assets consist primarily of
technology license rights and deferred patent costs and are amortized to expense
on a straight-line basis over their estimated useful life.  For the
years ended December 31, 2007, 2006 and 2005, amortization expense relating to
intangibles was $119,000, $38,000 and $40,000, respectively.  The
weighted average amortization period for intangible assets is 8.1
years.  Estimated amortization expense for the next five years is as
follows:





(dollars
      in thousands)
            
            2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012Estimated
      Amortization Expense
            
            $
            364
            
            
            $
            407
            
            
            $
            407
            
            
            $
            405
            
            
            $
            398





Impairment of Long-Lived
Assets





The
Company periodically evaluates the carrying value of long-lived assets used in
operations when events and circumstances indicate that assets might be
impaired.  Management believes that the carrying value of its
long-lived assets reported on the balance sheet at December 31, 2007 represents
recoverable value, and during 2007 and 2006, no adjustments to recorded amounts
were required.





Revenue
Recognition





Product
revenues are recognized when title and risk of loss for the product is
transferred to the customer, which is generally when product is shipped to the
customer.  The Company utilizes independent sales and marketing agents
to supplement its direct sales organization.  These independent agents
hold the Company’s inventory on a consignment basis.  For products
marketed through independent sales and marketing agents, the Company recognizes
revenue when the products are delivered to the third-party customer, as this is
when title and risk of loss for the product is
transferred.  Additionally, amounts billed to customers for shipping
and handling are included in revenue at the time the related product revenue is
recognized, with the related expenses recorded in cost of products
sold.





Research
grant revenues are recognized at the time qualified expenses are incurred,
unless the Company has continuing performance obligations, in which case,
revenue is recognized upon the satisfaction of such
obligations.  Grant payments received, but not yet earned, are
recorded as deferred revenue.





Research and Development
Expense





Research
and development costs are expensed when incurred and primarily include salaries
and fringe benefits, professional fees, costs associated with pre-clinical and
clinical studies, supplies and facilities costs.





Fair Value of Financial
Instruments





Financial
instruments consist of cash and cash equivalents, short-term and long-term
investments in marketable securities, accounts receivable, accounts payable and
certain current liabilities.  Management believes the carrying amounts
reported in the balance sheet for these items approximate fair
value.





Income
Taxes





Significant
judgment is required in determining the Company’s income tax
provision.  In the ordinary course of business, there are many
transactions and calculations where the ultimate tax outcome is
uncertain.  Although the Company believes that its estimates are
reasonable, the final outcome of these matters may be different than that which
is reflected in its historical income tax provisions and
accruals.  Such differences could have a material effect on the
Company’s income tax provision and net income in the period in which such
determination is made.





The
Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
for Income Taxes.”  Under the asset-and-liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.  Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.  The
recoverability of deferred tax assets is dependent upon the Company’s assessment
of whether it is more likely than not that sufficient future taxable income will
be generated to utilize the deferred tax asset.  In the event we
determine that future taxable income will not be sufficient to utilize the
deferred tax asset, a valuation allowance is recorded.  Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment
date.


F-7
 Table of Contents




Interest
related to income taxes is included in the financial caption interest and other
income, net.  Tax penalties are included in the financial caption
general and administrative expense.





The
Company adopted the provisions of FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” on January 1, 2007.  As a result of the
adoption of Interpretation 48, the Company recognized a $217,000 liability for
uncertain tax positions, which was accounted for as a reduction to the January
1, 2007, balance of retained earnings.  The liability, related to
potential state tax exposure, included $73,000 for the unrecognized tax
liabilities and $144,000 for accrued penalties and interest.  A
reconciliation of the beginning and ending amount of the accrual for
unrecognized tax liabilities is as follows:





(dollars
      in thousands)Balance
      at January 1, 2007
            
            $
            73Additions
      based on tax positions related to the current year
            
            
            71Additions
      for tax positions of prior years
            
            
            4Balance
      at December 31, 2007
            
            $
            148





During
the year ended December 31, 2007, the Company recognized approximately $534,000
in interest and penalties for a total liability for penalties and interest of
$678,000 at December 31, 2007.  The company files income tax returns
in the U.S. federal jurisdiction, and various states jurisdictions. Because the
Company utilized net operating loss carryforwards, we are subject to U.S.
federal income tax examinations by tax authorities for all tax years since
incorporation.  We are no longer subject to New Jersey income tax
examinations by tax authorities for years before 2005.





Comprehensive
Income





SFAS No.
130 “Reporting Comprehensive Income” establishes standards for reporting and
display of comprehensive income and its components in financial statements. It
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.





Share-Based
Compensation





Prior to
January 1, 2006, the Company accounted for share-based compensation in
accordance with Accounting Principles Board Opinion No. 25, (“APB 25”)
“Accounting for Stock Issued to Employees,” and related interpretations. The
Company also followed the disclosure requirements of SFAS No. 123, “Accounting
for Stock-Based Compensation,” as amended by SFAS 148, “Accounting for
Stock-Based Compensation - Transition and Disclosure.”  As a result,
no expense was recognized for options to purchase the Company’s common stock
that were granted with an exercise price equal to fair market value at the day
of the grant.  Effective January 1, 2006, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123R, (“SFAS
123R”) “Share-Based Payment,” which establishes accounting for equity
instruments exchanged for services. Under the provisions of SFAS 123R,
share-based compensation cost is measured at the grant date, based on the fair
value of the award, and is recognized as expense over the employee’s requisite
service period (generally the vesting period of the equity grant). The Company
elected the modified prospective transition method as provided by SFAS 123R and,
accordingly, financial statement amounts for the prior periods presented in this
Form 10-K have not been restated to reflect the fair value method of expensing
share-based compensation.





The
Company has elected the alternative transition method described
in  FSP FAS 123(R)-3 - “Transition Election Related to Accounting for
the Tax Effects of Share-Based Payment Awards” to account for the tax effects of
share-based payment awards.  When utilizing tax attributes relating to
items such as net operating losses and windfall tax benefits, the Company
utilizes tax law ordering.


F-8
 Table of Contents




The
following table illustrates the effect on net income and net income per share if
the Company had applied the fair value recognition provisions of FASB Statement
No. 123, “Accounting for Stock-Based Compensation” for the year ended December
31, 2005:





Year ended
      December, 31 2005(dollars
      in thousands, except per share data)Net
      income, as reported
            
            $
            12,044Add:  Total  stock-based
      compensation expense included in reported net income, net of related tax
      effects
            
            
            953Less:  Total  stock-based
      compensation expense determined under fair value based method for all
      awards, net of related tax effects
            
            
            (3,233
            )Net
      Income, Pro forma
            
            $
            9,764Basic
      net income per common shareAs
      reported
            
            $
            0.39Pro
      forma
            
            $
            0.32Diluted
      net income per common shareAs
      reported
            
            $
            0.36Pro
      forma
            
            $
            0.30





The pro
forma impact of applying the fair value method prescribed by SFAS 123 to
historical financial results is not representative of the impact that may be
expected in the future due to changes resulting from additional grants in future
years and changes in assumptions such as volatility, interest rates and expected
life used to estimate fair value of the grants in future years.




Concentrations of Credit
Risk





Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents, short and long-term
investments and accounts receivable.  The Company has investment
policies that limit investments of excess cash to investment grade
securities.  The Company provides credit, in the normal course of
business, to hospitals, medical professionals and distributors. The risk with
respect to accounts receivables is mitigated because amounts due the Company are
not concentrated within a relatively few number of customers.  The
Company maintains an allowance for doubtful accounts and charges actual losses
to the allowance when incurred.





Allowance for Doubtful
Accounts


(dollars
      in thousands)
            
            Balance
              at
      Beginning
              of
      Period
            
            
            Charge
      to Costs and Expenses
            
            
            Write-offs
              and
      Deductions
              From
      Allowance
            
            
            Balance
      at
              End
      of PeriodDecember
      31, 2007
            
            $
            279
            
            
            $
            103
            
            
            $
            (104
            )
            
            $
            278December
      31, 2006
            
            
            156
            
            
            
            223
            
            
            
            (100
            )
            
            
            279December
      31, 2005
            
            
            114
            
            
            
            103
            
            
            
            (61
            )
            
            
            156





New Accounting
Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS
No. 157 establishes a single definition of fair value and a framework for
measuring fair value, sets out a fair value hierarchy to be used to classify the
source of information used in fair value measurements, and requires new
disclosures of assets and liabilities measured at fair value based on their
level in the hierarchy. SFAS No. 157 is effective for all fiscal years beginning
after November 15, 2007 and is to be applied prospectively.  In
February 2008, the FASB issued Staff Positions No. 157-1 and No. 157-2 which
partially defer the effective date of SFAS No. 157 for one year for certain
non-financial assets and liabilities and remove certain leasing transactions
from its scope.  The implementation of SFAS 157 is not expected to
have a material impact on the results of operations, financial position or cash
flows.




F-9
 Table of Contents





3.
            Inventories,
      net





Inventories
consist of the following at December 31,:





2007
            
            
            2006(dollars
      in thousands)Unprocessed
      tissue and supplies
            
            $
            24,213
            
            
            $
            14,259Tissue
      products in-process
            
            
            7,933
            
            
            
            2,412Tissue
      products available for distribution
            
            
            12,121
            
            
            
            7,130Total
      inventories
            
            $
            44,267
            
            
            $
            23,801





4.
            Cash
      and Investments





Cash,
cash equivalents and investments consist of the following at December 31,
2007:





Amortized
            
            
            Gross
      Unrealized(dollars
      in thousands)
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueCash
            
            $
            6,099
            
            
            $
            —
            
            
            $
            —
            
            
            $
            6,099Cash
      equivalents:Money
      market  funds
            
            
            6,986
            
            
            
            —
            
            
            
            —
            
            
            
            6,986Commercial
      paper
            
            
            13,679
            
            
            
            —
            
            
            
            —
            
            
            
            13,679Marketable
      equity securities
            
            
            55
            
            
            
            —
            
            
            
            —
            
            
            
            55Total
      cash and cash equivalents
            
            
            26,819
            
            
            
            —
            
            
            
            —
            
            
            
            26,819Short-term
      investments:Commercial
      paper
            
            
            10,456
            
            
            
            —
            
            
            
            (3
            )
            
            
            10,453Corporate
      bonds
            
            
            31,125
            
            
            
            12
            
            
            
            (17
            )
            
            
            31,120Municipal
      bonds
            
            
            13,665
            
            
            
            52
            
            
            
            —
            
            
            
            13,717Asset-backed
      securities
            
            
            6,889
            
            
            
            29
            
            
            
            —
            
            
            
            6,918U.S.
      government obligations
            
            
            2,007
            
            
            
            2
            
            
            
            —
            
            
            
            2,009Total
      short-term investments
            
            
            64,142
            
            
            
            95
            
            
            
            (20
            )
            
            
            64,217Long-term
      investments:Municipal
      bonds
            
            
            4,348
            
            
            
            20
            
            
            
            —
            
            
            
            4,368Asset-backed
      securities
            
            
            2,509
            
            
            
            9
            
            
            
            —
            
            
            
            2,518Total
      long-term investments
            
            
            6,857
            
            
            
            29
            
            
            
            —
            
            
            
            6,886Total
      cash, cash equivalents and investments
            
            $
            97,818
            
            
            $
            124
            
            
            $
            (20
            )
            
            $
            97,922


F-10
 Table of Contents
  Cash,
cash equivalents and investments consist of the following at December 31,
2006:





Amortized
            
            
            Gross
      Unrealized(dollars
      in thousands)
            
            Cost
            
            
            Gains
            
            
            Losses
            
            
            Fair
      ValueCash
            
            $
            4,864
            
            
            $
            —
            
            
            $
            —
            
            
            $
            4,864Cash
      equivalents:Money
      market  funds
            
            
            2,096
            
            
            
            —
            
            
            
            —
            
            
            
            2,096Commercial
      paper
            
            
            2,990
            
            
            
            —
            
            
            
            —
            
            
            
            2,990Marketable
      equity securities
            
            
            50
            
            
            
            —
            
            
            
            —
            
            
            
            50Total
      cash and cash equivalents
            
            
            10,000
            
            
            
            —
            
            
            
            —
            
            
            
            10,000Short-term
      investments:Certificates
      of deposit
            
            
            5,568
            
            
            
            —
            
            
            
            —
            
            
            
            5,568Commercial
      paper
            
            
            7,926
            
            
            
            —
            
            
            
            —
            
            
            
            7,926Corporate
      bonds
            
            
            42,790
            
            
            
            —
            
            
            
            (25
            )
            
            
            42,765U.S.
      government obligations
            
            
            4,711
            
            
            
            2
            
            
            
            —
            
            
            
            4,713Total
      short-term investments
            
            
            60,995
            
            
            
            2
            
            
            
            (25
            )
            
            
            60,972Long-term
      investments:Corporate
      bonds
            
            
            6,874
            
            
            
            —
            
            
            
            —
            
            
            
            6,874Total
      long-term investments
            
            
            6,874
            
            
            
            —
            
            
            
            —
            
            
            
            6,874Total
      cash, cash equivalents and investments
            
            $
            77,869
            
            
            $
            2
            
            
            $
            (25
            )
            
            $
            77,846





The
Company’s long-term investments mature at various dates from May 2009 through
July 2011.  Interest income was $4,240,000 in 2007 and $2,847,000 in
2006.








5.
            Fixed
      Assets





Fixed
assets consist of the following at December 31,:





2007
            
            
            2006(dollars
      in thousands)Machinery
      and equipment
            
            $
            14,905
            
            
            $
            11,177Leasehold
      improvements
            
            
            23,973
            
            
            
            17,764Computer
      hardware, furniture and fixtures
            
            
            5,275
            
            
            
            4,315Computer
      software
            
            
            2,809
            
            
            
            2,21446,962
            
            
            
            35,470Accumulated
      depreciation and amortization
            
            
            (19,256
            )
            
            
            (15,556
            )Fixed
      assets, net
            
            $
            27,706
            
            
            $
            19,914





For the
years ended December 31, 2007, 2006 and 2005, depreciation and amortization
expense related to fixed assets was $4,379,000, $3,137,000 and $2,641,000,
respectively.








6.
            Accrued
      Liabilities





Accrued
liabilities consist of the following at December 31,:





2007
            
            
            2006(dollars
      in thousands)Compensation
            
            $
            12,869
            
            
            $
            5,330Tissue
      recovery fees
            
            
            6,694
            
            
            
            4,232Payroll
      taxes
            
            
            3,055
            
            
            
            173Income
      taxes payable
            
            
            —
            
            
            
            1,292Operating
      expenses and other
            
            
            2,430
            
            
            
            1,614Total
      accrued liabilities
            
            $
            25,048
            
            
            $
            12,641





Accrued
compensation includes amounts for annual bonuses, sales commissions and
severance expense.  Tissue recovery fees represents amounts due to
tissue recovery partners for tissue that has been received but not yet
invoiced.


F-11
 Table of Contents




7.
            Share-Based
      Compensation





In July
2005, the Company combined its existing 2003 Non-employee Director Stock Option
Plan and 2000 Stock Option Plan into the LifeCell Corporation Equity
Compensation Plan.  The Plan authorizes the issuance of various forms
of stock-based awards, including incentive and non-statutory stock options,
stock purchase rights, stock appreciation rights, and restricted and
unrestricted stock awards.  A total of 5,850,000 shares were
authorized to be issued under the Plan through March 1, 2010.  At
December 31, 2007, there were 1,309,000 shares available for future awards under
the Plan.





Share-based
compensation expense included in the Company’s statements of operations
was:





Year
      ended December, 312007
            
            
            2006
            
            
            2005(dollars
      in thousands)Cost
      of products sold
            
            $
            871
            
            
            $
            1,476
            
            
            $
            63Research
      and development
            
            
            2,673
            
            
            
            2,015
            
            
            
            397General
      and administrative
            
            
            3,956
            
            
            
            3,761
            
            
            
            808Selling
      and marketing
            
            
            2,230
            
            
            
            1,363
            
            
            
            269Stock-based
      compensation expense, before tax
            
            
            9,730
            
            
            
            8,615
            
            
            
            1,537Income
      tax benefit
            
            
            (2,611
            )
            
            
            (2,464
            )
            
            
            (584
            )Net
      compensation expense
            
            $
            7,119
            
            
            $
            6,151
            
            
            $
            953





In
addition, there was $466,000 and $141,000 of share-based compensation cost
capitalized in inventory at December 31, 2007 and 2006.





For
restricted common stock grants, the Company recognizes compensation expense over
the vesting period, based upon the fair market value on the measurement
date.





Stock
Options





Stock
option awards issued by the Company generally vest over four years and have a
ten year life. The Company estimates the fair value of stock options using the
Black-Scholes option-pricing model. The Company estimates volatility by
considering both implied volatility derived from publicly traded options to
purchase LifeCell common stock and historical stock
volatility.  During the second quarter of 2006, the Company began
using the calculated historical term of stock options in computing the fair
value of stock options.  For stock options issued prior to the second
quarter of 2006, the Company elected to use the simplified method for estimating
expected term equal to the midpoint between the vesting period and the
contractual term as allowed by Staff Accounting Bulletin (SAB) No. 107,
Share-Based Payment. The Company believes that the valuation technique and the
approach utilized to develop the underlying assumptions are appropriate in
determining the estimated fair value of the Company’s stock options granted.
Estimates of fair value are not intended to predict actual future events or the
value ultimately realized by persons who receive equity awards.




The fair
value of stock options granted during each of the periods was estimated using
the following assumptions:




Year
      Ended December 31,2007
            
            
            2006
            
            
            2005Volatility
            
            
            56.1
            %
            
            
            69.6
            %
            
            
            69.6%-81.0
            %Expected
      term (years)
            
            
            5.69
            
            
            
            5.67-6.25
            
            
            
            6.25Risk
      free interest rate
            
            
            3.4%
      - 5.0
            %
            
            
            4.1%
      - 5.0
            %
            
            
            3.7%
      - 4.4
            %Expected
      dividend yield
            
            
            0.0
            %
            
            
            0.0
            %
            
            
            0.0
            %


F-12
 Table of Contents
  A summary
of stock option activity for the years ended December 31, 2007, 2006 and 2005 is
as follows:





Number
      of Shares
            
            
            Weighted
      Average Exercise Price
            
            Weighted
      Average Remaining Contractual Life
            
            Aggregate
      Intrinsic Value (in thousands)Outstanding
      at December 31, 2004
            
            
            3,733,000
            
            
            $
            4.58
            
            6.6
      yearsGranted
            
            
            371,000
            
            
            $
            14.43Exercised
            
            
            (1,819,000
            )
            
            $
            3.85
            
            
            
            $
            21,925Forfeited
      or canceled
            
            
            (28,000
            )
            
            $
            6.79Outstanding
      at December 31, 2005
            
            
            2,257,000
            
            
            $
            6.71
            
            7.4
      yearsGranted
            
            
            533,000
            
            
            $
            21.84Exercised
            
            
            (759,000
            )
            
            $
            4.29
            
            
            
            $
            14,627Forfeited
      or canceled
            
            
            (131,000
            )
            
            $
            13.29Outstanding
      at December 31, 2006
            
            
            1,900,000
            
            
            $
            11.47
            
            7.4
      yearsGranted
            
            
            593,000
            
            
            $
            27.19Exercised
            
            
            (564,000
            )
            
            $
            6.81
            
            
            
            $
            14,894Forfeited
      or canceled
            
            
            (116,000
            )
            
            $
            18.63Outstanding
      at December 31, 2007
            
            
            1,813,000
            
            
            $
            17.61
            
            7.5
      years
            
            $
            46,232Exercisable
      at December 31, 2007
            
            
            735,000
            
            
            $
            9.88
            
            6.3
      years
            
            $
            24,432





In
addition to the amounts set forth in the table above, during 1996 the Company
granted options to purchase 220,000 shares of common stock not pursuant to a
plan, to directors who resigned upon the closing of the sale of the Series B
preferred stock.  During 2006 and, 2005, option holders exercised
options to purchase 10,000 and, 2,500 shares of common stock, respectively,
pursuant to these grants.  At December 31, 2007, none of the options
granted to directors remained outstanding.





A summary
of stock options outstanding at December 31, 2007 by price range is as
follows:





Options
      Outstanding
            
            
            Options
      ExercisableRange
      of
              Exercise
      Prices
            
            
            Number
              Outstanding
            
            
            Weighted-Average
      Remaining Contractual Life (Years)
            
            
            Weighted-
      Average
              ExercisePrice
            
            
            Number
      Exercisable
            
            
            Weighted-
              AverageExercise
      Price$
            1.75
            
            to
            
            $
            4.99
            
            
            
            172,000
            
            
            
            3.9
            
            
            $
            2.86
            
            
            
            172,000
            
            
            $
            2.865.00
            
            to
            
            
            9.99
            
            
            
            320,000
            
            
            
            5.6
            
            
            
            7.00
            
            
            
            233,000
            
            
            
            6.3010.00
            
            to
            
            
            14.99
            
            
            
            211,000
            
            
            
            6.9
            
            
            
            10.42
            
            
            
            146,000
            
            
            
            10.2615.00
            
            to
            
            
            19.99
            
            
            
            343,000
            
            
            
            7.9
            
            
            
            18.91
            
            
            
            100,000
            
            
            
            18.4320.00
            
            to
            
            
            24.99
            
            
            
            472,000
            
            
            
            8.8
            
            
            
            23.15
            
            
            
            63,000
            
            
            
            21.7825.00
            
            to
            
            
            29.99
            
            
            
            123,000
            
            
            
            8.8
            
            
            
            27.57
            
            
            
            15,000
            
            
            
            26.5730.00
            
            to
            
            
            34.99
            
            
            
            94,000
            
            
            
            9.3
            
            
            
            32.10
            
            
            
            6,000
            
            
            
            31.5035.00
            
            to
            
            
            39.99
            
            
            
            25,000
            
            
            
            9.7
            
            
            
            37.29
            
            
            
            —
            
            
            
            —40.00
            
            to
            
            
            46.68
            
            
            
            53,000
            
            
            
            9.9
            
            
            
            41.79
            
            
            
            —
            
            
            
            —$
            1.75
            
            to
            
            $
            46.68
            
            
            
            1,813,000
            
            
            
            7.5
            
            
            $
            17.61
            
            
            
            735,000
            
            
            $
            9.88





The
weighted average grant date fair value of stock options granted, calculated
using the Black-Scholes option-pricing model, in 2007, 2006 and 2005 was $15.22,
$14.30 and $14.43 per share, respectively.





In
connection with the stock options exercised during the years ended December 31,
2007 and 2006, the Company received cash proceeds of $3.9 million and $3.3
million, respectively.




F-13
 Table of Contents





Restricted
Stock





The
Company grants restricted stock to employees and directors that entitle the
holders to receive shares of the Company’s common stock upon the fulfillment of
certain service and/or performance conditions.  The fair value of
restricted stock is based on the market price of the Company’s stock on the date
of grant and is recorded as compensation expense ratably over the service
period, generally three to four years.  For restricted stock awards
that also have performance conditions, the compensation expense is based on the
expected future performance.




A summary
of restricted stock activity for the years ended December 31, 2007, 2006 and
2005 is as follows:







Non-vested
      Number of shares
            
            
            
            Weighted
      Average Grant-Date Fair Value
            
            
            Aggregate
      Intrinsic Value (in thousands)Balance
      at December 31, 2004
            
            
            --
            
            
            $
            --Granted
            
            
            647,000
            
            
            $
            17.03Balance
      at December 31, 2005
            
            
            647,000
            
            
            $
            17.03Granted
            
            
            121,000
            
            
            $
            21.58Vested
            
            
            (75,000
            )
            
            $
            16.90
            
            
            $
            2,028Forfeited
            
            
            (23,000
            )
            
            $
            17.60Balance
      at December 31, 2006
            
            
            670,000
            
            
            $
            17.85Granted
            
            
            155,000
            
            
            $
            26.55Vested
            
            
            (485,000
            )
            
            $
            17.40
            
            
            $
            19,695Forfeited
            
            
            (17,000
            )
            
            $
            19.39Balance
      at December 31, 2007
            
            
            323,000
            
            
            $
            22.62





At
December 31, 2007, there was $15.4 million of total unrecognized compensation
costs related to non-vested stock options and restricted stock, which is
expected to be recognized over a weighted average period of 1.77
years.








8
            Employee
      Benefit Plans





The
Company maintains a 401(k) retirement savings plan, which covers all full-time
employees.  The Company may, at its discretion, contribute amounts not
to exceed each employee’s contribution.  Participants’ contributions
may not exceed 15% of their annual compensation, subject to annual dollar limits
set by the Internal Revenue Service.  Participants are always 100%
vested in their contributions.  Company contributions are fully vested
after one year of employment.  Total Company contributions during
2007, 2006 and 2005 were $542,000, $309,000 and $213,000,
respectively.





The
Company also maintains an Employee Stock Purchase Plan to allow all full-time
employees to purchase the Company’s common stock on the open market using
employee and Company matching contributions.  Total Company
contributions during 2007, 2006 and 2005 were $59,000, $46,000 and $35,000,
respectively.








9.
            Income
      Taxes





Significant
components of the Company’s income tax expense for the years ended December 31,
2007, 2006 and 2005 were as follows:





(dollars
      in thousands)
              
              2007
              
              
              2006
              
              
              2005CurrentFederal
              
              $
              12,799
              
              
              $
              926
              
              
              $
              429State
              
              
              4,847
              
              
              
              2,916
              
              
              
              928DeferredFederal
              
              
              3,316
              
              
              
              11,328
              
              
              
              5,215State
              
              
              (384
              )
              
              
              484
              
              
              
              560Income
      tax provision, net
              
              $
              20,578
              
              
              $
              15,654
              
              
              $
              7,132


F-14
 Table of Contents




The
difference between the income tax provision at the statutory federal income tax
rate and the tax provision attributable to income before income taxes was as
follows:





2007
            
            
            2006
            
            
            2005U.S.
      federal tax at statutory rate
            
            $
            16,611
            
            
            
            35.0
            %
            
            $
            12,643
            
            
            
            35.0
            %
            
            $
            6,707
            
            
            
            35.0
            %State
      income taxes (net of federal benefit)
            
            
            2,901
            
            
            
            6.1
            %
            
            
            2,232
            
            
            
            6.2
            %
            
            
            968
            
            
            
            5.0
            %Write-up
      of deferred tax assets
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (481
            )
            
            
            -2.5
            %Change
      in valuation allowance
            
            
            —
            
            
            
            —
            
            
            
            (232
            )
            
            
            -0.6
            %
            
            
            —
            
            
            
            —Tax
      credits
            
            
            (531
            )
            
            
            -1.1
            %
            
            
            (320
            )
            
            
            -0.9
            %
            
            
            (236
            )
            
            
            -1.2
            %Incentive
      stock option compensation
            
            
            978
            
            
            
            2.1
            %
            
            
            911
            
            
            
            2.5
            %
            
            
            —
            
            
            
            —Other
      non-deductible items
            
            
            619
            
            
            
            1.3
            %
            
            
            420
            
            
            
            1.1
            %
            
            
            174
            
            
            
            0.9
            %Income
      tax provision
            
            $
            20,578
            
            
            
            43.4
            %
            
            $
            15,654
            
            
            
            43.3
            %
            
            $
            7,132
            
            
            
            37.2
            %





The
principal components of the Company’s deferred tax assets as of December 31,
2007 and 2006 are as follows:





(dollars
      in thousands)
            
            2007
            
            
            2006Temporary
      differences:Inventory
      reserves
            
            $
            990
            
            
            $
            740Stock-based
      compensation
            
            
            2,786
            
            
            
            2,225Uniform
      capitalization of inventory costs
            
            
            693
            
            
            
            400Tax
      over book depreciation
            
            
            (260
            )
            
            
            (617
            )Other
      accruals and reserves
            
            
            (96
            )
            
            
            (10
            )Total
      temporary differences
            
            
            4,113
            
            
            
            2,738Federal
      tax losses and credits not currently utilizable
            
            
            1,970
            
            
            
            6,662State
      tax losses and credits not currently utilizable
            
            
            1,251
            
            
            
            867Net
      deferred tax assets
            
            $
            7,334
            
            
            $
            10,267





As of
December 31, 2007, the Company had a net operating loss carryforward (“NOL”) for
federal income tax purposes of approximately $5.6 million expiring in
2012.  The federal NOL carryforwards are subject to limitation under
the rules regarding a change in stock ownership as determined by the Internal
Revenue Code.  As of December 31, 2007, approximately $5.6 million of
the Company’s NOL was subject to an annual limitation under Internal Revenue
Code Section 382.  In 2008, $2.6 million of the Company’s NOL will no
longer be subject to limitation and will be available to offset taxable
income.





During
2005, the Company recognized non-cash income tax benefits resulting from a
change in the projected tax rate that future year deferred income tax assets are
expected to be recovered or settled.  The favorable impact of the tax
benefits on net income was $481,000 for the year ended December 31,
2005.





Additionally,
in 2007, 2006 and 2005, the Company recognized $4,557,000, $4,687,000 and
$8,033,000, respectively, of deferred tax assets related to stock compensation,
which were recorded as a direct credit to stockholder’s equity.


F-15
 Table of Contents




10.
            Net
      Income per Common Share





The
following table sets forth the computation of basic and diluted net income per
share for the years ended December 31, 2007, 2006 and 2005:





For
      the Year Ended December 31,(dollars
      in thousands, except per share data)
                
                2007
                
                
                2006
                
                
                2005Net
      income applicable to common stockholders
                
                $
                26,883
                
                
                $
                20,469
                
                
                $
                12,044Weighted-average
      common shares outstanding
                
                
                33,345,000
                
                
                
                32,769,000
                
                
                
                30,877,000Denominator
      for basic net income per share
                
                
                33,345,000
                
                
                
                32,769,000
                
                
                
                30,877,000Effect
      of dilutive securities:Common
      stock options
                
                
                769,000
                
                
                
                945,000
                
                
                
                1,915,000Common
      stock warrants
                
                
                —
                
                
                
                —
                
                
                
                491,000Restricted
      stock
                
                
                420,000
                
                
                
                293,000
                
                
                
                65,000Denominator
      for diluted net income per share
                
                
                34,534,000
                
                
                
                34,007,000
                
                
                
                33,348,000Basic
      net income per share
                
                $
                0.81
                
                
                $
                0.62
                
                
                $
                0.39Diluted
      net income per share
                
                $
                0.78
                
                
                $
                0.60
                
                
                $
                0.36





The
calculation of net income per share for the years ended December 31, 2007, 2006
and 2005 excludes potentially dilutive common stock equivalents consisting of
outstanding options to purchase 698,000, 592,000 and 189,000 shares of common
stock in 2007, 2006 and 2005, respectively, because their inclusion would be
antidilutive.








11.
            Commitments
      and Contingencies


The
Company accrues for loss contingencies in accordance with SFAS 5; that is, when
it is deemed probable that a loss has been incurred and that the loss is
estimable.  The amounts accrued are based on the full amount of the
estimated loss.  The Company accrues legal fees expected to be
incurred in connection with loss contingencies as those fees are incurred by
outside counsel as a period cost.


Litigation





In
September 2005, the Company recalled certain human-tissue based products because
the organization that recovered the tissue, Biomedical Tissue Services, Ltd.
(“BTS”), may not have followed the FDA’s requirements for donor consent and/or
screening to determine if risk factors for communicable diseases
existed.  The Company promptly notified the FDA and all relevant
hospitals and medical professionals.  The FDA subsequently determined
that patients who received tissue implants prepared from BTS donor tissue might
be at a heightened risk of communicable disease transmission, and recommended
those patients receive appropriate testing.  The Company has worked
closely with the FDA to execute the product recall and to set up a
LifeCell-sponsored testing program.  The Company did not receive any
donor tissue from BTS after September 2005.





The
Company has been named, along with BTS and many other defendants, in lawsuits
that relate to this matter.  With the exception of the individual
plaintiff cases discussed below, the suits purport to serve as class actions for
persons receiving transplants who are not physically injured, but instead seek
medical monitoring and/or damages for emotional distress.  All of
these cases are venued in New Jersey as part of a Multi-District Litigation
(“MDL”).  The Company has been successful in obtaining a voluntarily
dismissal of every such class action, with the exception of one case that
purports to only involve LifeCell products (“Watling”).





In
addition, several suits, including two class actions have been filed in Federal
Court in Rochester, New York and Philadelphia Court of Common Pleas that seek
compensatory damages from BTS and all processing defendants that received and
used BTS-originated tissue, including LifeCell.  Plaintiffs are the
next-of-kin of the donors who did not authorize BTS to remove the tissue at
issue.  The cases which have been transferred to the MDL will be the
subject of motions to dismiss.





There has
also been approximately 30 individual plaintiff cases filed in which those
persons also seek compensatory damages for emotional distress and/or future
medical monitoring.  None of the individual plaintiffs claim any
present physical injury.  With the exception of twelve cases that were
filed in the State Court in New Jersey and four cases in the State Court in
Pennsylvania, all of the individual cases have been transferred to the
MDL.


F-16
 Table of Contents





Finally,
the Company has been named in two cases filed in the State Court of New Jersey
in which those plaintiffs allege to have contracted a disease from LifeCell’s
product (“Turpyn” and “Guzman”).  Those cases are in the earliest
stages of discovery and it is not presently confirmed that either plaintiff has
been diagnosed with a disease nor is it known whether there is any casual
relationship to the LifeCell product.





The
Company intends to vigorously defend each case.  The Company will
pursue dismissal of all cases which do not involve its product being at
issue.  The Company believes it is not currently possible to estimate
the likelihood of an unfavorable outcome and/or the impact, if any, that the
ultimate resolution of these cases could have on the Company’s operations,
financial position or cash flow.  The Company maintains insurance
coverage for events and in amounts that it deems appropriate.  There
can be no assurance that the level of insurance maintained will be sufficient to
cover the claims or that all of the claims will be covered by the terms of any
insurance.





Independent Sales and
Marketing Agency and Distributor Agreements





The
Company utilizes independent sales and marketing agents and distributors to
supplement its direct sales organization.  The Company’s independent
sales and marketing agents and distributors generated 12%, 15% and 20% of total
product revenue in the years ended December 31, 2007, 2006 and 2005,
respectively.  One of the Company’s distributors generated 5% of total
product revenues in 2007.  No other individual independent sales agent
or distributor generated more than 5% of our total product revenues in the year
ended December 31, 2007.





Independent
sales and marketing agents hold Company inventory on a consignment
basis.  The Company records product revenues when title to products
transfers to third-party customers.  Our independent sales and
marketing agents are paid agency fees based on the amount of product revenues
they generate for the Company.  Such fees are included in the
statement of operations as selling and marketing expenses at the time that
product revenues are recorded.





Leases





The
Company leases a building that contains approximately 120,000 square feet for
office, production and laboratory space in one building under a lease agreement
that expires in November 2015.  The lease contains a renewal option
for one additional successive five-year period.  In addition, the
Company is a party to various other operating leases.  Rental expense
was $968,000, $975,000 and $973,000 for the years ended December 31, 2007, 2006
and 2005, respectively.  The future minimum lease payments under
non-cancelable leases with remaining terms in excess of one year as of December
31, 2007, were as follows:




(dollars
      in thousands)
            
            Minimum
              Lease
      Payments2008
            
            $
            1,1412009
            
            
            1,1412010
            
            
            1,1342011
            
            
            1,0572012
      and beyond
            
            
            4,142Total
            
            $
            8,615





Licensing
Agreements





The
Company has entered into licensing agreements for exclusive rights for the use
of certain patents and proprietary technologies.  The future minimum
licensing fees under these agreements as of December 31, 2007, were as
follows:




(dollars
      in thousands)
            
            Minimum
              Licensing
      Fees2008
            
            $
            7502009
            
            
            7502010
            
            
            1,2502011
            
            
            1,2502012
      and beyond
            
            
            6,500Total
            
            $
            10,500


F-17
 Table of Contents




12.
            Segment
      Data





The
Company has one reportable business operating segment: - the processing and
distribution of regenerative tissue matrix products.  The Company’s
products are used in three primary surgical applications as summarized in the
following table:





For
      the Year Ended December 31,(dollars
      in thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2005Reconstructive
            
            $
            170,411
            
            
            $
            122,802
            
            
            $
            78,394Orthopedic
            
            
            12,286
            
            
            
            9,695
            
            
            
            7,785Urogynecology
            
            
            7,821
            
            
            
            8,150
            
            
            
            7,147Product
      revenues
            
            $
            190,518
            
            
            $
            140,647
            
            
            
            93,326





Product
revenues by geographic area are summarized as follows:





For
      the Year Ended December 31,(dollars
      in thousands, except per share data)
            
            2007
            
            
            2006
            
            
            2005United
      States
            
            $
            189,216
            
            
            $
            139,283
            
            
            $
            92,059Other
      countries
            
            
            1,302
            
            
            
            1,364
            
            
            
            1,267Product revenues
            
            $
            190,518
            
            
            $
            140,647
            
            
            
            93,326








13.
            Quarterly
      Financial Data (Unaudited)





Following
is a summary of unaudited quarterly results for the years ended December 31,
2007 and 2006:





First
              
              
              Second
              
              
              Third
              
              
              Fourth(dollars
      in thousands except per share amounts)
              
              Quarter
              
              
              Quarter
              
              
              Quarter
              
              
              Quarter2007Total
      revenues
              
              $
              42,962
              
              
              $
              47,981
              
              
              $
              47,588
              
              
              $
              52,599Product
      revenues
              
              
              42,744
              
              
              
              47,630
              
              
              
              47,545
              
              
              
              52,599Cost
      of products sold
              
              
              12,416
              
              
              
              13,834
              
              
              
              14,194
              
              
              
              15,646Net
      income
              
              
              6,427
              
              
              
              7,662
              
              
              
              7,317
              
              
              
              5,477
              (1)Income
      per share of common stock - basic
              
              
              0.19
              
              
              
              0.23
              
              
              
              0.22
              
              
              
              0.16
              (1)Income
      per share of common stock - diluted
              
              
              0.19
              
              
              
              0.22
              
              
              
              0.21
              
              
              
              0.16
              (1)2006Total
      revenues
              
              $
              30,665
              
              
              $
              36,121
              
              
              $
              35,265
              
              
              $
              39,629Product
      revenues
              
              
              30,523
              
              
              
              35,684
              
              
              
              35,103
              
              
              
              39,337Cost
      of products sold
              
              
              8,981
              
              
              
              10,329
              
              
              
              10,524
              
              
              
              11,022Net
      income
              
              
              4,063
              
              
              
              5,108
              
              
              
              5,072
              
              
              
              6,226Income
      per share of common stock - basic
              
              
              0.13
              
              
              
              0.16
              
              
              
              0.15
              
              
              
              0.19Income
      per share of common stock - diluted
              
              
              0.12
              
              
              
              0.15
              
              
              
              0.15
              
              
              
              0.18




(1)
            Includes
      settlement of a non-product related
claim.