**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**Form
      10-K**





x **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES** **EXCHANGE
      ACT OF 1934:** For
      the
      fiscal year ended December 31, 2005





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 ofIncorporation
                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 x .
      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 x





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 x .
      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. x




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 filero
            Accelerated
                filerx
            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 x .




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, 2005 was approximately **$491,600,000** .




The
      number of shares of registrant’s Common Stock outstanding as of March
      1 **,** 2006: **33,248,000.**




1




Table
                Of ContentsPART
                I
            
            
            PageItem
                1.Business
            3General
            3Technology
            3Products
            5Industry
                and Market Data
            6Marketing
                and Distribution
            7Tissue
                Procurement
            7Government
                Regulation
            8Research
                and Development
            11Patents,
                Proprietary Information &
                Trademarks
            12Competition
            13Employees
            13Item
                1A.
            
            Risk
                Factors and Forward Looking
                Statements
            14Item
                1B.
            
            Unresolved
                Staff Comment Letters
            21Item
                2.
            
            Properties
            22Item
                3.
            
            Legal
                Proceedings
            22Item
                4.
            
            Submission
                of Matters to a Vote of Security
                Holders
            23PART
                IIItem
                5.
            
            Market
                for Registrant's Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            23Dividend
                Policy
            23Item
                6.
            
            Selected
                Financial Data
            24Item
                7.
            
            Management's
                Discussion and Analysis of Financial Condition
                and Results of Operations
            25General
                and Background
            25Critical
                Accounting Policies
            25Results
                of Operations
            26Liquidity
                and Capital Resources
            30Item
                7A.
            
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            32Item
                8.
            
            Financial
                Statements and Supplementary Data
            32Item
                9.
            
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            32Item
                9A.
            
            Controls
                and Procedures
            32Item
                9B.
            
            Other
                Information
            33PART
                IIIItem
                10.
            
            Directors
                and Executive Officers of the
                Registrant
            33Item
                11.
            
            Executive
                Compensation
            38Item
                12.
            
            Security
                Ownership of Certain Beneficial Owners and
                Management
            43Item
                13.
            
            Certain
                Relationships and Related
                Transactions
            44Item
                14.
            
            Principal
                Accounting Fees and Services
            45PART
                IVItem
                15.
            
            Exhibits,
                Financial Statement Schedules
            46





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.”






Item
                1.
            Business






GENERAL


We
      develop and market human-derived tissue-based products for use in
      reconstructive, orthopedic and urogynecologic surgical procedures to repair
      soft
      tissue defects. Our patented technology produces a unique regenerative human
      tissue matrix -- a complex three-dimensional structure that contains vascular
      channels, proteins and growth factor binding sites -- that provides a template
      for the regeneration of normal human 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® and GraftJacket Xpress, 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.




TECHNOLOGY


Our
      patented tissue processing technology produces a unique regenerative tissue
      matrix - a complex three-dimensional structure that contains proteins, growth
      factor binding sites and vascular channels - that provides a template for the
      regeneration of normal human tissue. To date, our product development programs
      have been generated from the following proprietary technologies:





•
            methods
                for producing an acellular tissue matrix by removing antigenic cellular
                elements while stabilizing the matrix against damage;





•
            methods
                for cell preservation by manipulating cells through signal transduction
                (i.e., manipulation of cellular metabolism) to protect cells during
                prolonged storage; and





•
            methods
                for freeze-drying biological cells and tissues without the damaging
                effects of ice crystals.





Tissue
      Matrix Technology


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





•
            stabilizes
                the tissue matrix by preserving its natural 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 immune
                response upon transplantation.





3
 *Table
            of Contents*





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, growth factor binding sites
      and blood vessels (the “tissue matrix”). Together, the tissue matrix and the
      cells that populate it form the soft tissues of the body and other tissue types.
      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. The only
      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 previous attempts to
      remove cells from soft tissue grafts before performing an allograft transplant
      have resulted 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 studies with dermis and
      other tissues including heart valve leaflets, nerve connective tissue grafts
      and
      vascular grafts 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.




***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
      and with over 800,000 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. Lastly, LifeCell adheres
      to a
      stringently controlled and documented quality system that we believe meets
      regulatory requirements.




***Prolonged
      Shelf Life.*** Our
      tissue matrix technology allows extended storage and ease of transportation
      of
      products. AlloDerm, Repliform, Cymetra, GraftJacket and GraftJacket Xpress
      can
      be stored at normal refrigerated temperatures for up to two years. In contrast,
      traditionally processed skin allografts 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 to use our
      technology to develop tissue-based delivery vehicles for these factors and
      cells.





4
 *Table
            of Contents*





PRODUCTS




Reconstructive
      Tissue Products




AlloDerm
      Regenerative Tissue Matrix


AlloDerm
      is donated human cadaveric skin that has been processed with our tissue matrix
      technology. We believe that AlloDerm is the only human tissue product on the
      market today that supports the 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 and synthetic 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 support tissue following nerve or muscle damage.





In
      these
      procedures, alternatives to using processed human cadaveric skin include
      autologous tissue, synthetic and biosynthetic materials. We believe the
      disadvantages of using autologous tissue are 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 are the
      susceptibility of synthetics to infection, encapsulation (scarring), the graft
      moving away from the transplanted area (mobility), and erosion of the graft
      through the skin (extrusion). Some biosynthetic materials may include bovine
      collagen, that 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 a novel alternative to synthetic materials and
      autologous tissue because of its unique functional, biomechanical and
      regenerative properties. AlloDerm is also used in cancer reconstruction
      procedures, including breast reconstruction following mastectomy
      procedures.





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




Cymetra
      Micronized AlloDerm Tissue


Cymetra
      Micronized AlloDerm Tissue 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 similar to AlloDerm, promotes the regeneration
      of normal human soft tissue.





5
 *Table
            of Contents*




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 and
      GraftJacket Xpress are also used by podiatrists for the treatment of lower
      extremity wounds. Wright Medical is our exclusive distributor for GraftJacket
      in
      the United States.





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.
      AlloCraft DBM is intended to promote bone formation through revascularization
      and ultimately repopulation of the implant site with bone forming cells. 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.
      It is common that these conditions exist together with urinary incontinence.
      Therefore, it is becoming the current standard of care to correct pelvic floor
      conditions at the same time as a sling or suspension procedure to ensure that
      there are no conditions that can adversely affect patient outcome. 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 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, will repopulate as the patient’s own tissue and will not erode
      through the soft pelvic tissues. Boston Scientific Corporation is our exclusive
      worldwide sales and marketing representative for Repliform for use in
      urogynecologic surgical procedures.







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.





6
 *Table
            of Contents*




Product
                / Clinical Applications
            
            Targeted
                U. S. Annual Procedures (1)
            
            Revenue
                per Procedure (2)AlloDermHead
                and neck
            
            70,000
            
            $200
                - $800Abdominal
                wall
            
            135,000
            
            $1,300
                - $6,500Breast
                reconstruction
            
            55,000
            
            $1,400
                - $1,900RepliformBladder
                sling
            
            100,000
            
            $300
                - $600Pelvic
                floor reconstruction
            
            55,000
            
            $600
                - $1,200GraftJacketTendon
                and ligament repair
            
            220,000
            
            $350
                - $1,100Lower
                extremity wounds
            
            200,000
            
            $400
                - $600AlloCraft
                DBMSpine
                procedures
            
            200,000
            
            $400
                - $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 procdures where our products are used.


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






MARKETINGAND
      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, 2005, we had a sales, marketing
      and customer service staff of 74 persons, including 54 domestic sales personnel.
      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 AlloDerm and Cymetra. We also
      participate in numerous national fellowship programs, national and international
      conferences and trade shows, and we participate in or fund certain educational
      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 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
      2005,
      we obtained all of our donated human cadaveric tissue from approximately 40
      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. Although we have not
      experienced any material difficulty in procuring adequate donated cadaveric
      tissue, there is a risk that the future availability of donated human tissue
      will not be sufficient to meet our demand.





7
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            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 human 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. On a case-by-case basis, the FDA may choose to regulate
      such
      products solely as human tissue if certain requirements are met. Our AlloCraft
      DBM product is regulated as a medical device. If the applicable requirements
      are
      not met, the FDA will generally regulate such products as medical devices or
      biologics. 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
      human tissue to be commercially distributed without premarket clearance or
      approval. In contrast, products regulated as medical devices or biologics
      usually require such clearance or approval. The process of obtaining premarket
      clearance or approval for a medical device or biologic is often expensive,
      lengthy and uncertain.





Whether
      regulated as human tissue, 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. We are subject to inspection at any time by the FDA
      and
      state agencies for compliance with regulatory requirements. The FDA may impose
      a
      wide range of enforcement sanctions if we fail to comply,
      including:


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




FDA’s
      Human Tissue Regulation




The
      FDA’s
      regulatory requirements for human tissue 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 calls "HCT/Ps," 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. HCT/Ps
      generally may be commercially distributed without prior FDA clearance or
      approval.





The
      FDA
      has issued final regulations requiring tissue donors to be screened and tested
      for relevant communicable diseases and requiring 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. These
      regulations, which took effect in May 2005, have subjected us to significant
      and
      more costly regulatory requirements. 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.





8
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            of Contents*





During
      September 2005, we initiated a voluntary product recall of certain AlloDerm,
      Repliform and GraftJacket products from the marketplace when our internal
      quality control processes raised questions about the donor documentation
      received from one tissue bank, Biomedical Tissue Services (“BTS”), that supplied
      tissue to us. The donor documentation in question was used for donor screening
      to determine whether risk factors for communicable disease existed. We promptly
      notified the FDA and all relevant hospitals and medical profesionals who
      received products produced by us from tissue received from BTS. Upon subsequent
      investigation, the FDA determined that patients who received tissue implants
      prepared from BTS donors may be at heightened risk of communicable disease
      transmission, and recommended that patients receive appropriate infectious
      disease testing. We have been working in close cooperation with the FDA to
      execute the product recall and set up a LifeCell-sponsored patient testing
      program. We have not received any donor tissue from BTS since the product recall
      was initiated in September 2005. In January 2006, the FDA issued an order to
      BTS
      to cease its tissue operations.




FDA
      Status of Our Products




The
      FDA
      permits companies to make their own initial determination regarding the
      regulatory status of their products. Such determinations are subject to FDA
      review at any time. We believe that our AlloDerm, Repliform, Cymetra and
      GraftJacket products generally satisfy the FDA’s requirements to be considered
“HCT/Ps” eligible for regulation solely as human tissue. Accordingly, 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 a medical
      device and received 510(k) clearance from the FDA in December 2005.


We
        believe that our decision not to obtain prior FDA clearance or approval for
        commercial distribution of Repliform and Cymetra, which we began to market
        in
        1999, is supported by the FDA’s regulations and by our correspondence with the
        FDA regarding the status of these products as human tissue. Specifically,
        in
        November 2000, the FDA requested detailed information about Repliform and
        Cymetra. In February 2001, we responded to the FDA's request. In June 2001,
        the
        FDA notified us that Repliform and Cymetra, as currently marketed, are subject
        to regulation solely as human tissue.


In
      2002,
      we commenced commercial distribution of GraftJacket without seeking prior FDA
      clearance or approval. GraftJacket is the trade name given to AlloDerm when
      it
      is labeled for use in repairing damaged or inadequate integumental tissue in
      orthopedic surgery.





By
      letter
      dated December 8, 2003, the FDA informed us of their determination that
      GraftJacket for rotator cuff repair and periostium replacement are
      non-homologous uses of AlloDerm that do not qualify for human tissue regulation.
      Accordingly, the FDA took the position that GraftJacket requires premarket
      clearance or approval as a medical device before it may be marketed for use
      in
      rotator cuff repair. The FDA also took the position that, before GraftJacket
      may
      be marketed for periosteum replacement, we must submit a filing with the FDA
      requesting a formal determination as to whether medical device or biologic
      regulation would apply.





In
      2004,
      the FDA agreed to reconsider its GraftJacket determination in light of
      additional information that we submitted. In these submissions, we requested
      reconsideration of the FDA’s decision, proposed certain labeling changes to
      GraftJacket to address the FDA’s December 8, 2003 letter, and explained why we
      believe that the FDA should accord HCT/P status to GraftJacket for rotator
      cuff
      repair and periosteum replacement. In May 2004, the FDA responded in writing
      indicating that GraftJacket for these purposes would be regulated as an HCT/P
      if
      labeled and advertised as described in our submissions and subject to certain
      additional requested labeling changes. In September 2004 we submitted revised
      labeling to the FDA for their review, and they indicated their concurrence
      with
      the revised labeling.





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In
      2003,
      we commenced commercial distribution of AlloCraft DBM without obtaining FDA
      clearance or approval based upon on our belief that AlloCraft DBM was eligible
      for regulation solely as an HCT/P. In September 2004, the FDA notified us by
      written decision that after reviewing promotional materials for AlloCraft DBM,
      they believe that it did not meet the criteria for regulation as an HCT/P.
      In
      its letter to us, the FDA requested that we promptly file a Request for
      Designation, or RFD, to initiate a proceeding in which the FDA would determine
      the proper classification and associated pre-market requirements. We filed
      a
      preliminary RFD and met with the FDA in an informal exchange of our respective
      positions. At such time we presented our position as to why AlloCraft DBM met
      the definition of an HCT/P. The FDA rejected our position and asserted that
      they
      believed that AlloCraft DBM is most properly regulated as a medical device
      (and
      not as a drug or biologic). Although we believe that our legal position was
      correct, in September 2005 we filed a 510(k) submission to seek clearance for
      AlloCraft DBM to be regulated as a medical device and in December 2005 we
      received notification from the FDA that our product was cleared.




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 "premarket notification," unless the device is exempted
      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, which is 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)).
      No
      assurance can be given that any medical device will ultimately receive 510(k)
      clearance. Even if a device receives 510(k) clearance, any modification that
      could significantly affect its safety or effectiveness or that would constitute
      a major change in the intended use of the device, will require a new 510(k)
      submission or, possibly, a PMA application. In addition to 510(k) clearance
      requirements, class II devices can be subject to special controls (e.g.,
      performance standards, post market surveillance, patient registries and FDA
      guidelines) that do not apply to class I devices.





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





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Medical
      device products, such as AlloCraft DBM, are subject to pervasive and continuing
      postmarket regulation, including labeling regulations, QSR, Medical Device
      Reporting (“MDR”) 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.




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 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
      amounts 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.




Other
      Regulation




A
      few,
      but increasing number of states including Florida, California, New York and
      Maryland impose their own regulatory requirements on transplanted 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 a pharmaceutical product ,
      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.





RESEARCH
      AND DEVELOPMENT


Our
      research and development is focused on leveraging our core understanding of
      tissue and cellular engineering technology 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. 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.





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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
      2005, 2004 and 2003 for all programs were approximately $10.3 million, $7.9
      million and $5.4 million, respectively. Research grant revenues recognized
      during 2005, 2004 and 2003 were $1.1 million, $2.4 million and $1.7 million,
      respectively. See “Management’s Discussion and Analysis of Financial Condition
      and Results of Operations — Liquidity and Capital Resources.”





At
      December 31, 2005, we had approximately $1.9 million 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.







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 seven 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. Six United States patents and two
      pending United States patent applications cover methods of extending the shelf
      life of platelets, red blood cells and other blood cells.





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 biotechnology and medical product firms is
      highly uncertain and involves complex legal, scientific and factual questions.
      There is risk that other 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 eighteen
      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.





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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; AlloDerm,
      which concerns our commercial acellular dermal graft product;
      AlloDerm  GBR
      for
      use in periodontal applications; Micronized AlloDerm, the particulate form
      of
      AlloDerm; Cymetra, the brand name for Micronized AlloDerm; and 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
      biomedical field is undergoing rapid and significant technological change.
      Our
      success depends upon our ability to develop and commercialize efficient and
      effective products based on our technologies. Our products compete with other
      allograft tissue products, autograft tissue, synthetic and animal-based
      products.





Our
      Alloderm, Repliform and GraftJacket tissue products compete with synthetic
      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 Cook, Inc. and Tissue Science Laboratories, plc. Our AlloCraft
      DBM product competes with other similar bone repair products produced by
      companies such as Regeneration Technologies, Inc., Osteotech, Inc., AlloSource,
      Wright Medical, Isotis Orthobiologics and the Musculoskeletal Transplant
      Foundation (“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, 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. Recently, two tissue processors, MTF and Tutogen, have announced
      plans to commence distribution of human tissue based soft tissue repair products
      intended to compete with AlloDerm. MTF plans to distribute its products through
      Synthes, Inc and Tutogen plans to distribute its products through C.R. Bard.




EMPLOYEES


At
      December 31, 2005, we had 269 employees, of which 74 were employed in sales,
      marketing and customer service; 121 in production and quality assurance; 45
      in
      research and development; and 29 in administration and accounting.


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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
      or
      increase our AlloDerm revenues, our financial condition and results of
      operations could be materially and adversely affected.




During
      the years ended December 31, 2005, 2004 and 2003, revenues from the distribution
      of AlloDerm represented approximately 79%, 72% and 61%, respectively, of our
      total 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
      not obtained prior FDA clearance or approval for commercial distribution of
      certain of our human tissue-based products, because we believe that these
      products qualify for regulation as HCT/Ps.





We
      began
      marketing one of our products, AlloCraft DBM as an HCT/P, but the FDA ruled
      that
      it is a medical device requiring 510(k) clearance, which was obtained in
      December 2005. We cannot assure you that the other tissue-based products that
      we
      are currently marketing, or that we may develop in the future, will be regulated
      as HCT/Ps. The regulation of each of our products is decided by the FDA on
      a
      case-by-case basis and the agency’s position is subject to change. Although the
      FDA has agreed that some of our products qualify as HCT/Ps, that determination
      is limited to their current intended uses. In the future, we may wish to market
      our existing products for new intended uses. They may be regulated as medical
      devices based on these new uses, requiring premarket clearance or approval
      and
      adherence to the FDA’s medical device regulations. If the FDA chooses to
      regulate any of our current or future products as a medical device, the process
      of obtaining FDA clearance or approval would be expensive, lengthy and
      unpredictable. While the FDA can exercise its enforcement discretion to permit
      companies to continue marketing a product pending clearance or approval, the
      agency can choose to prohibit continued sales until a product is cleared or
      approved. We anticipate that it could take from one to three years or longer
      to
      obtain such clearance or approval and during such period, our revenue could
      be
      materially reduced. We do not know if such clearance or approval could be
      obtained in a timely fashion, or at all. Such clearance or approval process
      would almost certainly include a requirement to provide extensive supporting
      clinical testing 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.





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A
      few,
      but increasing number of states including Florida, California, 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


•
            establishment
                registration and product listing.





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 and other
      fines and 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.





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Our
      products contain donated human cadaveric tissue and therefore have the potential
      for disease transmission.




The
      implantation of donated cadaveric human tissue products 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.





In
      September 2005, we recalled products containing human cadaveric tissue because
      the tissue bank that recovered the tissue, BTS, did not follow FDA requirements
      for donor screening to determine whether risk factors for communicable disease
      existed. We promptly notified the FDA and all relevant hospitals and medical
      profesionals who received products produced from tissue received from BTS.
      Upon
      subsequent investigation, the FDA determined that patients who received tissue
      implants prepared from BTS donors may be at heightened risk of communicable
      disease transmission and recommended that patient recipients receive appropriate
      infectious disease testing. We have not received any donor tissue from BTS
      or
      distributed any products produced from BTS tissue since the product recall
      was
      initiated. In January 2006, the FDA ordered BTS to cease its tissue
      operations.





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




We
      are
      exposed to product liability claims for which our product liability insurance
      may be inadequate.




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 seven lawsuits that are related to the distribution of our
      products. Although we intend to to vigorously defend against thess 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.





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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 40 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 results
      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. As a result, our results
      of
      operations results 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.





17
 *Table
            of Contents*




We
      are
      highly dependent upon independent sales and marketing agents and distributors
      to
      generate our revenues.




Our
      independent sales and marketing agents and distributors generated 20% of our
      total product revenue in the year ended December 31, 2005. Boston Scientific
      Corporation, our exclusive worldwide sales and marketing agent for Repliform
      represented 8% of our total product revenues in 2005. Wright Medical, our
      exclusive distributor for GraftJacket represented 7% of our total product
      revenues 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, 2005.





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




The
      biomedical field is undergoing rapid and significant technological change.
      Our
      success depends upon our ability to develop and commercialize effective products
      that meet medical needs. Our Alloderm, Repliform and GraftJacket tissue products
      compete with synthetic 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 Cook, Inc. and Tissue Science Laboratories, plc.
      Our AlloCraft DBM product competes with other similar bone repair products
      produced by companies such as Regeneration Technologies, Inc.; Osteotech, Inc.;
      AlloSource; Wright Medical; Isotis Orthobiologics; and the Musculoskeletal
      Transplant Foundation.





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, 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. Recently, two tissue processors, MTF and Tutogen, have announced
      plans to commence distribution of human tissue based soft tissue repair products
      intended to compete with AlloDerm. MTF plans to distribute its products through
      Synthes, Inc and Tutogen plans to distribute its products through C.R. Bard.




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.





18
 *Table
            of Contents*





In
      general, the patent position of biotechnology and medical product firms is
      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
      eighteen 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.





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.




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 you that we can
      successfully do so.




Increasing
      our revenues and maintaining profitability 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 preclinical
      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 under development remains subject to all
      the
      risks associated with the commercialization of new products based on innovative
      technologies, including:





19
 *Table
            of Contents*





•
            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 devlop and commercialize new products, our future revenues
      and
      profitability could be materially and adversely affected.




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 to complete 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 either 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.





20
 *Table
            of Contents*





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





•
            the
                failure to maintain or increase revenues from the sale of our AlloDerm
                products;





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





•
            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 third party sales representatives and distributors to
                adequately promote, market and sell 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.





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 prospectus
      or the date of the document incorporated by reference into this prospectus.
      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 free of charge on our website 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, and 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 oure 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  Comment  Letters




None.




21
 *Table
            of Contents*




Item
                2.
            Properties




We
      lease
      approximately 90,000 square feet of office, laboratory, production and warehouse
      space in one building in Branchburg, New Jersey under a lease agreement that
      expires in November 2010. The current monthly rental obligation under this
      lease
      is approximately $85,000. 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. We intend to vigorously defend against this action. The likelihood of
      an
      unfavorable outcome is unknown at this time however, we believe any potential
      losses resulting from this action would be covered by its insurance policies
      and
      our insurance carrier has assumed defense of such action.





In
      September 2005, we recalled products containing human cadaveric tissue because
      the tissue bank that recovered the tissue, BTS, did not follow FDA requirements
      for donor screening to determine whether risk factors for communicable disease
      existed. We promptly notified the FDA and all relevant hospitals and medical
      profesionals who received products produced by us from tissue received from
      BTS.
      Upon subsequent investigation, the FDA determined that patients who received
      tissue implants prepared from BTS donors may be at heightened risk of
      communicable disease transmission, and recommended that patients receive
      appropriate infectious disease testing. We have been working in close
      cooperation with the FDA to execute the product recall and set up a
      LifeCell-sponsored patient testing program. We have not received any donor
      tissue from BTS since the product recall was initiated in September 2005. In
      January 2006, the FDA issued an order to BTS to cease its tissue
      operations.




We
      have
      been named, along with BTS and other defendants, in six lawsuits that relate
      to
      this matter, each of which was filed during the fourth quarter of 2005 or the
      first quarter of 2006. Five of the actions, Nguyen , Vitola , Tosto,  Coleman and Sciuva ,
      purport
      to serve as a class actions for persons receiving tissue based products that
      were improperly provided. None of these five cases identified our products
      as being used in the medical procedures. The Nguyen case was
      initially filed in the Superior Court of New Jersey, Middlesex County and was
      removed by another defendant to the United States District Court, District
      of
      New Jersey. At the time of the removal to the United States District Court,
      we
      were successful in obtaining a voluntary dismissal by plaintiffs, because their
      complaint identified other defendants’ products used in their medical
      procedures. The Vitola case was
      initially filed in the Superior Court of New Jersey, Atlantic County and was
      also removed to the United States District Court, District of New Jersey.
      Thereafter, another defendant filed a motion for consolidation of this case
      and
      all of the other federal court cases in one venue under the Multi District
      Litigation (“MDL”). The MDL motion is scheduled to be decided in April 2006. The Tosto case was
      initially filed in the Superior Court of New Jersey, Atlantic County and was
      also removed to the United States District Court, District of New Jersey and
      will be part of the MDL application. The Coleman case was
      filed in the United States District Court, Northern District of Oklahoma. There
      are pending motions to consolidate the Coleman case
      into New Jersey and to make it part of the MDL application. Similarly, the Sciuva case was
      filed in the United States District Court, Northern District of Ohio and there
      are pending motions to consolidate this case in New Jersey and also to make
      it
      part of the MDL application. One additional action, the Sanders case was
      filed in the Superior Court of North Carolina, Guilford County and also
      identifies other defendants. None of the plaintiffs in any of these six actions
      claim to be presently injured. Additionally, only the Sanders complaint
      specifically identifies our products as being used in the medical procedure.
      We
      intend to vigorously defend against each of these actions. We believe that
      it is
      not currently possible to estimate the likelihood of an unfavorable outcome
      and
      the impact, if any, that the ultimate resolution of these matters will have
      on
      our results of operations, financial position or cash flows.





22
 *Table
            of Contents*





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 any claims incurred or that the type of claims will be
      covered by the terms of insurance coverage.




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




None.








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 National Market under the symbol “LIFC.” On March
      3, 2006, the last reported sale price for our common stock on the National
      Market was $22.32 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 National Market.






Price
                Range2004
            
            High
            
            LowFirst
                Quarter
            
            $
            8.68
            
            $
            5.70Second
                Quarter
            
            
            11.50
            
            
            7.97Third
                Quarter
            
            
            11.34
            
            
            7.18Fourth
                Quarter
            
            
            11.05
            
            
            7.862005First
                Quarter
            
            $
            10.37
            
            $
            8.20Second
                Quarter
            
            
            16.49
            
            
            8.52Third
                Quarter
            
            
            25.57
            
            
            15.30Fourth
                Quarter
            
            
            22.70
            
            
            15.11




As
      of
      March 1, 2006, there were 266 registered holders of our common
      stock.




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.




23
 *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, 2005, 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)*
                  
                  2005
                  
                  2004
                  
                  2003
                  
                  2002
                  
                  2001Operations
                      Statement Data:Revenues:Product
                      revenues
                  
                  $
                  93,326
                  
                  $
                  58,751
                  
                  $
                  38,577
                  
                  $
                  32,935
                  
                  $
                  26,560Research
                      grant revenues
                  
                  
                  1,072
                  
                  
                  2,376
                  
                  
                  1,672
                  
                  
                  1,493
                  
                  
                  1,209Total
                      revenues
                  
                  
                  94,398
                  
                  
                  61,127
                  
                  
                  40,249
                  
                  
                  34,428
                  
                  
                  27,769Costs
                      and expenses:Costs
                      of products sold
                  
                  
                  29,205
                  
                  
                  17,755
                  
                  
                  12,241
                  
                  
                  10,134
                  
                  
                  8,862Research
                      and development
                  
                  
                  10,349
                  
                  
                  7,860
                  
                  
                  5,396
                  
                  
                  5,015
                  
                  
                  4,351General
                      and administrative
                  
                  
                  11,945
                  
                  
                  8,214
                  
                  
                  5,594
                  
                  
                  4,590
                  
                  
                  4,098Selling
                      and marketing
                  
                  
                  24,736
                  
                  
                  20,311
                  
                  
                  14,940
                  
                  
                  13,288
                  
                  
                  11,978Total
                      costs and expenses
                  
                  
                  76,235
                  
                  
                  54,140
                  
                  
                  38,171
                  
                  
                  33,027
                  
                  
                  29,289Income
                      (loss) from operations
                  
                  
                  18,163
                  
                  
                  6,987
                  
                  
                  2,078
                  
                  
                  1,401
                  
                  
                  (1,520
                  )Interest
                      and other income (expense), net
                  
                  
                  1,013
                  
                  
                  222
                  
                  
                  (28
                  )
                  
                  (129
                  )
                  
                  (550
                  )Income
                      (loss) before income taxes
                  
                  
                  19,176
                  
                  
                  7,209
                  
                  
                  2,050
                  
                  
                  1,272
                  
                  
                  (2,070
                  )Income
                      tax provision (benefit)
                  
                  
                  7,132
                  
                  
                  25
                  
                  
                  (16,622
                  )
                  
                  (157
                  )
                  
                  —Net
                      income (loss)
                  
                  
                  12,044
                  
                  
                  7,184
                  
                  
                  18,672
                  
                  
                  1,429
                  
                  
                  (2,070
                  )Preferred
                      stock and deemed dividends
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  (1,591
                  )Net
                      income (loss) to common shareholders
                  
                  $
                  12,044
                  
                  $
                  7,184
                  
                  $
                  18,672
                  
                  $
                  1,429
                  
                  $
                  (3,661
                  )Income
                      (loss) per common share:Basic
                  
                  $
                  0.39
                  
                  $
                  0.26
                  
                  $
                  0.85
                  
                  $
                  0.07
                  
                  $
                  (0.20
                  )Diluted
                  
                  $
                  0.36
                  
                  $
                  0.22
                  
                  $
                  0.70
                  
                  $
                  0.06
                  
                  $
                  (0.20
                  )Shares
                      used in computing income (loss) per share:Basic
                  
                  
                  30,877
                  
                  
                  27,553
                  
                  
                  22,094
                  
                  
                  21,176
                  
                  
                  18,240Diluted
                  
                  
                  33,348
                  
                  
                  31,974
                  
                  
                  26,632
                  
                  
                  24,696
                  
                  
                  18,240





As
                of December 31,2005
            
            2004
            
            2003
            
            2002
            
            2001Balance
                Sheet Data:Cash,
                cash equivalents and short-term investments
            
            $
            48,067
            
            $
            25,392
            
            $
            11,785
            
            $
            5,458
            
            $
            4,900Working
                capital
            
            
            73,209
            
            
            38,911
            
            
            23,283
            
            
            11,466
            
            
            8,851Total
                assets
            
            
            106,998
            
            
            72,093
            
            
            58,273
            
            
            24,116
            
            
            23,131Notes
                payable and term debt
            
            
            —
            
            
            —
            
            
            —
            
            
            863
            
            
            2,197Common
                stock, subject to redemption
            
            
            —
            
            
            —
            
            
            —
            
            
            478
            
            
            1,935Accumulated
                deficit
            
            
            (26,441
            )
            
            (38,485
            )
            
            (45,669
            )
            
            (64,341
            )
            
            (65,770
            )Total
                stockholders' equity
            
            
            92,070
            
            
            63,448
            
            
            52,379
            
            
            17,719
            
            
            14,833


24
 *Table
            of Contents*




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




The
      following discussion of operations and financial condition of LifeCell should
      be
      read in conjunction with the 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.







GENERAL
      AND BACKGROUND


We
      develop and market human-derived tissue-based products for use in
      reconstructive, orthopedic and urogynecologic surgical procedures to repair
      soft
      tissue defects. Our patented technology produces a unique regenerative human
      tissue matrix -- a complex three-dimensional structure that contains vascular
      channels, proteins and growth factor binding sites -- that provides a template
      for the regeneration of normal human 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® and GraftJacket® Xpress, for orthopedic applications and lower
      extremity wounds; AlloCraftTMDBM, for bone grafting procedures; and Repliform®,
      for urogynecologic surgical procedures. We market AlloDerm for plastic
      reconstructive, general surgical and burn applications through our direct sales
      organization. Our strategic sales and marketing partners include: Boston
      Scientific for Repliform; Wright Medical Group, Inc. for GraftJacket and
      GraftJacket Xpress; Stryker Corporation for AlloCraftDBM; and BioHorizons for
      periodontal applications of AlloDerm. 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 have a variety of research and development programs designed to expand our
      product line in the rapidly growing biologic market. Such programs include
      the
      investigation of novel biologics, alone or in combination with our regenerative
      tissue matrix.







CRITICAL
      ACCOUNTING POLICIES / ESTIMATES


We
      have
      identified the policies below as critical to the understanding of our financial
      statements. The application of these polices 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. 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.





25
 *Table
            of Contents*





*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 2006.





*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.





*Stock-Based
      Compensation* .
      We
      follow Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
      Issued to Employees,” and related interpretations in accounting for equity-based
      awards issued to employees and directors. No stock-based compensation cost
      for
      options is reflected in net income, as all options granted under the plans
      had
      an exercise price equal to the market value of the underlying common stock
      on
      the date of grant.







RESULTS
      OF OPERATIONS




Years
      Ended December 31, 2005 and 2004




*Revenues*




Total
      revenues for the year ended December 31, 2005 increased 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 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 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.





26
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            of Contents*





We
      utilize independent sales and marketing agents and distributors to suplement
      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 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 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*




Costs
      and
      expenses as a percentage of product revenue were the following at December
      31,:




2005
            
            2004*(dollars
                in thousands)*
            
            Dollars
            
            %
            
            Dollars
            
            %Cost
                of procucts sold
            
            $
            29,205
            
            
            31
            %
            $
            17,755
            
            
            30
            %Research
                and development
            
            
            10,349
            
            
            11
            %
            
            7,860
            
            
            13
            %General
                and administrative
            
            
            11,945
            
            
            13
            %
            
            8,214
            
            
            14
            %Selling
                and marketing
            
            
            24,736
            
            
            27
            %
            
            20,311
            
            
            35
            %Total
                costs and expenses
            
            $
            76,235
            
            
            82
            %
            $
            54,140
            
            
            92
            %







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 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. 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 leverage our core
      technology to other tissues, including tissues recovered from non-human sources.
      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. We plan to increase our research and development
      expenditures in 2006 and expect research and development spending for the full
      year to represent approximately 13% of product revenue.





General
      and administrative expenses increased 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.





27
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            of Contents*





Selling
      and marketing expenses increased 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 $791,000 in 2005 compared to 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 are not required
      to pay regular federal income taxes until such time as our net operating losses
      and tax credit carryforwards are exhausted or expire. We paid estimated federal
      alternative minimum taxes and state income taxes of $525,000 in 2005 and
      $258,000 in 2004.




Years
      Ended December 31, 2004 and 2003




*Revenunes*




Total
      revenues for the year ended December 31, 2004 increased 52% to $61.1 million
      compared to $40.2 million for the same period in 2003. The increase was
      primarily attributable to a 52% increase in product revenues to $58.7 million
      in
      the current period as compared to $38.6 million in the prior year.





Revenues
      generated from the use of our products in reconstructive surgical procedures
      increased 64% to $46.0 million in the year ended December 31, 2004 compared
      to
      $28.1 million in 2003. The growth was primarily driven by increased demand
      for
      AlloDerm in complex hernia repair procedures, partially offset by a decrease
      in
      Cymetra revenues. AlloDerm revenues increased 79% to $42.5 million in the year
      ended December 31, 2004 compared to $23.7 million in 2003. Cymetra revenues
      were
      negatively impacted by competitive products in 2004 and we expect this trend
      to
      continue in 2005.





Revenues
      generated from the use of our Repliform product in urogynecologic surgical
      procedures decreased 22% to $6.8 million in the year ended December 31, 2004
      compared to $8.7 million for the same period in 2003. Demand for Repliform
      in
      the treatment of stress urinary incontinence has been negatively affected by
      competition from synthetic alternatives, and we anticipate this trend to
      continue in 2005.





Orthopedic
      product revenue grew to $5.9 million in 2004 from $1.7 million in 2003. This
      revenue growth resulted from increased demand for our GraftJacket product,
      which
      was launched in the first quarter of 2003, and AlloCraft DBM, which was
      introduced on a limited basis in the fourth quarter of 2003. GraftJacket and
      AlloCraft DBM revenues were $4.1 million and $1.8 million, respectively, in
      2004
      compared to $1.5 million and $215,000 in 2003.





Our
      independent sales and marketing agents and distributors generated 27% of our
      total product revenue in the year ended December 31, 2004 and 38% in 2003.
      Boston Scientific and Wright Medical represented 12% and 7%, respectively,
      of
      our total product revenues in 2004 compared to 23% and 4%, respectively, for
      the
      same period in 2003. No other individual independent sales agent or distributor
      generated more than 5% of our total product revenues in the year ended December
      31, 2004.





28
 *Table
            of Contents*





Total
      revenues were also favorably impacted by a 42% increase in research grant
      revenues, which totaled $2.4 million in 2004 compared to $1.7 million in 2003.
      This increase was primarily due to an increase 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, 2004, approximately
      $1.9 million of approved grant funding was available to fund future research
      and
      development expenses through 2005.




*Costs
      and expenses*




Costs
      and
      expenses as a percentage of product revenue were the following at December
      31,:




2004
            
            2003*(dollars
                in thousands)*
            
            Dollars
            
            %
            
            Dollars
            
            %Cost
                of procucts sold
            
            $
            17,755
            
            
            30
            %
            $
            12,241
            
            
            32
            %Research
                and development
            
            
            7,860
            
            
            13
            %
            
            5,396
            
            
            14
            %General
                and administrative
            
            
            8,214
            
            
            14
            %
            
            5,594
            
            
            14
            %Selling
                and marketing
            
            
            20,311
            
            
            35
            %
            
            14,940
            
            
            39
            %Total
                costs and expenses
            
            $
            54,140
            
            
            92
            %
            $
            38,171
            
            
            99
            %







Cost
      of
      products sold for the year ended December 31, 2004 was $17.8 million, or 30%
      of
      product revenues, compared to cost of products sold of $12.2 million, or 32%
      of
      product revenue for the same period in 2003. In 2003, the cost of products
      sold
      included costs related to the launch of AlloCraft DBM, which increased the
      cost
      of products sold as a percentage of product revenues.





Total
      research and development expenses increased 46% to $7.9 million in the year
      ended December 31, 2004 compared to $5.4 million for the same period in 2003.
      The increase was primarily attributable to increased research and development
      headcount, professional fees and expenses related to animal studies. 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.





General
      and administrative expenses increased 47% to $8.2 million in the year ended
      December 31, 2004 compared to $5.6 million for the same period in 2003. The
      increase was primarily attributable to an increase in regulatory and accounting
      professional fees, payroll and related expenses associated with increased
      headcount and annual merit increases and depreciation expense associated with
      a
      new fully integrated computer software system.





Selling
      and marketing expenses increased 36% to $20.3 million for the year ended
      December 31, 2004 compared to $14.9 million for the same period in 2003. The
      increase was primarily attributable to: (i) higher selling expenses, principally
      payroll, commissions and travel and entertainment resulting from increased
      revenues and the expansion of our direct sales force and (ii) an increase in
      marketing and medical education expenses for AlloDerm. 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
      $4.0
      million and $4.6 million, respectively, in 2004 and 2003. The decrease in agent
      fees resulted from a decline in revenue generated through our independent sales
      and marketing agents.





*Interest
      and other income, net*




Interest
      and other income (expense), net increased $250,000 in 2004 compared to 2003.
      The
      net increase was primarily due to a $194,000 increase in interest income
      primarily resulting from a higher level of investments and a $39,000 decrease
      in
      interest expense resulting from the pay-off of outstanding debt in the third
      quarter of 2003.





29
 *Table
            of Contents*





*Income
      tax provision*




The
      provision for income taxes was $25,000 in 2004 compared to a benefit of $16.6
      million in 2003. Prior to the fourth quarter of 2003, no provision or benefit
      for income taxes was recorded because we were in a net deferred tax asset
      position and a full valuation allowance had been recorded. During the fourth
      quarter of 2003, we re-evaluated the amount of valuation allowance on our
      deferred tax assets and reduced the valuation allowance 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 $16.6 million in the fourth quarter of 2003. During the
      fourth quarter of 2004, we further reduced the amount of the valuation
      allowance, which resulted in the recognition of a non-cash income tax benefit
      of
      $2.9 million. The income tax provision for the year ended December 31, 2004
      is
      net of the benefit recorded in the fourth quarter. The valuation allowance
      of
      $606,000 at December 31, 2004 applies to certain tax credits that, in the
      opinion of management, are more likely than not to expire before we can use
      them.







LIQUIDITY
      AND CAPITAL RESOURCES


At
      December 31, 2005, we had $21.3 million in cash and cash equivalents and $26.8
      million in short-term marketable securities. Working capital increased to $73.2
      million at December 31, 2005 from $38.9 million at December 31, 2004. The
      increase in working capital resulted primarily from increases in cash and cash
      equivalents, short-term investments, accounts receivable, inventories and
      current deferred taxes, partially offset by an increase in accounts payable
      and
      accrued liabilities.





We
      generated $18.8 million of cash from operating activities for year ended
      December 31, 2005 compared to $8.7 million for the same period in 2004. The
      increase in cash from operating activities in 2005, as compared to 2004, was
      principally due to increases in net income after adjustments for non-cash items.
      Such increases were partially offset by a planned increase in inventories to
      support anticipated growth and a normal increase in receivables associated
      with
      higher revenue. Although we recorded a tax provision in 2005 and 2004, we are
      not required to pay regular federal income taxes until such time as our net
      operating losses and tax credit carryforwards are exhausted or
      expire.





Capital
      expenditures were $3.6 million in 2005 and consisted primarily of the purchase
      of manufacturing and computer equipment. In addition, we acquired certain
      technology licensing rights for $1.3 million in 2005.





Our
      financing activities generated $7.0 million for the year ended December 31,
      2005
      compared to $3.0 million for the same period in 2004. In both years, the cash
      generated from financing activities resulted from the exercise of common stock
      options and warrants. We had a $4 million revolving line of credit with a
      financial institution that expired in March 2005. After considering our
      anticipated near term cash requirements, we elected not to renew the credit
      facility.





The
      following table reflects a summary of our contractual cash obligations as of
      December 31, 2005:




Payments
                Due by PeriodTotal
            
            2006
            
            2007-2008
            
            2009-2010
            
            After
                2010Operating
                leases
            
            $
            4,519
            
            $
            919
            
            $
            1,838
            
            $
            1,762
            
            $
            -Licensing
                agreement
            
            
            1,750
            
            
            250
            
            
            500
            
            
            500
            
            
            500Total
                contractual cash obligations
            
            $
            6,269
            
            $
            1,169
            
            $
            2,338
            
            $
            2,262
            
            $
            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.





At
      the
      end of 2005, we commenced a facility expansion at our Branchburg, New Jersey
      facility. Estimated expenditures for the facility expansion are approximately
      $4.5 million in 2006 and $5.2 million in 2007.





30
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            of Contents*





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 fixed
      asset requirements in the foreseeable future. However, we may need additional
      funds to meet our long-term strategic objectives, including to complete
      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, 2005, 2004 and 2003.





New
      Accounting Pronouncements




In
      November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of
      ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
      amounts of idle facility expense, freights, handling costs and wasted materials
      (spoilage) should be recognized as current-period charges and require the
      allocation of fixed production overheads to inventory based on the nomal
      capacity of the production facilities. SFAS No. 151 is effective for inventory
      costs incurred during fiscal years beginning after June 15, 2005, with earlier
      application permitted. We adopted the provisions of SFAS No. 151 effective
      January 1, 2005. The adoption did not have a material impact on our financial
      position, cash flows or results of operrations.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      123R, Share-Based Payment — a revision of FASB Statement No. 123 Accounting for
      Stock-Based Compensation. This standard requires us to measure the cost of
      employee services received in exchange for equity awards based on the grant
      date
      fair value of the awards. The cost will be recognized as compensation expense
      over the vesting period of the awards.





SFAS
      123R
      permits public companies to adopt its requirements using one of the following
      methods:





A
      “modified prospective” method in which compensation cost is recognized beginning
      with the effective date (a) based on the requirements of SFAS 123R for all
      share-based payments granted after the effective date and (b) based on the
      requirements of SFAS 123 for all awards granted to employees prior to the
      effective date of SFAS 123R that remain unvested on the effective date.





A
      “modified retrospective” method which includes the requirements of the modified
      prospective method described above, but also permits entities to restate based
      on the amounts previously recognized under SFAS 123 for purposes of pro forma
      disclosures either (a) all prior periods presented or (b) prior interim periods
      of the year of adoption.





We
      adopted SFAS 123R using the “modified prospective” method effective January 1,
      2006.





Through
      December 31, 2005, as permitted by SFAS 123, we accounted for stock options
      awarded to employees and directors using APB Opinion 25’s intrinsic value method
      and, as such, recognized no compensation cost for employee stock options. The
      impact of adopting SFAS 123R in 2006 will be the recognition of approximately
      $4
      million of stock-based compensation expense associated with outstanding stock
      options that vest during the year. However, the adoption of SFAS 123R will
      have
      no impact on our overall cash flows and financial position. SFAS 123R also
      requires the benefits of tax deductions in excess of recognized compensation
      cost to be recorded when realized as a financing cash flow, rather than as
      an
      operating cash flow as required under current literature.





31
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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.
      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, 2005 or 2004.






Item
                8.
            Financial
                Statements and Supplementary Data




Financial
      statements and the financial statement schedules specified by this Item,
      together with the reports 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.






Item
                9a.
            Controls
                and Procedures




Evaluation
      of Disclosure Controls and Procedures




During
      the fourth quarter of 2005, 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, 2005, 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, 2005.





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Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2005 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.






PART
      III




Item
                10.
            Directors
                and Executive Officers of the
                Registrant




Background
      of Directors




The
      persons listed below served as directors of the Company during the year ended
      December 31, 2005.





Nominee
            Age
            Position
                with the Company
            Director
                SincePaul
                G. Thomas
            50
            Chairman
                of the Board, President and Chief Executive Officer
            1998Michael
                E. Cahr (1)
            65
            Director
            1991David
                Fitzgerald (2) (3) (4)
            72
            Director
            2001James
                G. Foster (4) (5)
            59
            Director
            1995Michael
                R. Minogue (2)
            38
            Director
            2005Robert
                P. Roche, Jr. (3)
            50
            Director
            2005Martin
                P. Sutter (6)
            50
            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
      AMEX company focused on the 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.





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***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 healthcare, data storage and
      hospitality fields. He also served as Chairman of Allscripts, Inc., a leading
      developer of hand-held device technology that provides physicians with 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, and a director
      of
      Mpower Communications Corporation, a publicly traded AMEX company specializing
      in providing data and voice services to businesses. Mr. Cahr received his
      undergraduate degree in Economics from Colgate University and his M.B.A. from
      Fairleigh Dickinson University.




***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 December 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
      a masters 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 Neothermia, 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 twelve 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
      Bachelor’s degree in Engineering from the United States Military Academy at West
      Point and his MBA from the University of Chicago.





34
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***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 MBA from The Wharton School, University of Pennsylvania.




***Martin
      P. Sutter*** .
      Mr.
      Sutter ** has
      been
      a director of LifeCell since December 2003. Mr. Sutter has been 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. He currently serves on the board of directors of Confluent Surgical,
      Inc., a privately held company specializing in surgical sealants and adhesion
      barriers; EluSys Therapeutics, Inc, a privately held company specializing in
      developing products for patients with end-stage congestive heart failure; Rinat
      Neuroscience Corporation, a privately held company specializing in developing
      therapeutic antibodies and BioForm
      Medical, Inc. ,
      a
      privately held medical
      device company
      specializing in 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 and the Nominating and
      Corporate Governance 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.





***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.





35
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***Independence
      of Audit Committee Members.*** Our
      common stock is listed on the Nasdaq National 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.





***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 the Company’s directors and officers. The Compensation
      Committee has overall responsibility for evaluating and approving the Company’s
      director and officer compensation plans, policies and programs.







Background
      of Executive Officers




The
      following sets forth certain information regarding the Company’s executive
      officers.




Name
            Offices
                Held
            Date
                of First Election
            AgePaul
                G. Thomas
            Chairman,
                President and Chief Executive Officer
            October
                1998
            50Lisa
                N. Colleran
            Senior
                Vice President, Commercial Operations
            December
                2002
            48Bruce
                Lamb, Ph.D.
            Senior
                Vice President, Development, Regulatory Affairs and Quality
            April
                2005
            50Young
                C. McGuinn
            Vice
                President, Manufacturing Operations
            July
                2004
            46Steven
                T. Sobieski
            Vice
                President, Finance and Administration & Chief Financial
                Officer
            June
                2000
            49




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.





***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.





36
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***Young
      C. McGuinn.*** Ms.
      McGuinn  joined
      LifeCell in July 2004 as Vice President, Manufacturing Operations. She has
      over
      15 years of healthcare-related experience. Prior to joining LifeCell, Ms.
      McGuinn served from 1998 to 2004 as Executive Director, Global Planning at
      Merck
      Manufacturing Division and served in various other supply-chain management
      and
      engineering roles at Merck and Company from 1989 through 1998. Ms. McGuinn
      received her B.S. degree from Manhattan College, and her M.S. degree from the
      University of Delaware.





***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
      public accounting and the medical technology field. Prior to joining LifeCell,
      Mr. Sobieski was Vice President, Finance at Osteotech, Inc, a publicly traded
      Nasdaq company focused on developing and marketing human tissue-based products
      for orthopedic applications, 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. 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.




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 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 on our website.





37
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Item
                11.
            Executive
                Compensation




The
      following table provides certain compensation information concerning our Chief
      Executive Officer and our next four most highly compensated executive officers
      for the fiscal year ended December 31, 2005.





**Summary
      Compensation Table**




Annual
                  Compenstation
              
              Long-TermCompensation(1)
              
              All
                  Other
                Compenstation(2)Name
                  and Pricipal Position
                at
                  December 31, 2005
              
              Year
              
              Salary
              
              Bonus
              
              Restricted
                Stock
                Awards
              
              Securities
                Underlying
                OptionsPaul
                  G. Thomas
              
              
              2005
              
              $
              416,042
              
              $
              368,550
              
              
              257,568
              
              
              __
              
              $
              10,000
              (3)Chairman,
                  President &
              
              
              2004
              
              $
              370,000
              
              $
              250,000
              
              
              __
              
              
              __
              
              $
              900Chief
                  Executive Officer
              
              
              2003
              
              $
              330,000
              
              $
              179,520
              
              
              __
              
              
              100,000
              
              $
              900Lisa
                  N. Colleran
              
              
              2005
              
              $
              260,750
              
              $
              117,729
              
              
              96,286
              
              
              __
              
              $
              1,550Senior
                  Vice President,
              
              
              2004
              
              $
              232,400
              
              $
              89,318
              
              
              __
              
              
              __
              
              $
              1,200Commercial
                  Operations
              
              
              2003
              
              $
              215,000
              
              $
              81,724
              
              
              __
              
              
              50,000
              
              $
              42,765
              (4)Bruce
                  Lamb, Ph.D.
              
              
              2005
              
              $
              176,250
              (5)
              $
              92,637
              
              
              __
              
              
              100,000
              
              $
              1,475Senior
                  Vice President,
              
              
              2004
              
              $
              __
              
              $
              __
              
              
              __
              
              
              __
              
              $
              __Development,
                  Regulatory
              
              
              2003
              
              $
              __
              
              $
              __
              
              
              __
              
              
              __
              
              $
              __Affairs
                  and QualityYoung
                  C. McGuinn
              
              
              2005
              
              $
              213,825
              
              $
              84,804
              
              
              21,341
              
              
              __
              
              $
              1,550Vice
                  President,
              
              
              2004
              
              $
              95,577
              (6)
              $
              34,526
              
              
              __
              
              
              100,000
              
              $
              1,025Manufacturing
                  Operations
              
              
              2003
              
              $
              __
              
              $
              __
              
              
              __
              
              
              __
              
              $
              __Steven
                  T. Sobieski
              
              
              2005
              
              $
              232,000
              
              $
              104,748
              
              
              50,000
              
              
              __
              
              $
              1,550Vice
                  President, Finance
              
              
              2004
              
              $
              222,000
              
              $
              86,014
              
              
              __
              
              
              __
              
              $
              1,200and
                  Administration &
                Chief
                  Financial Officer
              
              
              2003
              
              $
              202,000
              
              $
              70,902
              
              
              __
              
              
              35,100
              
              $
              1,200




(1)
            Represents
                restricted stock and shares issuable pursuant to stock options granted
                under our stock option plan.


(2)
            Represents
                contributions made by us pursuant to our 401(k) Plan and/or stock
                purchase
                plan unless otherwisenoted.


(3)
            Includes
                $8,750 of car allowance paid by the Company.


(4)
            Includes
                $41,565 of relocation related costs paid by the
                Company.


(5)
            Employment
                commenced April 2005. Annual salary was
                $235,000.


(6)
            Employment
                commenced July 2004. Annual salary was
                $210,000.





38
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Option
      Grants in 2005




The
      following table provides certain information with respect to options granted
      to
      our Chief Executive Officer and to each of the executive officers named in
      the
      Summary Compensation Table during the fiscal year ended December 31,
      2005:





**Option
      Grants in Last Fiscal Year**




Number
                of
              Securities
                Underlying
            
            Percent
                of
              Total
                Options
              Granted
                to
              Employees
            
            Exercise
            
            Market
                Price
            
            
            
            Potential
                Realizable
              Value
                at Assumed
              Annual
                Rates of Stock
              Price
                Appreciation for
              Option
                Term(1)Name
            
            Options
              Granted
            (2)
            in
              Fiscal
                Year
            
            Price
              per
                Share
            
            on
                Date
              of
                Grant ($)
            
            Expiration
              Date
            
            5%
            
            10%Bruce
                Lamb, Ph.D.
            
            
            100,000
            
            
            35.6
            %
            $
            8.84
            
            $
            8.84
            
            
            3/31/2015
            
            $
            555,943
            
            $
            1,408,868








(1)
            The
                Securities and Exchange Commission (the “SEC”) requires disclosure of the
                potential realizable value or present value of each grant. The 5%
                and 10%
                assumed annual rates of compounded stock price appreciation are mandated
                by rules of the SEC and do not represent our estimate or projection
                of our
                future common stock prices. The disclosure assumes the options will
                be
                held for the full ten-year term prior to exercise. Such options may
                be
                exercised prior to the end of such ten-year term. The actual value,
                if
                any, an executive officer may realize will depend on the excess of
                the
                stock price over the exercise price on the date the option is exercised.
                There can be no assurance that the stock price will appreciate at
                the
                rates shown in the table.


(2)
            Such
                options were granted with an exercise price equal to the fair market
                value
                of the Company’s stock on the date of grant and vest 25% per year
                commencing on the first anniversary of the date of
                grant.




Option
      Exercises and Holdings




The
      following table provides information concerning options exercised during 2005
      and the value of unexercised options held by each of the executive officers
      named in the Summary Compensation Table at December 31, 2005.





**Option
      Exercises and Values at December 31, 2005**




Shares
              Acquired
              on Exercise
            
            Value
            
            Number
                of Securities Underlying
              Unexercised
                Options at
              December
                31, 2005 (# of shares)
            
            Value
                of
              In-the-Money
                Options at
              December
                31, 2005 ($)(1)Name
            
            (#
                shares)
            
            Realized
            
            Exercisable
            
            Unexercisable
            
            Exercisable
            
            UnexercisablePaul
                G. Thomas
            
            
            698,784
            
            $
            8,165,626
            
            
            201,216
            
            
            100,000
            
            $
            3,220,762
            
            $
            1,503,500Lisa
                N. Colleran
            
            
            __
            
            
            __
            
            
            100,000
            
            
            50,000
            
            $
            1,566,750
            
            $
            751,750Bruce
                Lamb, Ph.D.
            
            
            __
            
            
            __
            
            
            __
            
            
            100,000
            
            $
            __
            
            $
            1,020,000Young
                C. McGuinn
            
            
            25,000
            
            $
            233,518
            
            
            __
            
            
            75,000
            
            $
            __
            
            $
            750,750Steven
                T. Sobieski
            
            
            114,000
            
            $
            1,536,939
            
            
            149,800
            
            
            36,300
            
            $
            2,126,459
            
            $
            547,289




(1)
            Based
                on $19.04 per share, the closing price of the common stock, as reported
                by
                the Nasdaq National Market, on December 30,
                2005.




Compensation
      of Directors




From
      January 1, 2005 through September 30, 2005, non-employee directors were paid
      $18,000 per year payable monthly, regardless of the number of Board meetings
      attended, as well as $1,000 per meeting attended. Non-employee directors who
      serve on the Compensation Committee were also paid $2,000 per year regardless
      of
      the number of committee meetings attended. Non-employee directors who serve
      on
      the Audit Committee were paid $4,000 per year regardless of the number of
      committee meetings attended. The chairman of each of the Compensation Committee
      and the Audit Committee were paid $4,000 per year.





Effective
      October 1, 2005, non-employee directors were paid $20,000 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 were also paid $2,000, $2,000 and $4,000 per year, respectively,
      regardless of the number of committee meetings attended. The chairman of each
      of
      the committees were paid $4,000 per year.





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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.





Newly
      elected non-employee directors receive an option to purchase 25,000 shares
      of
      common stock at an exercise price equal to the fair market value of a share
      of
      common stock on such election date, and each of our non-employee directors
      receives an annual option grant to purchase 10,000 shares of common stock on
      the
      date of our Annual Meeting of Stockholders. Options granted under our Director
      Stock Option Plans generally vest 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 options granted
      to
      non-employee Directors during the fiscal year ended December 31,
      2005:




**Option
      Grants to Non-Employee Directors During Last Fiscal Year**




Name
            Number
                of
              Securities
              Underlying
              Options
              Granted
            Exercise
                Price
              per
                Share
            Market
                Price
              on
                Date
              of
                Grant ($)
            Expiration
              DateMichael
                E. Cahr
            10,000
            $16.90
            $16.90
            07/18/15David
                Fitzgerald
            10,000
            $16.90
            $16.90
            07/18/15James
                G. Foster
            10,000
            $16.90
            $16.90
            07/18/15Michael
                R. Minogue
            25,000
            $21.63
            $21.63
            09/30/15Robert
                P. Roche, Jr.
            25,000
            $21.63
            $21.63
            09/30/15Martin
                P. Sutter
            10,000
            $16.90
            $16.90
            07/18/15




Change
      in
      Control and Severance Agreements




We
      have
      entered into severance and change in control agreements with certain of our
      executive officers to ensure that we will have their continued dedication as
      executives notwithstanding the possibility, threat or occurrence of a defined
      “change in control.” Following are details of the agreements.





In
      September 2005, we entered into employment agreements with each of Paul G.
      Thomas, LifeCell’s Chairman, President and Chief Executive Officer, Steven T.
      Sobieski, LifeCell’s Vice President Finance and Chief Financial Officer, and
      Lisa N. Colleran, LifeCell’s Senior Vice President, Commercial Operations.





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Employment
      under the employment agreements continues until the agreement is terminated
      (a)
      as a result of the executive’s death or “disability,” (b) by LifeCell with or
      without “cause,” (c) by the executive with or without “good reason,” or (d) by
      mutual agreement. If the executive is terminated as a result of his or her
      death
      or disability, in addition to accrued compensation and vested benefits, he/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
      he/she was employed during the year of termination and payable as follows:
      Mr.
      Thomas-over 18 months; Mr. Sobieski-over 12 months; and Ms. Colleran-over 12
      months. If Mr. Thomas is terminated without cause or he resigns for good reason,
      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 his target bonus for the year of
      termination) for 18 months and 18 months of subsidized COBRA coverage. If Mr.
      Sobieski or Ms. Colleran is terminated without cause, in addition to accrued
      compensation and benefits and the pro-rata bonus described above, he/she is
      entitled to continuation of his/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 LifeCell’s 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 Employee’s 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 LifeCell’s 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 the executive in favor of LifeCell and related parties.





Under
      Mr.
      Thomas’ employment agreement, if within the period beginning six months prior to
      a change in control and ending 18 months after a change in control there occurs
      a “trigger event,” Mr. Thomas will be entitled to receive: (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 trigger event or his target
      bonus
      for the year in which the trigger event occurred); and (b) subsidized COBRA
      coverage for 18 months. Under Mr. Sobieski’s employment agreement, if within the
      period beginning six months prior to a change in control and ending 12 months
      after a change in control there occurs a “trigger event,” Mr. Sobieski will be
      entitled to receive: (a) a lump sum payment equal to 2 times the sum of his
      base
      salary and bonus (based upon the greater of his bonus for the year prior to
      the
      trigger event or his target bonus for the year in which the trigger event
      occurred); and (b) subsidized COBRA coverage for 12 months and COBRA coverage
      at
      the sole cost of LifeCell for an additional six months. Under Ms. Colleran’s
      employment agreement, if within the period beginning six months prior to a
      change in control and ending 12 months after a change in control there occurs
      a
“trigger event,” Ms. Colleran will be entitled to receive: (a) payments in an
      aggregate amount equal to the product of: (i) either (y) if the trigger event
      occurs prior to September 21, 2006, 1.5, or (z) if the trigger event occurs
      on
      or after September 21, 2006, 2.0; and (ii) the sum of her base salary and bonus
      (based upon the greater of her bonus for the year prior to the trigger event
      or
      her target bonus for the year in which the trigger 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. For each of the executives, if the trigger event occurs on or after
      July
      1 of any calendar year, he/she also will be entitled to receive 50% of his/her
      target bonus for the year in which the trigger event occurred. Payments and
      benefits upon a trigger event are in lieu of the severance payments described
      in
      the paragraph above captioned “Term; Severance” and are conditioned upon the
      execution of a general release in favor of LifeCell and related parties. A
      “trigger event” is defined to include, without limitation, termination by
      LifeCell without cause or resignation by the executive for good reason.





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 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 and 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 only a portion of the performance shares granted
      to
      Mr. Thomas and Ms. Colleran, respectively, shall lapse.





In
      the
      event that any payment or benefit that Mr. Thomas, Mr. Sobieski or Ms. Colleran
      would receive 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, of
      the
      payment, whichever amount, after taking into account all taxes and the excise
      tax, results in the executive’s receipt, on an after tax basis, of the greater
      amount of the payment and benefits.





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In
      April
      2005, we entered into a change in control agreement with Bruce Lamb, Ph.D.
      Under
      the agreement, if within 12 months of a change in control there occurs a
      "trigger event," Dr. Lamb will be entitled to receive all then accrued
      compensation and fringe benefits, continuation of health benefits for a period
      of 18 months and cash payments in the aggregate amount equal to one and one
      half
      times his annualized base salary immediately prior to the change in control,
      payable over an eighteen month peripd. Additionally, all stock options shall
      immediately become vested and exercisable. Additionally, we entered into a
      severance arrangement with Dr. Lamb. Pursuant to such arrangement, Dr. Lamb
      is
      entitled to receive 12 months continuance of his base salary and health care
      benefits coverage if he is terminated by us without cause.





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




The
      following table sets forth information as of March 1, 2006, 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) our executive officers and directors
      and (iii) all of our executive officers and directors as a group. Unless
      otherwise indicated, the address of each such person is c/o LifeCell
      Corporation, One Millennium Way, Branchburg, New Jersey 08876.




Amount
                and Nature of
              Beneficial
                Ownership(1)Common
                StockBeneficial
                Owner
            
            Shares
            
            %Barclays
                Global Investors, NA (2)
            
            
            2,132,814
            
            
            6.41
            %Barclays
                Global Fund AdvisorsBarclays
                Global Investors, Ltd.Barclays
                Global Investors Japan Trust and Banking Company, Ltd.45
                Freemont StreetSan
                Francisco, CA 94105Arbor
                Capital Management, LLC (3)
            
            
            2,036,539
            
            
            6.13
            %Rick
                D. LeggottOne
                Financial Plaza120
                S. 6th Street, Suite 1000Minneapolis,
                Minnesota 55402Paul
                G. Thomas (4)
            
            
            470,564
            
            
            1.41
            %Chairman
                of the Board, President & Chief Executive OfficerMichael
                E. Cahr
            
            
            114,856
            
            
            *DirectorDavid
                Fitzgerald (5)
            
            
            55,000
            
            
            *DirectorJames
                G. Foster (6)
            
            
            75,000
            
            
            *DirectorMichael
                R. Minogue
            
            
            __
            
            
            *DirectorRobert
                P. Roche, Jr.
            
            
            __
            
            
            *DirectorMartin
                P. Sutter (7)
            
            
            84,630
            
            
            *DirectorLisa
                N. Colleran (8)
            
            
            202,735
            
            
            *Senior
                Vice President Commercial OperationsBruce
                Lamb, Ph.D. (9)
            
            
            31,026
            
            
            *Senior
                Vice President Development, Regulatory Affairs and QualityYoung
                C. McGuinn (10)
            
            
            26,803
            
            
            *Vice
                President Manufacturing OperationsSteven
                T. Sobieski (11)
            
            
            119,026
            
            
            *Vice
                President Finance & Chief Financial OfficerAll
                executive officers and directors as a group (15)
            
            
            1,179,640
            
            
            3.50
            %




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 warrants 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, 2006 have been exercised or converted.
                Options and warrants that are not exercisable within 60 days of February
                28, 2006 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.





43
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(2)
            Represents
                2,132,814 shares of Common Stock. Information with respect to the
                ownership of such stockholders was obtained from a Schedule 13G filed
                on
                January 31, 2006.


(3)
            Represents
                2,036,540 shares of Common Stock. Information with respect to the
                ownership of such stockholders was obtained from an amendment to
                a
                Schedule 13G filed jointly by Arbor Capital Management, LLC and Mr.
                Leggott on January 31, 2006. Arbor capital management, LLC, a Minnesota
                limited liability company, is an investment adviser registered under
                Section 203 of the Investment Advisers Act of 1940.  Mr. Leggott is
                CEO of Arbor Capital Management, LLC and beneficially owns a controlling
                percentage of its outstanding voting securities. As a result of his
                position with and ownership of securities of Arbor Capital Management,
                LLC, Mr. Leggott could be deemed to have voting and/or investment
                power
                with respect to the shares beneficially owned by Arbor Capital Management,
                LLC.  Neither the filing of the joint Schedule 13G nor any
                information contained therein shall be construed as an admission
                by Mr.
                Leggott of his control or power to influence the control of Arbor
                Capital
                Management, LLC.


(4)
            Includes
                101,216 shares underlying stock options and 277,568 shares of restricted
                stock.


(5)
            Represent
                55,000 shares underlying stock
                options.


(6)
            Represents
                75,000 shares underlying stock
                options.


(7)
            Includes
                39,630 shares of Common Stock and 45,000 shares underlying stock
                options,
                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.
                Ownership information was obtained from our stock records and a Form
                4
                filed on May 28, 2004.


(8)
            Includes
                100,000 shares underlying stock options and 102,090 shares of restricted
                stock.


(9)
            Includes
                25,000 shares underlying stock options and 5,256 shares of restricted
                stock.


(10)
            Includes
                26,629 shares of restricted stock.


(11)
            Includes
                38,550 shares underlying stock options and 61,612 shares of restricted
                stock.


(12)
            See
                notes (3) through (11).




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,
      2005. This plan was our only equity compensation plans in existence as of
      December 31, 2005.








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
            
            
            2,257,238
            
            $
            6.71
            
            
            2,353,743Equity
                Compensation Plans Not Approved by Shareholders
            
            
            10,000
            
            $
            4.00
            
            
            0TOTAL
            
            
            2,267,238
            
            $
            6.70
            
            
            2,353,743







Item
                13.
            Certain
                Relationships and Related
                Transactions




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.





44
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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 controls
        over financial reporting and 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, 2005 and 2004 totaled approximately $359,000 and
        $310,000, respectively.


*Audit-Related
      Fees.* We
      were
      billed $19,000 by PwC for the fiscal year ended December 31, 2004 for assurance
      and related services that are reasonably related to the performance of the
      audit
      or review of our financial statements and are not reported under the caption *Audit
      Fees* above.





*Tax
      Fees.* We were
      billed an aggregate of $50,000 by PwC for the fiscal year ended December 31,
      2004 for tax services, principally advice regarding the preparation of income
      tax returns.





*All
      Other Fees.* We did
      not incur any fees for the fiscal years ended December 31, 2005 and 2004 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.





45
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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, 2005 and 2004
            F-3Statements
                of Operations for the years ended December 31, 20054, 2004 and
                2003
            F-4Statements
                of Stockholders’ Equity for the years ended December 31, 2005, 2004 and
                2003
            F-5Statements
                of Cash Flows for the years ended December 31, 2005, 2004 and
                2003
            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.





Exhibits
      designated by the symbol † are management contracts or compensatory plans or
      arrangements that are required to be filed with this report pursuant to this
      Item 15.





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†
            Letter
                agreement dated September 8, 1998 between LifeCell Corporation and
                Paul G.
                Thomas, as amended by letter agreements dated September 9, 1998 and
                September 29, 1998 (incorporated by reference to Exhibit 10.3 to
                the
                Company’s Quarterly Report on Form 10-Q filed with the Commission on
                November 13, 1998).


46
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10.
            4†
            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).10.
            5†
            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.
            6†
            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.
            7†
            Form
                of Change in Control Agreement (incorporated by reference to Exhibit
                10.26
                to the Company's Annual Report on Form 10-K for the fiscal year ended
                December 31, 2000).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).14.
            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.




47
 *Table
          of Contents*


Signatures




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





LIFECELL
                CORPORATION(Registrant)By:
            /s/
                Paul G. ThomasPaul
                G. ThomasPresident,
                Chief Executive Officer andChairman
                of the Board of DirectorsDated:
                March 7, 2006





In
      accordance with 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
                7, 2006Paul
                G. Thomas
            
            Officer
                (Principal Executive Officer) and Chairman of the Board of
                Directors/s/
                Steven T. Sobieski
            
            Vice
                President and Chief Financial
            
            March
                7, 2006Steven
                T. Sobieski
            
            Officer
                (Principal Financial Officer)/s/
                Bradly C. Tyler
            
            Controller
            
            March
                7, 2006Bradly
                C. Tyler
            
            (Principal
                Accounting Officer)/s/
                Michael E. Cahr
            
            Director
            
            March
                7, 2006Michael
                E. Cahr/s/
                James G. Foster
            
            Director
            
            March
                7, 2006James
                G. Foster/s/
                David Fitzgerald
            
            Director
            
            March
                7, 2006David
                Fitzgerald/s/
                Michael R. Minogue
            
            Director
            
            March
                7, 2006Michael
                R. Minogue/s/
                Robert P. Roche, Jr.
            
            Director
            
            March
                7, 2006Robert
                P. Roche, Jr./s/
                Martin P. Sutter
            
            Director
            
            March
                7, 2006Martin
                P. Sutter




48
 *Table
          of Contents*




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 2005 and 2004 financial
      statements and of its internal control over financial reporting as of December
      31, 2005, and an audit of its 2003 financial statements 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, 2005 and 2004, and the results of its
      operations and its cash flows for each of the three years in the period ended
      December 31, 2005 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.





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, 2005 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,
      2005, 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.





F-1
 *Table
            of Contents*




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




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







/s/
      PricewaterhouseCoopers LLP


Florham
      Park, NJ


March
      3,
      2006





F-2
 *Table
            of Contents*




LifeCell
                Corporation Balance Sheets





December
                31,*(dollars
                in thousands)*
            
            2005
            
            2004AssetsCurrent
                assetsCash
                and cash equivalents
            
            $
            21,272
            
            
            10,084Short-term
                investments
            
            
            26,795
            
            
            15,308Receivables,
                less allowance of $156 in 2005 and $114 in 2004
            
            
            15,786
            
            
            9,240Inventories
            
            
            12,536
            
            
            8,895Prepayments
            
            
            885
            
            
            312Deferred
                tax assets
            
            
            10,660
            
            
            3,501Total
                current assets
            
            
            87,934
            
            
            47,340Investments
                in marketable securities
            
            
            —
            
            
            1,694Fixed
                assets, net
            
            
            9,271
            
            
            8,332Deferred
                tax assets
            
            
            8,057
            
            
            14,201Other
                assets, net
            
            
            1,736
            
            
            526Total
                assets
            
            $
            106,998
            
            $
            72,093Liabilities
                and Stockholders' EquityCurrent
                liabilitiesAccounts
                payable
            
            $
            6,680
            
            
            1,727Accrued
                liabilities
            
            
            8,045
            
            $
            6,702Total
                current liabilities
            
            
            14,725
            
            
            8,429Other
                liabilities
            
            
            203
            
            
            216Commitments
                and contingenciesStockholders'
                equityUndesignated
                preferred stock, $.001 par value 1,817,795shares authorized, none issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 48,000,000 shares authorized;32,841,000 and 29,126,000 shares issued and outstanding in 2005 and
                2004
            
            
            33
            
            
            29Common
                stock warrants, 1,519,000 outstanding in 2004
            
            
            —
            
            
            2,590Additional
                paid-in capital
            
            
            118,473
            
            
            99,310Accumulated
                other comprehensive income
            
            
            5
            
            
            4Accumulated
                deficit
            
            
            (26,441
            )
            
            (38,485
            )Total
                stockholders' equity
            
            
            92,070
            
            
            63,448Total
                liabilities and stockholders' equity
            
            $
            106,998
            
            $
            72,093




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)*
            
            2005
            
            2004
            
            2003Revenues:Product
                revenues
            
            $
            93,326
            
            $
            58,751
            
            $
            38,577Research
                grant revenues
            
            
            1,072
            
            
            2,376
            
            
            1,672Total
                revenues
            
            
            94,398
            
            
            61,127
            
            
            40,249Costs
                and expenses:Cost
                of products sold
            
            
            29,205
            
            
            17,755
            
            
            12,241Research
                and development
            
            
            10,349
            
            
            7,860
            
            
            5,396General
                and administrative
            
            
            11,945
            
            
            8,214
            
            
            5,594Selling
                and marketing
            
            
            24,736
            
            
            20,311
            
            
            14,940Total
                costs and expenses
            
            
            76,235
            
            
            54,140
            
            
            38,171Income
                from operations
            
            
            18,163
            
            
            6,987
            
            
            2,078Interest
                and other income (expense), net
            
            
            1,013
            
            
            222
            
            
            (28
            )Income
                before income taxes
            
            
            19,176
            
            
            7,209
            
            
            2,050Income
                tax provision (benefit)
            
            
            7,132
            
            
            25
            
            
            (16,622
            )Net
                income
            
            $
            12,044
            
            $
            7,184
            
            $
            18,672Net
                income per common share:Basic
            
            $
            0.39
            
            $
            0.26
            
            $
            0.85Diluted
            
            $
            0.36
            
            $
            0.22
            
            $
            0.70Shares
                used in computing net incomeper common share:Basic
            
            
            30,877,000
            
            
            27,553,000
            
            
            22,094,000Diluted
            
            
            33,348,000
            
            
            31,974,000
            
            
            26,632,000




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




F-4
 *Table
            of Contents*




LifeCell
                Corporation Statements of Stockholders’ Equity




Series
                B
              Preferred
                Stock
            
            Common
                Stock
            
            Common
                Stock
              Warrants
            
            Additional
                Paid-in
            
            Accumulated
                Comprehensive
            
            Accumulated
            
            Total
              Stockholders’(dollars
                and shares in thousands)
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Income
            
            Deficit
            
            EquityBalance
                at December 31, 2002
            
            
            74
            
            
            —
            
            
            21,193
            
            $
            21
            
            
            2,284
            
            $
            4,002
            
            $
            78,037
            
            $
            —
            
            $
            (64,341
            )
            $
            17,719Stock
                options exercised
            
            
            —
            
            
            —
            
            
            129
            
            
            —
            
            
            —
            
            
            —
            
            
            462
            
            
            —
            
            
            —
            
            
            462Warrants
                exercised
            
            
            —
            
            
            —
            
            
            224
            
            
            —
            
            
            (284
            )
            
            (590
            )
            
            982
            
            
            —
            
            
            —
            
            
            392Conversion
                of Series B preferred stock
            
            
            (6
            )
            
            —
            
            
            242
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Common
                stock issued for cash
            
            
            —
            
            
            —
            
            
            3,690
            
            
            5
            
            
            —
            
            
            —
            
            
            14,651
            
            
            —
            
            
            —
            
            
            14,656Reclassification
                of common stock,subject to redemption
            
            
            —
            
            
            —
            
            
            114
            
            
            —
            
            
            —
            
            
            —
            
            
            478
            
            
            —
            
            
            —
            
            
            478Net
                income
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            18,672
            
            
            18,672Balance
                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
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            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
            )
            
            —
            
            
            —
            
            
            —Income
                tax benefit from stock optionexercises
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            873
            
            
            —
            
            
            —
            
            
            873Balance
                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
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            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
            
            
            —
            
            
            —
            
            
            1,538Income
                tax benefit from stock optionexercises
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            8,033
            
            
            —
            
            
            —
            
            
            8,033Balance
                at December 31, 2005
            
            
            —
            
            $
            —
            
            
            32,841
            
            $
            33
            
            
            —
            
            $
            —
            
            $
            118,473
            
            $
            5
            
            $
            (26,441
            )
            $
            92,070




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)
            
            2005
            
            2004
            
            2003Cash
                Flows from Operating Activities:Net
                income
            
            $
            12,044
            
            $
            7,184
            
            $
            18,672Adjustments
                to reconcile net income to net cash provided by operating activities:Depreciation
                and amortization
            
            
            2,681
            
            
            2,357
            
            
            2,010Deferred
                taxes
            
            
            5,775
            
            
            (144
            )
            
            (16,656
            )Stock-based
                compensation
            
            
            1,537
            
            
            —
            
            
            —Provision
                for bad debt
            
            
            103
            
            
            69
            
            
            61Inventory
                write-off
            
            
            1,402
            
            
            —
            
            
            —Inventory
                net realizable value provision
            
            
            381
            
            
            (173
            )
            
            266Reserve
                for product returns
            
            
            63
            
            
            —
            
            
            —Deferred
                revenues
            
            
            —
            
            
            (130
            )
            
            (221
            )Deferred
                rent expense
            
            
            (13
            )
            
            44
            
            
            78Loss
                on disposal of fixed assets
            
            
            15
            
            
            8
            
            
            25Changes
                in operating assets and liabilities:Receivables
            
            
            (6,712
            )
            
            (3,433
            )
            
            (1,605
            )Inventories
            
            
            (5,424
            )
            
            108
            
            
            (2,729
            )Prepayments
            
            
            (573
            )
            
            8
            
            
            (60
            )Accounts
                payable, accruedliabilities and other
            
            
            7,550
            
            
            2,837
            
            
            981Net
                cash provided by operating activities
            
            
            18,829
            
            
            8,735
            
            
            822Cash
                Flows from Investing Activities:Proceeds
                from maturities and sale of investments
            
            
            7,028
            
            
            6,194
            
            
            —Purchase
                of investments
            
            
            (16,830
            )
            
            (12,088
            )
            
            (10,877
            )Capital
                expenditures
            
            
            (3,595
            )
            
            (3,151
            )
            
            (2,507
            )Intangible
                assets
            
            
            (1,250
            )
            
            —
            
            
            —Proceeds
                from sale of equipment
            
            
            —
            
            
            —
            
            
            100Net
                cash used in investing activities
            
            
            (14,647
            )
            
            (9,045
            )
            
            (13,284
            )Cash
                Flows from Financing Activities:Proceeds
                from issuance of common stock
            
            
            —
            
            
            —
            
            
            15,682Proceeds
                from issuance of long-term debt
            
            
            —
            
            
            —
            
            
            1,451Proceeds
                from exercise of common stock options and warrants
            
            
            7,006
            
            
            3,007
            
            
            856Principal
                payments on long-term debt
            
            
            —
            
            
            —
            
            
            (2,314
            )Offering
                fees
            
            
            —
            
            
            —
            
            
            (1,028
            )Net
                cash provided by financing activities
            
            
            7,006
            
            
            3,007
            
            
            14,647Net
                increase in cash and cash equivalents
            
            
            11,188
            
            
            2,697
            
            
            2,185Cash
                and cash equivalents at beginning of period
            
            
            10,084
            
            
            7,387
            
            
            5,202Cash
                and cash equivalents at end of period
            
            $
            21,272
            
            $
            10,084
            
            $
            7,387Supplemental
                Disclosure of Cash Flow Information:Cash
                paid during the year for interest
            
            $
            3
            
            $
            18
            
            $
            64Cash
                paid during the year for income taxes
            
            $
            525
            
            $
            258
            
            $
            336




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




F-6
 *Table
            of Contents*




LifeCell
                Corporation Notes To Financial Statements




*(December
      31, 2005)*




1.
            ORGANIZATION




LifeCell
      Corporation (“LifeCell” or “the Company”) develops and markets products made
      from human tissue 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 (the
      “FDA”) as human tissue for transplantation. 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, 2005 or 2004.
      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 2005, 2004 or 2003.




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 or
      the
      estimated useful life of the asset.





F-7
 *Table
            of Contents*




Intangible
      Assets




Intangible
      assets amounted to $1,587,000 at December 31, 2005, net of $311,000 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, 2005, 2004 and 2003, amortization expense relating to intangibles
      was $40,000, $38,000 and $45,000, respectively. The weighted average
      amortization period for intangible assets is 11.3 years. Estimated
      amortization expense for the next five years is as follows:




*(dollars
                in thousands)*
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010Estimated
                Amortization Expense
            
            $
            76
            
            $
            189
            
            $
            189
            
            $
            189
            
            $
            189




Impairment
      of Long-Lived Assets




The
      Company periodically evalutes 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, 2005 represent recoverable value, and during
      2005 and 2004 no adjustmetn 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 are recognized.





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, 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.





F-8
 *Table
            of Contents*





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. At December 31, 2005 and 2004, the valuation allowance
      primarily reflected uncertainties involving the realization of certain tax
      credits due to the potential impact of future stock option exercises and
      shorter-term tax asset expiration dates. 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.




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.




Stock-Based
      Compensation




The
      Company follows Accounting Principles Board (APB) Opinion No. 25, “Accounting
      for Stock Issued to Employees,” and related interpretations in accounting for
      equity-based awards issued to employees and directors. No stock-based
      compensation cost for options is reflected in net income, as all options granted
      under the plans had an exercise price equal to the market value of the
      underlying common stock on the date of grant.





The
      following table illustrates the effect on net income and earnings per share
      if
      the company had applied the fair value recognition provisions of FASB Statement
      No. 123, Accounting for Stock-Based Compensation, to stock-based compensation
      for the years ended December 31,:




(dollars
                in thousands, except per share data)
            
            2005
            
            2004
            
            2003Net
                income, as reported
            
            $
            12,044
            
            $
            7,184
            
            $
            18,672Add:
                Total stock-based
                compensation expense included in reported net income, net of related
                income tax effects
            
            
            953
            
            
            —
            
            
            —Less:
                Total stock-based compensation expensedetermined under fair value based method for all awards, net of related
                tax effects
            
            
            (3,233
            )
            
            (1,498
            )
            
            (1,248
            )Pro
                forma net income
            
            $
            9,764
            
            
            5,686
            
            
            17,424Net
                income per common share - basicAs
                reported
            
            $
            0.39
            
            $
            0.26
            
            $
            0.85Pro
                forma
            
            $
            0.32
            
            $
            0.21
            
            $
            0.79Net
                income per common share - dilutedAs
                reported
            
            $
            0.36
            
            $
            0.22
            
            $
            0.70Pro
                forma
            
            $
            0.30
            
            $
            0.18
            
            $
            0.66




See
      Note
      9 for additional information regarding the computations presented
      above.




F-9
 *Table
            of Contents*





Concentrations
      of Credit Risk




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




Allowance
      for Doubtful Accounts





*(dollars
                in thousands)*
            
            Balance
              at
                Beginning
              of
                Period
            
            Charge
                (Benefit) to
              Costs
                and Expenses
            
            Write-offs
              and
                Deductions
              From
                Allowance
            
            Balance
                at
              End
                of PeriodDecember
                31, 2005
            
            $
            114
            
            $
            103
            
            $
            (61
            )
            $
            156December
                31, 2004
            
            
            54
            
            
            69
            
            
            (9
            )
            
            114December
                31, 2003
            
            
            40
            
            
            61
            
            
            (47
            )
            
            54




New
      Accounting Pronouncements




In
      November 2004, the FASB issued SFAS No. 151, Inventory Costs — an amendment of
      ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal
      amounts of idle facility expense, freights, handling costs, and wasted materials
      (spoilage) should be recognized as current-period charges and require the
      allocation of fixed production overheads to inventory based on the normal
      capacity of the production facilities. SFAS No. 151 was adopted January 1,
      2005.
      The adoption of this accounting pronouncement did not have a material impact
      on
      the Company’s financial position, cash flows, or results of
      operations.





In
      December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      123R, Share-Based Payment — a revision of FASB Statement No. 123 Accounting for
      Stock-Based Compensation. This standard requires the Company to measure the
      cost
      of employee services received in exchange for equity awards based on the grant
      date fair value of the awards. The cost will be recognized as compensation
      expense over the vesting period of the awards.





SFAS
      123R
      permits public companies to adopt its requirements using one of the following
      methods:




1.
            A
                “modified prospective” method in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                SFAS
                123R for all share-based payments granted after the effective date
                and (b)
                based on the requirements of SFAS 123 for all awards granted to employees
                prior to the effective date of SFAS 123R that remain unvested on
                the
                effective date.


2.
            A
                “modified retrospective” method which includes the requirements of the
                modified prospective method described above, but also permits entities
                to
                restate based on the amounts previously recognized under SFAS 123
                for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of
                adoption.





The
      Company will adopt SFAS 123R using the “modified prospective” method effective
      January 1, 2006.





Through
      December 31, 2005, as permitted by SFAS 123, the Company accounted for stock
      options awarded to employees and directors using APB Opinion 25’s intrinsic
      value method and, as such, recognized no compensation cost for employee stock
      options. The impact of adopting SFAS 123R in 2006 will be the recognition of
      approximately $4 million of stock-based compensation expense associated with
      outstanding stock options that vest during the year. However, the adoption
      of
      SFAS 123R will have no impact on cash flows and financial position. SFAS 123R
      also requires the benefits of tax deductions in excess of recognized
      compensation cost to be recorded when realized as a financing cash flow, rather
      than as an operating cash flow as required under current literature.





F-10
 *Table
            of Contents*




3.
            INVENTORIES




Inventories
      consist of the following at December 31,:




(dollars
                in thousands)
            
            2005
            
            2004Unprocessed
                tissue and materials
            
            $
            7,730
            
            $
            4,347Tissue
                products in-process
            
            
            1,688
            
            
            1,956Tissue
                products available for distribution
            
            
            3,118
            
            
            2,592Total
                inventories
            
            $
            12,536
            
            $
            8,895




In
      September 2005, the Company wrote-off $1.4 million of inventory that was
      recalled from one tissue recovery organization.




4.
            CASH
                AND INVESTMENTS




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




2005
            
            2004(dollars
                in thousands)
            
            Carrying
                Value
            
            Fair
                Value
            
            Carrying
                Value
            
            Fair
                ValueCash
                and cash equivalents
            
            $
            21,272
            
            $
            21,275
            
            $
            10,084
            
            $
            10,085Short-term
                investments
            
            
            26,795
            
            
            26,759
            
            
            15,308
            
            
            15,290Long-term
                investments
            
            
            —
            
            
            —
            
            
            1,694
            
            
            1,687




5.
            FIXED
                ASSETS





Fixed
      assets consist of the following at December 31,:




*(dollars
                in thousands)*
            
            2005
            
            2004Machinery
                and equipment
            
            $
            7,864
            
            $
            5,914Leasehold
                improvements
            
            
            8,346
            
            
            7,656Computer
                equipment, furniture and fixtures
            
            
            5,505
            
            
            4,64721,715
            
            
            18,217Accumulated
                depreciation and amortization
            
            
            (12,444
            )
            
            (9,885
            )Fixed
                assets, net
            
            $
            9,271
            
            $
            8,332





For
      the
      years ended December 31, 2005, 2004 and 2003, depreciation and amortization
      expense related to fixed assets was $2,641,000, $2,319,000 and $1,965,000,
      respectively.




6.
            ACCRUED
                LIABILITIES




Accrued
      liabilities consist of the following at December 31,:




*(dollars
                in thousands)*
            
            2005
            
            2004Employee
                compensation and benefits
            
            $
            4,350
            
            $
            3,341Tissue
                recovery expenses
            
            
            2,630
            
            
            2,173Marketing
                agent fees
            
            
            665
            
            
            594Operating
                expenses and other
            
            
            400
            
            
            594Total
                accrued liabilities
            
            $
            8,045
            
            $
            6,702




F-11
 *Table
            of Contents*




7.
            DEFERRED
                REVENUE




In
      March
      1999, in conjunction with the signing of an agreement with an independent sales
      and marketing agent, the Company issued 108,577 shares of common stock at a
      premium of $506,000 over the closing market price of the Company’s common stock
      on the date of issuance. This premium, which was recorded as deferred revenue,
      represented a payment for marketing rights and was recognized over the initial
      five-year term of the agreement. The total equity investment was valued at
      $1.0
      million less offering costs of $100,000.





In
      February 2000, in conjunction with the Company entering into an agreement with
      an independent sales and marketing agent, the agent agreed to make a $600,000
      payment in exchange for certain product marketing rights. The payment, which
      was
      received in September 2000, was recorded as deferred revenue to be recognized
      over the five-year term of the agreement. In February 2004, the Company
      terminated the agreement and recognized the remaining $110,000 of deferred
      revenue, representing the unamortized balance of payments received at the
      inception of the agreement.




8.
            FINANCING
                ARRANGEMENTS AND LONG-TERM DEBT




In
      March
      2004, the Company secured a $4 million revolving line of credit. The credit
      facility was collateralized by the Company’s accounts receivable, inventory,
      intellectual property, and intangible and fixed assets. The loan agreement
      contained certain financial covenants and a subjective acceleration clause.
      The
      revolving line of credit bore interest at the bank prime rate plus 0.75% and
      was
      available through March 2005. The Company elected not to renew the credit
      facility upon its expiration in March 2005.





In
      January 2003, the Company secured a $4 million credit facility through a
      financial institution consisting of a $2 million revolving line of credit and
      an
      equipment line for up to an additional $2 million. The credit facility was
      collateralized by the Company’s accounts receivable, inventory, intellectual
      property, and intangible and fixed assets. The agreement contained certain
      financial covenants and a subjective acceleration clause. The revolving line
      of
      credit bore interest at the bank prime rate plus 0.75% and was available through
      January 2004. The equipment term note bore interest at the bank prime rate
      plus
      1.5%. In 2003, the Company received proceeds of $1,451,000 under the equipment
      line portion of the credit facility and used part of the proceeds to repay
      all
      of its existing debt. In September 2003, the Company repaid the entire
      outstanding balance on the equipment line and the equipment line was
      terminated.





Interest
      expense for the years ended December 31, 2005, 2004 and 2003 was $3,000, $18,000
      and $57,000, respectively.




9.
            CAPITAL
                STOCK, OPTIONS AND WARRANTS




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.




Common
      Stock




In
      August
      2003, the Company sold 3,294,113 shares of its common stock at $4.25 per share
      in a private placement to a group of institutional investors. In connection
      with
      the private placement, in September 2003, the Company sold an additional 395,856
      shares of its common stock at $4.25 per share to several holders of LifeCell's
      Series B preferred stock, including one of the Company’s directors. These shares
      were sold pursuant to a contractual right of the holders of the Series B
      preferred stock to participate in the August 2003 private placement. The
      aggregate net proceeds of the private placement were approximately $14.7 million
      after deducting offering costs.





F-12
 *Table
            of Contents*




Options




The
      Company’s Amended and Restated 1992 Stock Option Plan (the “1992 Plan”) provided
      for the grant of options to purchase up to 2,500,000 shares of common stock
      through January 16, 2002. In June 2000, the stockholders of the Company approved
      the Year 2000 Stock Option Plan (the “2000 Plan”), which provided for the grant
      of options to purchase up to 1,500,000 shares of common stock through March
      1,
      2010. In May 2003, the Company’s shareholders approved an amendment to the 2000
      Plan increasing the number of shares reserved for issuance under the 2000 Plan
      to 3,500,000.





Stock
      options issued pursuant to the 1992 Plan and 2000 Plan generally become
      exercisable ratably over a four-year period, beginning on the first anniversary
      of the date of grant. To the extent not exercised, options generally expire
      on
      the tenth anniversary of the date of grant, except for employees who own more
      than 10 percent of all the voting shares of the Company, in which event the
      expiration date is the fifth anniversary of the date of grant. All options
      granted under the plans have exercise prices equal to the fair market value
      at
      the date of grant.





In
      May
      2003, the Company’s shareholders approved the LifeCell Corporation 2003
      Non-Employee Director Stock Option Plan (the “Directors Plan”). Under the 2003
      Directors Plan, options may be granted to purchase up to 750,000 shares of
      the
      Company’s common stock through March 2013. The 2003 Directors Plan replaced the
      Second Amended and Restated 1993 Non-Employee Director Stock Option Plan, which
      terminated in July 2003. The provisions of the “Directors Plan” provide for an
      initial grant of options to purchase 25,000 shares of common stock for newly
      elected non-employee directors and an annual grant of an option to purchase
      10,000 shares upon re-election to the Company’s Board. Options granted under the
      Directors Plan have exercise prices equal to the fair market value at the date
      of grant, vest one year after date of grant and expire on the tenth aniversary
      of the date of grant.





At
      the
      Company’s Annual Meeting of Stockholders held in July 2005, the stockholders
      approved the combination of the Company’s existing 2003 Non-employee Director
      Stock Option Plan and 2000 Stock Option Plan by adopting the LifeCell
      Corporation Equity Compensation Plan. The stockholders also approved an increase
      in the number of shares available for issuance under the Equity Compensation
      Plan by 1.6 million shares.





A
      summary
      of stock option activity for the years ended December 31, 2005, 2004 and 2003
      is
      as follows:




Total
                Stock Options
            
            Weighted-Average
              Exercise
                Price ($)Balance
                at December 31, 2002
            
            
            3,678,000
            
            
            3.52Granted
            
            
            807,000
            
            
            5.03Exercised
            
            
            (79,000
            )
            
            4.00Forfeited
                or canceled
            
            
            (393,000
            )
            
            3.93Balance
                at December 31, 2003
            
            
            4,013,000
            
            
            3.77Granted
            
            
            523,000
            
            
            9.48Exercised
            
            
            (594,000
            )
            
            3.30Forfeited
                or canceled
            
            
            (209,000
            
            
            4.93Balance
                at December 31, 2004
            
            
            3,733,000
            
            
            4.58Granted
            
            
            371,000
            
            
            14.43Exercised
            
            
            (1,819,000
            )
            
            3.85Forfeited
                or canceled
            
            
            (28,000
            )
            
            6.79Balance
                at December 31, 2005
            
            
            2,257,000
            
            
            6.71





At
      December 31, 2005, there were 2,429,000 shares available for future stock option
      grants under the Equity Compensation Plan.




F-13
 *Table
          of Contents*




A
      summary
      of stock options outstanding at December 31, 2005 is as follows:


Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of
                Exercise
                  Prices
              
              Number
                Outstanding
                  at
                December
                  31, 2005
              
              Weighted-Average
                Remaining
                  Contractual
                Life
                  (Years)
              
              Weighted-
                Average
                Exercise****Price
              
              Number
                  Exercisable
                at****December
                  31,2005
              
              Weighted-
                Average
                Exercise
                  Price$
                  1.64to$ 2.99
              
              
              710,000
              
              
              6.6
              
              $
              2.57
              
              
              538,000
              
              $
              2.533.00
                  to 5.99
              
              
              693,000
              
              
              6.5
              
              
              5.13
              
              
              424,000
              
              
              5.036.00
                  to 8.99
              
              
              225,000
              
              
              7.7
              
              
              7.99
              
              
              60,000
              
              
              6.839.00
                  to 11.99
              
              
              417,000
              
              
              8.8
              
              
              9.86
              
              
              72,000
              
              
              10.0912.00
                  to 14.99
              
              
              23,000
              
              
              9.4
              
              
              13.21
              
              
              —
              
              
              —15.00
                  to 17.99
              
              
              94,000
              
              
              9.6
              
              
              16.39
              
              
              —
              
              
              —18.00
                  to 25.12
              
              
              95,000
              
              
              9.8
              
              
              21.29
              
              
              —
              
              
              —$
                  1.64 to $ 25.12
              
              
              2,257,000
              
              
              7.4
              
              $
              6.71
              
              
              1,094,000
              
              $
              4.23




In
      addition to the amounts set forth in the tables 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 2005, option holders exercised options to purchase
      2,500
      shares of common stock pursuant to these grants. At December 31, 2005, options
      to acquire 10,000 shares of common stock remained outstanding with a
      weighted-average exercise price of $4.00. The weighted-average remaining
      contractual life of the outstanding option grants was 5 months as of December
      31, 2005.





The
      Company accounts for its employee stock-based compensation plans under APB
      No.
      25 and its related interpretations. If compensation expense had been determined
      based on the fair value as of the grant dates for awards in 2005, 2004 and
      2003
      consistent, with SFAS No. 123, the Company would have recorded additional
      stock-based compensation expense net of related tax effects of $2,279,000,
      $1,498,000 and $1,248,000 respectively. See Note 2 “Stock-Based Compensation”
for the pro forma effect on net income.





Under
      the
      provisions of SFAS No. 123, the weighted-average fair value of options granted
      in 2005, 2004 and 2003 was $14.43, $6.87 and $3.63 per share, respectively.
      The
      fair value of each option grant is estimated on the date of grant using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions used for grants in 2005, 2004 and 2003, respectively: a
      weighted-average risk-free interest rate of 2.7% to 5.3% percent for all
      years; no expected dividend yield during the expected life of the option;
      expected lives of six years for each grant and expected volatility between
      70
      and 100 percent.




Common
      Stock Warrants




During
      2001 and 2000, the Company issured common stock warrants to investors in
      connection with the sale of its common stock in private placement transactions.
      The following table summarizes information about common stock warrants
      outstanding at December 31,





Warrants
                OutstandingExercise
                Price
            
            2005
            
            2004
            
            Expiration
                Date$
                1.92
            
            
            —
            
            
            1,313,000
            
            
            July
                10, 2006$
                5.00
            
            
            —
            
            
            206,000
            
            
            October
                27, 2005—
            
            
            1,519,000




F-14
 *Table
            of Contents*




10.
            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 2005, 2004 and 2003 were $213,000, $111,000 and
      $86,000, 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
      2005, 2004, and 2003 were $35,000, $27,000 and $22,000,
      respectively.




11.
            INCOME
                TAXES




Significant
      components of the Company’s income tax expense (benefit) for the years ended
      December 31, 2005, 2004 and 2003 were as follows:





*(dollars
                in thousands)*
            
            2005
            
            2004
            
            2003CurrentFederal
            
            $
            429
            
            $
            135
            
            $
            43State
            
            
            928
            
            
            242
            
            
            (9
            )DeferredFederal
            
            
            5,215
            
            
            (431
            )
            
            (15,617
            )State
            
            
            560
            
            
            79
            
            
            (1,039
            )Income
                tax provision (benefit), net
            
            $
            7,132
            
            $
            25
            
            $
            (16,622
            )







The
      difference between the tax provison (benefit) at the statuatory federal income
      tax rate and the tax provision attributable to income before income taxes was
      as
      follows:





U.S.
                federal tax at statutory rate
            
            $
            6,707
            
            
            35.0
            %
            
            2,451
            
            
            34.0
            %
            
            692
            
            
            33.8
            %State
                income taxes (net of federal benefit)
            
            
            968
            
            
            5.0
            %
            
            212
            
            
            2.9
            %
            
            226
            
            
            11.0
            %Sale
                of state tax net operating losses
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (235
            )
            
            -11.5
            %Write-up
                of deferred tax assets
            
            
            (481
            )
            
            -2.5
            %
            
            —
            
            
            —
            
            
            —
            
            
            —Change
                in valuation allowance
            
            
            —
            
            
            —
            
            
            (2,647
            )
            
            -36.7
            %
            
            (16,656
            
            
            -812.5
            %Net
                operating losses utilized
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (778
            )
            
            -38.0
            %Tax
                credits
            
            
            (236
            )
            
            -1.2
            %
            
            (109
            
            
            -1.5
            %
            
            —
            
            
            —Other
                non-deductible items
            
            
            174
            
            
            0.9
            %
            
            118
            
            
            1.6
            %
            
            86
            
            
            4.2
            %Alternative
                minimum taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            43
            
            
            2.1
            %Income
                tax provision (benefit)
            
            $
            7,132
            
            
            37.2
            %
            $
            25
            
            
            0.3
            %
            $
            (16,622
            )
            
            -810.9
            %





In
      2003,
      the Company realized a $235,000 benefit through the sale and transfer of $3.0
      million of state tax net operating losses. The sales and transfers were made
      through the Technology Business Tax Certificate Program sponsored by the New
      Jersey Economic Development Authority.





F-15
 *Table
            of Contents*





The
      principal components of the Company’s deferred tax assets as of December 31,
      2005 and 2004 are as follows:




(dollars
                in thousands)
            
            2005
            
            2004Temporary
                differences:Inventory
                reserves
            
            $
            555
            
            $
            407Stock-based
                compensation
            
            
            538
            
            
            —Uniform
                capitalization of inventory costs
            
            
            217
            
            
            192Tax
                over book depreciation
            
            
            (851
            )
            
            (1,041
            )Other
                accruals and reserves
            
            
            (347
            )
            
            (82
            )Total
                temporary differences
            
            
            112
            
            
            (524
            )Federal
                tax losses and credits not currently utilizable
            
            
            17,554
            
            
            17,917State
                tax losses and credits not currently utilizable
            
            
            1,329
            
            
            916Total
                gross deferred tax assets
            
            
            18,995
            
            
            18,309Less
                valuation allowance
            
            
            (278
            )
            
            (606
            )Net
                deferred tax assets
            
            $
            18,717
            
            $
            17,703




As
      of
      December 31, 2005, the Company had a net operating loss carryforward (“NOL”) for
      federal income tax purposes of approximately $46.6 million expiring between
      2006
      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, 2005 approximately $13.3 million of the Company’s NOL is subject to
      an annual limitation under Internal Revenue Code Section 382.





At
      December 31, 2005, the Company also had a NOL carryforward for state income
      tax
      purposes of approximately $8.1 million, expiring between 2009 and 2010.
      Additionally, the Company has 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 2005 and 2025.





Prior
      to
      fourth quarter 2003, no provision or benefit for income taxes was recorded
      because the Company was in a net deferred tax asset position and a full
      valuation allowance had been recorded. During the fourth quarter of 2003, the
      Company re-evaluated the amount of valuation allowance required based on
      profitability achieved in 2003 and 2002 and expected in future years. As a
      result, the Company reduced the valuation allowance to reflect net deferred
      tax
      assets that we believed were more likely than not of being realized. The
      reduction of the valuation allowance resulted in the recognition of a $16.6
      million non-cash tax benefit in the fourth quarter of 2003.





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





F-16
 *Table
            of Contents*




12.
            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, 2005, 2004 and 2003:




For
                the Year Ended December 31,(dollars
                in thousands, except per share data)
            
            2005
            
            2004
            
            2003Net
                income applicable tocommon stockholders
            
            $
            12,044
            
            $
            7,184
            
            $
            18,672Weighted-average
                common shares outstanding
            
            
            30,877,000
            
            
            27,553,000
            
            
            22,094,000Denominator
                for basic net income per share
            
            
            30,877,000
            
            
            27,553,000
            
            
            22,094,000Effect
                of dilutive securities:Common
                stock options
            
            
            1,915,000
            
            
            2,116,000
            
            
            887,000Common
                stock warrants
            
            
            491,000
            
            
            1,476,000
            
            
            993,000Restricted
                stock
            
            
            65,000
            
            
            —
            
            
            —Series
                B preferred stock assuming conversion
            
            
            —
            
            
            829,000
            
            
            2,658,000Denominator
                for diluted net income per share
            
            
            33,348,000
            
            
            31,974,000
            
            
            26,632,000Basic
                net income per share
            
            $
            0.39
            
            $
            0.26
            
            $
            0.85Diluted
                net income per share
            
            $
            0.36
            
            $
            0.22
            
            $
            0.70




The
      calculation of net income per share for the years ended December 31, 2005,
      2004
      and 2003 excludes potentially dilutive common stock equivalents consisting
      of
      outstanding options to purchase 189,000, 439,000 and 1,207,000 shares of common
      stock in 2005, 2004 and 2003, respectively, and warrants to purchase 250,000
      shares of common stock in 2003 because their inclusion would be
      antidilutive.




13.
            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 Company intends to
      vigorously defend against this action. The likelihood of an unfavorable outcome
      is unknown at this time however, the Company believes any potential losses
      resulting from this action would be covered by its insurance policies. As a
      result, the Company does not believe that an unfavorable outcome will have
      a
      material adverse effect on the results of operations, cash flows and financial
      position.





F-17
 *Table
            of Contents*





In
      September 2005, we recalled products containing human cadaveric tissue because
      the tissue bank that recovered the tissue, Biomedical Tissue Services (“BTS”),
      did not follow FDA requirements for donor screening to determine whether risk
      factors for communicable disease existed. The Company promptly notified the
      FDA
      and all relevant hospitals and medical profesionals who received products
      produced from tissue received from BTS. Upon subsequent investigation, the
      FDA
      determined that patients who received tissue implants prepared from BTS donors
      may be at heightened risk of communicable disease transmission, and recommended
      that patients receive appropriate infectious disease testing. The Company has
      been working in close cooperation with the FDA to execute the product recall
      and
      set up a LifeCell-sponsored patient testing program. The Company has not
      received any donor tissue from BTS since the product recall was initiated in
      September 2005. In January 2006, the FDA issued an order to BTS to cease its
      tissue operations. The Company has been named, along with BTS and other
      defendants, in six lawsuits that relate to this matter, each of which was filed
      during the fourth quarter of 2005 or the first quarter of 2006. Five of the
      actions, Nguyen , Vitola , Tosto , Coleman and Sciuva ,
      purport
      to serve as a class actions for persons receiving tissue based products that
      were improperly provided. None of these five cases identified our products
      as being used in the medical procedures. The Nguyen case was
      initially filed in the Superior Court of New Jersey, Middlesex County and was
      removed by another defendant to the United States District Court, District
      of
      New Jersey. At the time of the removal to the United States District Court,
      we
      were successful in obtaining a voluntary dismissal by plaintiffs, because their
      complaint identified other defendants’ products used in their medical
      procedures. The Vitola case was
      initially filed in the Superior Court of New Jersey, Atlantic County and was
      also removed to the United States District Court, District of New Jersey.
      Thereafter, another defendant filed a motion for consolidation of this case
      and
      all of the other federal court cases in one venue under the Multi District
      Litigation (“MDL”). The MDL motion is scheduled to be decided in April 2006. The Tosto case was
      initially filed in the Superior Court of New Jersey, Atlantic County and was
      also removed to the United States District Court, District of New Jersey and
      will be part of the MDL application. The Coleman case was
      filed in the United States District Court, Northern District of Oklahoma. There
      are pending motions to consolidate the Coleman case
      into New Jersey and to make it part of the MDL application. Similarly, the Sciuva case was
      filed in the United States District Court, Northern District of Ohio and there
      are pending motions to consolidate this case in New Jersey and also to make
      it
      part of the MDL application. One additional action, the Sanders case was
      filed in the Superior Court of North Carolina, Guilford County and also
      identifies other defendants. None of the plaintiffs in any of these six actions
      claim to be presently injured. Additionally, only the Sanders complaint specifically identifies our products as being used in the medical
      procedure. We intend to vigorously defend against each of these actions. We
      believe that it is not currently possible to estimate the likelihood of an
      unfavorable outcome and the impact, if any, that the ultimate resolution of
      these matters will have on our results of operations, financial position or
      cash
      flows.





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 any claims incurred by the Company or that the
      type
      of claims will be covered by the terms of insurance coverage.







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 20%, 27% and 38% of total product
      revenue in the years ended December 31, 2005, 2004 and 2003, respectively.
      One
      of the Company’s sales and marketing agents generated 8% and one distributor
      generated 7% of total product revenues 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, 2005.





F-18
 *Table
            of Contents*





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 expense 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 $973,000, $1,042,000 and $1,021,000 for
      the
      years ended December 31, 2005, 2004 and 2003, respectively. The future minimum
      lease payments under noncancelable leases with remaining terms in excess of
      one
      year as of December 31, 2005, were as follows:




(dollars
                in thousands)
            
            Minimum
              Lease
                Payments2006
            
            $
            9192007
            
            
            9192008
            
            
            9192009
            
            
            9192010
                and beyond
            
            
            843Total
            
            $
            4,519




14.
            SEGMENT
                DATA




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





*(dollars
                in thousands)*
            
            2005
            
            2004
            
            2003Reconstructive
            
            $
            78,394
            
            $
            46,028
            
            $
            28,115Orthopedic
            
            
            7,785
            
            
            5,885
            
            
            1,728Urogynecology
            
            
            7,147
            
            
            6,838
            
            
            8,734Total
                Product Revenues
            
            $
            93,326
            
            $
            58,751
            
            $
            38,577




Product
      revenues by geographic area for the years ended December 31, 2004, 2003 and
      2002, are summarized as follows:





*(dollars
                in thousands)*
            
            2005
            
            2004
            
            2003United
                States
            
            $
            92,059
            
            $
            57,564
            
            $
            37,257Other
                countries
            
            
            1,267
            
            
            1,187
            
            
            1,320Total
                Product Revenues
            
            $
            93,326
            
            $
            58,751
            
            $
            38,577




F-19
 *Table
            of Contents*




15.
            QUARTERLY
                FINANCIAL DATA (UNAUDITED)




Following
      is a summary of unaudited quarterly results for the years ended December 31,
      2005 and 2004:




(dollars
                in thousands except per share amounts)
            
            First
                Quarter
            
            Second
                Quarter
            
            Third
                Quarter
            
            Fourth
                Quarter2005Total
                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
            
            
            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
            
            
            0.112004Total
                revenues
            
            $
            13,753
            
            $
            15,103
            
            $
            15,617
            
            $
            16,654Product
                revenues
            
            
            13,345
            
            
            14,453
            
            
            14,947
            
            
            16,006Cost
                of products sold
            
            
            4,118
            
            
            4,509
            
            
            4,444
            
            
            4.684Net
                income
            
            
            883
            
            
            1,046
            
            
            1,113
            
            
            4,142(2
            )Income
                per share of common stock - basic
            
            
            0.03
            
            
            0.04
            
            
            0.04
            
            
            0.14Income
                per share of common stock - diluted
            
            
            0.03
            
            
            0.03
            
            
            0.03
            
            
            0.13





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


(2)
            Includes
                a $2,860,000 tax benefit resulting from reversal of deferred tax
                asset
                valuation allowance.






F-20