**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, 2006


**o** **TRANSITION
          REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
          1934:**For the transition period from __________ to
          __________




Commission
      file number: 0-19890





**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 o .





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 o .
      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 o .




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, or a non-accelerated filer. See definition of accelerated
      filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filerþ
            Accelerated
                filero
            Non-accelerated
                filero




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




Yes o .
      No þ .




The
      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, 2006 was approximately **$1,013,785,000** .




The
      number of shares of registrant’s Common Stock outstanding as of February 26,
      2007: 33,783,000 **.**












Tableof
                Contents





PART
                I
            
            PageItem
                1.
            Business
            3General
            3Technology
            3Products
            4Industry
                and Market Data
            5Marketing
                and Distribution
            6Tissue
                Procurement
            6Government
                Regulation
            7Research
                and Development
            9Patents,
                Proprietary Information &
                Trademarks
            10Competition
            10Employees
            11Item
                1A.
            Risk
                Factors and Forward-Looking Statements
            12Item
                1B.
            Unresolved
                Staff Comments
            18Item
                2.
            Properties
            18Item
                3.
            Legal
                Proceedings
            18Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            19PART
                IIItem
                5.
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            20Dividend
                PolicyItem
                6.
            Selected
                Financial Data
            21Item
                7.
            Management's
                Discussion and Analysis of Financial Condition and
                Results of Operations
            22Overview
            22Results
                of Operations
            23Liquidity
                and Capital Resources
            26Critical
                Accounting Policies / Estimates
            27Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            29Item
                8.
            Financial
                Statements and Supplementary Data
            29Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting and
                Financial Disclosure
            29Item
                9A.
            Controls
                and Procedures
            29Item
                9B.
            Other
                Information
            30PART
                IIIItem
                10.
            Directors,
                Executive Officers and Corporate
                Governance
            31Item
                11.
            Executive
                Compensation
            35Item
                12.
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            51Item
                13.
            Certain
                Relationships and Related Transactions, and Director
                Independence
            52Item
                14.
            Principal
                Accounting Fees and Services
            52PART
                IVItem
                15.
            Exhibits,
                Financial Statement Schedules
            54


2
 *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.”





Item1.
            Business





**GENERAL**





We
      develop and market tissue-based products for use in reconstructive, orthopedic
      and urogynecologic surgical procedures to repair soft tissue defects. Our core
      technology produces a unique regenerative tissue matrix that creates an ideal
      biological framework for organizing the same tissue regeneration process that
      the body undergoes to repair worn or damaged tissue. Our current products
      include: AlloDerm®, for plastic reconstructive, general surgical, burn and
      periodontal procedures; Cymetra®, a particulate form of AlloDerm suitable for
      injection; GraftJacket®, for orthopedic applications and lower extremity wounds;
      AlloCraftTMDBM, for bone grafting procedures; and Repliform®, for urogynecologic
      surgical procedures. Our research and development initiatives include programs
      designed to extend the use of our current regenerative tissue matrix products
      into new surgical applications, as well as leveraging our core technology to
      other tissues, including tissues recovered from non-human sources.




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.





**TISSUE
      MATRIX TECHNOLOGY**





Our
      core
      tissue matrix technology preserves biochemical components and biomechanical
      strength, producing a unique regenerative tissue matrix that creates an ideal
      biological framework for organizing the same tissue regeneration process that
      the body undergoes to repair worn or damaged tissue.





Our
      tissue matrix technology removes antigenic cells from biological tissue to
      minimize the potential for specific rejection of the transplanted tissue. Our
      tissue matrix technology also:




·
            stabilizes
                the tissue matrix by preserving its structure and biochemical properties
                that allow for cell repopulation; and


·
            allows
                for extended storage by freeze-drying the tissue matrix without
                significant ice crystal damage, thus avoiding a non-specific inflammatory
                response upon transplantation.





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. One method of replacing large sections
      of
      the tissue matrix is through transplantation.





Soft
      tissue transplants from one part of the patient’s body to another (“autograft”)
      generally are successful. However, the procedure results in the creation of
      an
      additional wound site. Historically, the ability to transplant tissue from
      one
      person to another (“allograft”) has been limited because the donor’s cells
      within the transplanted tissue may trigger an immune response, resulting in
      rejection of the transplanted tissue. We believe that other processing methods
      to remove cells from soft tissue grafts before performing an allograft
      transplant may result in disruption or damage of the tissue matrix, causing
      an
      inflammatory response and rejection of the tissue following transplantation.
      We
      believe our tissue matrix technology offers the following important
      benefits:





***Natural
      Tissue Regeneration.*** Tissue
      grafts produced with our tissue matrix technology retain the structural and
      biochemical properties that support normal cell repopulation and normal soft
      tissue regeneration. In addition, in our pre-clinical research studies with
      dermis and other soft tissues processed using our technology, we have shown
      that
      such tissues can be remodeled by the recipient’s own cells and eventually become
      the recipient’s own tissue.


3
 *Table
          of Contents*


***Multiple
      Potential Applications.*** We
      believe that our tissue matrix technology has the potential to generate
      additional products with multiple clinical applications. In addition to the
      current commercial applications of our proprietary tissue products, we believe
      that these products may provide additional benefits in other clinical
      applications.





***Safety*** *.* Our
      processed human tissue products have a proven safety record of over ten years
      with almost one million tissue grafts processed and distributed to date. There
      are several elements to the safety profile of our tissue products, some of
      which
      are related to donor eligibility, including donor blood testing for infectious
      diseases. In addition, LifeCell’s tissue processing adds significantly to the
      safety profile of the product, including substantially reducing the potential
      for viral contamination. LifeCell’s acellular process and patented preservation
      methodology have been shown in testing to reduce certain viruses by more than
      99%. In addition to viral safety, both incoming tissue and final products are
      screened and are negative for microbial pathogens.




***Shelf
      Life.*** Our
      tissue matrix technology allows extended storage and ease of transportation
      of
      products. AlloDerm, Repliform, Cymetra and GraftJacket can be stored at normal
      refrigerated temperatures for up to two years. In contrast, skin allografts
      typically require low temperature (-80°C) storage and shipping with dry ice.
      AlloCraft DBM can be stored at ambient temperature for up to two
      years.





***Compatibility
      with Other Technologies.*** Human
      tissues processed with our technology retain important biochemical components,
      such as collagens, proteoglycans and hyaluronic acid. These biochemical
      components bind growth factors and interact with cells that are involved in
      tissue regeneration. Therefore, we believe it may be possible in the future
      to
      use our technology to develop tissue-based delivery vehicles for these factors
      and cells.





**PRODUCTS**





**Reconstructive
      Tissue Products**





***AlloDerm
      Regenerative Tissue Matrix.*** AlloDerm
      is donated human cadaveric skin that has been processed with our tissue matrix
      technology. AlloDerm supports the repair of damaged tissue by providing a
      foundation for regeneration of normal human soft tissue. Following transplant,
      AlloDerm is revascularized (i.e., blood supply is restored) 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 autograft tissue, synthetic materials and other biologic 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.





In
      these
      procedures, alternatives to using processed human cadaveric skin include
      autologous tissue, synthetic and biologic materials. We believe the use of
      autologous 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 believe the disadvantages of using synthetic materials and certain
      other biologic materials include their susceptibility to infection,
      encapsulation (scarring), movement away from the transplanted area (mobility),
      and erosion through the skin (extrusion). Some biologic materials may include
      bovine collagen, which requires patient sensitivity testing.





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 general surgical procedures, head and neck reconstructive
      procedures and 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 autologous tissue, synthetic
      materials and other biologic materials because of its functional, biomechanical
      and regenerative properties. AlloDerm is also used in cancer reconstruction
      procedures, including breast reconstruction following mastectomy
      procedures.


4
 *Table
          of Contents*


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 and AlloDerm
      GBR®
for use in periodontal applications in the United States and certain
      international markets.





***Cymetra.*** Cymetra
      is made from AlloDerm sheets that are micronized at a low temperature to create
      a particulate form of AlloDerm suitable for delivery through a canula. This
      form
      allows a non-surgical alternative in reconstructive plastic and other procedures
      to replace damaged or inadequate integumental tissue, such as correction of
      soft
      tissue defects and depressed scars or to replace integumental tissue lost
      through atrophy. Cymetra does not require patient sensitivity testing and like
      AlloDerm, allows the regeneration of normal human soft tissue.





**Orthopedic
      Tissue Repair Products**





***GraftJacket
      Regenerative Tissue Matrix.*** GraftJacket
      is the trade name for our proprietary 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 tissue-based bone-grafting product that combines
      demineralized bone and micronized acellular 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 Repair Products**





***Repliform
      Regenerative Tissue Matrix.*** Repliform
      is the trade name for our proprietary 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.





Some
      forms of female stress urinary incontinence can be treated with a sling
      procedure, which involves lifting and supporting the bladder neck to provide
      urethral support and compression. Repliform is used by surgeons as the sling
      material in these types of procedures.





Cystocele,
      rectocele and other pelvic floor conditions occur frequently in women and
      require soft tissue surgical repair. These conditions are particularly common
      after multiple vaginal births and cause significant discomfort to the patient.
      Repliform is also used by surgeons to reinforce the pelvic floor.





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.


5
 *Table
          of Contents*




Product
                / Clinical Applications
            
            Targeted
                U.S. Annual Procedures (1)
            
            Revenue
                per Procedure (2)AlloDerm
              Head
                and neck
              Abdominal
                wall
              Breast
                reconstruction
            
            70,000
              125,000
              60,000
            
            $
                200 - $ 800
              $2,500
                - $9,000
              $1,500
                - $3,000Repliform
              Bladder
                sling
              Pelvic
                floor reconstruction
            
            100,000
              55,000
            
            $350
                - $ 650
              $650
                - $1,300GraftJacket
              Tendon
                and ligament repair
              Lower
                extremity wounds
            
            220,000
              200,000
            
            $300
                - $1,000
              $400
                - $ 550AlloCraft
                DBM
              Spine
                procedures
            
            200,000
            
            $150
                - $650




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 eachof
                  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. Our direct sales and marketing representatives also market Cymetra
      to hospital-based surgeons. As of December 31, 2006, we had a sales, marketing
      and customer service staff of 92 persons, including 71 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
      regenerative 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 and AlloDerm GBR for use in
      periodontal applications. Boston Scientific Corporation is our exclusive
      worldwide sales and marketing agent for Repliform for use in urogynecology.
      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.





**TISSUE
      PROCUREMENT**





We
      receive donated human cadaveric tissue from tissue banks and organ procurement
      organizations in the United States that 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.




In
      2006,
      we obtained all of our donated human cadaveric tissue from approximately 50
      tissue banks and organ procurement organizations. We believe that we have
      established adequate sources of donated human tissue to satisfy the expected
      demand for our products in the foreseeable future. To date, we have not
      experienced any material difficulty in procuring adequate donated cadaveric
      tissue.


6
 *Table
          of Contents*


**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 tissue products are subject to
      regulation by the U.S. Food and Drug Administration (“FDA”). The FDA administers
      the Federal Food, Drug and Cosmetics 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.





The
      FDA
      does not apply a single regulatory scheme to human tissues and products derived
      from human tissue. A product containing human tissue may be regulated solely
      as
      a human cellular and tissue-based product, which the FDA refers to as an
      HCT/P’s, or it may also be subject to regulation as a medical device or
      biologic. We have determined that AlloDerm, Cymetra, GraftJacket and Repliform
      are HCT/P’s not subject to additional regulation as a medical device or
      biologic. AlloCraft DBM is regulated as an HCT/P and as a medical device. We
      do
      not have any products subject to regulation as biologics.





A
      fundamental difference in the treatment of products under these various
      classifications is that the FDA generally permits products regulated solely
      as
      HCT/P’s to be commercially distributed without pre-market submission
      requirements. In contrast, human tissue products that are also regulated as
      medical devices or biologics usually require FDA pre-market clearance or
      approval. The process of obtaining pre-market clearance or approval for a
      medical device or biologic can be expensive, lengthy and uncertain.





Whether
      regulated solely as an HCT/P, or also as a medical device or biologic, 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;
              •  
                injunctions;
              •  
                civil penalties;
              •  
                recall or seizure of our products;
            
            •  
                total or partial suspension of production;
              •  
                refusal of the government to authorize the marketing of new products
                or to
                allow us to enter into supply contracts; and
              •  
                criminal prosecution.





**FDA’s
      Human Tissue Regulation**





The
      FDA’s
      regulatory requirements for human tissue products are complex and constantly
      evolving. In 2001, the FDA issued a final rule requiring manufacturers of human
      cellular and tissue-based products, which the FDA refers to as "HCT/P’s", 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). 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.





The
      FDA
      final regulations 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
      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 "pre-market 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.


7
 *Table
          of Contents*


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 pre-market 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. As part of the PMA application review,
      the FDA will inspect the manufacturer’s facilities for compliance with the
      Quality System Regulation (“QSR”), which includes elaborate testing, control,
      documentation and other quality assurance procedures. Upon submission, the
      FDA
      determines if the PMA application is sufficient to permit a substantive review
      and, if so, the PMA application is accepted for filing. The FDA then commences
      an in-depth review of the PMA application, which we believe typically takes
      one
      to three years, but which may take longer. Even after approval of a PMA
      application, a new PMA application or a supplemental filing to an existing
      PMA
      is required in the event of a modification to the device, its labeling or its
      manufacturing process affecting the safety or efficacy of the device.




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.





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.





**FDA
      Status of Our Products**





Companies
      are permitted to make their own initial determination regarding whether their
      products meet the FDA’s test for determining eligibility for regulation solely
      as HCT/P’s. Such determinations are subject to FDA review at any time. We
      believe that our AlloDerm, Cymetra, 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. Nevertheless, because
      we
      believe our products meet the definition of an HCT/P, we must comply with the
      FDA’s donor screening, infectious disease testing, record maintenance,
      establishment registration, product listing and GTP requirements. AlloCraft
      DBM
      is regulated as an HCT/P and medical device and received 510(k) clearance from
      the FDA in December 2005.





In
      January 2007, we received 510(k) clearance from the FDA for a regenerative
      human
      tissue matrix product intended as a dura mater substitute. We have not commenced
      commercial distribution of the dura mater substitute product. In February 2007,
      we submitted a 510(k) pre-market application to the FDA for an animal-based
      regenerative tissue product that we developed. We plan to commence clinical
      evaluation of this product once clearance is received from the FDA. See
“Research and Development.”





**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.


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**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.





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. 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. Other countries have
      no
      applicable regulations regarding the import or sale of products similar to
      our
      products, creating uncertainty as to what standards we may be required to
      meet.





A
      limited
      amount of our human tissue products are currently distributed in several
      countries internationally. Additionally, we may pursue clearance to distribute
      our 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. 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. 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
      tissue in order to develop biosurgery products that fulfill unmet clinical
      needs. Our strategy balances our investment in research among short-, mid-
      and
      long-term programs aimed at enhancing our current products and ensuring a future
      stream of innovative new products. Our research and development initiatives
      include programs designed to extend the use of our current regenerative tissue
      matrix products into new surgical applications, as well as leveraging our core
      technology to other tissues, including tissues recovered from non-human sources.
      A significant amount of our research and development effort is focused on the
      development of an animal-based version of our regenerative tissue product.
      In
      February 2007, we submitted a 510(k) pre-market application to the FDA for
      our
      animal-based regenerative tissue product and we are preparing to commence
      clinical evaluation once clearance is received from the FDA. Assuming we receive
      FDA clearance in the first half of 2007, we are targeting a full commercial
      launch of our animal-based regenerative tissue product in early 2008.
      Additionally, we have a variety of research and development 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 regenerative tissue matrix. 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
      2006, 2005 and 2004 for all programs were approximately $16.5 million, $10.3
      million and $7.9 million, respectively. Research grant revenues recognized
      during 2006, 2005 and 2004 were $1.0 million, $1.1 million and $2.4 million,
      respectively. See “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations — Liquidity and Capital Resources.”





At
      December 31, 2006, we had approximately $853,000 of approved grant funding
      available to fund future research. We continue to seek additional grant funding
      for our research programs. Generally, we have the right to patent any
      technologies developed from government grants and contract funding, subject
      to
      the United States government’s right to receive a royalty-free license for
      federal government use and to require licensing to others in certain
      circumstances.


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**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.





Three
      primary families of patents and patent applications protect our technology.
      Two
      United States patents cover methods of producing our tissue-based products
      and
      products made by some of these methods. Nine additional United States patents
      and ten pending United States patent applications supplement these patents and
      cover methods and apparatus for preparation 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.





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 commercial acellular dermal graft product; for AlloDerm
      GBR
      for use in periodontal applications; Micronized AlloDerm, the particulate form
      of AlloDerm; for Cymetra, the brand name for micronized AlloDerm; and for
      Repliform, the version of AlloDerm for urology and gynecology. GraftJacket
      is a
      registered trademark of Wright Medical Group. AlloCraft DBM is a 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 regenerative
      tissue products compete with autologous tissue and various commercially
      available products made from synthetic materials or biologic materials of human
      or animal tissue origin.


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          of Contents*


Our
      AlloDerm, Repliform and GraftJacket regenerative tissue 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. Recently, two tissue processors, Musculoskeletal Transplant
      Foundation (“MTF”) and Tutogen, commenced distribution of human tissue-based
      soft tissue repair products intended to compete with our regenerative tissue
      products. MTF distributes one of its products through Synthes, Inc, and 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.





**EMPLOYEES**





At
      December 31, 2006, we had 335 employees, of which 92 were employed in sales,
      marketing and customer service; 149 in production and quality assurance; 60
      in
      research and development; and 34 in administration and accounting.


11
 *Table
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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, 2006, 2005 and 2004, revenues from the distribution
      of AlloDerm represented approximately 85%, 79% and 72%, 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 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.




***Government
      regulations could adversely affect the marketing of our current products and
      the
      development and commercialization of products currently being developed by
      us.***





We
      have
      determined that our AlloDerm, Cymetra, 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. Our determination
      is
      limited to their current intended uses. In the future, we may wish to market
      our
      existing products for new intended uses. Based on these new uses, our products
      may also be regulated as medical devices or biologics, requiring pre-market
      clearance or approval and adherence to the FDA’s medical device or biologic
      regulations. Additionally, we intend to seek FDA approval for new products
      and
      have submitted a 510(k) pre-market application to the FDA in February 2007
      for
      our animal-based regenerative tissue product. The process of obtaining FDA
      clearance or approval could be expensive, lengthy and unpredictable.
      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. In addition, the
      FDA
      requires that medical devices be produced in accordance with the Quality System
      Regulation for medical devices. As a result, our manufacturing and compliance
      costs would increase and any such device products would be subject to more
      comprehensive development, testing, monitoring and validation standards. As
      a
      result, compliance with such standards could materially and adversely affect
      our
      financial condition and results of operations.





A
      few,
      but increasing number of states including Florida, California, Illinois, New
      York and Maryland, impose their own regulatory requirements on transplanted
      human tissue. We believe that we are in compliance with such regulations. There
      can be no assurance that the various states in which our products are sold
      will
      find that we are in compliance or will not impose additional regulatory
      requirements or marketing impediments on our products. Additionally, any
      disruption in our ability to market our current products would materially and
      adversely affect our revenues and cash flows.





***The
      FDA can impose civil and criminal sanctions and other penalties on us if we
      fail
      to comply with the stringent FDA regulations applicable to our tissue
      facilities.***





Tissue
      establishments must engage in:





·
            donor
                screening and infectious disease
                testing;


·
            Good
                Tissue Practice;


·
            stringent
                record keeping and reporting; and


·
            establishment
                registration and product
                listing.


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As
      a
      result, our involvement in the processing and distribution of human tissue
      for
      transplantation requires us to ensure that proper donor screening and infectious
      disease testing are done appropriately and conducted under strict procedures.
      In
      addition, we must maintain records, which are available for FDA inspectors
      documenting that the procedures were followed. The FDA has authority to conduct
      inspections of tissue establishments and to detain, recall or destroy tissue
      or
      order the cessation of manufacturing if the procedures were not followed or
      appropriate documentation is not available. Labeling and promotional activities
      are also subject to scrutiny by the FDA and, in certain instances, by the
      Federal Trade Commission. From time to time, the FDA may modify such
      requirements, imposing additional or different requirements, which may require
      us to alter our business methods. Failure to comply with any applicable FDA
      requirements could result in civil and criminal enforcement actions, as well
      as
      fines and other penalties that could increase our expenses and materially and
      adversely affect our results of operations and cash flows.




***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.





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





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.





***Our
      products are subject to recalls which could materially and adversely affect
      our
      revenues and results of operations.***





Whether
      regulated solely as a HCT/P, or also as a medical device or a biologic product,
      once our products are on the market, they are subject to pervasive and
      continuing regulation by the FDA. If we fail to comply with such regulations,
      our products may be subject to voluntary or government-mandated recall. A recall
      could distract management’s attention and potentially harm our reputation with
      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.


13
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          of Contents*


***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
      defendants in several 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 approximately 50 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 the 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.***





There
      has
      recently been negative publicity concerning the use and method of obtaining
      donated human tissue that is used in medical procedures. This type of negative
      publicity 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.


14
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***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 regenerative
      tissue products compete with autologous tissue and various commercially
      available products made from synthetic materials or biologic materials of human
      or animal tissue origin.




Our
      AlloDerm, Repliform and GraftJacket regenerative tissue products compete with
      synthetic surgical mesh products marketed by large medical device companies
      such
      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. Recently, two tissue processors, Musculoskeletal Transplant
      Foundation (“MTF”) and Tutogen, commenced distribution of human tissue-based
      soft tissue repair products intended to compete with our regenerative tissue
      products. MTF distributes one of its products through Synthes, Inc., and Tutogen
      distributes its products through C.R. Bard and Mentor.




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.


15
 *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
      some of our revenues.***





Our
      independent sales and marketing agents and distributors generated 15% of our
      total product revenue in the year ended December 31, 2006. Boston Scientific
      Corporation, our exclusive worldwide sales and marketing agent for Repliform,
      and Wright Medical Group, our exclusive distributor for GraftJacket, each
      represented 6% of our total product revenues 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, 2006.





If
      any of
      our independent sales and marketing agents or distributors fails to adequately
      market our products, our revenues could be materially and 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.





***The
      United States government’s rights to use technology developed by us with
      government grant funds could limit our intellectual property
      rights.***





Certain
      of our research and development activities are funded through grants from the
      United States government. Generally, we have the right to patent any
      technologies developed from government grants and contract funding, subject
      to
      the United States government’s right to receive a royalty-free license for
      federal government use and to require licensing to others in certain
      circumstances. We are free to commercially exploit those government funded
      technologies and may assert our intellectual property rights to seek to block
      other non-government users thereof, but we cannot assure that we can
      successfully do so.





***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 products. Although we have conducted pre-clinical
      studies on many of our products under development that indicate that the product
      may be feasible for a particular application, results obtained from expanded
      studies may not be consistent with earlier results, or be sufficient for us
      to
      obtain any required regulatory approvals or clearances. The completion of the
      development of any of our 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; and


·
            the
                possibility of significantly higher development costs than
                anticipated.





Moreover,
      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, our future revenues
      and
      profitability could be materially and adversely affected.


16
 *Table
          of Contents*


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





We
      intend
      to expend funds for our ongoing research and product development activities.
      We
      may need additional capital, depending on:





·
            the
                number and types of research and product development programs undertaken;
                and


·
            the
                progress of our research and product development efforts and the
                associated costs relating to obtaining regulatory approvals, if any,
                that
                may be needed to commercialize some of our products currently under
                development.





We
      believe that our current cash resources, together with anticipated cash from
      ongoing operating activities, committed research grant funding and remaining
      availability under our credit facility, 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;


·
            product
                recalls;


·
            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;


·
            our
                ability to increase market penetration of our current products and
                to
                develop and commercialize new
                products;


·
            changes
                in third-party reimbursement
                practices;


·
            the
                failure of independent sales and marketing agents and distributors
                to
                adequately promote, market and distribute our
                products;


·
            our
                inability to protect our intellectual
                property;


·
            the
                effects of competition; and


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


17
 *Table
          of Contents*


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.





**SUPERVISION
      AND REGULATION - SECURITIES AND EXCHANGE COMMISSION**





We
      maintain a website at www.lifecell.c o m.
      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 2010 and contains two five-year renewal options. We believe that our
      current facility will be sufficient to meet our anticipated needs for the next
      several years.





Item
                3.
            Legal
                Proceedings





The
      previously reported complaint, filed in November 2003 in the Circuit Court
      of
      Fairfax, Virginia captioned Sun Hee Jung v. Yongsook Victoria Suh, M.D.,
      Victoria Plastic Surgery Center, Inc. and LifeCell Corporation, was dismissed
      without prejudice in December 2004 when the plaintiff elected to take a
      voluntary non-suit in this action. The plaintiff had six months from the date
      of
      the Order of Non-Suit to re-file the case, otherwise the case would have been
      dismissed with prejudice and forever barred. The complaint was re-filed in
      May
      2005. The re-filed case was dismissed with prejudice by the Court and a final
      judgment order was entered for LifeCell in June 2006. In August 2006, the
      plaintiff filed a Petition for Appeal with the Supreme Court of Virginia that
      was denied in December 2006.





In
      September 2005, we recalled certain human tissue-based products because the
      organization that recovered the tissue, Biomedical Tissue Services, Ltd.
      (“BTS”), did not follow 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 have not received any donor
      tissue from BTS after September 2005.


18
 *Table
          of Contents*


We
      were
      named, along with BTS and many other defendants, in several 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 were 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 LifeCell products
      (“Watling”).





In
      addition, two other types of class action were filed in Federal Court in
      Rochester, New York (“Kennedy-McInnis” and “Graves”) that seek compensatory
      damages from BTS and all processing defendants, including LifeCell that received
      and used BTS-originated tissue. Plaintiffs are the next-of-kin of the donors
      who
      did not authorize BTS to remove the tissue at issue. Those cases have also
      been
      transferred to the MDL and are presently the subject of motions to dismiss.





There
      has
      also been a series of 17 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 four cases that were filed in the State Court in New
      Jersey, all of the individual cases have been or are in the process of being
      transferred to the MDL.





We
      intend
      to vigorously defend each case. We will pursue dismissal of all class action
      cases that do not identify 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, that 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 we deem 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.




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





None.


19
 *Table
          of Contents*


PART
      II




Item
                5.
            Market
                for 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 26, 2007, the last reported sale price for our common stock on the
      National Market was $24.08 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
                Range2006
            
            2005High
            
            Low
            
            High
            
            LowFirst
                Quarter
            
            $
            24.05
            
            $
            18.09
            
            $
            10.37
            
            $
            8.20Second
                Quarter
            
            
            31.98
            
            
            20.95
            
            
            16.49
            
            
            8.52Third
                Quarter
            
            
            33.00
            
            
            24.78
            
            
            25.57
            
            
            15.30Fourth
                Quarter
            
            
            33.39
            
            
            20.94
            
            
            22.70
            
            
            15.11





As
      of
      February 26, 2007, there were 269
      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, 2006, 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, 2001, 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.*








**Dividend
      Policy**





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.




20
 *Table
          of Contents*




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, 2006, 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)*
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Operating
                Results:Revenues:Product
                revenues
            
            $
            140,647
            
            $
            93,326
            
            $
            58,751
            
            $
            38,577
            
            $
            32,935Research
                grant revenues
            
            
            1,033
            
            
            1,072
            
            
            2,376
            
            
            1,672
            
            
            1,493Total
                revenues
            
            
            141,680
            
            
            94,398
            
            
            61,127
            
            
            40,249
            
            
            34,428Costs
                and expenses:Costs
                of products sold
            
            
            40,856
            
            
            29,205
            
            
            17,755
            
            
            12,241
            
            
            10,134Research
                and development
            
            
            16,500
            
            
            10,349
            
            
            7,860
            
            
            5,396
            
            
            5,015General
                and administrative
            
            
            18,618
            
            
            11,945
            
            
            8,214
            
            
            5,594
            
            
            4,590Selling
                and marketing
            
            
            32,376
            
            
            24,736
            
            
            20,311
            
            
            14,940
            
            
            13,288Total
                costs and expenses
            
            
            108,350
            
            
            76,235
            
            
            54,140
            
            
            38,171
            
            
            33,027Income
                from operations
            
            
            33,330
            
            
            18,163
            
            
            6,987
            
            
            2,078
            
            
            1,401Interest
                and other income (expense),net
            
            
            2,793
            
            
            1,013
            
            
            222
            
            
            (28
            )
            
            (129
            )Income
                before income taxes
            
            
            36,123
            
            
            19,176
            
            
            7,209
            
            
            2,050
            
            
            1,272Income
                tax provision (benefit)
            
            
            15,654
            
            
            7,132
            
            
            25
            
            
            (16,622
            )
            
            (157
            )Net
                income
            
            
            20,469
            
            $
            12,044
            
            $
            7,184
            
            $
            18,672
            
            $
            1,429Net
                income per common share:Basic
            
            $
            0.62
            
            $
            0.39
            
            $
            0.26
            
            $
            0.85
            
            $
            0.07Diluted
            
            $
            0.60
            
            $
            0.36
            
            $
            0.22
            
            $
            0.70
            
            $
            0.06Shares
                used in computing net income per common share:Basic
            
            
            32,769
            
            
            30,877
            
            
            27,553
            
            
            22,094
            
            
            21,176Diluted
            
            
            34,007
            
            
            33,348
            
            
            31,974
            
            
            26,632
            
            
            24,696




As
                of December 31,*(In
                thousands, except for per share data)*
            
            2006
            
            2005
            
            2004
            
            2003
            
            2002Balance
                Sheet:Cash
                and cash equivalents
            
            $
            10,000
            
            $
            21,272
            
            $
            10,084
            
            $
            7,387
            
            $
            5,202Investments
            
            
            67,846
            
            
            26,795
            
            
            17,002
            
            
            11,133
            
            
            256Working
                capital
            
            
            94,711
            
            
            73,209
            
            
            38,911
            
            
            23,283
            
            
            11,466Total
                assets
            
            
            157,121
            
            
            106,998
            
            
            72,093
            
            
            58,273
            
            
            24,116Notes
                payable and term debt
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            863Common
                stock, subject to redemption
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            478Accumulated
                deficit
            
            
            (5,972
            )
            
            (26,441
            )
            
            (38,485
            )
            
            (45,669
            )
            
            (64,341
            )Total
                stockholders’ equity
            
            
            129,299
            
            
            92,070
            
            
            63,448
            
            
            52,379
            
            
            17,719


21
 *Table
          of Contents*





Item
                7.
            Management’s
                Discussion 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 and market tissue-based products for use in reconstructive, orthopedic
      and urogynecologic surgical procedures to repair soft tissue defects. Our core
      technology produces a unique regenerative tissue matrix that creates an ideal
      biological framework for organizing the same tissue regeneration process that
      the body undergoes to repair worn or damaged tissue. Our current products
      include: AlloDerm, for plastic reconstructive, general surgical, burn and
      periodontal procedures; Cymetra, a particulate form of AlloDerm suitable for
      injection; GraftJacket, for orthopedic applications and lower extremity wounds;
      AlloCraftDBM, for bone grafting procedures; and Repliform, for urogynecologic
      surgical procedures. Our research and development initiatives include programs
      designed to extend the use of our currently marketed regenerative tissue matrix
      products into new surgical applications, as well as leveraging our core
      technology to other tissues, including tissues recovered from non-human
      sources.




**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 2007, we expect our revenues to
      increase as we 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 2007, we expect cost
      of
      products sold to decrease slightly as a percentage of total revenue due to
      cost
      efficiencies achieved through increased processing volume.





***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 of pre-clinical and clinical studies and other product development related
      costs. We expense all R&D costs in the period incurred. Our R&D
      initiatives include programs designed to extend the use of our current
      regenerative tissue matrix products into new surgical applications, as well
      as
      leveraging our core technology to other tissues, including tissues recovered
      from non-human sources. R&D expenditures are expected to remain at
      approximately the same percentage of revenue as in 2006.





***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 2007, 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 2007, we expect sales and marketing expenses to
      increase due to the expansion of our sales force by 18 at the end of 2006,
      and
      marketing costs associated with preparation for the anticipated product launch
      early in 2008 of our animal-based regenerative tissue product.


22
 *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.





%
                Increase12
                Months Ended
            
            
            
            %
                of Total Revenue
            
            (Decrease)2006
            
            2005vs.
            
            vs.2006
            
            2005
            
            2004
            
            2006
            
            2005
            
            2004
            
            2005
            
            2004**Net
                Revenues:**Reconstructive
                revenues
            
            $
            122,802
            
            $
            78,394
            
            $
            46,028
            
            
            87
            %
            
            83
            %
            
            75
            %
            
            57
            %
            
            70
            %Orthopedic
                revenues
            
            
            9,695
            
            
            7,785
            
            
            5,885
            
            
            7
            %
            
            8
            %
            
            10
            %
            
            25
            %
            
            32
            %Urogynecologic
                revenues
            
            
            8,150
            
            
            7,147
            
            
            6,838
            
            
            6
            %
            
            8
            %
            
            11
            %
            
            14
            %
            
            5
            %Product
                Revenues
            
            
            140,647
            
            
            93,326
            
            
            58,751
            
            
            99
            %
            
            99
            %
            
            96
            %
            
            51
            %
            
            59
            %Research
                Grant Revenues
            
            
            1,033
            
            
            1,072
            
            
            2,376
            
            
            1
            %
            
            1
            %
            
            4
            %
            
            -4
            %
            
            -55
            %Total
                Net Revenues
            
            
            141,680
            
            
            94,398
            
            
            61,127
            
            
            100
            %
            
            100
            %
            
            100
            %
            
            50
            %
            
            54
            %**Costs
                and Expenses:**Cost
                of Products Sold
            
            
            40,856
            
            
            29,205
            
            
            17,755
            
            
            29
            %
            
            31
            %
            
            29
            %
            
            40
            %
            
            64
            %Research
                and Development
            
            
            16,500
            
            
            10,349
            
            
            7,860
            
            
            12
            %
            
            11
            %
            
            13
            %
            
            59
            %
            
            32
            %General
                and Administrative
            
            
            18,618
            
            
            11,945
            
            
            8,214
            
            
            13
            %
            
            13
            %
            
            13
            %
            
            56
            %
            
            45
            %Selling
                and Marketing
            
            
            32,376
            
            
            24,736
            
            
            20,311
            
            
            23
            %
            
            26
            %
            
            33
            %
            
            31
            %
            
            22
            %Total
                Costs and Expenses
            
            
            108,350
            
            
            76,235
            
            
            54,140
            
            
            76
            %
            
            81
            %
            
            89
            %
            
            42
            %
            
            41
            %**Income
                from Operations**
            
            
            33,330
            
            
            18,163
            
            
            6,987
            
            
            24
            %
            
            19
            %
            
            11
            %
            
            84
            %
            
            160
            %





**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.


23
 *Table
          of Contents*


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***





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. We elected the modified
      prospective transition method as provided by SFAS 123R and, accordingly, prior
      year results have not been restated. Stock-based compensation expense recognized
      under SFAS 123R for the year ended December 31, 2006 was $8.6 million. 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, 2006*(dollars
                in thousands)*
            
            Dollars
            
            %
                of revenueCost
                of products sold
            
            $
            1,476
            
            
            1
            %Research
                and development
            
            
            2,015
            
            
            1
            %General
                and administrative
            
            
            3,761
            
            
            3
            %Selling
                and marketing
            
            
            1,363
            
            
            1
            %Total
                stock-based compensation
            
            $
            8,615
            
            
            6
            %





At
      December 31, 2006, there was $14.5 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 1.7
      years.





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: (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: (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: (i) higher 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) an increase in 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. The increase in agent fees resulted from an increase in
      revenue generated through our independent sales and marketing
      agents.




***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.


24
 *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. We paid estimated federal alternative minimum taxes and state income
      taxes of $870,000 in 2006 and $525,000 in 2005. In the first half of 2007,
      we
      expect to utilize all available net operating loss and tax credit carry
      forwards, and accordingly will be required to pay regular federal income taxes
      for the balance of the year.





**Years
      Ended December 31, 2005 and 2004**





***Revenues***





Total
      revenues for the year ended December 31, 2005 increased by $33.3 million, or
      54%
      to $94.4 million compared to $61.1 million for the same period in 2004. The
      increase was attributable to a 59% increase in product revenues to $93.3 million
      in the current period as compared to $58.7 million in the prior
      year.





Revenues
      generated from the use of our products in reconstructive surgical procedures
      increased by $32.4 million, or 70% to $78.4 million in the year ended December
      31, 2005 compared to $46.0 million in 2004. The growth was primarily driven
      by
      increased surgeon demand for AlloDerm in complex hernia repair procedures and
      breast reconstruction procedures. AlloDerm revenues increased 74% to $73.8
      million in the year ended December 31, 2005 compared to $42.5 million in 2004.





Orthopedic
      product revenue grew by $1.9 million or 32% to $7.8 million in 2005 from $5.9
      million in 2004. This revenue growth resulted from increased demand for our
      GraftJacket products. GraftJacket revenues were $6.3 million in 2005 compared
      to
      $4.1 million in 2004.





Revenues
      generated from the use of our Repliform product in urogynecologic surgical
      procedures increased 5% to $7.1 million in the year ended December 31, 2005
      compared to $6.8 million for the same period in 2004. Demand for Repliform
      in
      pelvic floor repairs increased 20%, but the growth was partially offset by
      decreased use of Repliform for the treatment of stress urinary incontinence,
      which has been negatively affected by competition from synthetic alternatives.




We
      utilize independent sales and marketing agents and distributors to supplement
      our direct sales organization in certain markets. Our independent sales and
      marketing agents and distributors generated 20% of our total product revenue
      in
      the year ended December 31, 2005 and 27% in 2004. Boston Scientific and Wright
      Medical Group represented 8% and 7%, respectively, of our total product revenues
      in 2005 compared to 12% and 7%, respectively, for the same period in 2004.
      No
      other individual independent sales agent or distributor generated more than
      5%
      of our total product revenues in the year ended December 31, 2005.





Research
      grant revenues decreased by $1.3 million, or 55% to $1.1 million in 2005
      compared to $2.4 million in 2004. This decrease was primarily due to a decrease
      in research spending on projects funded by approved research grants, since
      research grant revenues are recognized when qualified expenses are incurred.
      As
      of December 31, 2005, approximately $1.9 million of approved grant funding
      was
      available to fund future research and development expenses through the end
      of
      2006.





***Costs
      and expenses***





Cost
      of
      products sold for the year ended December 31, 2005 was $29.2 million, or 31%
      of
      product revenues, compared to cost of products sold of $17.8 million, or 30%
      of
      product revenue, for the same period in 2004. Cost of products sold includes
      the
      impact of a $1.4 million inventory write-off related to a voluntary product
      recall in the third quarter of 2005. The increase in cost of products sold
      as a
      percentage of revenue was primarily due to the inventory write-off and increased
      tissue recovery costs, partially offset by efficiencies gained through increased
      processing volume.





Total
      research and development expenses increased by $2.4 million, or 32% to $10.3
      million in the year ended December 31, 2005 compared to $7.9 million for the
      same period in 2004. The increase was primarily attributable to: (i) increased
      payroll and related expenses resulting from increases in the scientific and
      technical staff, (ii) increased outside testing and services, (iii) increased
      operating supplies and (iv) increased pre-clinical testing.


25
 *Table
          of Contents*


General
      and administrative expenses increased by $3.7 million, or 45% to $11.9 million
      in the year ended December 31, 2005 compared to $8.2 million for the same period
      in 2004. The increase was primarily attributable to: (i) increases in payroll
      and related expenses associated with increased headcount, annual merit increases
      and expense associated with the issuance of restricted stock, (ii) professional
      fees, (iii) depreciation expense associated with a new fully integrated computer
      software system and (iv) an increase in insurance expense.





Selling
      and marketing expenses increased by $4.4 million, or 22% to $24.7 million for
      the year ended December 31, 2005 compared to $20.3 million for the same period
      in 2004. The increase was primarily attributable to: (i) selling expenses,
      principally payroll, commissions and travel and entertainment resulting from
      the
      expansion of our direct sales force and increased revenues, (ii) payroll and
      related expenses associated with increased marketing headcount, annual merit
      increases and expense associated with the issuance of restricted stock, (iii)
      an
      increase in professional fees for market research, and (iv) an increase in
      expenses for medical education programs. Our independent sales and marketing
      agents are paid agency fees based on the amount of product revenues they
      generate for us. Selling and marketing expenses included agent fees of $3.4
      million and $4.0 million, respectively, in 2005 and 2004. Agency fees decreased
      because one of our independent sales and marketing agents changed from an agency
      relationship to a distributor relationship and no longer was paid agency
      fees.





***Interest
      and other income, net***





Interest
      and other income, net increased by $791,000, or 356% to $1.0 million in 2005
      compared to $222,000 in 2004. The net increase was due to an increase in
      interest income resulting from a higher level of average investments and higher
      rate of return.





***Income
      tax provision***





The
      provision for income taxes was $7.1 million in 2005 compared to $25,000 in
      2004.
      During 2005, we recognized a non-cash income tax benefit resulting from a change
      in the projected tax rate that future year tax benefits are expected to be
      recovered or settled. The favorable impact of the tax benefit on net income
      in
      2005 was $481,000. During 2004, we reduced the valuation allowance on our
      deferred tax assets to reflect net deferred tax assets that we believed were
      more likely than not of being realized. The reduction in the valuation allowance
      resulted in the recognition of a non-cash income tax benefit of $2.9 million
      in
      2004. Although we recorded a tax provision in 2005 and 2004, we were not
      required to pay regular federal income taxes due to the utilization of net
      operating loss carry forwards. We paid estimated federal alternative minimum
      taxes and state income taxes of $525,000 in 2005 and $258,000 in
      2004.





**LIQUIDITY
      AND CAPITAL RESOURCES**





At
      December 31, 2006, we had $10.0 million in cash and cash equivalents, $61.0
      million in short-term marketable securities and $6.9 million in long-term
      marketable securities. Working capital increased to $94.7 million at December
      31, 2006 from $73.0 million at December 31, 2005. The increase in working
      capital resulted primarily from increases in short-term investments, accounts
      receivable, and inventories, partially offset by a decrease in cash and cash
      equivalents, deferred tax assets and an increase in accounts payable and accrued
      liabilities.




We
      generated $35.6 million of positive cash flow from operating activities for
      the
      year ended December 31, 2006 compared to $18.8 million for the same period
      in
      2005. The positive cash flow from operating activities in 2006 was principally
      due to higher net income after adjustments for non-cash items and normal
      increases in accounts payable and accrued liabilities associated with our
      growth, partially offset by a planned increase in inventories to support
      anticipated growth, and an increase in receivables associated with higher
      revenue. 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. In the first half of 2007 we expect to utilize
      all remaining available net operating loss and tax credit carry forwards, and
      therefore will be required to pay regular federal income taxes for the balance
      of the year.





Capital
      expenditures were $13.8 million in 2006 compared to $3.6 million in 2005 and
      consisted primarily of leasehold improvements related to a facility expansion
      and the purchase of manufacturing and computer equipment.





Our
      financing activities generated $7.9 million for the year ended December 31,
      2006
      compared to $7.0 million for the same period in 2005. In 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. In 2005, the cash generated from financing activities resulted from
      cash proceeds received from the exercise of common stock options and
      warrants.


26
 *Table
          of Contents*


The
      following table reflects a summary of our contractual cash obligations as of
      December 31, 2006:





Payments
                Due by Period*(dollars
                in thousands)*
            
            Total
            
            Less
                than 1 year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            More
                than 5 yearsOperating
                leases
            
            $
            4,468
            
            $
            1,141
            
            $
            2,282
            
            $
            1,045
            
            $
            -Licensing
                agreement
            
            
            1,750
            
            
            250
            
            
            500
            
            
            500
            
            
            500Total
                contractual cash obligations
            
            $
            6,218
            
            $
            1,391
            
            $
            2,782
            
            $
            1,545
            
            $
            500




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 $7.4 million in 2007.





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.





**Inflation**





We
      do not
      believe that inflation has had a material impact on our results of operations
      for the years ended December 31, 2006, 2005 and 2004.





**CRITICALACCOUNTINGPOLICIES / 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 2007.


27
 *Table
          of Contents*


***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.





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
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
      Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and
      FASB Statement No. 3, or SFAS 154. SFAS 154 requires retrospective application
      to prior periods’ financial statements for changes in accounting principle,
      unless it is impracticable to determine either the period-specific effects
      or
      the cumulative effect of the change. SFAS 154 also requires that a change in
      depreciation, amortization, or depletion method for long-lived, non-financial
      assets be accounted for as a change in accounting estimate affected by a change
      in accounting principle. SFAS 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      The implementation of SFAS 154 on January 1, 2006 did not have a material impact
      on our results of operations, financial position or cash flows.




In
      November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1,
“The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1”), which provides guidance on determining when
      investments in certain debt and equity securities are considered impaired,
      whether that impairment is other-than-temporary, and on measuring such
      impairment loss. FSP 115-1 also includes accounting considerations subsequent
      to
      the recognition of an other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 is effective for reporting periods
      beginning after December 15, 2005. Our adoption of FSP 115-1 on January 1,
      2006
      did not have a material impact on our results of operations, financial position
      or cash flows.


28
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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. We expect the impact of adopting
      FIN 48 to be immaterial.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles and expands
      disclosures about fair value measurements. SFAS 157 does not require any new
      fair value measurements, but rather eliminates inconsistencies in guidance
      found
      in various prior accounting pronouncements. SFAS 157 is effective for fiscal
      years beginning after November 15, 2007 and interim periods within those fiscal
      years. The implementation of SFAS 157 is not expected to have a material impact
      on our results of operations, financial position or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
      provides guidance on the consideration of the effects of prior year
      misstatements in quantifying current year misstatements for the purpose of
      determining whether the current year’s financial statements are materially
      misstated. SAB 108 is effective for fiscal years ending after November 15,
      2006.
      The implementation of SAB 108 did not 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, 2006 or 2005.





Item
                8.
            Financial
                Statements 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.
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure




None.




29
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          of Contents*





Item
                9a.
            Controls
                and Procedures





**Evaluation
      of Disclosure Controls and Procedures**





During
      the fourth quarter of 2006, 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, 2006, 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, 2006.





Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers
      LLP, an independent registered accounting firm, as stated in their report which
      appears herein.





**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.




30
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PART
      III




Item10.
            Directors,
                Executive Officers and Corporate
                Governance




**Background
      of Directors**




The
      persons listed below served as our directors during the year ended December
      31,
      2006.




Nominee
            Age
            Position
                with the Company
            Director
                SincePaul
                G. Thomas
            51
            Chairman
                of the Board, President and Chief Executive Officer
            1998Michael
                E. Cahr (1)
            66
            Director
            1991David
                Fitzgerald (2) (3) (4)
            73
            Director
            2001James
                G. Foster (4) (5)
            60
            Director
            1995Michael
                R. Minogue (2)
            39
            Director
            2005Robert
                P. Roche, Jr. (3)
            51
            Director
            2005Martin
                P. Sutter (6)
            51
            Director
            2003




(1)  Chairman
      of the Audit Committee.


(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 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 Avanir Pharmaceuticals, a publicly traded
      NASDAQ company focused on biopharmaceutical drug discovery and development,
      and
      Innovative Spinal Technologies, Inc., a privately held medical technology
      company focused on developing minimally invasive treatments for spinal
      disorders.





***Michael
      E. Cahr.*** Mr.
      Cahr
      has been a director of LifeCell since July 1991. Mr. Cahr is currently 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.


31
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          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., a publicly traded
      NASDAQ company specializing in soft tissue surgical technology and Orthovita,
      Inc., a publicly traded NASDAQ 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., a publicly traded NASDAQ
      company specializing in soft tissue surgical technology and Intact Medical,
      a
      privately held company specializing in breast and other biopsy
      technology.





***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; EluSys Therapeutics, Inc., a privately held company developing
      therapeutic agents for the treatment of blood-borne pathogens and hematologic
      disorders; and BioForm Medical, Inc., a privately held company developing soft
      tissue augmentation products.





**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 seven of our 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/ .


32
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          of Contents*


***Audit
      Committee Financial Expert*** **.** The
      Board of Directors has determined that Michael E. Cahr is an “audit committee
      financial expert,” as such term is defined by the SEC. As noted above, Mr. Cahr,
      as well as the other members of the Audit Committee, has 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
            51Lisa
                N. Colleran
            Senior
                Vice President, Commercial Operations
            December
                2002
            49Bruce
                Lamb, Ph.D.
            Senior
                Vice President, Development, Regulatory Affairs and Quality
            April
                2005
            51Steven
                T. Sobieski
            Vice
                President, Finance and Administration & Chief Financial
                Officer
            June
                2000
            50




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




***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.


33
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          of Contents*


***Bruce
      Lamb, Ph.D.*** Dr. Lamb
      joined LifeCell in April 2005 as Senior Vice President, Development, Regulatory
      Affairs & Quality. 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,
      a privately held 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 2005, 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/ .


34
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          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
      2006 compensation, but some historical and forward-looking information is also
      provided to put 2006 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 three other most highly compensated “executive
      officers,” who are sometimes referred to in this section as our “named executive
      officers.” We note that the employment of one of our three other most highly
      compensated executive officers terminated in October 2006.





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
                biologic 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, 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,
      Regulatory Affairs and Quality.


35
 *Table
          of Contents*


In
      approaching new employment agreements for Mr. Thomas and other executive
      officers 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 generally used a 2-to-1 ratio for the
      grant
      of stock options and restricted stock awards with the intent to re-assess this
      ratio as the Company grows. As the Company’s growth is recent, we have not
      reviewed wealth and retirement accumulation as a result of employment with
      us,
      and we have only focused on fair compensation for the year in
      question.





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 19 peer group companies that we have selected with Radford’s assistance.
      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.





***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 executive 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.


36
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Based
      on
      all of the factors described above, including base salary (which historically
      lagged the marketplace), Company performance and individual performance reviews,
      in December 2005, effective for 2006, the Chief Executive Officer was granted
      a
      15% salary increase and the other named executive officers received, on average,
      a 5% increase. A similar process occurred in December 2006. Again, after
      reviewing first performance and then benchmarking data, the Committee granted
      the Chief Executive Officer and each of the other executive officers a salary
      increase of approximately 5% for 2007. We believe that our salary levels are
      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. For
      instance, the 2006 financial goals included target measures for product revenue,
      operating income and gross margin (before equity compensation). Non-financial
      goal measures include achieving various product development milestones,
      processing metrics and cost savings. Each goal is assigned a particular weighing
      in the overall bonus formula.





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. 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 2006,
      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 similarly situated companies, as reported by Radford, our
      historical practices and any contractual commitments that we have relating
      to
      executive bonuses.





The
      Company does 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.





***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 percentile blended with the market 50th percentile
      number of options irrespective of value. The Committee also considered
      comparable company data on the relationship of stock options and restricted
      stock granted to outstanding shares. 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 2005 and 2006
      for
      equity grants in January 2006 and 2007, respectively.


37
 *Table
          of Contents*


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. Stock
      options are believed to be a superior vehicle to encourage executives to focus
      on increasing stock price 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 2005 meeting, the Compensation Committee, in consultation with Radford,
      considered equity grants to be made effective January 2006. 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.





***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. Our agreements are double trigger
      change-in-control arrangements. 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 the Company 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
      the Company.





***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




38
 *Table
          of Contents*


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





The
      Compensation Committee Process





Compensation
      Committee meetings typically have included, for all or a portion of each
      meeting, a representative of Aon, 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.





**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 three 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, 2006.


**Summary
                Compensation Table**Name
                and principal position
            
            Year
            
            Salary
            
            Stock
                awards(1)
            
            Option
                awards(1)
            
            Non-equity
                incentive plan compensation
              ($)(2)
            
            All
                other compensation
              ($)
            
            Total
                ($)Paul
                G. Thomas
            
            
            2006
            
            $
            477,750
            
            $
            1,904,847
            (3)
            $
            304,255
            (3)
            $
            390,417
            
            $
            16,500
            (4)
            $
            3,093,769Chairman,
                President and
            
            
            2005
            
            $
            416,042
            
            $
            641,793
            (5)
            $
            264,702
            (3)
            $
            368,550
            
            $
            10,000
            (4)
            $
            1,701,087Chief
                Executive Officer
            
            
            2004
            
            $
            370,000
            
            $
            -
            
            $
            266,049
            (3)
            $
            250,000
            
            $
            -
            
            $
            886,049Steven
                T. Sobieski
            
            
            2006
            
            $
            246,850
            
            $
            337,298
            (3)
            $
            141,765
            (3)
            $
            112,490
            
            $
            -
            
            $
            838,403Vice
                President, Finance and Administration,
            
            
            2005
            
            $
            232,000
            
            $
            126,447
            (5)
            $
            96,990
            (3)
            $
            104,748
            
            $
            -
            
            $
            560,185Chief
                Financial Officer
            
            
            2004
            
            $
            222,000
            
            $
            -
            
            $
            147,043
            (3)
            $
            86,014
            
            $
            -
            
            $
            455,057Lisa
                N. Colleran
            
            
            2006
            
            $
            272,225
            
            $
            711,720
            (3)
            $
            131,423
            (3)
            $
            130,913
            
            $
            -
            
            $
            1,246,281Senior
                Vice President,
            
            
            2005
            
            $
            260,750
            
            $
            239,715
            (5)
            $
            97,825
            (3)
            $
            117,729
            
            $
            -
            
            $
            716,019Commercial
                Operations
            
            
            2004
            
            $
            232,400
            
            $
            -
            
            $
            98,093
            (3)
            $
            89,318
            
            $
            -
            
            $
            419,811Bruce
                S. Lamb, Ph.D.
            
            
            2006
            
            $
            246,050
            
            $
            25,087
            (3)
            $
            193,080
            (3)
            $
            88,578
            
            $
            -
            
            $
            552,795Senior
                Vice President, Development, Regulatory
            
            
            2005
            
            $
            176,250
            
            $
            -
            
            $
            119,968
            (3)
            $
            92,637
            
            $
            -
            
            $
            388,855Affairs
                and Quality
            
            
            2004
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Young
                C. McGuinn
            
            
            2006
            
            $
            186,750
            
            $
            66,240
            (3)
            $
            89,213
            (3)
            $
            -
            
            $
            -
            
            $
            342,203Vice
                President,
            
            
            2005
            
            $
            213,825
            
            $
            53,970
            (5)
            $
            162,925
            (3)
            $
            84,804
            
            $
            -
            
            $
            515,524Manufacturing
                Operations(6)
            
            
            2004
            
            $
            95,577
            
            $
            -
            
            $
            73,712
            (3)
            $
            34,526
            
            $
            -
            
            $
            203,815




39
 *Table
          of Contents*





(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 8 of our Financial
                Statements for the fiscal years ended December 31, 2006, 2005 and
                2004 for
                the assumptions used for valuing the expense under FAS
                123(R).


(2)
            Represents
                bonus paid for such fiscal year.


(3)
            These
                awards vest in four equal annual installments beginning one year
                after the
                date of grant.


(4)
            Includes
                $15,000 of car allowance paid by us in 2006 and $8,750 in 2005. The
                remaining amount represents our match on our 401(k)
                Plan.


(5)
            For
                Mr. Thomas, 67,913 restricted stock awards that vest in three equal
                annual
                installments beginning one year after the date of grant (July 20,
                2005),
                75,862 restricted stock awards that vest in full on December 31,
                2007 and
                113,739 restricted stock awards that vest on December 31, 2007 if
                certain
                product revenue and operations income targets are achieved by us
                for the
                fiscal year ending December 31, 2007; for Ms. Colleran, 21,341 shares
                vest
                in three equal annual installments beginning one year after the date
                of
                grant, 29,977 shares vest in full on December 31, 2007 and 44,966
                shares
                vest on December 31, 2007 if certain product revenue and operating
                income
                targets are achieved by us for the fiscal year ending December 31,
                2007;
                and for Ms. McGuinn and Mr. Sobieski, all of the restricted stock
                awards
                vest in three equal annual installments beginning one year after
                the date
                of grant.


(6)
            Ms.
                McGuinn's employment with us terminated in October
                2006.




**Plan-Based
      Awards**




**Option
      and Stock Award Grants in 2006**




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, 2006.





**Grants
                of Plan-Based Awards**Name
            
            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 (#)(2)
            
            Exercise
                or Base Price of Option Awards ($ per share)
            
            Grant
                Date Fair Value of Stock and Option AwardsPaul
                G. Thomas
            
            
            1/3/06
            
            
            12/14/05
            
            
            20,000
            
            
            
            
            
            
            
            $
            385,0001/3/06
            
            
            12/14/05
            
            
            
            
            
            35,000
            
            $
            19.25
            
            $
            447,230Steven
                T. Sobieski
            
            
            1/3/06
            
            
            12/14/05
            
            
            11,612
            
            
            
            
            
            
            
            $
            223,5311/3/06
            
            
            12/14/05
            
            
            
            
            
            22,576
            
            $
            19.25
            
            $
            288,476Lisa
                N. Colleran
            
            
            1/3/06
            
            
            12/14/05
            
            
            5,804
            
            
            
            
            
            
            
            $
            111,7271/3/06
            
            
            12/14/05
            
            
            
            
            
            10,964
            
            $
            19.25
            
            $
            140,098Bruce
                S. Lamb, Ph.D.
            
            
            1/3/06
            
            
            12/14/05
            
            
            5,256
            
            
            
            
            
            
            
            $
            101,1781/3/06
            
            
            12/14/05
            
            
            
            
            
            10,512
            
            $
            19.25
            
            $
            134,322Young
                C. McGuinn(3)
            
            
            1/3/06
            
            
            12/14/05
            
            
            5,288
            
            
            
            
            
            
            
            $
            101,7941/3/06
            
            
            12/14/05
            
            
            
            
            
            10,576
            
            $
            19.25
            
            $
            135,140





(1)
            In
                accordance with its normal practice, the Compensation Committee approved
                the grant of these awards effective on January 3, 2006 at a meeting of
                the
                Compensation Committee held on December 14,
                2005.


(2)
            These
                awards vest in four equal installments beginning one year after the
                date
                of grant.


(3)
            Ms.
                McGuinn's employment with us terminated in October
                2006.


40
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**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, 2006.




**Option
                Exercises and Stock Vested**Option
                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
            
            
            201,216
            
            $
            3,689,372
            
            
            22,637
            
            $
            608,030Steven
                T. Sobieski
            
            
            146,250
            
            $
            452,920
            
            
            16,666
            
            $
            447,649Lisa
                N. Colleran
            
            
            40,000
            
            $
            1,098,688
            
            
            7,113
            
            $
            191,055Bruce
                S. Lamb, Ph.D.
            
            
            -
            
            $
            -
            
            
            -
            
            $
            -Young
                C. McGuinn
            
            
            -
            
            $
            -
            
            
            7,113
            
            $
            191,055





(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.




**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, 2006.


41
 *Table
          of Contents*





**Outstanding
                Equity Awards at Fiscal Year-End**Option
                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
            
            
            13,504
            
            
            -
            
            $
            2.74
            
            
            12/22/1225,000
            
            
            25,000
            
            $
            5.27
            
            
            12/11/13-
            
            
            35,000
            
            $
            19.25
            
            
            01/02/16113,739
            
            $
            2,745,65945,276
            
            $
            1,092,96375,862
            
            $
            1,831,30920,000
            
            $
            482,800Steven
                  T. Sobieski
            
            
            18,750
            
            
            -
            
            $
            2.74
            
            
            12/22/12-
            
            
            8,775
            
            $
            5.27
            
            
            12/11/13-
            
            
            22,576
            
            $
            19.25
            
            
            01/02/1633,334
            
            $
            804,68311,612
            
            $
            280,314Lisa
                N. Colleran
            
            
            60,000
            
            
            -
            
            $
            2.74
            
            
            12/22/1237,500
            
            
            12,500
            
            $
            5.27
            
            
            12/11/13-
            
            
            10,964
            
            $
            19.25
            
            
            01/02/1644,967
            
            $
            1,085,50314,228
            
            $
            343,46429,978
            
            $
            723,6695,804
            
            $
            126,880Bruce
                S. Lamb, Ph.D.
            
            
            25,000
            
            
            75,000
            
            $
            8.84
            
            
            03/31/15-
            
            
            10,512
            
            $
            19.25
            
            
            01/02/165,256
            
            $
            131,400Young
                C. McGuinn(2)




(1)
            Based
                on $24.14 per share, the closing price of the Common Stock, as reported
                on
                the NASDAQ Global Market, on December 29,
                2006.





(2)
            Ms.
                McGuinn's employment with us terminated in October
                2006.


42
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          of Contents*


**Compensation
      of Directors**




Effective
      June 1, 2006, 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
      2006,
      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. However, there
      were no new directors elected to the Board in 2006. Additionally in 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 2006
      will
      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,
      2006.





**Directors
                Compensation**Name
            
            Fees
                earned or paid in cash ($)
            
            Stock
                awards ($)(1)
            
            Option
                awards ($)(2)
            
            Total
                ($)Michael
                E. Cahr(3)
            
            $
            40,993
            
            $
            18,067
            
            $
            66,470
            
            $
            125,530David
                Fitzgerald(3)
            
            $
            38,660
            
            $
            18,067
            
            $
            66,470
            
            $
            123,197James
                G. Foster(3)
            
            $
            41,245
            
            $
            18,067
            
            $
            66,470
            
            $
            125,782Michael
                R. Minogue(3)
            
            $
            31,493
            
            $
            18,067
            
            $
            66,470
            
            $
            116,030Robert
                P. Roche, Jr.(3)
            
            $
            31,493
            
            $
            18,067
            
            $
            66,470
            
            $
            116,030Martin
                P. Sutter(3)
            
            $
            -
            
            $
            18,067
            
            $
            66,470
            
            $
            84,537





(1)
            Represents
                the compensation expense recognized in 2006 pursuant to FAS 123(R)
                for
                restricted stock awards granted as long-term incentives pursuant
                to our
                Equity Compensation Plan. Each director received 3,500 shares of
                restricted stock that vests in equal installments over a three-year
                period
                commencing on the first anniversary of the date of grant which was
                June
                29, 2006.


(2)
            Represents
                the compensation expense recognized in 2006 pursuant to FAS 123(R)
                for
                stock options granted as long-term incentives pursuant to our Equity
                Compensation Plan. Each director received an option grant to purchase
                10,000 shares of common stock that vest one year after the date of
                grant
                which was July 19, 2005.


(3)
            At
                December 31, 2006, Mr. Cahr had 3,500 restricted stock awards; Mr.
                Fitzgerald had options to purchase 65,000 shares and 3,500 restricted
                stock awards; Mr. Foster had options to purchase 85,000 shares and
                3,500
                restricted stock awards; Mr. Minogue had options to purchase 25,000
                shares
                and 3,500 restricted stock awards; Mr. Roche had options to purchase
                25,000 shares and 3,500 restricted stock awards; and Mr. Sutter had
                options to purchase 45,000 shares and 3,500 restricted stock
                awards.


43
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**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 Operationst. 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.





***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.


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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.”





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.


45
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          of Contents*


***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.





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 teo 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.


46
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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.





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.


47
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*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.





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.


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*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.





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.


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**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 29, 2006 (the last business day of the
      fiscal year) under the various scenarios described in the column headings as
      explained in the footnotes below. The chart does not include Young McGuinn
      whose
      employment with us terminated in October 2006.





Name
            
            Death
                or Disability(1)
            
            Resignation
                for Good Reason (2)
            
            Termination
                without Cause (2)
            
            Change-in-control
                Trigger Event (3)Paul
                G. Thomas
            
            $
            369,000
            
            $
            1,285,000
            
            $
            1,285,000
            
            $
            4,518,000Steven
                T. Sobieski
            
            $
            105,000
            
            
            ----
            
            $
            563,000
            
            $
            1,583,000Lisa
                N. Colleran
            
            $
            118,000
            
            
            ----
            
            $
            403,000
            
            $
            1,505,000Bruce
                S. Lamb, Ph.D.
            
            
            ----
            
            
            ----
            
            $
            257,000
            
            $
            850,000





(1)
            Includes
                pro-rata bonus only based on such Named Executive Officer’s bonus for the
                fiscal year ended December 31, 2005, since it was higher than the
                target
                bonus for the year ended December 31,
                2006.





(2)
            Includes
                (a) a multiple of salary and bonus, based on such Named Executive
                Officer’s salary for the year ended December 31, 2006 and bonus for the
                fiscal year ended December 31, 2005, (b) pro-rata bonus based on
                such
                Named Executive Officer’s bonus for the fiscal year ended December 31,
                2005, (c) subsidized COBRA payments and (d) with respect to Mr. Sobieski
                only, “in the money” value on December 29, 2006 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, 2006 and bonus for the
                fiscal year ended December 31, 2005, (b) pro-rata bonus based on
                such
                Named Executive Officer’s bonus for the fiscal year ended December 31,
                2005, (c) subsidized COBRA payments and (d) “in the money” value on
                December 29, 2006 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.


50
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Item12.
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Stockholder Matters





The
      following table sets forth information as of February 28, 2007, 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
              
              %Samuel
                  D. Islay(2)
                OrbiMed
                  Advisors LLC
                OrbiMed
                  Capital LLC
                767
                  Third Avenue
                New
                  York, New York 10017
              
              
              3,246,000
              
              
              9.6
              %Eaton
                  Vance Management(3)
                255
                  State Street
                Boston,
                  Massachusetts 02109
              
              
              2,282,579
              
              
              6.8
              %Paul
                  G. Thomas(4)
                Chairman
                  of the Board, President & Chief Executive Officer
              
              
              433,964
              
              
              1.3
              %Michael
                  E. Cahr(5)
                Director
              
              
              108,356
              
              
              *David
                  Fitzgerald(6)
                Director
              
              
              68,500
              
              
              *James
                  G. Foster(7)
                Director
              
              
              88,500
              
              
              *Michael
                  R. Minogue(8)
                Director
              
              
              28,500
              
              
              *Robert
                  P. Roche, Jr.(8)
                Director
              
              
              28,500
              
              
              *Martin
                  P. Sutter(9)
                Director
              
              
              98,130
              
              
              *Lisa
                  N. Colleran(10)
                Senior
                  Vice President, Commercial Operations
              
              
              205,921
              
              
              *Bruce
                  Lamb, Ph.D.(11)
                Senior
                  Vice President, Development, Regulatory Affairs and
                  Quality
              
              
              58,852
              
              
              *Steven
                  T. Sobieski(12)
                Vice
                  President Finance & Chief Financial Officer
              
              
              100,587
              
              
              *All
                  executive officers and directors as a group(13)
              
              
              1,219,810
              
              
              3.6
              %




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 28, 2007 have been exercised
                or
                converted. Options and restricted stock units that are not exercisable
                within 60 days of February 28, 2007 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
                3,246,000 shares of Common Stock. Samuel D. Islay, OrbiMed Advisors,
                LCC
                and OrbiMed Capital LLC 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 9, 2007.




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(3)
            Represents
                2,282,579 shares of Common Stock. Information with respect to the
                ownership of such stockholders was obtained from a Schedule 13G filed
                on
                January 29, 2007.


(4)
            Includes
                47,254 shares underlying stock options and 254,931 shares of restricted
                stock.


(5)
            Includes
                3,500 shares of restricted stock.


(6)
            Includes
                65,000 shares underlying stock options and 3,500 shares of restricted
                stock.


(7)
            Includes
                85,000 shares underlying stock options and 3,500 shares of restricted
                stock.


(8)
            Includes
                25,000 shares underlying stock options and 3,500 shares of restricted
                stock.


(9)
            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.


(10)
            Includes
                100,241 shares underlying stock options and 94,977 shares of restricted
                stock.


(11)
            Includes
                52,628 shares underlying stock options and 5,256 shares of restricted
                stock.


(12)
            Includes
                24,394 shares underlying stock options and 44,946 shares of restricted
                stock.


(13)
            See
                notes (4) through (12).




**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,
      2006. This plan was our only equity compensation plan in existence as of
      December 31, 2006.








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
            
            
            1,899,681
            
            $
            11.47
            
            
            1,905,658




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, 2006 and 2005 totaled approximately
      $380,000 and $359,000, respectively.





*All
      Other Fees* .
      We did
      not incur any fees for the fiscal years ended December 31, 2006 and 2005 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.


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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, 2006 and 2005
            F-3Statements
                of Operations for the years ended December 31, 2006, 2005 and
                2004
            F-4Statements
                of Stockholders’ Equity for the years ended December 31, 2006, 2005 and
                2004
            F-5Statements
                of Cash Flows for the years ended December 31, 2006, 2005 and
                2004
            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 3.2 to
                the
                Company’s Quarterly Report on Form 10-Q for the period ended June 30,
                1996, filed with the Commission on August 14, 1996).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).




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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
            Severance
                Agreement dated as of August 14, 2006 by and between LifeCell Corporation
                and Young C. McGuinn (incorporated by reference to Exhibit 10.1 of
                the
                Company’s Form 8-K filed with the Commission on August 18,
                2006).10.
            7
            Change-in-control
                Agreement dated as of August 16, 2006 by and between LifeCell Corporation
                and Young C. McGuinn (incorporated by reference to Exhibit 10.1 of
                the
                Company’s Form 8-K filed with the Commission on August 18,
                2006).10.
            8
            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.
            9
            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.
            10
            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.
            11
            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.
            12*
            First
                Amendment to the LifeCell Corporation Equity Compensation Plan14.
            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.




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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 and Chairman of the Board of
                  Directors





Dated:
      March 1, 2007




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
            
            March
                1, 2007Paul
                G. Thomas
            
            Officer
                (Principal Executive Officer) and Chairman of the Board of
                Directors/s/
                Steven T. Sobieski
            
            Vice
                President and Chief Financial
            
            March
                1, 2007Steven
                T. Sobieski
            
            Officer
                (Principal Financial Officer)/s/
                Bradly C. Tyler
            
            Controller
            
            March
                1, 2007Bradly
                C. Tyler
            
            (Principal
                Accounting Officer)/s/
                Michael E. Cahr
            
            Director
            
            March
                1, 2007Michael
                E. Cahr/s/
                James G. Foster
            
            Director
            
            March
                1, 2007James
                G. Foster/s/
                David Fitzgerald
            
            Director
            
            March
                1, 2007David
                Fitzgerald/s/
                Michael R. Minogue
            
            Director
            
            March
                1, 2007Michael
                R. Minogue/s/
                Robert P. Roche, Jr.
            
            Director
            
            March
                1, 2007Robert
                P. Roche, Jr./s/
                Martin P. Sutter
            
            Director
            
            March
                1, 2007Martin
                P. Sutter




55
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Report
                of Independent Registered Public Accounting
                Firm






To
      the
      Board of Directors and Shareholders of LifeCell Corporation:





We
      have
      completed integrated audits of LifeCell Corporation's financial statements
      and
      of its internal control over financial reporting as of December 31, 2006, in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Our opinions, based on our audits, are presented
      below.





Financial
      statements





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, 2006 and 2005, and the results of its operations
      and
      its cash flows for each of the three years in the period ended December 31,
      2006
      in conformity with accounting principles generally accepted in the United States
      of America. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits. We conducted our audits of these statements
      in
      accordance with the standards of the Public Company Accounting Oversight Board
      (United States). Those standards require that we plan and perform the audit
      to
      obtain reasonable assurance about whether the financial statements are free
      of
      material misstatement. An audit of financial statements includes 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.
      We believe that our audits provide a reasonable basis for our
      opinion.





As
      discussed in Note 2 to the financial statements, the Company changed the manner
      in which it accounts for share-based compensation in 2006.





Internal
      control over financial reporting





Also,
      in
      our opinion, management’s assessment, included in Management's Report on
      Internal Control Over Financial Reporting appearing under Item 9A, that the
      Company maintained effective internal control over financial reporting as of
      December 31, 2006 based on criteria established in Internal Control - Integrated
      Framework issued by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO), is fairly stated, in all material respects, based on those
      criteria. Furthermore, in our opinion, the Company maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2006, based on criteria established in Internal Control - Integrated Framework
      issued by the COSO. The Company’s management is responsible for maintaining
      effective internal control over financial reporting and for its assessment
      of
      the effectiveness of internal control over financial reporting. Our
      responsibility is to express opinions on management’s assessment and on the
      effectiveness of the Company’s internal control over financial reporting based
      on our audit. We conducted our audit of internal control over financial
      reporting in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). Those standards require that we plan and
      perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. An audit of internal control over financial reporting includes
      obtaining an understanding of internal control over financial reporting,
      evaluating management’s assessment, testing and evaluating the design and
      operating effectiveness of internal control, and performing such other
      procedures as we consider necessary in the circumstances. We believe that our
      audit provides a reasonable basis for our opinions.





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.


F-1
 *Table
          of Contents*


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
      28, 2007


F-2
 *Table
          of Contents*




LifeCell
                  Corporation Balance Sheets





*(dollars
                in thousands)*
            
            December
                31,2006
            
            2005ASSETSCurrent
                assetsCash
                and cash equivalents
            
            $
            10,000
            
            $
            21,272Short-term
                investments
            
            
            60,972
            
            
            26,795Receivables,
                less allowance of $279 in 2006 and $156 in 2005
            
            
            22,286
            
            
            15,786Inventories
            
            
            23,801
            
            
            12,536Prepayments
                and other
            
            
            1,309
            
            
            885Deferred
                tax assets
            
            
            4,165
            
            
            10,660Total
                current assets
            
            
            122,533
            
            
            87,934Investments
                in marketable securities
            
            
            6,874
            
            
            --Fixed
                assets, net
            
            
            19,914
            
            
            9,271Deferred
                tax assets
            
            
            6,102
            
            
            8,057Other
                assets, net
            
            
            1,698
            
            
            1,736Total
                assets
            
            $
            157,121
            
            $
            106,998LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilitiesAccounts
                payable
            
            $
            15,181
            
            $
            6,680Accrued
                liabilities
            
            
            12,641
            
            
            8,248Total
                current liabilities
            
            
            27,822
            
            
            14,928Commitments
                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; 33,709,000
                and
                32,841,000 shares issued and outstanding in 2006 and 2005
            
            
            34
            
            
            33Additional
                paid-in capital
            
            
            135,214
            
            
            118,473Accumulated
                other comprehensive income
            
            
            23
            
            
            5Accumulated
                deficit
            
            
            (5,972
            )
            
            (26,441
            )Total
                stockholders’ equity
            
            
            129,299
            
            
            92,070Total
                liabilities and stockholders’ equity
            
            $
            157,121
            
            $
            106,998




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




F-3
 *Table
          of Contents*




LifeCell
                Corporation Statements of
                Operations





For
                the Year Ended December 31,*(dollars
                in thousands, except per share data)*
            
            2006
            
            2005
            
            2004Revenues:Product
                revenues
            
            $
            140,647
            
            $
            93,326
            
            $
            58,751Research
                grant revenues
            
            
            1,033
            
            
            1,072
            
            
            2,376Total
                revenues
            
            
            141,680
            
            
            94,398
            
            
            61,127Costs
                and expenses:Cost
                of products sold
            
            
            40,856
            
            
            29,205
            
            
            17,755Research
                and development
            
            
            16,500
            
            
            10,349
            
            
            7,860General
                and administrative
            
            
            18,618
            
            
            11,945
            
            
            8,214Selling
                and marketing
            
            
            32,376
            
            
            24,736
            
            
            20,311Total
                costs and expenses
            
            
            108,350
            
            
            76,235
            
            
            54,140Income
                from operations
            
            
            33,330
            
            
            18,163
            
            
            6,987Interest
                and other income, net
            
            
            2,793
            
            
            1,013
            
            
            222Income
                before income taxes
            
            
            36,123
            
            
            19,176
            
            
            7,209Income
                tax provision, net
            
            
            15,654
            
            
            7,132
            
            
            25Net
                income
            
            $
            20,469
            
            $
            12,044
            
            $
            7,184Net
                income per common share:Basic
            
            $
            0.62
            
            $
            0.39
            
            $
            0.26Diluted
            
            $
            0.60
            
            $
            0.36
            
            $
            0.22Shares
                used in computing net income per common share:Basic
            
            
            32,769
            
            
            30,877
            
            
            27,553Diluted
            
            
            34,007
            
            
            33,348
            
            
            31,974




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




F-4
 *Table
          of Contents*




LifeCell
                Corporation Statements of Stockholders’ Equity




Series
                  B
              
              
              
              Common
                  Stock
              
              Additional
              
              Accumulated
              
              
              
              TotalPreferred
                  Stock
              
              Common
                  Stock
              
              Warrants
              
              Paid-in
              
              Comprehensive
              
              Accumulated
              
              Stockholders'(dollars
                  and shares in thousands)
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Income
              
              Deficit
              
              Equity**Balance
                  at December 31, 2003**
              
              
              68
              
              
              —
              
              
              25,592
              
              $
              26
              
              
              2,000
              
              $
              3,412
              
              
              94,610
              
              $
              —
              
              $
              (45,669
              )
              $
              52,379Comprehensive
                  income:Net
                  income
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              7,184
              
              
              7,184Unrealized
                  securities gains, net of taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              4
              
              
              —
              
              
              4Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              7,188Stock
                  options exercised
              
              
              —
              
              
              —
              
              
              609
              
              
              1
              
              
              —
              
              
              —
              
              
              2,011
              
              
              —
              
              
              —
              
              
              2,012Warrants
                  exercised
              
              
              —
              
              
              —
              
              
              475
              
              
              —
              
              
              (481
              )
              
              (822
              )
              
              1,818
              
              
              —
              
              
              —
              
              
              996Conversion
                  of Series B preferred stock
              
              
              (68
              )
              
              —
              
              
              2,450
              
              
              2
              
              
              —
              
              
              —
              
              
              (2
              )
              
              —
              
              
              —
              
              
              —Excess
                  tax benefit stock-based compensation
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              873
              
              
              —
              
              
              —
              
              
              873**Balance
                  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
              
              
              —
              
              
              1Comprehensive
                  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
              
              
              —
              
              
              —
              
              
              8,033**Balance
                  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
              
              
              —
              
              
              18Comprehensive
                  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
              
              
              —
              
              
              —
              
              
              4,687**Balance
                  at December 31, 2006**
              
              
              —
              
              $
              —
              
              
              33,709
              
              $
              34
              
              
              —
              
              $
              —
              
              $
              135,214
              
              $
              23
              
              $
              (5,972
              )
              $
              129,299




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




F-5
 *Table
          of Contents*




LifeCell
                Corporation Statements of Cash
                Flows





For
                the Year Ended December 31,*(dollars
                in thousands)*
            
            2006
            
            2005
            
            2004Cash
                flows from operating activities:Net
                income
            
            $
            20,469
            
            $
            12,044
            
            $
            7,184Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            3,174
            
            
            2,681
            
            
            2,357Deferred
                taxes
            
            
            13,144
            
            
            5,775
            
            
            (144
            )Excess
                tax benefit from stock-based compensation
            
            
            (4,645
            )
            
            —
            
            
            —Stock-based
                compensation
            
            
            8,616
            
            
            1,537
            
            
            —Provision
                for bad debt
            
            
            223
            
            
            103
            
            
            69Inventory
                write-off
            
            
            —
            
            
            1,402
            
            
            —Inventory
                net realizable value provision
            
            
            640
            
            
            381
            
            
            (173
            )Reserve
                for product returns
            
            
            203
            
            
            63
            
            
            —Deferred
                Revenues
            
            
            —
            
            
            —
            
            
            (130
            )Loss
                on disposal of fixed assets
            
            
            2
            
            
            15
            
            
            8Changes
                in operating assets and liabilities:Receivables
            
            
            (6,926
            )
            
            (6,712
            )
            
            (3,433
            )Inventories
            
            
            (11,764
            )
            
            (5,424
            )
            
            108Prepayments
                and other
            
            
            (424
            )
            
            (573
            )
            
            8Accounts
                payable and accrued liabilities
            
            
            12,894
            
            
            7,537
            
            
            2,881Net
                cash provided by operating activities
            
            
            35,607
            
            
            18,829
            
            
            8,735Cash
                flows from investing activities:Proceeds
                from maturities and sale of investments
            
            
            4,699
            
            
            7,028
            
            
            6,194Purchases
                of investments
            
            
            (45,739
            )
            
            (16,830
            )
            
            (12,088
            )Capital
                expenditures
            
            
            (13,782
            )
            
            (3,595
            )
            
            (3,151
            )Intangible
                assets
            
            
            —
            
            
            (1,250
            )
            
            —Net
                cash used in investing activities
            
            
            (54,822
            )
            
            (14,647
            )
            
            (9,045
            )Cash
                flows from financing activities:Proceeds
                from exercise of common stock options
            
            
            3,298
            
            
            7,006
            
            
            3,007Excess
                tax benefit from stock-based compensation
            
            
            4,645
            
            
            —
            
            
            —Net
                cash provided by financing activities
            
            
            7,943
            
            
            7,006
            
            
            3,007Net
                increase (decrease) in cash and cash equivalents
            
            
            (11,272
            )
            
            11,188
            
            
            2,697Cash
                and cash equivalents at beginning of period
            
            
            21,272
            
            
            10,084
            
            
            7,387Cash
                and cash equivalents at end of period
            
            $
            10,000
            
            $
            21,272
            
            $
            10,084Supplemental
                disclosure of cash flow information:Cash
                paid during the period for interest
            
            $
            —
            
            $
            3
            
            $
            18Cash
                paid during the period for income taxes
            
            $
            870
            
            $
            525
            
            $
            258





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


F-6
 *Table
          of Contents*





LifeCell
                Corporation Notes To Financial Statements




*(December
      31, 2006)*





**1.**
            **Organization**





LifeCell
      Corporation (“LifeCell” or “the Company”) develops and markets tissue-based
      products for use in reconstructive, orthopedic and urogynecologic surgical
      procedures to repair soft tissue defects. 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, 2006 or 2005.
      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 2006, 2005 or 2004.





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.





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-7
 *Table
          of Contents*


Intangible
      Assets





Intangible
      assets amounted to $1,549,000 at December 31, 2006, net of $349,000 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, 2006, 2005 and 2004, amortization expense relating to intangibles
      was $38,000, $40,000 and $38,000, respectively. The weighted average
      amortization period for intangible assets is 10.4 years. Estimated amortization
      expense for the next five years is as follows:





*(dollars
                in thousands)*
            
            2007
            
            2008
            
            2009
            
            2010
            
            2011Estimated
                Amortization Expense
            
            $
            216
            
            $
            216
            
            $
            216
            
            $
            216
            
            $
            213





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, 2006 represents recoverable value, and during
      2006 and 2005, 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 to the product transfers. 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.





In
      2004,
      the Company recognized $130,000 of deferred revenue, representing the
      unamortized balance of payments received at the inception of an agreement with
      an independent sales and marketing agent.





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, no assurance can be given that the final outcome
      of
      these matters will not 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-8
 *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.





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.





As
      a
      result of adopting SFAS 123R on January 1, 2006, the Company’s income before
      taxes and net income for the year ended December 31, 2006, were $4.0 million
      and
      $3.4 million lower than had it continued to account for stock-based compensation
      under APB No. 25. Basic and diluted net income per share for the year ended
      December 31, 2006 would have been $0.10 higher had the Company not adopted
      SFAS
      123R, compared to reported basic and diluted net income per share of $0.62
      and
      $0.60, respectively. The adoption of SFAS 123R changed the way tax benefits
      related to stock compensation are reported in the statement of cash flows,
      resulting in a reduction in cash provided by operating activities and an
      increase in cash provided by financing activities by $4.7 million. The adoption
      of SFAS 123R also resulted in a cumulative effect adjustment for estimated
      forfeitures for awards with compensation cost recognized in the financial
      statements prior to adoption. The adjustment was not material to the financial
      statements.





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-9
 *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 periods prior to January
      1, 2006:




Year
                    ended December, 312005
                
                2004*(dollars
                    in thousands, except per share data)*Net
                    income, as reported
                
                $
                12,044
                
                $
                7,184Add:
                    Total stock-based compensation expense included in reported net
                    income,
                    net of related tax effects
                
                
                953
                
                
                —Less:
                    Total stock-based compensation expense determined under fair
                    value based
                    method for all awards, net of related tax effects
                
                
                (3,233
                )
                
                (1,498
                )Net
                    Income, Pro forma
                
                $
                9,764
                
                $
                5,686Basic
                    net income per common shareAs
                    reported
                
                $
                0.39
                
                $
                0.26Pro
                    forma
                
                $
                0.32
                
                $
                0.21Diluted
                    net income per common shareAs
                    reported
                
                $
                0.36
                
                $
                0.22Pro
                    forma
                
                $
                0.30
                
                $
                0.18





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.





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




Year
                  ended December, 312006
              
              2005*(dollars
                  in thousands)*Cost
                  of products sold
              
              $
              1,476
              
              $
              63Research
                  and development
              
              
              2,015
              
              
              397General
                  and administrative
              
              
              3,761
              
              
              808Selling
                  and marketing
              
              
              1,363
              
              
              269Stock-based
                  compensation expense, before tax
              
              
              8,615
              
              
              1,537Income
                  tax benefit
              
              
              (2,464
              )
              
              (584
              )Net
                  compensation expense
              
              $
              6,151
              
              $
              953





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





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.


F-10
 *Table
          of Contents*


Allowance
      for Doubtful Accounts





*(dollars
                in thousands)*
            
            Balance
              at
                Beginning
              ofPeriod
            
            Charge
                to Costs
              and
                Expenses
            
            Write-offs
              and
                Deductions
              From
                Allowance
            
            Balance
                at
              End
                of PeriodDecember
                31, 2006
            
            $
            156
            
            $
            223
            
            $
            (100
            )
            $
            279December
                31, 2005
            
            
            114
            
            
            103
            
            
            (61
            )
            
            156December
                31, 2004
            
            
            54
            
            
            69
            
            
            (9
            )
            
            114





New
      Accounting Pronouncements





In
      May
      2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154,
“Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20
      and FASB Statement No. 3, or SFAS 154. SFAS 154 requires retrospective
      application to prior periods’ financial statements for changes in accounting
      principle, unless it is impracticable to determine either the period-specific
      effects or the cumulative effect of the change. SFAS 154 also requires that
      a
      change in depreciation, amortization, or depletion method for long-lived,
      non-financial assets be accounted for as a change in accounting estimate
      affected by a change in accounting principle. SFAS 154 is effective for
      accounting changes and corrections of errors made in fiscal years beginning
      after December 15, 2005. The implementation of SFAS 154 on January 1, 2006
      did
      not have a material impact on the results of operations, financial position
      or
      cash flows.




In
      November 2005, FASB issued FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1,
“The Meaning of Other-than-Temporary Impairment and Its Application to Certain
      Investments” (“FSP 115-1”) which provides guidance on determining when
      investments in certain debt and equity securities are considered impaired,
      whether that impairment is other-than-temporary, and on measuring such
      impairment loss. FSP 115-1 also includes accounting considerations subsequent
      to
      the recognition of an other-than-temporary impairment and requires certain
      disclosures about unrealized losses that have not been recognized as
      other-than-temporary impairments. FSP 115-1 is effective for reporting periods
      beginning after December 15, 2005. Our adoption of FSP 115-1 on January 1,
      2006
      did not have a material impact on our consolidated results of operations,
      financial position or cash flows.





In
      July
      2006, FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in
      Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”) that
      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. The Company expects the impact
      of adopting FIN 48 to be immaterial.





In
      September 2006, FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in accordance with generally accepted accounting principles and expands
      disclosures about fair value measurements. SFAS 157 does not require any new
      fair value measurements, but rather eliminates inconsistencies in guidance
      found
      in various prior accounting pronouncements. SFAS 157 is effective for fiscal
      years beginning after November 15, 2007 and interim periods within those fiscal
      years. The implementation of SFAS 157 is not expected to have a material impact
      on the results of operations, financial position or cash flows.





In
      September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108
      provides guidance on the consideration of the effects of prior year
      misstatements in quantifying current year misstatements for the purpose of
      determining whether the current year’s financial statements are materially
      misstated. SAB 108 is effective for fiscal years ending after November 15,
      2006.
      The implementation of SAB 108 did not have a material impact on the results
      of
      operations, financial position or cash flows.


F-11
 *Table
          of Contents*


**3.**
            **Inventories**





Inventories
      consist of the following at December 31,:




2006
              
              2005*(dollars
                  in thousands)*Unprocessed
                  tissue and supplies
              
              $
              14,259
              
              $
              7,730Tissue
                  products in-process
              
              
              2,412
              
              
              1,688Tissue
                  products available for distribution
              
              
              7,130
              
              
              3,118Total
                  inventories
              
              $
              23,801
              
              $
              12,536





**4.**
            **Cash
                and Investments**





Cash,
      cash equivalents and investments consist of the following at December 31,
      2006:





(dollars
                in thousands)
            
            Carrying
              Value
            
            Unlrealized
              Gains
            
            Unrealized
              Losses
            
            Estimated
              Fair
                ValueCash
            
            $
            4,864
            
            $
            —
            
            $
            —
            
            $
            4,864Cash
                equivalents:Money
                market funds
            
            
            2,095
            
            
            —
            
            
            —
            
            
            2,095Commercial
                paper
            
            
            2,990
            
            
            —
            
            
            —
            
            
            2,990Marketable
                equity securities
            
            
            51
            
            
            —
            
            
            —
            
            
            51Total
                cash and cash equivalents
            
            
            10,000
            
            
            —
            
            
            —
            
            
            10,000Short-term
                investments:Certificates
                of deposit
            
            
            5,568
            
            
            —
            
            
            (1
            )
            
            5,567Commercial
                paper
            
            
            7,926
            
            
            —
            
            
            —
            
            
            7,926Corporate
                bonds
            
            
            42,765
            
            
            25
            
            
            (18
            )
            
            42,772U.S.
                government obligations
            
            
            4,713
            
            
            2
            
            
            —
            
            
            4,715Total
                short-term investments
            
            
            60,972
            
            
            27
            
            
            (19
            )
            
            60,980Long-term
                investments:Corporate
                bonds
            
            
            6,874
            
            
            —
            
            
            (9
            )
            
            6,865Total
                long-term investments
            
            
            6,874
            
            
            —
            
            
            (9
            )
            
            6,865Total
                cash, cash equivalents and investments
            
            $
            77,846
            
            $
            27
            
            $
            (28
            )
            $
            77,845





Cash,
      cash equivalents and investments consist of the following at December 31,
      2005:


*(dollars
                    in thousands)*
                
                Carrying
                  Value
                
                Unrealized
                  Gains
                
                Unrealized
                  Losses
                
                Estimated
                  Fair
                    ValueCash
                
                $
                3,303
                
                $
                —
                
                $
                —
                
                $
                3,303Cash
                    equivalents:Money
                    market funds
                
                
                2,191
                
                
                —
                
                
                —
                
                
                2,191Commercial
                    paper
                
                
                10,248
                
                
                2
                
                
                —
                
                
                10,250Marketable
                    equity securities
                
                
                43
                
                
                —
                
                
                —
                
                
                43U.S.
                    government obligations
                
                
                5,487
                
                
                1
                
                
                —
                
                
                5,488Total
                    cash and cash equivalents
                
                
                21,272
                
                
                3
                
                
                —
                
                
                21,275Short-term
                    investments:Certificates
                    of deposit
                
                
                1,382
                
                
                —
                
                
                (2
                )
                
                1,380Commercial
                    paper
                
                
                7,642
                
                
                —
                
                
                (1
                )
                
                7,641Corporate
                    bonds
                
                
                8,606
                
                
                —
                
                
                (26
                )
                
                8,580U.S.
                    government obligations
                
                
                9,165
                
                
                1
                
                
                (8
                )
                
                9,158Total
                    short-term investments
                
                
                26,795
                
                
                1
                
                
                (37
                )
                
                26,759Total
                    cash, cash equivalents and investments
                
                $
                48,067
                
                $
                4
                
                $
                (37
                )
                $
                48,034


F-12
 *Table
          of Contents*


The
      Company’s long-term investments mature at various dates from January 2008
      through February 2008.





**5.**
            **Fixed
                Assets**





Fixed
      assets consist of the following at December 31,:





2006
            
            2005*(dollars
                in thousands)*Machinery
                and equipment
            
            $
            11,177
            
            $
            7,864Leasehold
                improvements
            
            
            17,764
            
            
            8,346Computer
                hardware, furniture and fixtures
            
            
            4,315
            
            
            3,459Computer
                software
            
            
            2,214
            
            
            2,04635,470
            
            
            21,715Accumulated
                depreciation and amortization
            
            
            (15,556
            )
            
            (12,444
            )Fixed
                assets, net
            
            $
            19,914
            
            $
            9,271





For
      the
      years ended December 31, 2006, 2005 and 2004, depreciation and amortization
      expense related to fixed assets was $3,137,000, $2,641,000 and $2,319,000,
      respectively.





**6.**
            **Accrued
                Liabilities**





Accrued
      liabilities consist of the following at December 31,:





2006
            
            2005*(dollars
                in thousands)*Employee
                compensation and benefits
            
            $
            5,473
            
            $
            4,350Tissue
                recovery fees
            
            
            4,232
            
            
            2,630Income
                taxes payable
            
            
            1,292
            
            
            21Marketing
                agent fees
            
            
            852
            
            
            665Operating
                expenses and other
            
            
            792
            
            
            582Total
                accrued liabilities
            
            $
            12,641
            
            $
            8,248





**7.**
            **Series
                B Preferred Stock**





Pursuant
      to the terms of the Company's certificate of incorporation, the Series B
      preferred stock automatically converted into common stock when the closing
      price
      of the Company’s common stock averaged or exceeded $9.30 per share for 30
      consecutive trading days. This condition was met on May 14, 2004, and
      accordingly, all of the outstanding shares of Series B Preferred Stock of
      LifeCell automatically converted on such date into an aggregate of 1,867,569
      shares of the Company’s common stock.





**8.**
            **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, 2006, there were 1,929,000 shares
      available for future awards under the Plan.





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.




F-13
 *Table
          of Contents*


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




Year
                Ended December 31,2006
            
            2005
            
            2004Volatility
            69.6%
            
            69.6%-81.0%
            
            81.0%-82.6%Expected
                term (years)
            5.67-6.25
            
            6.25
            
            6.00-6.25Risk
                free interest rate
            4.1%
                - 5.0%
            
            3.7%
                - 4.4%
            
            3.1%
                - 4.4%Expected
                dividend yield
            0.0%
            
            0.0%
            
            0.0%





A
      summary
      of stock option activity for the years ended December 31, 2006, 2005 and 2004
      is
      as follows:




Number
                  of Shares
              
              Weighted
                  Average Exercise Price
              
              Weighted
                  Average Remaining Contractual Life
              
              Aggregate
                  Intrinsic Value (in thousands)Outstanding
                  at December 31, 2003
              
              
              4,013,000
              
              $
              3.77Granted
              
              
              523,000
              
              $
              9.48Exercised
              
              
              (594,000
              )
              $
              3.30
              
              
              
              
              $
              3,478Forfeited
                  or canceled
              
              
              (209,000
              )
              $
              4.93Outstanding
                  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
                  years
              
              $
              24,068Exercisable
                  at December 31, 2006
              
              
              901,000
              
              $
              6.88
              
              
              6.6
                  years
              
              $
              15,554





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, 2005 and 2004, option holders exercised options
      to
      purchase 10,000, 2,500 and 15,000 shares of common stock, respectively, pursuant
      to these grants. At December 31, 2006, none of the options granted to directors
      remained outstanding.





A
      summary
      of stock options outstanding at December 31, 2006 by price range is as
      follows:





Options
                    Outstanding
                
                Options
                    ExercisableRange
                    of****Exercise
                    Prices
                
                Number
                    Outstanding
                
                Weighted-Average
                    Remaining Contractual Life (Years)
                
                Weighted-
                    Average Exercise****Price
                
                Number
                    Exercisable
                
                Weighted-
                    Average****Exercise
                    Price$ 
                    1.75  to  $   4.99
                
                
                371,000
                
                
                5.2
                
                $
                2.85
                
                
                360,000
                
                $
                2.865.00  to       9.99
                
                
                613,000
                
                
                6.8
                
                
                6.72
                
                
                320,000
                
                
                6.1410.00 
                    to     14.99
                
                
                252,000
                
                
                7.9
                
                
                10.45
                
                
                121,000
                
                
                10.2615.00  to     19.99
                
                
                413,000
                
                
                8.9
                
                
                18.67
                
                
                46,000
                
                
                16.9820.00  to     24.99
                
                
                133,000
                
                
                9.2
                
                
                21.96
                
                
                53,000
                
                
                21.6525.00  to     29.99
                
                
                82,000
                
                
                9.4
                
                
                27.21
                
                
                2,000
                
                
                25.0030.00  to     32.19
                
                
                36,000
                
                
                9.8
                
                
                31.45
                
                
                —
                
                
                —$ 
                    1.75  to  $ 32.19
                
                
                1,900,000
                
                
                7.4
                
                $
                11.47
                
                
                902,000
                
                $
                6.88




F-14
 *Table
          of Contents*


The
      weighted average grant date fair value of stock options granted, calculated
      using the Black-Scholes option-pricing model, in 2006, 2005 and 2004 was $14.30,
      $14.43 and $6.87 per share, respectively.





In
      connection with the stock options exercised during the year ended December
      31,
      2006, the Company received cash proceeds of $3.3 million.





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, 2006, 2005 and
      2004 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
            
            $
            17.85





At
      December 31, 2006, there was $14.5 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 1.7
      years.





**9.**
            **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 2006, 2005 and 2004 were $309,000, $213,000 and
      $111,000, 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
      2006, 2005 and 2004 were $46,000, $35,000 and $27,000,
      respectively.





**10.**
            **Income
                Taxes**





Significant
      components of the Company’s income tax expense for the years ended December 31,
      2006, 2005 and 2004 were as follows:





*(dollars
                in thousands)*
            
            2006
            
            2005
            
            2004*Current**Federal*
            
            $
            926
            
            $
            429
            
            $
            135*State*
            
            
            2,916
            
            
            928
            
            
            242*Deferred**Federal*
            
            
            11,328
            
            
            5,215
            
            
            (431
            )*State*
            
            
            484
            
            
            560
            
            
            79*Income
                tax provision, net*
            
            $
            15,654
            
            $
            7,132
            
            $
            25




F-15
 *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:




2006
                
                2005
                
                2004U.S.
                    federal tax at statutory rate
                
                $
                12,643
                
                
                35.0
                %
                $
                6,707
                
                
                35.0
                %
                $
                2,451
                
                
                34.0
                %State
                    income taxes (net of federal benefit)
                
                
                2,232
                
                
                6.2
                %
                
                968
                
                
                5.0
                %
                
                212
                
                
                2.9
                %Write-up
                    of deferred tax assets
                
                
                —
                
                
                —
                
                
                (481
                )
                
                -2.5
                %
                
                —
                
                
                —Change
                    in valuation allowance
                
                
                (232
                )
                
                -0.6
                %
                
                —
                
                
                —
                
                
                (2,647
                )
                
                -36.7
                %Tax
                    credits
                
                
                (320
                )
                
                -0.9
                %
                
                (236
                )
                
                -1.2
                %
                
                (109
                )
                
                -1.5
                %Incentive
                    stock option compensation
                
                
                911
                
                
                2.5
                %
                
                —
                
                
                —
                
                
                —
                
                
                —Other
                    non-deductible items
                
                
                420
                
                
                1.1
                %
                
                174
                
                
                0.9
                %
                
                118
                
                
                1.6
                %Income
                    tax provision
                
                $
                15,654
                
                
                43.3
                %
                $
                7,132
                
                
                37.2
                %
                $
                25
                
                
                0.3
                %





The
      principal components of the Company’s deferred tax assets as of December 31,
      2006 and 2005 are as follows:




(dollars
                  in thousands)
              
              2006
              
              2005Temporary
                  differences:Inventory
                  reserves
              
              $
              740
              
              $
              555Stock-based
                  compensation
              
              
              2,225
              
              
              538Uniform
                  capitalization of inventory costs
              
              
              400
              
              
              217Tax
                  over book depreciation
              
              
              (617
              )
              
              (851
              )Other
                  accruals and reserves
              
              
              (10
              )
              
              (347
              )Total
                  temporary differences
              
              
              2,738
              
              
              112Federal
                  tax losses and credits not currently utilizable
              
              
              6,662
              
              
              17,554State
                  tax losses and credits not currently utilizable
              
              
              867
              
              
              1,329Total
                  gross deferred tax assets
              
              
              10,267
              
              
              18,995Less
                  valuation allowance
              
              
              —
              
              
              (278
              )Net
                  deferred tax assets
              
              $
              10,267
              
              $
              18,717





As
      of
      December 31, 2006, the Company had a net operating loss carryforward (“NOL”) for
      federal income tax purposes of approximately $13.0 million expiring between
      2007
      and 2021. 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, 2006, approximately $8.2 million of the
      Company’s NOL was subject to an annual limitation under Internal Revenue Code
      Section 382. In 2007, $7.3 million of the Company’s NOL is not subject to
      limitation and is available to offset taxable income.





At
      December 31, 2006, the Company also had approximately $1.3 million of research
      and development tax credit carryforwards for federal and state income tax
      purposes, which will expire in varying amounts between 2007 and 2026.





In
      2004,
      the Company reduced the valuation allowance on deferred taxes by $4.0 million.
      Approximately $1.1 million of the reduction resulted from the write-off against
      the valuation allowance of certain tax credits where future realization was
      determined to be remote. The remaining amount, which resulted in the recognition
      of a $2.9 million non-cash tax benefit, resulted from management’s determination
      that it is more likely than not the benefit of certain previously reserved
      federal net operating loss carryforwards and tax credits would be realized.





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 2006, 2005 and 2004, the Company recognized $4,687,000, $8,033,000 and
      $873,000, respectively, of deferred tax assets related to stock compensation,
      which were recorded as a direct credit to stockholder’s equity.





**11.**
            **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, 2006, 2005 and 2004:


F-16
 *Table
          of Contents*





For
                the Year Ended December 31,(dollars
                in thousands, except per share data)
            
            2006
            
            2005
            
            2004Net
                income applicable to common stockholders
            
            $
            20,469
            
            $
            12,044
            
            $
            7,184Weighted-average
                common shares outstanding
            
            
            32,769,000
            
            
            30,877,000
            
            
            27,553,000Denominator
                for basic net income per share
            
            
            32,769,000
            
            
            30,877,000
            
            
            27,553,000Effect
                of dilutive securities:Common
                stock options
            
            
            945,000
            
            
            1,915,000
            
            
            2,116,000Common
                stock warrants
            
            
            —
            
            
            491,000
            
            
            1,476,000Restricted
                stock
            
            
            293,000
            
            
            65,000
            
            
            —Series
                B preferred stock assuming conversion
            
            
            —
            
            
            —
            
            
            829,000Denominator
                for diluted net income per share
            
            
            34,007,000
            
            
            33,348,000
            
            
            31,974,000Basic
                net income per share
            
            $
            0.62
            
            $
            0.39
            
            $
            0.26Diluted
                net income per share
            
            $
            0.60
            
            $
            0.36
            
            $
            0.22





The
      calculation of net income per share for the years ended December 31, 2006,
      2005
      and 2004 excludes potentially dilutive common stock equivalents consisting
      of
      outstanding options to purchase 592,000, 189,000 and 439,000 shares of common
      stock in 2006, 2005 and 2004, respectively, because their inclusion would be
      antidilutive.





**12.**
            **Commitments
                and Contingencies**





Litigation





In
      November 2003, a complaint was filed in the Circuit Court of Fairfax, Virginia
      captioned Sun Hee Jung v. Yongsook Victoria Suh, M.D., Victoria Plastic Surgery
      Center, Inc. and LifeCell Corporation. The matter is a product liability action
      for personal injury damages allegedly arising from the use of one of the
      Company’s products. The case was dismissed without prejudice in December 2004
      when the plaintiff elected to take a voluntary non-suit in this action. The
      plaintiff had six months from the date of the Order of Non-Suit to re-file
      the
      case, otherwise the case would have been dismissed with prejudice and forever
      barred. The complaint was re-filed in May 2005. The re-filed case was dismissed
      with prejudice by the Court and a final judgment order was entered for the
      Company in June 2006. In August 2006, the plaintiff filed a Petition for Appeal
      with the Supreme Court of Virginia, which was denied in December
      2006.





In
      September 2005, the Company recalled certain human-tissue based products because
      the organization that recovered the tissue, Biomedical Tissue Services, Ltd.
      (“BTS”), did not follow 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
      has not received any donor tissue from BTS after September 2005.





The
      Company has been named, along with BTS and many other defendants, in several
      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
      were 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, two other types of class action were filed in Federal Court in
      Rochester, New York (“Kennedy-McInnis” and “Graves”) that seek compensatory
      damages from BTS and all processing defendants, including LifeCell, that
      received and used BTS-originated tissue. Plaintiffs are the next-of-kin of
      the
      donors who did not authorize BTS to remove the tissue at issue. Those cases
      have
      also been transferred to the MDL and are presently the subject of motions to
      dismiss.


F-17
 *Table
          of Contents*


There
      has
      also been a series of 17 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 four cases that were filed in the State Court in New
      Jersey, all of the individual cases have been or are in the process of being
      transferred to the MDL.





The
      Company intends to vigorously defend each case. The Company will pursue
      dismissal of all class action cases which do not identify 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 15%, 20% and 27% of total product
      revenue in the years ended December 31, 2006, 2005 and 2004, respectively.
      One
      of the Company’s sales and marketing agents generated 6% and one distributor
      generated 6% of total product revenues 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, 2006.





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 approximately 90,000 square feet for office, production and
      laboratory space in one building under a lease agreement that expires in
      November 2010. The lease contains a renewal option for two additional successive
      five-year periods. In addition, the Company is a party to various other
      operating leases. Rental expense was $975,000, $973,000 and $1,042,000 for
      the
      years ended December 31, 2006, 2005 and 2004, respectively. The future minimum
      lease payments under non-cancelable leases with remaining terms in excess of
      one
      year as of December 31, 2006, were as follows:




*(dollars
                  in thousands)*
              
              Minimum
                Lease
                Payments2007
              
              $
              1,1412008
              
              
              1,1412009
              
              
              1,1412010
              
              
              1,0452011
                  and beyond
              
              
              —Total
              
              $
              4,468





**13.**
            **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)*
            
            2006
            
            2005
            
            2004Reconstructive
            
            $
            122,802
            
            $
            78,394
            
            $
            46,028Orthopedic
            
            
            9,695
            
            
            7,785
            
            
            5,885Urogynecology
            
            
            8,150
            
            
            7,147
            
            
            6,838Total
                revenues
            
            $
            140,647
            
            $
            93,326
            
            
            58,751




F-18
 *Table
          of Contents*


Product
      revenues by geographic area are summarized as follows:





For
                the Year Ended December 31,*(dollars
                in thousands, except per share data)*
            
            2006
            
            2005
            
            2004United
                States
            
            $
            139,283
            
            $
            92,059
            
            $
            57,564Other
                countries
            
            
            1,364
            
            
            1,267
            
            
            1,187Total
                revenues
            
            $
            140,647
            
            $
            93,326
            
            
            58,751





**14.**
            **Quarterly
                Financial Data (Unaudited)**





Following
      is a summary of unaudited quarterly results for the years ended December 31,
      2006 and 2005:





First
            
            Second
            
            Third
            
            Fourth*(dollars
                in thousands except per share amounts)*
            
            Quarter
            
            Quarter
            
            Quarter
            
            Quarter2006Total
                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
            
            
            0.182005Total
                revenues
            
            $
            19,880
            
            $
            22,687
            
            $
            24,532
            
            $
            27,299Product
                revenues
            
            
            19,714
            
            
            22,302
            
            
            24,260
            
            
            27,050Cost
                of products sold
            
            
            6,184
            
            
            6,551
            
            
            8,551(1
            )
            
            7.919Net
                income
            
            
            2,129
            
            
            3,580
            
            
            2,504
            
            
            3,831Income
                per share of common stock - basic
            
            
            0.07
            
            
            0.12
            
            
            0.08
            
            
            0.12Income
                per share of common stock - diluted
            
            
            0.07
            
            
            0.11
            
            
            0.07
            
            
            0.11




(1)
            Includes
                a $1,402,000 write-off of inventory related to a product
                recall.






F-19