##### Table of Contents



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



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FORM 10-K



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|                |  |                                                                                     
|--------------- |  | ------------------------------------------------------------------------------------
|X IN BALLOT BOX |  | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|               
|               
|               
|               
|                |  | For the fiscal year ended June 30, 2001
Commission file number: 0-4136              



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LIFECORE BIOMEDICAL, INC.
(Exact name of registrant as specified in its charter)

|                                                                         |  |                                             
|------------------------------------------------------------------------ |  | --------------------------------------------
|Minnesota
(State or other jurisdiction
of incorporation or organization) |  | 41-0948334
(IRS Employer
Identification No.)

3515 Lyman Boulevard
Chaska, Minnesota 55318-3051
(Address of principal executive offices)

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

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

Securities registered pursuant to Section 12(g) of the Act:Common Stock ($.01 stated value)
Preferred Stock Purchase Rights
(Title of Class)



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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 IN BALLOT BOX No
OPEN BALLOT BOX

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. OPEN BALLOT BOX

The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $79,939,000 at August 31, 2001 when the last
sale price of such stock, as reported by the Nasdaq National Market, was $6.35.

The number of shares outstanding of the Registrants Common Stock, $.01
stated value, as of August 31, 2001 was 12,748,724 shares.



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DOCUMENTS INCORPORATED BY REFERENCE

|   |  |                                                                                                                                                                                                                                                            
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. |  | Certain responses to Part III are incorporated by reference to
information contained in the Companys definitive Proxy Statement for its
2001 Annual Meeting to be filed with the Commission within 120 days after
the end of the Registrants fiscal year.



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1



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TABLE OF CONTENTS



|                                                   |  |  |  |  |  |  |  | 
|-------------------------------------------------- |  |  |  |  |  |  |  | 
|PART I                                            
|PART II                                           
|SELECTED CONSOLIDATED FINANCIAL DATA              
|PART III                                          
|PART IV                                           
|DESCRIPTION                                       
|SIGNATURES                                        
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
|CONSOLIDATED BALANCE SHEETS                       
|LIABILITIES AND SHAREHOLDERS EQUITY              
|CONSOLIDATED STATEMENT OF OPERATIONS              
|CONSOLIDATED STATEMENTS OF CASH FLOWS             
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY   
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS   
|Loan Agreement dated as of 9/1/90                 
|Amendment #3 to Credit and Security Agreement     
|Consent of Grant Thornton LLP                     
|Risk Factors                                      



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##### Table of Contents






PART I

Item 1. Business

General

Lifecore Biomedical, Inc. (Lifecore or the Company) manufactures
biomaterials and medical devices for use in various surgical markets and also
provides specialized contract aseptic manufacturing services. The Company
operates two divisions, the Hyaluronan Division and the Oral Restorative
Division. Further information about Lifecore can be obtained from Lifecores
Internet website at www.lifecore.com, however, the contents of the website are not intended to
be a part of this Form 10-K and are not incorporated by reference. The Company
was incorporated in the State of Minnesota in 1965.

The Companys Hyaluronan Division is principally involved in the
development and manufacture of products utilizing hyaluronan, a naturally
occurring carbohydrate that moisturizes or lubricates the soft tissues of the
body. The Hyaluronan Divisions primary development project involves a product
using Lifecores patented ferric hyaluronan technology, GYNECARE INTERGEL
Adhesion Prevention Solution (INTERGEL Solution). INTERGEL Solution is a
second-generation product with potential application in reducing the incidence
of post-surgical adhesions. INTERGEL Solution is intended to reduce the
incidence of fibrous tissue adhesions commonly formed as part of the bodys
natural healing process when tissues are subject to accidental or surgical
trauma. These adhesions may cause internal complications that often require
costly re-operations, particularly with respect to abdominal, cardiovascular,
orthopedic, reproductive, and thoracic surgeries. Government sources recently
estimated the annual cost for treatment of adhesion complications in the female
lower abdomen alone, a common site for the occurrence of adhesions, at $1.6
billion in the United States. Since June 1998, the Companys exclusive
worldwide marketing partner, GYNECARE, the womens healthcare division of
ETHICON, INC., a Johnson & Johnson Company, has been marketing INTERGEL
Solution outside the U.S.

The Company produces hyaluronan through a proprietary fermentation
process. Currently, the Companys hyaluronan is primarily used as a component
in ophthalmic surgical solutions for cataract surgery. Lifecore is pursuing
other applications of hyaluronan through corporate partners for drug delivery
and wound care applications. The Company also is leveraging its hyaluronan
manufacturing skills to provide specialized contract aseptic manufacturing
services.

The Companys Oral Restorative Division develops and markets precision
surgical and prosthetic devices for the restoration of damaged or deteriorating
dentition and associated support tissues. The Companys titanium alloy dental
implants are permanently implanted in the jaw for tooth replacement therapy as
long-term support for crowns, bridges, and dentures. In September 1999, the
Company introduced the STAGE-1 Single Stage Implant System and in March 2001
introduced the RBM STAGE-1 Single Stage Implant System. The Oral Restorative
Division also offers innovative soft tissue and bone regenerative products for
the restoration of soft tissue and bone defects resulting from periodontal
disease and tooth loss. The Oral Restorative Division assists its dental
surgery clients by developing comprehensive continuing education curricula, as
provided in the Support Plus and Support Plus II programs, to train
restorative clinicians and their auxiliary teams in the principles of tooth
replacement therapy and practice management techniques. The Increasing Case
Acceptance program offers client personnel the marketing and selling skills
training to foster higher patient acceptance of dental implants. The Oral
Restorative Divisions products are marketed in the U.S. through the Companys
direct sales force and marketed internationally in 35 countries through direct
subsidiaries in Italy, Germany and Sweden and 22 distributors.

Hyaluronan Division

Background

Hyaluronan is a critical, naturally occurring carbohydrate component of
physiological fluids that lubricate, moisturize or otherwise protect the bodys
soft tissues. Due to its widespread presence in tissues and its high degree of
biocompatibility, the Company believes that hyaluronan can be used for a wide
variety of medical applications.

Hyaluronan (also referred to as hyaluronic acid or sodium hyaluronate) was
first demonstrated to have commercial medical utility as a viscoelastic
(elastic yet fluid) solution in cataract surgery. In this application, its use
for coating and lubricating tissues during the implantation of intraocular
lenses dramatically improved the existing surgical success rates. The first
ophthalmic hyaluronan product produced by extraction from rooster comb tissue
became commercially available in the United States in 1981. Hyaluronan-based
products, produced both by rooster comb extraction and by fermentation
processes such as the Companys, have since gained widespread acceptance in
ophthalmology and are currently used in the majority of cataract extraction
procedures in the

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world. The Companys hyaluronan is also utilized in an
aseptic solution which is used as a carrier vehicle for demineralized, freezedried
bone allograft provided to orthopedic surgeons. The Companys hyaluronan
has been utilized in veterinary applications such as cryopreservation and
traumatic arthritis since 1994.

Other hyaluronan applications currently being investigated by Lifecore or
its partners include post-surgical prevention of adhesions and drug delivery
(as a vehicle to carry wound management agents). The Company believes that the
use of hyaluronan for the prevention of post-surgical adhesions currently
represents the most significant potential application for hyaluronan.

Strategy

The Company intends to use its proprietary fermentation process to be a
leader in the development of hyaluronan-based products for multiple
applications. Elements of the Companys strategy include the following:

 Establish strategic alliances with market leaders.The Company will
continue to develop applications for products with partners who have strong
marketing, sales and distribution capabilities to end-user markets. The Company
currently has established relationships with Alcon Laboratories, Inc., an
indirect subsidiary of Nestle S.A. (Alcon), GYNECARE, the womens healthcare
division of ETHICON, INC., a Johnson & Johnson Company (ETHICON), market
leaders in the ophthalmics and surgical products fields and Musculoskeletal
Transplant Foundation (MTF), the worlds largest bone tissue procurement and
distribution service.

 Expand medical applications for hyaluronan.The Company is currently
pursuing gynecological surgery, as well as drug delivery and wound care
opportunities. Due to the growing knowledge of the unique characteristics of
hyaluronan, the Company intends to continue to identify and pursue further uses
for hyaluronan in medical applications.

 Maintain flexibility in product development and supply relationships.
The Companys vertically integrated development and manufacturing capabilities
allow it to establish a variety of relationships with large corporate partners.
The Companys role in these relationships extends from supplier of raw
materials to manufacturer of aseptically-packaged finished products. In
addition, the Company may develop its own proprietary products.

 Leverage hyaluronan manufacturing skills.The Company is using its
viscous fluid handling and aseptic packaging experience gained in producing
hyaluronan to provide specialized contract aseptic manufacturing services.

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Hyaluronan Division Products

The following chart summarizes the principal products and development
projects of the Hyaluronan Division, along with their applications and the
companies with which Lifecore has related strategic alliances:

|                                               |  |                                                                                                                                                                                                      |  |                                                   |  |                                                                                                                                            
|---------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|PRODUCT                                        |  | STRATEGIC ALLIANCE                                                                                                                                                                                   |  | MARKET                                            |  | STATUS*                                                                                                                                    
|                                               |  |                                                                                                                                                                                                      |  |                                                   |  |                                                                                                                                            
|                                              
|                                              
|                                              
|                                              
|GYNECOLOGICAL
SURGERY                          |  |                                                                                                                                                                                                      |  |                                                   |  |                                                                                                                                            
|                                              
|                                              
|                                              
|                                              
|GYNECARE INTERGEL Adhesion
Prevention Solution |  | Lifecores proprietary product under
development; GYNECARE, the womens
healthcare division of ETHICON has
exclusive worldwide marketing rights for
adhesion prevention applications and
orthopedics |  | Adhesion
prevention                               |  | Pending U.S. FDA
Pre-Market Approval,
marketed by GYNECARE,
the womens
healthcare division
of ETHICON in Europe
for abdominal
applications
|                                              
|                                              
|                                              
|                                              
|OPHTHALMIC                                     |  |                                                                                                                                                                                                      |  |                                                   |  |                                                                                                                                            
|                                              
|                                              
|                                              
|                                              
|Viscoat®Ophthalmic
  Viscoelastic Solution     |  | Lifecore supplies proprietary hyaluronan
powder for inclusion in Alcons
viscoelastic solution                                                                                                       |  | Cataract surgery                                  |  | Commercial sales
since 1983                                                                                                                
|                                              
|                                              
|                                              
|                                              
|LUROCOAT®Ophthalmic
  Solution                 |  | Lifecore supplies its proprietary product
for marketing on a non-exclusive basis
outside the U.S.                                                                                                    |  | Cataract surgery                                  |  | Lifecore export
shipments commenced
in June 1997                                                                                           
|                                              
|                                              
|                                              
|                                              
|OTHER APPLICATIONS                             |  |                                                                                                                                                                                                      |  |                                                   |  |                                                                                                                                            
|                                              
|                                              
|                                              
|                                              
|MAP-5Embryo
  Cryopreservation Solution       |  | Lifecore supplies hyaluronan in vials to
Vetrepharm, Inc., who markets the product                                                                                                                   |  | Veterinary
cryopreservation,
traumatic
arthritis  |  | Commercial sales
since 1994                                                                                                                
|                                              
|                                              
|                                              
|                                              
|HY-50®                                         |  | Lifecore supplies syringes of
hyaluronan-based solution to Bexco
Pharma, Inc for use as a veterinary
orthopedic injectible drug                                                                      |  | Veterinary drug                                   |  | Commercial sales                                                                                                                           
|                                              
|                                              
|                                              
|                                              
|Hyaluronan Solution for MTF                    |  | Lifecore supplies an aseptic
solution containing
hyaluronan to Musculoskeletal Transplant Foundation (MTF) for use as
a carrier vehicle for its
demineralized, freeze-dried bone
allograft         |  | Grafting
material for restoration of bone defects |  | Commercial sales since
2000                                                                                                                

*     For many of the products or projects listed above, government regulatory
approvals and significant development work are required before commercial sales
can commence in the United States or elsewhere. See Government Regulation. No
assurance can be given that such products will be successfully developed or
marketed.

GYNECARE INTERGEL Adhesion Prevention solution; GYNECARE; and ETHICON,
INC., are registered trademarks of ETHICON, INC. Viscoat® Ophthalmic
Viscoelastic Solution is a registered trademark of Alcon Laboratories, Inc.
LUROCOAT® Ophthalmic Solution is a registered trademark of Lifecore Biomedical,
Inc. MAP-5 Embryo Cryopreservation Solution is a trademark of Vetrepharm,
Inc. HY-50® is a registered trademark of Bexco Pharma, Inc. MTF® Bone
Allograft Solution is a registered trademark of the Musculoskeletal Transplant
Foundation. Amvisc® and Amvisc Plus® Ophthalmic Solutions are registered
trademarks of Bausch & Lomb.

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Adhesion Prevention Development Project with ETHICON, INC.

The Company is developing a product using a version of its patented ferric
hyaluronan technology, INTERGEL Solution, for potential application in reducing
the incidence of post-surgical adhesions. GYNECARE, the womens healthcare
division of ETHICON, INC., has worldwide, exclusive distribution rights for
INTERGEL Solution.

Following surgical procedures fibrous tissue, or adhesions, commonly form
as part of the bodys natural healing process resulting from trauma to tissues
or organs during surgery. Particularly with respect to abdominal,
cardiovascular, gynecological, orthopedic, reproductive and thoracic surgeries,
these adhesions may cause internal complications that require costly additional
surgical intervention. For example, adhesions following gynecological surgery
can cause infertility, life threatening bowel obstructions and can complicate
subsequent surgical interventions. The Company believes that successful
penetration of this market will require a product with low toxicity, easy
application, high procedural flexibility, broad effectiveness, and appropriate
pricing.

Laparotomy. Prior to 1994 Lifecore and ETHICON were jointly developing an
anti-adhesion product. In 1994, Lifecore assumed responsibility for completion
of this project. Lifecore subsequently completed the pre-clinical studies and
submitted an application to the FDA for an Investigational Device Exemption
(IDE) to begin human clinical trials to evaluate the safety and efficacy of
INTERGEL Solution. In April 1995, the FDA approved the IDE. At that time
responsibility for development of this project was shifted to Lifecore. The
Company and ETHICON entered into a Conveyance, License, Development and Supply
Agreement (the ETHICON Agreement) to carry out the shift of responsibility.
The ETHICON Agreement transferred to the Company the intellectual property
developed to date from the anti-adhesion project, including patent rights and
data from research, product development, clinical safety and efficacy, and
marketing evaluations. The Company assumed responsibility for continuing the
development project, including conducting human clinical trials with INTERGEL
Solution. Furthermore, the Company granted ETHICON exclusive worldwide
marketing rights to INTERGEL Solution for post-surgical adhesion prevention and
certain orthopedic applications in return for an exclusive supply contract
through 2008 with provisions for renewal. A pilot human clinical trial,
involving 23 female patients undergoing peritoneal cavity surgery with
preservation of fertility, was completed at a single United States clinical
center in December 1995. Patients were randomly selected to receive either
INTERGEL Solution or a control solution applied in a final step prior to
completion of surgery by laparotomy (conventional or open surgery). The
primary goals of the pilot study were the preliminary assessment of the safety
of INTERGEL Solution and an evaluation of the experimental clinical protocol.
A secondary goal was the preliminary assessment of the effectiveness of
INTERGEL Solution in reducing post-surgical adhesions by second-look
laparoscopy. Second-look laparoscopy is a standard surgical practice with
fertility patients, and consists of a less invasive follow-up evaluation of the
patients internal abdominal anatomy. The laparoscopy enabled clinicians to
gather data comparing post-surgical adhesions in the two patient treatment
groups. Analysis of the pilot clinical data indicated that patients who
received INTERGEL Solution experienced a 45% lower incidence of a broad range
of adhesions than control patients (p<0.02). Further, the study showed that
when adhesions did occur, those of the INTERGEL Solution patient group were
significantly less extensive and less severe than those of the control group
(p<0.01). Finally, physicians indicated that the test material was easily
administered during clinical procedures.

Based on these results the Company initiated a pivotal human clinical
trial in March 1996. That study was completed in December 1998. It involved
281 patients in a blinded study at eleven clinical sites in the United States
and five clinical sites in Europe. These patients underwent a similar
randomized treatment protocol and were evaluated for adhesion formation at 24
anatomical sites by second-look laparoscopy.

The Company submitted an application for FDA Pre-Market Approval (PMA)
in March 1999, which was accepted by the FDA in May 1999 for expedited review.
In January 2000, an advisory panel to the FDA recommended to the FDA that
INTERGEL Solution not be approved for use in the United States. After
consulting with the FDA, the Company prepared and submitted a major amendment
to the PMA in June 2000 to address the concerns raised at the January 2000
panel meeting. After review of the amendment, FDAs Office of Device
Evaluation (ODE) determined that, while the results of clinical testing may
appear to be encouraging, in their opinion there was not sufficient information
to demonstrate reasonable assurance of safety and effectiveness. Thus, ODE
concluded in November 2000 that the PMA was not approvable and notified the
Company of the option for Medical Devices Dispute Resolution Panel (MDDRP)
review. That Panel reviewed the Companys PMA in a public meeting on September
6, 2001. The Panel voted unanimously to recommend approval to the FDAs
Director of the Center for Devices and Radiological Health regarding GYNECARE
INTERGEL Solution. That approval is expected to be forthcoming. However, even
if the Company ultimately receives approval from the FDA, there can be no
assurance that it will receive market acceptance.

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Failure to achieve
significant sales of the product could have a material adverse effect on future
prospects for the Companys operations. See Government Regulation.

Laparoscopy. In 1997, the Company began a second series of human clinical
trials to evaluate INTERGEL Solution as an adjunct in less invasive,
microsurgical procedures. Since laparoscopic procedures are rapidly becoming a
preferred surgical interventional method, the Company wished to ensure the
utility of INTERGEL Solution under the more physically restrictive demands of
laparoscopic techniques in comparison to laparotomy techniques. A pilot trial
was completed showing results similar to that of the product in the pilot
laparotomy trial. Enrollment in a subsequent multi-center clinical trial was
completed in June 2000. The results of that study are expected to be submitted
to the FDA in a future PMA supplement.

Ophthalmic Applications

Cataract Surgery.Currently, the primary commercial application for the
Companys hyaluronan is in cataract surgery. During the process of cataract
surgery, hyaluronan, in the form of a viscoelastic solution, is used to coat
and lubricate the anterior chamber of the eye during intraocular lens
implantation. These solutions have been shown to reduce surgical trauma and
thereby contribute to more rapid recovery with fewer complications than were
experienced prior to the use of viscoelastics. The Company currently sells
hyaluronan for this application to several customers, including Alcon, the
leading producer of ophthalmic surgical products in the world. The Company
also has agreements to supply its LUROCOAT Solution under private label
relationships outside the United States and Canada.

Hyaluronan-based products are used in the majority of cataract surgeries
in the world. The Company estimates that the worldwide market for hyaluronan
for cataract surgery, on a hospital cost basis, is approximately $140 million
per year. The market share of products using fermented hyaluronan is
increasing relative to the market share of products using hyaluronan extracted
from rooster combs.

Alcon purchases the Companys hyaluronan for inclusion in Viscoat®
Ophthalmic Viscoelastic Solution, which is used during cataract surgery. The
Companys relationship with Alcon and its predecessors commenced in 1983, when
the Companys hyaluronan was specified as a raw material component of the
Viscoat product, which received marketing clearance from the FDA in 1986. Until
1990, Alcons predecessors had the exclusive rights to purchase the Companys
hyaluronan for ophthalmic applications. In 1990, the arrangement with Alcon
became non-exclusive. Since that time, sales of hyaluronan to Alcon have
continued to be made pursuant to supply agreements. The current Alcon supply
agreement, as renewed in December 2000, is for a term of two years through
December 31, 2002. See Managements Discussion and Analysis of Financial
Condition and Results of Operations.

In December 1994 the Company entered into a supply agreement with Bausch &
Lomb (B&L). This supply agreement terminated on December 31, 2000. Under the
agreement, the Company had been selling its hyaluronan to B&L for export in
packaged syringes in connection with two of B&Ls ophthalmic viscoelastic
surgical products, Amvisc® and Amvisc Plus® Ophthalmic Solutions. B&L also
completed a clinical evaluation designed to show the bioequivalence of
Lifecores ophthalmic hyaluronan with B&Ls rooster comb source material. The
FDA would require such data if B&L were to distribute Lifecores version of the
above products in the US.

The Company has developed its own viscoelastic solution, LUROCOAT
Solution. The Company received CE marking for LUROCOAT Solution during 1997
allowing LUROCOAT Solution to be marketed and sold in Europe. The Company has
private label agreements to supply LUROCOAT Solution outside the United States
and Canada. Export shipments of LUROCOAT Solution began in 1997.

The Company supplies an aseptic hyaluronan solution to the Musculoskeletal
Transplant Foundation (MTF), which utilizes the solution as a carrier vehicle
for its demineralized, freeze-dried bone allograft in a final putty composition
trademarked as DBX. This bone putty is provided by MTF to orthopedic
surgeons through MTFs tissue distribution channels.

Other Applications

In its work with hyaluronan, the Company developed specialized packaging
skills with materials that, due to their perishable nature or complex viscous
handling properties, cannot be sterilized in a conventional manner and require
rigorous aseptic manufacturing and packaging protocols. The Company is
leveraging these skills to initiate non-ophthalmic development projects for the
manufacture of hyaluronan and non-hyaluronan products in other medical areas.

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The Hyaluronan Division undertakes its own product development activities
for both hyaluronan-based and non-hyaluronan-based applications, as well as on
a contract basis with certain clients. The majority of outside projects are
initiated by a client to demonstrate that the Companys hyaluronan is suitable
for a particular medical application. Suitability is often measured by detailed
specifications for product characteristics such as purity, stability,
viscosity, and molecular weight, as well as efficacy for a particular medical
application.

The Company currently manufactures Vetrepharm, Inc.s MAP-5 Embryo
Cryopreservation Solution, an aseptically-packaged hyaluronan solution, for the
cryopreservation of fertilized animal embryos. MAP-5 Solution is used to
preserve the embryos for transportation to local veterinarians. Sales to
Vetrepharm, Inc. have been made since 1994 pursuant to annual purchase orders
that specify the quantity and unit price. The Company also manufactures Bexco
Pharma, Inc.s HY-50® product, an aseptically packaged hyaluronan solution, for
use as a veterinary orthopedic injectible drug.

There can be no assurance that products currently under development by the
Company or others will be successfully developed or, if so developed, will be
successfully and profitably marketed.

Oral Restorative Division

Background

Dental implants are increasingly accepted as a replacement for missing or
extracted teeth and serve as supports for dentures, crowns, and bridges. In
comparison to conventional restorative procedures, dental implants are
surgically placed in the jawbone simulating the anchoring of a tooth by its
root. The implant maintains underlying bone structure and provides superior
fixation of restorations, minimizing loosening of fixtures against surrounding
teeth and gingiva. The titanium cylinder or cylindrically-screw shaped implant
is categorized by shape and method of implantation. For example, the threaded
cylinder implant is screwed into the jawbone, while an alternate form, the
press-fit cylinder, is placed into a precision-drilled hole with a friction
fit. To further enhance bone fixation, various implant styles may be
spray-coated with hydroxylapatite and/or grit blasted to create a roughened
surface. The Company believes the current annual worldwide dental implant
market is approximately $700 million.

Bone graft substitutes and bone regeneration membranes are used for the
restoration of deteriorated bone caused by periodontal disease and tooth loss.
Historically, bone-filling material needed to fill holes or restore
deteriorated bone was only available from cadavers or autologous bone
(self-donated from another part of the patients body). These sources have
quality, convenience, and safety limitations. Synthetic and animal-derived
bone graft substitutes emerged to address these issues, as did the
demineralized freeze-dry processing of cadaver bone. The current annual U.S.
market for synthetic and animal-derived bone substitute products is
approximately $25 million. The annual U.S. dental market for tissue bank
service fees paid to obtain freeze dried donor bone is estimated to be
approximately $15 million. In May 2000, the Company entered into a
representation agreement with the Musculoskeletal Transplant Foundation to
solicit orders for its MTF® Bone Allograft Tissue for a representation fee.

The addition of supplemental bone regeneration barrier membranes has
expanded the U.S. dental bone regeneration market to approximately $70
million. The Companys TefGen Regenerative Membrane and CAPSET® Calcium
Sulfate Bone Graft Barrier products address this market opportunity.

Strategy

The Company intends to be a leader in the oral restorative surgical
products industry. The Company has steadily increased the market share for its
implant products by implementing the following strategies:

|  |  |                                                                                                                                                                                                                                                                                                         
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Develop a broad line of dental implants and related dental surgery
support products that facilitate the transition from competitive
systems to a broad-based Lifecore system.                                                                                                                           
| 
| 
| 
| 
| |  | Develop and deliver unique educational programs and materials aimed at
restorative clinicians and their auxiliary teams in the principles of
tooth replacement therapy, practice management techniques and
marketing and selling skills training to foster higher patient
acceptance of dental implants.
| 
| 
| 
| 
| |  | Continue expansion in International markets through either direct
selling efforts or additional distribution agreements.                                                                                                                                                                                

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Oral Restorative Division Products

The following chart summarizes the principal products of the Companys Oral
Restorative Division:

|                                               |  |                                                                                                                          |  |                                             | 
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------- | 
|PRODUCT                                        |  | MARKET                                                                                                                   |  | STATUS                                     
|                                               |  |                                                                                                                          |  |                                            
|                                              
|                                              
|                                              
|                                              
|SUSTAIN® and RESTORE® Dental
  Implant Systems |  | Replacement of lost or extracted teeth                                                                                   |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|STAGE-1 Single Stage Implant
  System         |  | One-stage surgical procedure with
self-tapping implant design for easier
placement and Morse taper prosthetic
connection |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|SuperCAT Super Self-Tapping
  Implant         |  | Faster and more efficient implant
installation to reduce surgical time                                                   |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|CAPSET® Calcium Sulfate Bone
  Graft Barrier   |  | For use with natural and synthetic bone
graft materials as a resorbable barrier
cap and/or binding agent                 |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|CAPSET® SlowSet Barrier                       |  | Repair of multiple periodontal bone defects                                                                              |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|TefGen Regenerative Membrane                  |  | Nonresorbable membrane for guided tissue
regeneration                                                                    |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|HAPSET® Hydroxylapatite Bone
  Graft Plaster   |  | Repair of jawbone structure requiring a
non-resorbable bone matrix                                                       |  | Commercial sales                           
|                                              
|                                              
|                                              
|                                              
|MTF® Bone Allograft Tissue                     |  | Grafting material for restoration of
dental bone defects                                                                 |  | Distributed by MTF,
represented by Lifecore

SUSTAIN® and RESTORE® Dental Implant Systems, STAGE-1 Single Stage
Implant System, SuperCAT Super Self-Tapping Implant, CAPSET® Calcium Sulfate
Bone Graft Barrier, CAPSET® SlowSet Barrier, TefGen Regenerative Membrane,
HAPSET® Hydroxylapatite Bone Graft Plaster; and Support Plus are registered
trademarks of Lifecore Biomedical, Inc. MTF® Bone Allograft Tissue is a
registered trademark of the Musculoskeletal Transplant Foundation.

Implant Products

The Company offers the RESTORE Dental Implant System, the SUSTAIN Dental
Implant System and the STAGE-1 Single Stage Implant System.

The RESTORE System is based on a classic threaded titanium implant design
that pioneered the commercialization of these devices in general oral
restorative surgery. In July 1993, the Company acquired this implant design in
connection with its acquisition of Implant Support Systems, Inc., a
manufacturer of dental implant products. The Company has since enhanced and
expanded the original ISS line into a broad range of implant options, marketed
under the RESTORE System name. Included in the ISS acquisition was a line of
dental implant prosthetic components that the Company continues to market under
the Implant Support Systems brand. These components are compatible and
interchangeable with several other dental implant manufacturers systems, as
well as miscellaneous dental implant support products, permitting the Company
to market its products to dental offices that currently use competitors
implant systems.

The SUSTAIN System is based on a newer innovative design that embraces
both threaded and press-fit cylinder formats with added bone-like
hydroxylapatite. In May 1992, the Company acquired the basic SUSTAIN System
from Bio-Interfaces, Inc. after serving as an exclusive distributor for the
SUSTAIN System since 1990. The SUSTAIN System, like the RESTORE System, is
complemented by a complete line of prosthetic components.

The STAGE-1 Single Stage Implant System was designed by the Company to
allow for a one-stage surgical procedure. The STAGE-1 System uses a
self-tapping implant design for easier placement and includes the reliable
Morse taper prosthetic connection. Commercial sales began in September 1999.
In March 2001, the Company added the RBM STAGE-1 Single Stage Implant System to
this line.

Lifecore has enhanced and expanded its product lines, creating numerous
new products with a combination of innovative features from its existing
systems. This gives the Company a broad product line and offers practitioners
maximum flexibility in choice of treatment modalities.

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Bone and Soft Tissue Regeneration Products

The Company offers products that address various bone and tissue
regeneration procedures.

CAPSET Calcium Sulfate Bone Graft Barrier received 510(k) clearance and
was introduced to the market in 1995. CAPSET SlowSet Barrier was introduced in
July 1999. These products are based on a calcium sulfate plaster technology
developed by and licensed from Wright Medical, Inc., an orthopedic product
manufacturer based in Memphis, Tennessee. CAPSET Barrier and CAPSET SlowSet
Barrier allow the clinician to more efficiently use demineralized freeze-dried
bone grafts to restore missing bone, particularly in periodontal defects,
without resorting to more elaborate treatment techniques or no treatment at
all.

TefGen Regenerative Membrane technology was acquired by the Company from
Bridger Biomed, Inc. in May 1997. This non-resorbable membrane is based on
nanoporous PTFE Biomaterials(nPTFE); competitive with the markets leading
product produced by W.L. Gore. TefGen Regenerative Membrane allows the dental
surgeon to cover a treated defect in bone and prevent the invasion of soft
tissue while the slower growing bone tissue underneath has time to establish
itself.

HAPSET Hydroxylapatite Bone Graft Plaster is a moldable, partially
resorbable form of hydroxylapatite graft substitute that can be contoured to
fill a bone defect during surgery. It consists of the Companys
hydroxylapatite particle in a carrier of the same calcium sulfate plaster used
in CAPSET Barrier.

Lifecore has exclusive dental industry representation of the bone
allograft particle products distributed by the Musculoskeletal Transplant
Foundation (MTF), the worlds largest bone tissue procurement and
distribution service. MTF Bone Allograft Tissue is human donor bone tissue
processed and distributed by MTF and represented by the Company. MTF Bone
Allograft Tissue is available in mineralized or demineralized bone tissue to be
used as substitutes for the patients own bone in dental surgeries requiring
grafting. The Company entered into a three-year representation agreement with
MTF in May 2000. The Company receives a representation fee for coordinating
the relationship between MTF and the dental surgeon.

Through July 31, 2000, the Company distributed AlloDerm® Acellular Dermal
Graft, a freeze-dried, chemically processed, human donor skin that can be used
as a substitute for soft tissue grafts taken from the roof of the patients
mouth. In June 1997, Lifecore entered into a three-year exclusive U.S.
distribution agreement with LifeCell Corporation to market and distribute
AlloDerm Graft in the dental market. The distribution agreement with LifeCell
was not renewed after the initial three-year term expired.

Product Development

The Oral Restorative Division is also involved in product development
activities to improve existing components and packaging, and to add new
components to the dental implant systems. These development activities enhance
the suitability and ease of use of the products for specific surgical
applications and reflect changing trends in dental implant technology. There
can be no assurance, however, that products which are currently under
development by the Company will be successfully developed, or if so developed,
will be successfully and profitably marketed.

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Sales and Marketing

Hyaluronan Division Products

The Company generally markets and distributes its hyaluronan products to
end-users through corporate partners. The Company sells hyaluronan to these
partners in a variety of forms, including powders, gels and solutions packaged
in bulk or single-application units. The Company sells its ophthalmic grade
hyaluronan powder to Alcon for Viscoat solution. The Company has private label
agreements to supply LUROCOAT Solution to customers outside the United States
and Canada. The Company also sells hyaluronan solutions to Vetrepharm, Inc.
for veterinary embryo cryopreservation, to Bexco Pharma, Inc. for veterinary
orthopedic indications outside the U.S. and to MTF as a carrier vehicle for its
demineralized, freeze-dried bone allograft.

The Company has an agreement with GYNECARE, the womens healthcare
division of ETHICON for exclusive distribution of INTERGEL Solution. The
Company believes that ETHICON is the worldwide market leader in the area of
surgical products and has one of the largest marketing and sales forces in the
industry. Commercialization of INTERGEL Solution is dependent on receipt of FDA
marketing clearance, successful manufacturing of commercial quantities, and the
efforts of ETHICON to develop the market for the product. No assurance can be
given that any or all of these conditions will be met.

The Company also sells various forms of medical grade hyaluronan directly
to third parties for development and evaluation of new applications to be
marketed and distributed through those companies distribution systems or a
jointly developed distribution system.

Oral Restorative Division Products

The Company is focused on expanding its oral restorative product line and
developing increased sales and marketing support. The dental implant market is
highly specialized. Products are marketed to oral surgeons, periodontists,
implantologists, prosthodontists, general dental practitioners and dental
laboratories. Accordingly, management believes it must maintain a highly
experienced direct sales force in the United States for proper distribution of
these products. The Company believes that its sales force offers better
customer service, technical support and regulatory control than could be
achieved through an independent distributor network in the United States. The
Company employs twenty-one individuals dedicated to sales in the United States
and six U.S.-based salespersons dedicated to international sales. The Oral
Restorative Division products are marketed internationally in 35 countries
through 22 distributors and in Italy through its subsidiary, Lifecore
Biomedical SpA, in Germany through its subsidiary, Lifecore Biomedical GmbH,
and in Scandinavia through its subsidiary, Lifecore Biomedical AB.

The Companys marketing activities are designed to support its direct
sales force and include advertising and product publicity in trade journals,
direct mail catalogs, newsletters, continuing education programs,
telemarketing, and attendance at trade shows and professional association
meetings. Industry estimates indicate a need for replacement of approximately
100 million teeth in the adult population of the United States. That
represents a potential market for implant companies such as Lifecore of
approximately $20 billion.

Manufacturing

The commercial production of hyaluronan by the Company requires
fermentation, separation and purification capabilities, and aseptic packaging
of product in a variety of formats. In addition, the production of the INTERGEL
Solution requires high volume precision mixing of viscous fluids.

The Company produces its hyaluronan through a proprietary process of
fermentation. Until the introduction of the Companys medical grade hyaluronan,
the only commercial source for medical hyaluronan was through an animal
rendering process of extraction from rooster combs. The Company believed that
the rooster comb extraction method would not be capable of producing large
quantities of hyaluronan in an efficient manner if competition for the use of
medical grade hyaluronan greatly increased. In addition, changing regulatory
requirements make medical use of animal extracts increasingly problematic.
Consequently, the Company developed its proprietary fermentation process for
hyaluronan using existing knowledge of other successful fermentation
manufacturing processes. The Company believes that the fermentation
manufacturing approach is superior to rooster comb extraction because of
greater efficiency, flexibility, a more favorable long-term regulatory
environment, and better economies of scale in producing large commercial
quantities.

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The Companys 110,000 square foot facility is used primarily for the
proprietary hyaluronan manufacturing process. Since January 2000, the Company
has reduced its manufacturing levels causing excess capacity charges in the
ongoing periods. The Company has adequate hyaluronan inventory levels in
anticipation of the initial U.S. demand for INTERGEL Solution. The FDA has
completed a pre-approval site inspection of the Companys INTERGEL Solution
manufacturing operations to allow release of product in the U.S. after
approval. The Company believes that the current inventory on-hand, together
with its manufacturing capacity, will be sufficient to allow it to meet the
needs of its current customers for the foreseeable future.

The Company provides versatility in the simultaneous manufacturing of
various types of finished products. Currently, the Company supplies several
different formulations of hyaluronan (e.g., varied molecular weight fractions)
in powders, solutions and gels, and in a variety of bulk and single-use
finished packages. The Hyaluronan Division is continuously conducting
development work relating to the techniques utilized in hyaluronan
manufacturing. Such development activity is designed to improve production
efficiencies and expand the Companys capabilities to achieve a wider range of
hyaluronan product specifications. The Companys specialized fluid handling and
aseptic packaging capabilities also provide the opportunity for the Company to
offer contract packaging for other technically challenging non-hyaluronan
fluids.

In anticipation of significant commercial demand for hyaluronan products,
specifically INTERGEL Solution, the Company has expanded its warehouse and
distribution capabilities and its aseptic formulation and packaging facilities
for finished products. The scale-up of the aseptic operations requires the
purchase and validation of additional equipment and training of additional
personnel. See Managements Discussion and Analysis of Financial Condition and
Results of Operations.

The Companys facility was designed to meet applicable regulatory
requirements and has been cleared by the FDA for the manufacture of both device
and pharmaceutical products. The FDA periodically inspects the Companys
manufacturing systems, and requires conformance to the FDAs Quality Systems
Regulations (QSR). In addition, the Companys corporate partners are required
by the FDA to conduct intensive regulatory audits of the facilities. The
Company also regularly contracts with independent regulatory consultants to
conduct audits of the Companys operations. The Company has received
certification of conformance to ISO 9001 Quality Assurance System and EN 46001
Medical Device Standards as per the Medical Device Directive, 93/42/EEC, as
well as the Conformite Europeene(CE) Mark for our products from TUV Product
Services of Munich, Germany. These approvals represent international symbols
of quality system assurance and compliance with applicable European Medical
Device Directives, which greatly assist in the marketing of the Companys
products in the European Union.

The Company uses outside metal finishing vendors to produce its dental
implant devices and related components. The Company inspects vendors quality
assurance and control functions, and performs its own finished packaging
related to the implant product lines.

The Company purchases raw materials for its production of hyaluronan and
hydroxylapatite from outside vendors. While these materials are available from
a variety of sources, the Company principally uses limited sources for some of
its key materials to better monitor quality and achieve cost efficiencies.
Wright Medical, Inc. exclusively supplies the key raw material for CAPSET
Barrier. The Company believes Wright Medical is able to provide adequate
amounts of the raw materials for CAPSET Barrier. The Company utilizes a supply
agreement with Bridger Biomed, Inc. to supply the TefGen Regenerative Membrane
product line.

Competition

The competitors of the Company include major chemical, dental, medical,
and pharmaceutical companies, as well as smaller specialized firms. Many of
these companies have significantly greater financial, manufacturing, marketing,
and research and development resources than the Company.

Hyaluronan Products

A number of companies produce hyaluronan products and thus directly or
indirectly compete with Lifecore or its corporate partners. Several companies
are pursuing anti-adhesion product development, including Alliance
Pharmaceuticals, Inc., Anika Therapeutics, Inc., Genzyme Corporation
(Genzyme), Gliatech, Inc., Life Medical Sciences, Osteotech, and W.L. Gore &
Associates, Inc. Genzyme is developing hyaluronan-based formulations for
surgical anti-adhesion applications that could compete with the Companys
INTERGEL Solution product, if and when cleared for marketing by the FDA. If
the products obtain commercial acceptance the Companys prospects for INTERGEL
Solution, if and when approved, may be adversely affected.

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In addition to Genzyme several companies produce hyaluronan through a
fermentation process including Bio-Technology General Corporation, Kyowa Hakko,
Nippon, Seikagaku, and Bayer. Genzyme currently sells a high molecular weight
fermentation
version of hyaluronan to the Companys ophthalmic customer, Alcon, for use in
its Provisc® solution. In addition, several companies manufacture hyaluronan
by using rooster comb extraction methods. These companies primarily include
Anika Therapeutics, Inc., Genzyme, Inc., Fidia SpA, and Pharmacia Upjohn. The
Company believes that its patented fermentation process may offer production
and regulatory advantages over the traditional rooster comb extraction method.
The Companys competitors have filed or obtained patents covering aspects of
fermentation production or uses of hyaluronan. These patents may cover the same
applications as the Companys. Although there can be no assurance, the Company
believes that it does not infringe the patents of its competitors. See Patents
and Proprietary Rights.

The Company believes that competition in the ophthalmic and medical grade
hyaluronan market is primarily based on product performance and manufacturing
capacity, as well as product development capabilities. Future competition may
be based on the existence of established supply relationships, regulatory
approvals, intellectual property, and product price. After a manufacturer has
taken a product through the FDA marketing approval process, a change in
suppliers can involve significant cost and delay because significant
manufacturing issues may be encountered and supplemental FDA review may be
required.

Oral Restorative Products

The dental implant market is also highly competitive. Major market
competitors include Friadent, Sulzer Dental, Inc., Biomet, Inc., Straumann AG
and Nobel Biocare AB. A number of these competitors are established companies
with dominant market shares. The Company believes that competition in the
dental implant market is based primarily on product performance and quality,
strong sales support, and education.

The Company believes that its broad product line facilitates the
conversion of competitive implant users to a Lifecore system. In addition, the
Company has developed several innovative education and marketing support
programs which are designed to increase the clients implant business. The
Company believes it has established a strong reputation for quality products
due to its stringent design and inspection criteria. No assurance can be given,
however, that the Company can effectively compete with other manufacturers of
dental implant systems.

The market for the Companys tissue regeneration products is also
competitive. The major competitors include Biomet, Inc., Dentsply, Inc.,
Geistlich, W. L. Gore (GORE-TEX), and Sulzer Dental, Inc. (Biomend). While the
Company believes its product line and experienced sales representation are an
advantage in this area, no assurance can be given that it can gain significant
market share from its more established competitors.

Patents and Proprietary Rights

The Company pursues a policy of obtaining patent protection for patentable
subject matter in its proprietary technology. In May 1985, the Company received
a United States patent covering certain aspects of its hyaluronan fermentation
process. In August 1994, in connection with the ETHICON Agreement, the Company
was assigned a pending patent covering the composition and use of INTERGEL
Solution, with applications filed in the United States, Australia, Brazil,
Canada, Europe, Greece, and Japan. Subsequently, the patent has been issued in
Australia, Canada, Greece, Japan, and the United States. The Company also has a
United States patent covering the processes used in the manufacture of
hydroxylapatite and a second patent covering the hydroxylapatite product
produced by that process. The Company licenses two patents covering the dental
surgical use of calcium sulfate from Wright Medical, Inc. The Company also
licenses patented technology used in the production of calcium sulfate from
Wright Medical and the University of North Carolina. In conjunction with the
purchase of the TefGen Regenerative Membrane product line, the Company obtained
the rights to the patent for composition, manufacture and use of the nPTFE
material. The Company has received a patent on its dental implant packaging
and a patent on its SuperCAT Super Self-Tapping Dental Implant.

The Company believes that patent protection is significant to its
business. However, if other manufacturers were to infringe on its patents,
there can be no assurance that the Company would be successful in challenging,
or would have adequate resources to challenge, such infringement. The Company
also relies upon trade secrets, proprietary know-how and continuing
technological innovation to develop and maintain its competitive position.
There can be no assurance that others will not obtain or independently develop
technologies which are the same as or similar to the Companys technologies.
The Company pursues a policy of requiring employees, temporary staff,
consultants and customers (which have access to some of its proprietary

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information) to sign confidentiality agreements. There can be no assurance that
the Company will be able to adequately protect its proprietary technology
through patents or other means.

The Company is aware that one or more of its competitors have obtained, or
are attempting to obtain, patents covering fermentation and other processes for
producing hyaluronan. Other patents have been, or may be, issued in the future
in product areas
of interest to the Company. Although the Company is not aware of any claims
that its current or anticipated products infringe on patents held by others, no
assurance can be given that there will not be an infringement claim against the
Company in the future. The costs of any Company involvement in legal
proceedings could be substantial, both in terms of legal costs and the time
spent by management of the Company in connection with such proceedings. It is
also possible that the Company, to manufacture and market some of its products,
may be required to obtain additional licenses, which may require the payment of
initial fees, minimum annual royalty fees and ongoing royalties on net sales.
There can be no assurance that the Company would be able to license technology
developed by others, on favorable terms or at all, that may be necessary for
the manufacture and marketing of its products.

Government Regulation

Government regulation in the United States and other countries is a
significant factor in the marketing of the Companys products and in the
Companys ongoing research and development activities. The Companys products
are subject to extensive and rigorous regulation by the FDA, which regulates
the products as medical devices and which, in some cases, requires a PMA, and
by foreign countries, which regulate the products as medical devices or drugs.
Under the Federal Food, Drug, and Cosmetic Act (FDC Act), the FDA regulates
clinical testing, manufacturing, labeling, distribution, sale, and promotion of
medical devices in the United States.

Following the enactment of the Medical Device Amendments of 1976 to the
FDC Act, the FDA classified medical devices in commercial distribution at the
time of enactment (old devices) into one of three classes  Class I, II, or
III. This classification is based on the controls necessary to reasonably
ensure the safety and effectiveness of medical devices. Class I devices are
those whose safety and effectiveness can reasonably be ensured through general
controls, such as labeling, premarket notification (the 510(k) Notification),
and adherence to FDA-mandated current QSR requirements for devices. Class II
devices are those whose safety and effectiveness can reasonably be ensured
through the use of special controls, such as performance standards, post-market
surveillance, patient registries, and FDA guidelines. Class III devices are
devices that must receive a PMA from the FDA to ensure their safety and
effectiveness. Ordinarily, a PMA requires the performance of at least two
independent, statistically significant clinical trials that demonstrate the
devices safety and effectiveness. Class III devices are generally
life-sustaining, life-supporting, or implantable devices, and also include most
devices that were not on the market before May 28, 1976 (new devices) and for
which the FDA has not made a finding of substantial equivalence based upon a
510(k) Notification. An old Class III device does not require a PMA unless and
until the FDA issues regulation requiring submission of a PMA application for
the device.

The FDA invariably requires clinical data for a PMA application and has
the authority to require such data for a 510(k) Notification. If clinical data
are necessary, the manufacturer or distributor is ordinarily required to obtain
an IDE authorizing the conduct of human studies. Once in effect, an IDE permits
evaluation of devices under controlled clinical conditions. After a clinical
evaluation process, the resulting data may be included in a PMA application or
a 510(k) Notification. The PMA may be approved, or the 510(k) Notification
cleared by the FDA, only after a review process that may include requests for
additional data, sometimes requiring further studies.

If a manufacturer or distributor of medical devices can establish to the
FDAs satisfaction that a new device is substantially equivalent to what is
called a predicate device, i.e., a legally marketed Class I or Class II
medical device or a legally marketed Class III device for which the FDA has not
required a PMA, the manufacturer or distributor may market the new device. In
the 510(k) Notification, a manufacturer or distributor makes a claim of
substantial equivalence, which the FDA may require to be supported by various
types of information, including data from clinical studies, showing that the
new device is as safe and effective for its intended use as the predicate
device.

Following submission of the 510(k) Notification, the manufacturer or
distributor may not place the new device into commercial distribution until an
order is issued by the FDA finding the new device to be substantially
equivalent. The FDA has no specific time limit by which it must respond to a
510(k) Notification. The 510(k) Notification process can take up to eighteen
months or more. The FDA may agree with the manufacturer or distributor that the
new device is substantially equivalent to a predicate device, and allow the new
device to be marketed in the United States. The FDA may, however, determine
that the new device is not substantially equivalent and require the
manufacturer or distributor to submit a PMA or require further information,

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such as additional test data, including data from clinical studies, before it
is able to make a determination regarding substantial equivalence. Although the
PMA process is significantly more complex, time-consuming, and expensive than
the 510(k) Notification process, the latter process can also be expensive and
substantially delay the market introduction of a product.

Hyaluronan products are generally Class III devices. In cases where the
Company is supplying hyaluronan to a corporate partner as a raw material or
producing a finished product under a license for the partner, the corporate
partner will be responsible for
obtaining the appropriate FDA clearance or approval. Export of the Companys
hyaluronan products generally requires approval of the importing country.

The Companys TefGen Regenerative Membrane product line is a Class II
device. CAPSET Barrier and HAPSET Plaster have received market clearance
through 510(k) Notifications but are unclassified.

Other regulatory requirements are placed on a medical devices manufacture
and the quality control procedures in place, such as the FDAs device QSR
regulations. Manufacturing facilities are subject to periodic inspections by
the FDA to ensure compliance with device QSR requirements. The Companys
facility is subject to inspections as both a device and a drug manufacturing
operation. Other applicable FDA requirements include the medical device
reporting regulation, which requires that the Company provide information to
the FDA on deaths or serious injuries alleged to have been associated with the
use of its devices, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur.

If the Company is not in compliance with FDA requirements, the FDA or the
federal government can order a recall, detain the Companys devices, withdraw
or limit 510(k) Notification clearances or PMA approvals, institute proceedings
to seize the Companys devices, prohibit marketing and sales of the Companys
devices, and assess civil money penalties and impose criminal sanctions against
the Company, its officers, or its employees.

There can be no assurance that any of the Companys clinical studies will
show safety or effectiveness; that 510(k) Notifications or PMA applications
will be submitted or, if submitted, accepted for filing; that any of the
Companys products that require clearance of a 510(k) Notification or approval
of a PMA application will obtain such clearance or approval on a timely basis,
on terms acceptable to the Company for the purpose of actually marketing the
products, or at all; or that following any such clearance or approval
previously unknown problems will not result in restrictions on the marketing of
the products or withdrawal of clearance or approval.

Product Liability

Product liability claims may be asserted with respect to the Companys
products. In addition, the Company may be subject to claims for products of its
customers that incorporate Lifecores materials. The Company maintains product
liability insurance coverage in amounts the Company deems to be adequate. The
Company also carries an umbrella insurance policy that also covers product
liability claims. Lifecore Biomedical SpA and Lifecore GmbH also carry product
liability insurance. There can be no assurance that the Company will have
sufficient resources to satisfy product claims if they exceed available
insurance coverage.

Employees

As of August 23, 2001, the Company employed 185 persons on a full-time
basis, six part-time employees and nine temporary employees. None of the
Companys employees is represented by a labor organization, and the Company has
never experienced a work stoppage or interruption due to labor disputes.
Management believes its relations with employees are good.

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Executive Officers of the Registrant

Executive Officers

The following sets forth the names of the executive officers of Lifecore,
in addition to information about their positions with Lifecore, their periods
of service in such capacities, and their business experience for at least the
past five years. There are no family relationships among them. All executive
officers named are elected or appointed by the Board of Directors for a term of
office from the time of election or appointment until the next annual meeting
of directors (held following the annual meeting of shareholders) and until
their respective successors are elected and have qualified.

James W. Bracke, Ph.D.Dr. Bracke has been President and Chief Executive
Officer and a director of the Company since August 1983 and Secretary since
March 1995. He joined the Company in February 1981 as Senior Research
Scientist.

Dennis J. Allingham.Mr. Allingham was appointed Executive Vice President
of the Company in November 1997. He has been Chief Financial Officer of the
Company since January 1996. Mr. Allingham has also been General Manager of the
Hyaluronan Division since November 1996 and General Manager of the Oral
Restorative Division since November 1997.

Andre P. Decarie. Mr. Decarie joined the Company as Vice President of
Sales and Marketing  ORD in January 2001. Prior to joining the Company, Mr.
Decarie was Vice President, Business Development for Avitar, Inc., a
manufacturer of specialized wound dressings, from 1999 to December 2000. From
1998 to 1999, Mr. Decarie was Vice President, Business Development for Tremont
Medical, Inc., a medical electronics company. From 1993 to 1998, Mr. Decarie
was Senior Vice President with Integra LifeSciences Corporation, a medical
products company.

Brian J. Kane.Mr. Kane was appointed Vice President of New Business
Development of the Company in January 2001. He had been Vice President of New
Business Development and Marketing since December 1997. He joined the Company
as Vice President of Marketing in 1986.

Colleen M. Olson.Ms. Olson has been Vice President of Corporate
Administrative Operations of the Company since May 1991. She has been involved
in the administration operations of the Company since 1980.

Item 2. Properties

The Companys operations are all conducted in its 110,000 square foot
building in Chaska, Minnesota. The Company completed an expansion of its
facility during fiscal 1998. The Company leases local office space for its
three foreign subsidiaries.

Item 3. Legal Proceedings

In March 2000, the Company was served with a lawsuit in the Federal
District Court for the District of Massachusetts by The Straumann Company
alleging unfair competition and trade dress infringement surrounding the
Companys STAGE-1 Single Stage Implant System. Straumann Company moved for a
preliminary injunction, seeking a court order prohibiting Lifecores continued
sale of STAGE-1 Single Stage Implants. The federal court denied Straumanns
motion, ruling that Straumann had failed to prove that the claimed trade
dress was nonfunctional in nature. The Company has filed a motion with the
court for summary judgement, seeking dismissal of all claims. The Company
believes the lawsuit is without merit and intends to vigorously defend this
position.

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

Not applicable.

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PART II

Item 5. Market for Registrants Common Equity and Related Stockholder Matters

The Companys Common Stock is traded on the Nasdaq National Market under
the symbol LCBM. The following table sets forth for each quarter of fiscal 2001
and 2000 the range of high and low closing sale prices of the Common Stock on
the Nasdaq National Market.

|            |                |     |   |       |      |  |   |       | 
|----------- | -------------- | --- | - | ----- | ---- |  | - | ----- | 
|Fiscal year |                | Low |   |       | High
|            |                |     |   |       |     
|2001        |                |     |   |       |      |  |   |      
|           
|           
|           
|           
|            | First Quarter  |     | $ | 7.06  |      |  | $ | 8.50  | 
|           
|           
|           
|           
|            | Second Quarter |     |   | 3.69  |      |  |   | 7.88  | 
|           
|           
|           
|           
|            | Third Quarter  |     |   | 4.00  |      |  |   | 6.69  | 
|           
|           
|           
|           
|            | Fourth Quarter |     |   | 3.88  |      |  |   | 7.20  | 
|           
|           
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|           
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|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|           
|2000        |                |     |   |       |      |  |   |      
|           
|           
|           
|           
|            | First Quarter  |     | $ | 8.75  |      |  | $ | 13.75 | 
|           
|           
|           
|           
|            | Second Quarter |     |   | 11.25 |      |  |   | 21.50 | 
|           
|           
|           
|           
|            | Third Quarter  |     |   | 6.75  |      |  |   | 23.75 | 
|           
|           
|           
|           
|            | Fourth Quarter |     |   | 5.63  |      |  |   | 9.50  | 

The Company has not paid cash dividends on its Common Stock and does not
plan to pay cash dividends in the near future. The Company expects to retain
any future earnings to finance its business. The Company has a loan agreement
that restricts its ability to pay dividends. See Note D to Consolidated
Financial Statements.

At August 22, 2001, the Company had 634 shareholders of record.

Recent Sales of Unregistered Securities

On April 2, 2001, the Company issued 20,973 shares of common stock to
Lancet Software Development, Inc. (Lancet). On June 20, 2001, the Company
issued an additional 23,152 shares of common stock to Lancet. The shares of
common stock were issued to Lancet in exchange for consulting services relating
to the development of the Companys e-Commerce website. The aggregate value of
each issuance of stock was $100,000 and $127,000, respectively. The issuances
were completed pursuant to an exemption from registration provided under
Section 4(2) of the Securities Act of 1933.

On August 2, 2001, the Company issued 40,161 shares of common stock, with
an aggregate value of $200,000, to Dr. Thomas Kallus and 29,436 shares of
common stock, with an aggregate value of $146,600, to Mr. Mattias Molin. The
shares were issued in connection with the acquisition of shares of Lifecore
Biomedical AB held by such individuals. The issuances were completed pursuant
to an exemption from registration provided under Section 4(2) of the Securities
Act of 1933.

16



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##### Table of Contents



Item 6. Selected Financial Data




SELECTED CONSOLIDATED FINANCIAL
DATA  (In thousands, except per share amounts)

The following sets forth selected historical financial data with respect
to the Company and its subsidiaries. The data given below as of and for the
five years ended June 30, 2001 has been derived from the Companys Consolidated
Financial Statements audited by Grant Thornton LLP, independent certified
public accountants. Such data should be read in conjunction with the Companys
Consolidated Financial Statements and Notes thereto included elsewhere herein
and Managements Discussion and Analysis of Financial Condition and Results of
Operations.

|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |       |        |   |        |       |        |  
|---------------------------------------------------------------- | -------------------------- | ------- | ------ | ----- | ------ | - | ------ | -------------------- | ------ | ---- | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | -
|                                                                 |                            |         |        |       |        |   |        | Years Ended June 30, |        |      |       
|                                                                 |                            |         |        |      
|                                                                 |                            |         |        | 2001  |        |   | 2000   |                      |        | 1999 |        |       | 1998   |   |        | 1997 
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|Statements of Operations Data:                                   |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Net sales                                                        |                            | $       | 34,136 |       |        | $ | 32,823 |                      |        | $    | 27,321 |       |        | $ | 25,570 |       |        | $ | 18,913 |      
|                                                                
|                                                                
|                                                                
|                                                                
|Costs of goods sold                                              |                            |         | 18,487 |       |        |   | 17,618 |                      |        |      | 10,768 |       |        |   | 10,941 |       |        |   | 9,052  |      
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|Gross profit                                                     |                            |         | 15,649 |       |        |   | 15,205 |                      |        |      | 16,553 |       |        |   | 14,629 |       |        |   | 9,861  |      
|                                                                
|                                                                
|                                                                
|                                                                
|Operating expenses                                              
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Research and development   |         | 4,704  |       |        |   | 4,213  |                      |        |      | 3,557  |       |        |   | 4,940  |       |        |   | 3,703  |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Marketing and sales        |         |        | 9,284 |        |   |        | 7,907                |        |      |        | 7,164 |        |   |        | 6,889 |        |   |        | 5,464 |       
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | General and administrative |         |        | 4,633 |        |   |        | 3,847                |        |      |        | 3,534 |        |   |        | 3,345 |        |   |        | 2,986 |       
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|                                                                 |                            |         | 18,621 |       |        |   | 15,967 |                      |        |      | 14,255 |       |        |   | 15,174 |       |        |   | 12,153 |      
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|Operating income (loss)                                          |                            |         | (2,972 | )     |        |   | (762   | )                    |        |      | 2,298  |       |        |   | (545   | )     |        |   | (2,292 | )    
|                                                                
|                                                                
|                                                                
|                                                                
|Other income (expense)                                           |                            |         | (729   | )     |        |   | (837   | )                    |        |      | (722   | )     |        |   | 778    |       |        |   | 1,259  |      
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|Net income (loss)                                                |                            | $       | (3,701 | )     |        | $ | (1,599 | )                    |        | $    | 1,576  |       |        | $ | 233    |       |        | $ | (1,033 | )    
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Net income (loss) per common share                               |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                            | Basic   |        | $     | (.29   | ) |        | $                    | (.13   | )    |        | $     | .13    |   |        | $     | .02    |   |        | $     | (.08   | )
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                            | Diluted |        | $     | (.29   | ) |        | $                    | (.13   | )    |        | $     | .13    |   |        | $     | .02    |   |        | $     | (.08   | )
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|Weighted average common and common
equivalent shares outstanding |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |       |        |   |        |      
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                            | Basic   |        |       | 12,631 |   |        |                      | 12,489 |      |        |       | 12,398 |   |        |       | 12,269 |   |        |       | 12,179 |  
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      
|                                                                 |                            | Diluted |        |       | 12,631 |   |        |                      | 12,489 |      |        |       | 12,508 |   |        |       | 12,568 |   |        |       | 12,179 |  
|                                                                 |                            |         |        |       |        |   |        |                      |        |      |        |       |        |   |        |      

|                      |  |   |        |                |  |   |        |  |  |      |        |  |      |   |        |      |  |   |        |  |  | 
|--------------------- |  | - | ------ | -------------- |  | - | ------ |  |  | ---- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | 
|                      |  |   |        | As of June 30,
|                      |  |   |        |               
|                      |  |   |        | 2001           |  |   | 2000   |  |  | 1999 |        |  | 1998 |   |        | 1997
|                      |  |   |        |                |  |   |        |  |  |      |        |  |      |   |        |     
|Balance Sheet Data:   |  |   |        |                |  |   |        |  |  |      |        |  |      |   |        |      |  |  
|                     
|                     
|                     
|                     
|Working capital       |  | $ | 14,210 |                |  | $ | 15,530 |  |  | $    | 16,649 |  |      | $ | 17,084 |      |  | $ | 26,848 | 
|                     
|                     
|                     
|                     
|Total assets          |  |   | 62,696 |                |  |   | 66,108 |  |  |      | 68,797 |  |      |   | 66,948 |      |  |   | 65,509 | 
|                     
|                     
|                     
|                     
|Long-term obligations |  |   | 6,249  |                |  |   | 6,477  |  |  |      | 6,720  |  |      |   | 6,658  |      |  |   | 7,596  | 
|                     
|                     
|                     
|                     
|Shareholders equity  |  |   | 52,056 |                |  |   | 55,421 |  |  |      | 55,471 |  |      |   | 53,299 |      |  |   | 52,096 | 

17



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##### Table of Contents



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

General

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

The Company has a number of relationships with corporate partners relating
to the development and marketing of hyaluronan-based products for a variety of
medical applications, as well as certain non-hyaluronan-based applications that
utilize the Companys specialized manufacturing capabilities. Currently, the
primary commercial application for the Companys hyaluronan is as a component
in ophthalmic surgical products marketed by Alcon for cataract surgery. Sales
to Alcon are made under a supply agreement that extends through December 31,
2002. The agreement contains minimum purchase requirements totaling $2.5
million in each of calendar years 2001 and 2002. The Company supplied B&L with
aseptically packaged syringes under a supply agreement that ended on December
31, 2000. Initial sales of INTERGEL Solution occurred during fiscal 1998, as
GYNECARE, the womens healthcare division of ETHICON, INC. began marketing
INTERGEL Solution in Europe. Sales of INTERGEL Solution in the United States
are dependent upon Pre-Market Approval by the FDA.

The Companys Oral Restorative Division markets a comprehensive line of
titanium-based dental implants for tooth replacement therapy. The Oral
Restorative Division also manufactures and markets synthetic bone graft
substitute products for the restoration of bone tissue deterioration resulting
from periodontal disease and tooth loss. The Oral Restorative Division also
markets other products for the regeneration of bone and soft tissue. The
Divisions products are marketed in the United States through the Companys
direct sales force; in Italy through the Companys subsidiary, Lifecore
Biomedical SpA, in Germany through the Companys subsidiary, Lifecore
Biomedical GmbH, in Scandinavia through the Companys subsidiary, Lifecore
Biomedical AB, and in other countries through distributors.

Results of Operations

Year ended June 30, 2001 compared with year ended June 30, 2000

|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |      |            |           |  |   |            |           | 
|----------------------- | -------------------------- | - | ---------- | --------- |  | ---------------- | ---------- | --------- | ------------ | - | ---------- | --------- |  | - | ---------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                        |                            |   | Hyaluronan |           |  | Oral Restorative |            |           |              |   |            |           |  |  
|                        |                            |   | Division   |           |  | Division         |            |           | Consolidated
|                        |                            |   |            |           |  |                  |            |           |             
|                        |                            |   | 2001       |           |  | 2000             |            |           | 2001         |   |            | 2000      |  |   | 2001       |           |  | 2000
|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |     
|Net sales               |                            | $ | 14,185,000 |           |  | $                | 12,765,000 |           |              | $ | 19,951,000 |           |  | $ | 20,058,000 |           |  | $    | 34,136,000 |           |  | $ | 32,823,000 |          
|                       
|                       
|                       
|                       
|Cost of goods sold      |                            |   | 10,258,000 |           |  |                  | 9,002,000  |           |              |   | 8,229,000  |           |  |   | 8,616,000  |           |  |      | 18,487,000 |           |  |   | 17,618,000 |          
|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |     
|Gross profit            |                            |   | 3,927,000  |           |  |                  | 3,763,000  |           |              |   | 11,722,000 |           |  |   | 11,442,000 |           |  |      | 15,649,000 |           |  |   | 15,205,000 |          
|                       
|                       
|                       
|                       
|Operating expenses      |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |      |            |           |  |   |            |          
|                       
|                       
|                       
|                       
|                        | Research and development   |   |            | 3,674,000 |  |                  |            | 3,556,000 |              |   |            | 1,030,000 |  |   |            | 657,000   |  |      |            | 4,704,000 |  |   |            | 4,213,000 | 
|                       
|                       
|                       
|                       
|                        | Marketing and sales        |   |            | 206,000   |  |                  |            | 139,000   |              |   |            | 9,078,000 |  |   |            | 7,768,000 |  |      |            | 9,284,000 |  |   |            | 7,907,000 | 
|                       
|                       
|                       
|                       
|                        | General and administrative |   |            | 1,771,000 |  |                  |            | 1,514,000 |              |   |            | 2,862,000 |  |   |            | 2,333,000 |  |      |            | 4,633,000 |  |   |            | 3,847,000 | 
|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |     
|                        |                            |   | 5,651,000  |           |  |                  | 5,209,000  |           |              |   | 12,970,000 |           |  |   | 10,758,000 |           |  |      | 18,621,000 |           |  |   | 15,967,000 |          
|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |     
|Operating income (loss) |                            | $ | (1,724,000 | )         |  | $                | (1,446,000 | )         |              | $ | (1,248,000 | )         |  | $ | 684,000    |           |  | $    | (2,972,000 | )         |  | $ | (762,000   | )        
|                        |                            |   |            |           |  |                  |            |           |              |   |            |           |  |   |            |           |  |     

Net Sales.Net sales increased $1,313,000 or 4% in fiscal 2001 from
fiscal 2000. Hyaluronan Division sales increased $1,420,000 or 11% while the
Oral Restorative Division sales decreased $107,000.

The increase in hyaluronan sales was due to an increase in sales of
ophthalmic products and an increase from other Hyaluronan Division customers in
fiscal 2001 compared to fiscal 2000. Sales of ophthalmic products to Alcon
were $6,406,000 in fiscal 2001 compared with $5,981,000 for fiscal 2000. Sales
to a second customer for an aseptically packaged hyaluronan solution increased
by $1,610,000 in fiscal 2001 compared to fiscal 2000.

18



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##### Table of Contents



Oral Restorative sales decreased to $19,951,000 in fiscal 2001 from
$20,058,000 in fiscal 2000. Sales in the domestic market declined due to the
end of the Alloderm Graft distribution agreement in July 2000. When sales of
Alloderm Graft are adjusted out of the two years, the domestic market grew by
8%. Sales in the international markets increased by 12%, mainly from the
addition of the German subsidiary. The Company continues to experience growth
in the STAGE-1 Single Stage Implant System and in the RBM coated implant lines.

Gross profit.Consolidated gross profit, as a percentage of net sales,
was 46% in both fiscal 2001 and fiscal 2000. The gross profit for the
Hyaluronan Division decreased to 28% in fiscal 2001 from 29% in fiscal 2000.
Charges for unused capacity, associated with the Companys hyaluronan
production as a result of an unanticipated delay in receiving INTERGEL Solution
marketing approval in the U.S. from the FDA, were $2.7 million in fiscal 2001
and $3.2 million in fiscal 2000. The Company expects that its Hyaluronan
Division gross margins will continue to be negatively impacted until marketing
approval for INTERGEL Solution is achieved and production levels are increased.
Gross profit for the Oral Restorative Division increased to 59% in fiscal 2001
from 57% in fiscal 2000. The increase is the result of product mix; sales of
the lower margin Alloderm Graft product were less in fiscal 2001.

Research and development.Research and development expenses increased
$491,000 or 12% in fiscal 2001 from fiscal 2000. The increase resulted
principally from product development costs for the RBM STAGE-1 Single Stage
Implant that was introduced in March 2001 and from the consulting and related
expenses associated with the ongoing regulatory process with the FDA for
INTERGEL Solution.

Marketing and sales.Marketing and sales expenses increased by $1,377,000
or 17% in fiscal 2001 from fiscal 2000. The increase was due mainly to the
development and execution of new products, promotions and customer training
programs for the Oral Restorative Division and costs associated with operating
Lifecore GmbH.

General and administrative.General and administrative expenses increased
by $786,000 or 20% in fiscal 2001 from fiscal 2000. The increase is principally
from costs associated with operating Lifecore Germany and higher legal and
health insurance expenses in the current period as compared to the same period
of last fiscal year.

Other income (expense).Interest expense was lower in fiscal 2001
compared to 2000 mainly from a lower level of borrowings on the line of credit
in fiscal 2001. A higher level of cash available for investment in fiscal 2001
contributed to the increase in interest income.

Year ended June 30, 2000 compared with year ended June 30, 1999

|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |      |            |           |  |   |            |           | 
|----------------------- | -------------------------- | - | ---------- | --------- |  | ---------------- | --------- | --------- | ------------ | - | ---------- | --------- |  | - | ---------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                        |                            |   | Hyaluronan |           |  | Oral Restorative |           |           |              |   |            |           |  |  
|                        |                            |   | Division   |           |  | Division         |           |           | Consolidated
|                        |                            |   |            |           |  |                  |           |           |             
|                        |                            |   | 2000       |           |  | 1999             |           |           | 2000         |   |            | 1999      |  |   | 2000       |           |  | 1999
|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |     
|Net sales               |                            | $ | 12,765,000 |           |  | $                | 8,190,000 |           |              | $ | 20,058,000 |           |  | $ | 19,131,000 |           |  | $    | 32,823,000 |           |  | $ | 27,321,000 |          
|                       
|                       
|                       
|                       
|Cost of goods sold      |                            |   | 9,002,000  |           |  |                  | 3,495,000 |           |              |   | 8,616,000  |           |  |   | 7,273,000  |           |  |      | 17,618,000 |           |  |   | 10,768,000 |          
|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |     
|Gross profit            |                            |   | 3,763,000  |           |  |                  | 4,695,000 |           |              |   | 11,442,000 |           |  |   | 11,858,000 |           |  |      | 15,205,000 |           |  |   | 16,553,000 |          
|                       
|                       
|                       
|                       
|Operating expenses      |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |      |            |           |  |   |            |          
|                       
|                       
|                       
|                       
|                        | Research and development   |   |            | 3,556,000 |  |                  |           | 2,937,000 |              |   |            | 657,000   |  |   |            | 620,000   |  |      |            | 4,213,000 |  |   |            | 3,557,000 | 
|                       
|                       
|                       
|                       
|                        | Marketing and sales        |   |            | 139,000   |  |                  |           | 108,000   |              |   |            | 7,768,000 |  |   |            | 7,056,000 |  |      |            | 7,907,000 |  |   |            | 7,164,000 | 
|                       
|                       
|                       
|                       
|                        | General and administrative |   |            | 1,514,000 |  |                  |           | 1,438,000 |              |   |            | 2,333,000 |  |   |            | 2,096,000 |  |      |            | 3,847,000 |  |   |            | 3,534,000 | 
|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |     
|                        |                            |   | 5,209,000  |           |  |                  | 4,483,000 |           |              |   | 10,758,000 |           |  |   | 9,772,000  |           |  |      | 15,967,000 |           |  |   | 14,255,000 |          
|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |     
|Operating income (loss) |                            | $ | (1,446,000 | )         |  | $                | 212,000   |           |              | $ | 684,000    |           |  | $ | 2,086,000  |           |  | $    | (762,000   | )         |  | $ | 2,298,000  |          
|                        |                            |   |            |           |  |                  |           |           |              |   |            |           |  |   |            |           |  |     

Net Sales.Net sales increased $5,502,000 or 20% in fiscal 2000 from
fiscal 1999. Hyaluronan Division sales increased $4,575,000 or 56% while the
Oral Restorative Division sales increased $927,000 or 5%.

19



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##### Table of Contents



The increase in hyaluronan sales was due to higher sales of its ophthalmic
products in fiscal 2000 compared to fiscal 1999. Sales to Alcon were
$5,981,000 in fiscal 2000 compared with $2,740,000 for fiscal 1999. Ophthalmic
product sales in fiscal 2000 increased 80% compared to fiscal 1999, primarily
from Alcon. Sales to other Hyaluronan Division customers in fiscal 2000
increased 22% compared to fiscal 1999, primarily from increases in veterinary
customer sales.

Oral Restorative sales increased 5% to $20,058,000 in fiscal 2000 from
$19,131,000 in fiscal 1999. Sales in the domestic market increased, while
sales to international markets decreased due to unfavorable economic conditions
in many of the foreign locations in which the Company operates. The
introduction of the STAGE-1 Single Stage Implant system in the U.S. market
helped to increase sales in fiscal 2000. The STAGE-1 Single Stage Implant
System was not introduced outside the U.S. until late in fiscal 2000.

Gross profit.Consolidated gross profit, as a percentage of net sales,
decreased to 46% in fiscal 2000 from 61% in fiscal 1999. The gross profit for
the Hyaluronan Division decreased to 29% in fiscal 2000 from 57% in fiscal
1999. Charges for unused capacity, associated with the Companys hyaluronan
production as a result of an unanticipated delay in receiving INTERGEL Solution
marketing approval in the U.S. from the FDA, were $3.2 million in fiscal 2000.
Gross profit for the Oral Restorative Division decreased to 57% in fiscal 2000
from 62% in fiscal 1999. The decrease is the result of higher overhead
expenses, mainly associated with the introduction of the STAGE-1 Single Stage
Implant System, which was introduced domestically in September 1999.

Research and development.Research and development expenses increased
$656,000 or 18% in fiscal 2000 from fiscal 1999. The increase resulted
principally from increased costs associated with human clinical trials and the
regulatory process with the FDA for INTERGEL Solution.

Marketing and sales.Marketing and sales expenses increased by $743,000 or
10% in fiscal 2000 from fiscal 1999. The increase in expenses occurred
principally in the Oral Restorative Division. An increased commitment to
training and technical support in the oral restorative market, resulted in
customer training, seminar and trade show expenses being higher in fiscal 2000
compared to fiscal 1999. Marketing expenses for the introduction of the
STAGE-1 Single Stage Implant System also contributed to the increased expense
in the current year.

General and administrative.General and administrative expenses increased
by $313,000 or 9% in fiscal 2000 from fiscal 1999. Amortization associated
with the cost of acquiring the customer list from a former distributor in Spain
in April 1999 and higher personnel related costs, including salaries and rising
health insurance costs accounted for the increase.

Other income (expense).Interest expense was higher in fiscal 2000
compared to 1999 mainly from a higher level of borrowings on the line of credit
in fiscal 2000. A lower level of cash available for investments in fiscal 2000
contributed to the decrease in interest income.

For information regarding the Companys international sales and
identifiable assets of each of its two business segments, see Note J to
Consolidated Financial Statements.

Liquidity and Capital Resources

Inventories consist mainly of finished hyaluronan powder and oral
restorative products and related raw materials. The portion of finished
hyaluronan inventory that is not expected to be consumed within the next twelve
months is classified as long-term. The finished hyaluronan inventory is
maintained in a frozen state and has a shelf life in excess of five years.
Total inventory decreased by $3,597,000 and $109,000 in fiscal 2001 and 2000 as
the Company shut down production of hyaluronan powder and INTERGEL Solution
after the January 2000 FDA Advisory Panel meeting. Existing inventory has been
utilized to fulfill customer orders.

While the Company had positive cash flow from operations in fiscal 2001
and 2000, the Company had a significant operating cash flow deficit in fiscal
1999. As the Hyaluronan Divisions production levels increase, its related
production efficiencies will increase. However, charges for unused capacity
associated with the Companys hyaluronan production have negatively impacted
operating results in fiscal 2001 and 2000. These charges are a result of an
unanticipated delay in receiving INTERGEL Solution marketing approval in the
U.S. from the FDA. The Company expects that its Hyaluronan Division gross
margins will continue to be negatively impacted until marketing approval

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for INTERGEL Solution is achieved and production levels increase. Also, marketing
and sales expenses for the oral restorative products are expected to continue
at a high level, and personnel costs have increased.

On March 15, 2001, the Company entered into an agreement with Lancet
Software Development, Inc. whereby Lancet agreed to develop an eCommerce site
for the Company to market its products worldwide. Payments due under the
agreement may be made in the form of the Companys common stock or cash, at the
option of the Company. In April 2001, the Company issued an aggregate of
20,973 shares of common stock to Lancet as the first progress payment under the
agreement. In June 2001, the Company issued an aggregate of 23,152 shares of
common stock to Lancet as the second progress payment under the agreement. The
number of shares issued to Lancet was determined using a formula based on the
quoted market value of the common stock as determined on the Nasdaq National
Market. Under the terms of the agreement, Lancet exercised the right to have
the shares registered for sale. Registration Statements on Form S-3 were filed
and declared effective by the Securities and Exchange Commission in April and
August 2001.

In March 2000, the Company issued an aggregate of 118,238 shares of common
stock as payment for a $1,200,000 note payable, plus interest, to Bridger
Biomed, Inc. under the formula described in the note. Under the terms of the
note payable entered into in May 1997, the Company had the right to choose
whether it would pay the note in cash or the Companys common stock. The
recipients of the shares exercised their right to have the shares registered
for sale. A Registration Statement on Form S-3 was filed and declared
effective by the Securities and Exchange Commission in March 2000.

The loan agreement between the Company and the holder of the industrial
development revenue bonds issued to finance the Companys Chaska, Minnesota
facility was amended in May 2001 to waive the fixed charge coverage ratio and
the cash flow coverage ratio through June 30, 2002. With respect to certain of
these covenants, the Company may be required to obtain further waivers for
fiscal 2003. There can be no assurance that future waivers will be granted to
the Company.

The Company has an agreement with a bank for a $5,000,000 line of credit.
The agreement allows for advances against eligible accounts receivable and
inventories, subject to a borrowing base certificate. Interest is accrued at
the prime rate, which was 6.75% and 9.50% at June 30, 2001 and 2000,
respectively. The agreement has a maturity date of December 28, 2001. At June
30, 2001 and 2000 there was no outstanding balance under this line of credit.
The terms of the agreement require the Company to comply with various financial
covenants including minimum net worth, capital expenditure limitations and
liabilities to tangible net worth ratio. At June 30, 2001, the Company was in
compliance with all covenants.

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

Cautionary Statement

Statements included in this Managements Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Form 10-K,
in the Letter to Shareholders contained in the Annual Report to Shareholders,
in future filings by the Company with the Securities and Exchange Commission
and in the Companys press releases and oral statements made with the approval
of authorized executive officers, if the statements are not historical or
current facts, should be considered forward-looking statements made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements include future product development
plans and timing, the results of clinical trials, FDA clearances and the
related timing of such, the potential size of the markets for the Companys
products, future product introductions, future capital needs and the Companys
ability to successfully negotiate acceptable agreements with its corporate
partners. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical earnings and
those presently anticipated or projected. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The following important factors, among
others, in some cases have

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affected and in the future could affect the
Companys actual results and could cause its actual financial performance to
differ materially from that expressed in any forward-looking statement: (i)
obtaining the necessary PMA from the FDA for INTERGEL Solution, and of other
new hyaluronan products; (ii) the Companys reliance on corporate partners to
develop new products on a timely basis and to market
the Companys existing and new hyaluronan products effectively; (iii) possible
limitations on the Companys ability to meet anticipated significant commercial
demand for INTERGEL Solution on a timely basis; (iv) the uncertainty of the
possible outcome of the litigation with The Straumann Company regarding the
STAGE-1 Single Stage Implant System, (v) intense competition in the markets for
the Companys principal products and (vi) other factors discussed in the risk
factors filed as Exhibit 99 to this Form 10-K. The foregoing list should not
be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

The Company invests its excess cash in money market mutual funds and
highly rated corporate debt securities. All investments are held-to-maturity.
The market risk on such investments is minimal. Receivables from sales to
foreign customers are denominated in U.S. Dollars. Transactions at the
Companys foreign subsidiaries, Lifecore Biomedical SpA, Lifecore Biomedical
GmbH and Lifecore Biomedical AB, are in Italian Lira, Deutsche Marks and
Swedish Krona, respectively. Lifecore Biomedical SpA and Lifecore Biomedical
GmbH switched to the Euro for transactions after July 1, 2001. The Company has
historically had minimal exposure to changes in foreign currency exchange
rates, and as such, has not used derivative financial instruments to manage
foreign currency fluctuation risk. The Companys outstanding long-term debt
carries interest at a fixed rate. There is no material market risk relating to
the Companys long-term debt.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements are listed under Item 14 of this
report. Summarized unaudited quarterly financial data for 2001 and 2000 is as
follows:

|                         |                                                                  |         |   |           |            |   |        |           |            |       |   |           |            |   |   |            |            |  
|------------------------ | ---------------------------------------------------------------- | ------- | - | --------- | ---------- | - | ------ | --------- | ---------- | ----- | - | --------- | ---------- | - | - | ---------- | ---------- | -
|                         |                                                                  |         |   |           |            |   |        |           | Quarter    |       |   |           |           
|                         |                                                                  |         |   |          
|                         |                                                                  |         |   | First     |            |   | Second |           |            | Third |   |           | Fourth    
|                         |                                                                  |         |   |           |            |   |        |           |            |       |   |           |           
|                        
|                        
|                        
|                        
|Year ended June 30, 2001 |                                                                  |         |   |           |            |   |        |           |            |       |   |           |            |   |   |           
|                        
|                        
|                        
|                        
|                         | Net sales                                                        |         | $ | 7,896,000 |            |   | $      | 8,717,000 |            |       | $ | 8,627,000 |            |   | $ | 8,896,000  |           
|                        
|                        
|                        
|                        
|                         | Gross profit                                                     |         |   | 3,728,000 |            |   |        | 4,009,000 |            |       |   | 4,195,000 |            |   |   | 3,717,000  |           
|                        
|                        
|                        
|                        
|                         | Net loss                                                         |         |   | (606,000  | )          |   |        | (561,000  | )          |       |   | (621,000  | )          |   |   | (1,913,000 | )         
|                        
|                        
|                        
|                        
|                         | Net loss per share                                               |         |   |           |            |   |        |           |            |       |   |           |            |   |   |            |           
|                        
|                        
|                        
|                        
|                         |                                                                  | Basic   |   | $         | (.05       | ) |        | $         | (. 04      | )     |   | $         | (.05       | ) |   | $          | (.15       | )
|                        
|                        
|                        
|                        
|                         |                                                                  | Diluted |   | $         | (.05       | ) |        | $         | (. 04      | )     |   | $         | (.05       | ) |   | $          | (.15       | )
|                        
|                        
|                        
|                        
|                         | Weighted average common and
common equivalent shares outstanding |         |   |           |            |   |        |           |            |       |   |           |            |   |   |            |           
|                        
|                        
|                        
|                        
|                         |                                                                  | Basic   |   |           | 12,611,499 |   |        |           | 12,622,249 |       |   |           | 12,626,257 |   |   |            | 12,657,958 |  
|                        
|                        
|                        
|                        
|                         |                                                                  | Diluted |   |           | 12,611,499 |   |        |           | 12,622,249 |       |   |           | 12,626,257 |   |   |            | 12,657,958 |  
|                        
|                        
|                        
|                        
|Year ended June 30, 2000 |                                                                  |         |   |           |            |   |        |           |            |       |   |           |            |   |   |           
|                        
|                        
|                        
|                        
|                         | Net sales                                                        |         | $ | 7,140,000 |            |   | $      | 8,527,000 |            |       | $ | 8,205,000 |            |   | $ | 8,951,000  |           
|                        
|                        
|                        
|                        
|                         | Gross profit                                                     |         |   | 4,177,000 |            |   |        | 4,611,000 |            |       |   | 3,025,000 |            |   |   | 3,392,000  |           
|                        
|                        
|                        
|                        
|                         | Net income (loss)                                                |         |   | 114,000   |            |   |        | 388,000   |            |       |   | (927,000  | )          |   |   | (1,174,000 | )         
|                        
|                        
|                        
|                        
|                         | Net income (loss) per share                                      |         |   |           |            |   |        |           |            |       |   |           |            |   |   |            |           
|                        
|                        
|                        
|                        
|                         |                                                                  | Basic   |   | $         | .01        |   |        | $         | . 03       |       |   | $         | (.07       | ) |   | $          | (.09       | )
|                        
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|                        
|                        
|                         |                                                                  | Diluted |   | $         | .01        |   |        | $         | . 03       |       |   | $         | (.07       | ) |   | $          | (.09       | )
|                        
|                        
|                        
|                        
|                         | Weighted average common
and common equivalent shares outstanding |         |   |           |            |   |        |           |            |       |   |           |            |   |   |            |           
|                        
|                        
|                        
|                        
|                         |                                                                  | Basic   |   |           | 12,417,832 |   |        |           | 12,424,252 |       |   |           | 12,497,650 |   |   |            | 12,606,076 |  
|                        
|                        
|                        
|                        
|                         |                                                                  | Diluted |   |           | 12,565,395 |   |        |           | 12,775,079 |       |   |           | 12,497,650 |   |   |            | 12,606,076 |  

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

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PART III

Item 10. Directors and Executive Officers of the Registrant

Information concerning director nominees is set forth in the sections
entitled Election of Directors and Section 16(a) Beneficial Ownership
Reporting Compliance in the Companys Proxy Statement for its 2001 Annual
Meeting of Shareholders to be held November 15, 2001, which is incorporated
herein by reference. See also Executive Officers of the Registrant in Item 1
above.

Item 11. Executive Compensation

Information concerning executive compensation is set forth in the section
entitled Executive Compensation in the Companys Proxy Statement for its 2001
Annual Meeting of Shareholders which is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Security ownership of certain owners and management is set forth in the
section entitled Security Ownership of Certain Beneficial Owners and
Management in the Companys Proxy Statement for its 2001 Annual Meeting of
Shareholders which is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions



| |                
| | ---------------
| | Not Applicable.




PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K



| |  |                                           |  |  | 
| |  | ----------------------------------------- |  |  | 
| |  | (a) Documents filed as part of the report



|   |  |                                                                                            |  |                  |               
|-- |  | ------------------------------------------------------------------------------------------ |  | ---------------- | --------------
|1. |  | Consolidated Financial Statements                                                         
|  
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|   |  |                                                                                            |  |                  | Form 10-K     
|   |  |                                                                                            |  |                  | Page Reference
|   |  |                                                                                            |  |                  |               
|   |  | Report of Independent Certified Public Accountants                                         |  | F-1             
|  
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|   |  | Consolidated Balance Sheets  June 30, 2001 and 2000                                       |  | F-2             
|  
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|   |  | Consolidated Statements of Operations  years ended June 30, 2001, 2000 and 1999           |  | F-4             
|  
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|   |  | Consolidated Statements of Cash Flows  years ended June 30, 2001, 2000 and 1999           |  | F-5             
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|   |  | Consolidated Statements of Shareholders Equity  years ended June 30, 2001, 2000 and 1999 |  | F-6             
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|   |  | Notes to Consolidated Financial Statements                                                 |  | F-7 through F-17
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|2. |  | Consolidated Financial Statement Schedules                                                
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|   |  | Schedule II  Valuation and Qualifying Accounts                                            |  | S-1             
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|   |  | (b) Reports on Form 8-K                                                                   
|   |  | None                                                                                      
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|   |  | (c) Exhibits and Exhibit Index                                                            

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Description

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|2.1   |  | Stock Purchase Agreement between ISS and Lifecore dated July 28,
1993 (includes $2 million 5% Promissory Note dated July 28,
1993 as Exhibit A and Security Agreement as Exhibit B)
(Pursuant to Rule 24b-2, certain portions of this Exhibit have
been deleted and filed separately with the Commission) (incorporated
by reference to Exhibit 2.1 to Form 8-K dated July 8, 1993)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
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|3.1   |  | Restated Articles of Incorporation, as amended (incorporated by reference
to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to
Form 10-Q for the quarter ended December 31, 1987), as amended by
Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K
for the year ended June 30, 1997)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
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|3.2   |  | Amended Bylaws, (incorporated by reference to Exhibit 3.2 to Form 10-K/A
for the year ended June 30, 1995)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|3.3   |  | Form of Rights Agreement, dated as of May 23, 1996, between the Company and
Norwest Bank Minnesota, National Association (incorporated by reference to
Exhibit 1 to the Companys Form 8-A Registration Statement dated May 31, 1996)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|4.1   |  | Form of Common Stock Certificate (incorporated by reference to Exhibit
4.1 to 1987 S-2 Registration Statement [File No. 33-12970])                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
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|10.1  |  | Loan Agreement dated as of September 1, 1990 between the City of Chaska
and the Company (incorporated by reference from Exhibit 4.2 to the
Registrants Form 10-K for the year ended June 30, 1990, as amended on
Form 8 dated October 12, 1990) as amended on June 10, 1991 and July 24,
1991 (incorporated by reference from Exhibit 10.2 to the Registrants
Amendment No. 1 to Form 1991 S-2 Registration Statement [File No.
33-41291]) as amended on August 3, 1992 (incorporated by reference to
Exhibit 10.1 to Form 10-K for the year ended June 30, 1992) as amended on
July 28, 1994 (incorporated by reference to Exhibit 10.1 to Form 10-K for
the year ended June 30, 1994), as amended on July 27, 1995 (incorporated
by reference to Exhibit 10.1 to Form 10-K for the year ended June 30,
1995), as amended on July 8, 1996, (incorporated by reference to Exhibit
10.1 to Form 10-K for the year ended June 30, 1996), as amended on July
1, 1997 (incorporated by reference to Exhibit 10.1 to Form 10-K for the
year ended June 30, 1997), as amended on June 5, 1998, (incorporated by
reference to Exhibit 10.1 to Form 10-K for the year ended June 30, 1998),
as amended on June 10, 1999, (incorporated by reference to Exhibit 10.1
to Form 10-K for the year ended June 30, 1999), as amended on June 8,
2000, (incorporated by reference to Exhibit 10.1 to Form 10-K for the
year ended June 30, 2000), as amended on May 24, 2001, filed herewith
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|10.2  |  | Trust Indenture dated as of September 1, 1990 from the City of Chaska to
Norwest Bank Minnesota, N.A., as Trustee (incorporated by reference from
Exhibit 4.3 to the Registrants Form 10-K for the year ended June 30,
1990, as amended on Form 8 dated October 12, 1990)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|10.3  |  | Combination Mortgage, Security Agreement and Fixture Financing Statement
dated as of September 1, 1990 from the Company to Norwest Bank Minnesota,
N.A., as Trustee (incorporated by reference from Exhibit 4.4 to the
Registrants Form 10-K for the year ended June 30, 1990, as amended on
Form 8 dated October 12, 1990)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
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|10.4  |  | Contract for Private Redevelopment dated as of September 1, 1990 between
the Company and Chaska Economic Development Authority (incorporated by
reference from Exhibit 4.5 to the Registrants Form 10-K for the year
ended June 30, 1990, as amended on Form 8 dated October 12, 1990)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|10.5  |  | Hyaluronan Purchase Agreement dated March 28, 1990 between the Company
and Alcon (incorporated by reference to Exhibit 10 to Form 8-K dated
April 10, 1990, as amended on Form 8 dated May 23, 1990) as amended on
July 17, 1992, (Certain information has been deleted from this exhibit
and filed separately with the Securities and Exchange Commission pursuant
to a request for confidential treatment under Rule 24b-2) (incorporated
by reference to Exhibit 10.5 to Form 10-K for the year ended June 30,
1992)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
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|10.6* |  | Employment Agreement dated June 10, 1991 with James W. Bracke
(incorporated by reference to Exhibit 10.11 to 1991 S-2 Registration
Statement [File No. 33-41291]), as amended by letter agreement dated on
August 14, 1995 (incorporated by reference to Exhibit 10.6 to Form 10-K
for the year ended June 30, 1995), as amended by letter agreement dated
November 14, 1996 (incorporated by reference to Exhibit 10.1 to Form 10-Q
for the quarter ended December 31, 1997)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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Description



|       |  |                                                                                                                                                                                                                                                                                                                                                                 
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7   |  | Form of Indemnification Agreement entered into between the Company and
directors and officers (incorporated by reference to
Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)                                                                                                                                                                         
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|10.8*  |  | 1987 Stock Option Plan (incorporated by reference to Exhibit 4(a) to S-8
Registration Statement [File No. 33-26065])                                                                                                                                                                                                                                            
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|10.9*  |  | 1990 Employee Stock Purchase
Savings Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No. 33-32984])                                                                                                                                                                                                                         
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|10.10* |  | 1990 Stock Plan (incorporated
by reference to Exhibit 4(a) to S-8 Registration Statement
[File No. 33-38914]) as amended by Amendment
No. 1 (incorporated by reference to Exhibit 10.13 to
Form 10-K for the year ended June 30, 1994), as amended by Amendment No. 2 (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended June 30, 1997)
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|10.11  |  | Conveyance, License,
Development and Supply Agreement dated August 8, 1994 between
Lifecore Biomedical, Inc. and ETHICON, INC. (pursuant to
Rule 24b-2, certain portions of this Exhibit have been omitted
and filed separately with the Commission) (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June 30, 1994)                 
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|10.12* |  | 1996 Stock Option Plan
(incorporated by reference to Exhibit 4.1 to S-8 Registration Statement [File No. 333-18515])                                                                                                                                                                                                                                            
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|10.13  |  | Supply Agreement dated
December 7, 1994 between Lifecore Biomedical, Inc. and IOLAB
Corporation (now Bausch & Lomb Surgical) (pursuant to Rule
24b-2, certain portions of this Exhibit have been omitted and filed
separately with the Commission) (incorporated by reference to Exhibit 10.20 to Form 10-K for the year ended June 30, 1995)                   
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|10.14  |  | Credit and Security
Agreement, dated December 28, 1998, between the U.S. Bank
National Association and the Company, (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 1998)                                                                                                                                            
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|10.15  |  | Amendment No. 1 to
Credit and Security Agreement dated February 7, 2000 between
U.S. Bank National Association and the Company, (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended June 30, 2000)                                                                                                                                      
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|10.16  |  | Amendment No. 2 to
Credit and Security Agreement dated July 21, 2000 between U.S.
Bank National Association and the Company, (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended June 30, 2000)                                                                                                                                         
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|10.17  |  | Amendment No. 3 to
Credit and Security Agreement dated August 21, 2001 between U.S. Bank National Association and the Company, filed herewith                                                                                                                                                                                                                   
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|23.1   |  | Consent of Grant Thornton LLP                                                                                                                                                                                                                                                                                                                                   
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|99     |  | Risk Factors                                                                                                                                                                                                                                                                                                                                                    



---

|* |  | Denotes management contract or compensatory plan, contract or arrangement.
|- |  | --------------------------------------------------------------------------

25



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##### Table of Contents








SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                          |                           |                                                                                               
|------------------------- | ------------------------- | ----------------------------------------------------------------------------------------------
|                          | LIFECORE BIOMEDICAL, INC.
|                         
|Dated: September 20, 2001 |                           | By   /s/ James W. BrackeJames W. Bracke, Ph.D.President, Chief Executive Officer
and Secretary

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

|                          |  |                                                                                                                                       
|------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|Dated: September 20, 2001 |  | By   /s/ Dennis J. AllinghamDennis J. AllinghamExecutive Vice President and Chief Financial Officer
(principal financial officer)     
|                         
|Dated: September 20, 2001 |  | By   /s/ James W. BrackeJames W. Bracke, Ph.D.President, Chief Executive Officer
(principal executive officer), Secretary and Director
|                         
|Dated: September 20, 2001 |  | By   /s/ Orwin L. CarterOrwin L. CarterDirector                                                                                       
|                         
|Dated: September 20, 2001 |  | By   /s/ Joan L. GardnerJoan L. GardnerDirector                                                                                       
|                         
|Dated: September 20, 2001 |  | By   /s/ Thomas H. GarrettThomas H. GarrettDirector                                                                                   
|                         
|Dated: September 20, 2001 |  | By   /s/ John C. HeinmillerJohn C. HeinmillerDirector                                                                                 
|                         
|Dated: September 20, 2001 |  | By   /s/ Richard W. PerkinsRichard W. PerkinsDirector                                                                                 
|                         
|Dated: September 20, 2001 |  | By   /s/ Mark T. SellnowMark T. SellnowController (principal accounting officer)                                                      

25



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##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Shareholders and Board of Directors
   Lifecore Biomedical, Inc.

We have audited the accompanying consolidated balance sheets of Lifecore
Biomedical, Inc. (a Minnesota corporation) and subsidiaries as of June 30, 2001
and 2000, and the related consolidated statements of operations, shareholders
equity, and cash flows for each of the three years in the period ended June 30,
2001. 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 in accordance with auditing standards generally
accepted in the United States of America. 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 includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lifecore
Biomedical, Inc. and subsidiaries as of June 30, 2001 and 2000, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended June 30, 2001, in conformity with
accounting principles generally accepted in the United States of America.

We have also audited Schedule II of Lifecore Biomedical, Inc. and
subsidiaries for each of the three years in the period ended June 30, 2001. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.

|                                                                                                         |  |                       
|-------------------------------------------------------------------------------------------------------- |  | ----------------------
|                                                                                                         |  | /s/ GRANT THORNTON LLP
|                                                                                                        
|Minneapolis, Minnesota
July 27, 2001 (except for Note K,
     as to which the date is September 6, 2001)

F-1



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




CONSOLIDATED BALANCE
SHEETSJune 30,ASSETS

|                                        |                                      |                      |            |             |            |   |            |             |            | 
|--------------------------------------- | ------------------------------------ | -------------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | 
|                                        |                                      |                      |            | 2001        |            |   | 2000       |            
|                                        |                                      |                      |            |             |            |   |            |            
|CURRENT ASSETS                         
|                                       
|                                       
|                                       
|                                       
|                                        | Cash and cash equivalents            |                      | $          | 2,310,000   |            |   | $          | 1,101,000   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Accounts receivable, less allowances |                      |            | 6,923,000   |            |   |            | 5,616,000   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                          |                      |            | 8,693,000   |            |   |            | 12,290,000  |           
|                                       
|                                       
|                                       
|                                       
|                                        | Prepaid expenses                     |                      |            | 675,000     |            |   |            | 733,000     |           
|                                        |                                      |                      |            |             |            |  
|                                        |                                      | Total current assets |            |             | 18,601,000 |   |            |             | 19,740,000 | 
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|PROPERTY, PLANT AND EQUIPMENT  AT COST
|                                       
|                                       
|                                       
|                                       
|                                        | Land                                 |                      |            | 249,000     |            |   |            | 249,000     |           
|                                       
|                                       
|                                       
|                                       
|                                        | Building                             |                      |            | 23,924,000  |            |   |            | 23,921,000  |           
|                                       
|                                       
|                                       
|                                       
|                                        | Equipment                            |                      |            | 15,425,000  |            |   |            | 14,783,000  |           
|                                       
|                                       
|                                       
|                                       
|                                        | Land and building improvements       |                      |            | 3,429,000   |            |   |            | 3,381,000   |           
|                                        |                                      |                      |            |             |            |  
|                                        |                                      |                      | 43,027,000 |             |            |   | 42,334,000 |            
|                                       
|                                       
|                                       
|                                       
|                                        | Less accumulated depreciation        |                      |            | (14,590,000 | )          |   |            | (11,982,000 | )         
|                                        |                                      |                      |            |             |            |  
|                                        |                                      |                      | 28,437,000 |             |            |   | 30,352,000 |            
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|                                       
|OTHER
ASSETS                           
|                                       
|                                       
|                                       
|                                       
|                                        | Intangibles                          |                      |            | 4,605,000   |            |   |            | 5,286,000   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Security deposits                    |                      |            | 854,000     |            |   |            | 847,000     |           
|                                       
|                                       
|                                       
|                                       
|                                        | Inventories                          |                      |            | 9,368,000   |            |   |            | 9,368,000   |           
|                                       
|                                       
|                                       
|                                       
|                                        | Other                                |                      |            | 831,000     |            |   |            | 515,000     |           
|                                        |                                      |                      |            |             |            |  
|                                        |                                      |                      | 15,658,000 |             |            |   | 16,016,000 |            
|                                        |                                      |                      |            |             |            |  
|                                        |                                      | $                    | 62,696,000 |             |            | $ | 66,108,000 |            
|                                        |                                      |                      |            |             |            |  

F-2



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS  (Continued)
June 30,




LIABILITIES AND SHAREHOLDERS EQUITY

|                              |                                                                                                                                                       |                                             |                           |             |           |           |            |             |           |           | 
|----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------- | ----------- | --------- | --------- | ---------- | ----------- | --------- | --------- | 
|                              |                                                                                                                                                       |                                             |                           |             | 2001      |           |            | 2000        |          
|                              |                                                                                                                                                       |                                             |                           |             |           |           |            |             |          
|CURRENT
LIABILITIES          
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                       | Current maturities of long-term obligations |                           | $           | 227,000   |           |            | $           | 243,000   |          
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                       | Accounts payable                            |                           |             | 3,057,000 |           |            |             | 2,550,000 |          
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                       | Accrued compensation                        |                           |             | 796,000   |           |            |             | 768,000   |          
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                       | Accrued expenses                            |                           |             | 311,000   |           |            |             | 347,000   |          
|                             
|                             
|                             
|                             
|                              |                                                                                                                                                       | Customers deposits                         |                           |             |          |           |            |             | 302,000   |          
|                              |                                                                                                                                                       |                                             |                           |             |           |          
|                              |                                                                                                                                                       |                                             | Total current liabilities |             |           | 4,391,000 |            |             |           | 4,210,000 | 
|                             
|                             
|                             
|                             
|                             
|                             
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|                             
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|                             
|                             
|                             
|                             
|LONG-TERM OBLIGATIONS         |                                                                                                                                                       |                                             | 6,249,000                 |             |           |           | 6,477,000  |            
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|COMMITMENTS AND CONTINGENCIES |                                                                                                                                                       |                                             |                          |             |           |           |           |            
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|                             
|SHAREHOLDERS
EQUITY         
|                             
|                             
|                             
|                             
|                              | Preferred stock  authorized, 25,000,000 shares of $1.00 stated
value; none issued                                                                    |                                             |                           |            |           |           |            |            |          
|                             
|                             
|                             
|                             
|                              | Preferred stock, Series A Junior Participating  authorized,
500,000 shares of $1.00 par value; none issued                                           |                                             |                           |            |           |           |            |            |          
|                             
|                             
|                             
|                             
|                              | Common stock  authorized, 50,000,000 shares of
$.01 stated value; issued and outstanding, 12,679,127 and
12,606,124 shares at June 30, 2001 and 2000 |                                             |                           | 127,000     |           |           |            | 126,000     |          
|                             
|                             
|                             
|                             
|                              | Additional paid-in capital                                                                                                                            |                                             |                           | 87,561,000  |           |           |            | 87,226,000  |          
|                             
|                             
|                             
|                             
|                              | Accumulated deficit                                                                                                                                   |                                             |                           | (35,632,000 | )         |           |            | (31,931,000 | )        
|                              |                                                                                                                                                       |                                             |                           |             |           |          
|                              |                                                                                                                                                       |                                             | 52,056,000                |             |           |           | 55,421,000 |            
|                              |                                                                                                                                                       |                                             |                           |             |           |          
|                              |                                                                                                                                                       | $                                           | 62,696,000                |             |           | $         | 66,108,000 |            
|                              |                                                                                                                                                       |                                             |                           |             |           |          

The accompanying notes are an integral part of these statements.

F-3



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




CONSOLIDATED STATEMENT OF
OPERATIONSYears ended June 30,

|                                                                 |                            |                         |            |            |            |            |            |            |          |            |            |            |           |            | 
|---------------------------------------------------------------- | -------------------------- | ----------------------- | ---------- | ---------- | ---------- | ---------- | ---------- | ---------- | -------- | ---------- | ---------- | ---------- | --------- | ---------- | 
|                                                                 |                            |                         |            |            | 2001       |            |            | 2000       |          |            | 1999       |           
|                                                                 |                            |                         |            |            |            |            |            |            |          |            |            |           
|Net sales                                                        |                            | $                       | 34,136,000 |            |            | $          | 32,823,000 |            |          | $          | 27,321,000 |           
|                                                                
|                                                                
|                                                                
|                                                                
|Cost of goods sold                                               |                            |                         | 18,487,000 |            |            |            | 17,618,000 |            |          |            | 10,768,000 |           
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                 | Gross profit               |                         |            | 15,649,000 |            |            |            | 15,205,000 |          |            |            | 16,553,000 |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|Operating
expenses                                              
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Research and development   |                         |            | 4,704,000  |            |            |            | 4,213,000  |          |            |            | 3,557,000  |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Marketing and sales        |                         |            | 9,284,000  |            |            |            | 7,907,000  |          |            |            | 7,164,000  |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | General and administrative |                         |            | 4,633,000  |            |            |            | 3,847,000  |          |            |            | 3,534,000  |          
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                 |                            |                         | 18,621,000 |            |            |            | 15,967,000 |            |          |            | 14,255,000 |           
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                 |                            | Operating income (loss) |            |            | (2,972,000 | )          |            |            | (762,000 | )          |            |            | 2,298,000 |           
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|Other
income (expense)                                          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest income            |                         |            | 202,000    |            |            |            | 86,000     |          |            |            | 190,000    |          
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Interest expense           |                         |            | (807,000   | )          |            |            | (876,000   | )        |            |            | (912,000   | )        
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 | Other                      |                         |            | (124,000   | )          |            |            | (47,000    | )        |            |            |           |          
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                 |                            |                         | (729,000   | )          |            |            | (837,000   | )          |          |            | (722,000   | )         
|                                                                 |                            |                         |            |            |            |            |            |            |         
|NET INCOME (LOSS)                                                |                            | $                       | (3,701,000 | )          |            | $          | (1,599,000 | )          |          | $          | 1,576,000  |           
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|Net
income (loss) per common share                              
|                                                                 |                            |                         | Basic      |            | $          | (.29       | )          |            | $        | (.13       | )          |            | $         | .13        | 
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                 |                            |                         | Diluted    |            | $          | (.29       | )          |            | $        | (.13       | )          |            | $         | .13        | 
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|                                                                
|Weighted average common and common equivalent shares
outstanding
|                                                                 |                            |                         | Basic      |            |            | 12,630,990 |            |            |          | 12,488,687 |            |            |           | 12,398,010 | 
|                                                                 |                            |                         |            |            |            |            |            |            |         
|                                                                 |                            |                         | Diluted    |            |            | 12,630,990 |            |            |          | 12,488,687 |            |            |           | 12,508,069 | 
|                                                                 |                            |                         |            |            |            |            |            |            |         

The accompanying notes are an integral part of these statements.

F-4



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




CONSOLIDATED STATEMENTS OF CASH
FLOWS Years ended June 30,

|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |      |         |            |            |   |         |            |  
|-------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | ------------------------------ | ---------- | ------------------- | - | ------- | ---------- | ---------- | ---- | ------- | ---------- | ---------- | - | ------- | ---------- | -
|                                                                                                   |                                                                 |                                |            |                     |   | 2001    |            |            | 2000 |         |            | 1999       |  
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |      |         |            |            |  
|Cash flows from operating activities:                                                              |                                                                 |                                |            |                     |   |         |            |            |      |         |            |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Net income (loss)                                                                                  |                                                                 | $                              | (3,701,000 | )                   |   | $       | (1,599,000 | )          |      | $       | 1,576,000  |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |                                                                 |                                |            |                     |   |         |            |            |      |         |            |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Depreciation and amortization                                   |                                |            | 3,306,000           |   |         |            | 3,301,000  |      |         |            | 3,104,000  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Allowance for doubtful accounts                                 |                                |            | (49,000             | ) |         |            | (186,000   | )    |         |            | 26,000     |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Loss on sale of property, plant and equipment                   |                                |            |                    |   |         |            | 14,000     |      |         |            |           |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Changes in operating assets and liabilities
Accounts receivable |                                |            | (1,258,000          | ) |         |            | 1,299,000  |      |         |            | (2,523,000 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                |            | Inventories         |   |         | 3,597,000  |            |      |         | 109,000    |            |   |         | (6,074,000 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                |            | Prepaid expenses    |   |         | 58,000     |            |      |         | (241,000   | )          |   |         | 11,000     |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                |            | Accounts payable    |   |         | 507,000    |            |      |         | 937,000    |            |   |         | (2,170,000 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                |            | Accrued liabilities |   |         | (8,000     | )          |      |         | (503,000   | )          |   |         | 242,000    |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                |            | Customers deposits |   |         | (302,000   | )          |      |         | 302,000    |            |   |         |           |  
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|Net cash provided by (used in) operating activities                                                |                                                                 |                                | 2,150,000  |                     |   |         | 3,433,000  |            |      |         | (5,808,000 | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cash flows from investing activities:                                                              |                                                                 |                                |            |                     |   |         |            |            |      |         |            |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Purchases of property, plant and equipment                      |                                |            | (693,000            | ) |         |            | (1,001,000 | )    |         |            | (1,610,000 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Proceeds from sale of property, plant and equipment             |                                |            |                    |   |         |            | 15,000     |      |         |            |           |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Purchases of intangibles                                        |                                |            | (17,000             | ) |         |            | (33,000    | )    |         |            | (97,000    | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Purchases of investments                                        |                                |            |                    |   |         |            |           |      |         |            | (2,485,000 | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Maturities of investments                                       |                                |            |                    |   |         |            |           |      |         |            | 6,438,000  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Decrease (increase) in security deposits                        |                                |            | (7,000              | ) |         |            | (6,000     | )    |         |            | 7,000      |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Decrease (increase) in other assets                             |                                |            | (81,000             | ) |         |            | (69,000    | )    |         |            | 126,000    |  
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|Net cash provided by (used in) investing activities                                                |                                                                 |                                | (798,000   | )                   |   |         | (1,094,000 | )          |      |         | 2,379,000  |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cash flows from financing activities:                                                              |                                                                 |                                |            |                     |   |         |            |            |      |         |            |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Payments of long-term obligations                               |                                |            | (244,000            | ) |         |            | (258,000   | )    |         |            | (133,000   | )
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Advance (payments) on line of credit                            |                                |            |                    |   |         |            | (1,883,000 | )    |         |            | 1,883,000  |  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   | Proceeds from stock options exercised                           |                                |            | 101,000             |   |         |            | 359,000    |      |         |            | 131,000    |  
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|Net cash provided by (used in) financing activities                                                |                                                                 |                                | (143,000   | )                   |   |         | (1,782,000 | )          |      |         | 1,881,000  |           
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|Net increase (decrease) in cash and cash equivalents                                               |                                                                 |                                | 1,209,000  |                     |   |         | 557,000    |            |      |         | (1,548,000 | )         
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Cash and cash equivalents at beginning of year                                                     |                                                                 |                                | 1,101,000  |                     |   |         | 544,000    |            |      |         | 2,092,000  |           
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|Cash and cash equivalents at end of year                                                           |                                                                 | $                              | 2,310,000  |                     |   | $       | 1,101,000  |            |      | $       | 544,000    |           
|                                                                                                   |                                                                 |                                |            |                     |   |         |            |            |     
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|Supplemental disclosure of cash flow information:                                                  |                                                                 |                                |            |                     |   |         |            |            |      |         |            |           
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 | Cash paid during the year for: |            |                     |   |         |            |            |      |         |            |            |   |        
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                  
|                                                                                                   |                                                                 |                                | Interest   |                     | $ | 807,000 |            |            | $    | 940,000 |            |            | $ | 726,000 |           

The accompanying notes are an integral part of these statements.

F-5



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |            |         |             |             |            |   | 
|------------------------- | -------------------------------------------------------------------------------------------------------------- |  | ---------- | ------------ |  | - | ------- | ----- |  | ------- | ---------- | ---------- | ------- | ----------- | ----------- | ---------- | - | 
|                          |                                                                                                                |  |            | Common Stock |  |   |         |       |  |         |            |            |        
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |            |        
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            | Additional |         |             |             |            |  
|                          |                                                                                                                |  |            | Shares       |  |   |         |       |  |         | Paid-In    |            |         | Accumulated |            
|                          |                                                                                                                |  |            | Issued       |  |   | Amount  |       |  | Capital |            |            | Deficit |            
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |            |         |            
|Balances at July 1, 1998  |                                                                                                                |  | 12,321,709 |              |  | $ | 123,000 |       |  | $       | 85,084,000 |            |         | $           | (31,908,000 | )         
|                         
|                         
|                         
|                         
|                          | Exercise of stock options and
employee stock purchase savings
plan                                             |  |            | 66,607       |  |   |         | 1,000 |  |         |            | 345,000    |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Issuance of common stock as
payment of debt                                                                    |  |            | 28,413       |  |   |         |      |  |         |            | 250,000    |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Net income for the year ended June 30, 1999                                                                    |  |            |             |  |   |         |      |  |         |            |           |         |             |             | 1,576,000  |  
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |           
|Balances at June 30, 1999 |                                                                                                                |  | 12,416,729 |              |  |   | 124,000 |       |  |         | 85,679,000 |            |         |             | (30,332,000 | )         
|                         
|                         
|                         
|                         
|                          | Exercise of stock options and
employee stock purchase savings
plan, net of 4,000 shares
surrendered in payment |  |            | 71,157       |  |   |         | 1,000 |  |         |            | 462,000    |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Issuance of common stock as
payment of debt                                                                    |  |            | 118,238      |  |   |         | 1,000 |  |         |            | 1,085,000  |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Net loss for the year ended June 30, 2000                                                                      |  |            |             |  |   |         |      |  |         |            |           |         |             |             | (1,599,000 | )
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |           
|Balances at June 30, 2000 |                                                                                                                |  | 12,606,124 |              |  |   | 126,000 |       |  |         | 87,226,000 |            |         |             | (31,931,000 | )         
|                         
|                         
|                         
|                         
|                          | Exercise of stock options and
employee stock purchase savings
Plan                                             |  |            | 28,878       |  |   |         |      |  |         |            | 101,000    |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Issuance of common stock as
payment for services                                                               |  |            | 44,125       |  |   |         | 1,000 |  |         |            | 234,000    |         |             |             |           |  
|                         
|                         
|                         
|                         
|                          | Net loss for the year ended June 30, 2001                                                                      |  |            |             |  |   |         |      |  |         |            |           |         |             |             | (3,701,000 | )
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |           
|Balances at June 30, 2001 |                                                                                                                |  | 12,679,127 |              |  | $ | 127,000 |       |  | $       | 87,561,000 |            |         | $           | (35,632,000 | )         
|                          |                                                                                                                |  |            |              |  |   |         |       |  |         |            |           

The accompanying notes are an integral part of these statements.

F-6



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Lifecore Biomedical, Inc. (the Company), manufactures biomaterials and
surgical devices for use in various surgical markets and provides specialized
contract aseptic manufacturing services through its two divisions, the
Hyaluronan Division and the Oral Restorative Division. The Companys
manufacturing facility is located in Chaska, Minnesota. The Hyaluronan
Division markets its products through OEM and contract manufacturing alliances
in the fields of general surgery, ophthalmology, veterinary and wound
management. The Oral Restorative Division markets its products through direct
sales in the United States, Italy, Germany and Sweden and through distributors
in other foreign countries.

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and revenues and expenses during the reporting
periods. Actual results could differ from those estimates.

A summary of significant accounting policies consistently applied in the
preparation of the financial statements follows:



|1. |  | Consolidation
|-- |  | -------------

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Implant Support Systems, Inc., Lifecore
Biomedical SpA and Lifecore Biomedical GmbH. All intercompany balances and
transactions have been eliminated in consolidation.



|2. |  | Cash and Cash Equivalents
|-- |  | -------------------------

The Company considers all highly liquid temporary investments with
original maturities of three months or less to be cash equivalents. At June
30, 2001 and 2000, substantially all of the Companys cash and cash equivalents
were invested in a money market fund.



|3. |  | Accounts Receivable
|-- |  | -------------------

The Company extends credit to customers in the normal course of business,
but generally does not require collateral or any other security to support
amounts due. Management performs on-going credit evaluations of its customers.
The Companys customers are located primarily throughout the United States,
Asia, Europe and South America. Accounts receivable balances from customers
located in Asia, Europe and South America were 11%, 29% and 9% of total
receivables at June 30, 2001 and 8%, 15% and 12% of total receivables at June
30, 2000. The Company maintains allowances for potential credit losses, which
were $145,000 and $186,000 at June 30, 2001 and 2000.

F-7



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued



|4. |  | Inventories
|-- |  | -----------

Inventories are stated at the lower of cost (first-in, first-out method)
or market. Inventories consist mainly of finished hyaluronan powder, aseptic
units and oral restorative products and related raw materials. The portion of
finished hyaluronan powder inventory not expected to be consumed within the
next twelve months is classified as a long-term asset. The finished hyaluronan
inventory is maintained in a frozen state and has a shelf life in excess of
five years. Inventories consist of the following:

|                |  |                |            |  |      |   |            | 
|--------------- |  | -------------- | ---------- |  | ---- | - | ---------- | 
|                |  | As of June 30, |           
|                |  |                |           
|                |  | 2001           |            |  | 2000 |  
|                |  |                |            |  |      |  
|Raw materials   |  | $              | 3,150,000  |  |      | $ | 3,833,000  | 
|               
|               
|               
|               
|Work-in-process |  |                | 358,000    |  |      |   | 255,000    | 
|               
|               
|               
|               
|Finished goods  |  |                | 14,553,000 |  |      |   | 17,570,000 | 
|                |  |                |            |  |      |  
|                |  | $              | 18,061,000 |  |      | $ | 21,658,000 | 
|                |  |                |            |  |      |  



|5. |  | Depreciation
|-- |  | ------------

Depreciation is provided in amounts sufficient to charge the cost of
depreciable assets to operations over their estimated service lives principally
on a straight-line method for financial reporting purposes and on straight-line
and accelerated methods for income tax reporting purposes. Depreciation expense
was approximately $2,608,000, $2,603,000 and $2,519,000 for the years ended
June 30, 2001, 2000 and 1999. Lives used in straight-line depreciation for
financial reporting purposes are as follows:

|                               |  |           |  | 
|------------------------------ |  | --------- |  | 
|                               |  | Number of | 
|                               |  | years     | 
|                               |  |           | 
|Building                       |  | 18-25     | 
|                              
|                              
|                              
|                              
|Equipment                      |  | 3-15      | 
|                              
|                              
|                              
|                              
|Land and building improvements |  | 18        | 



|6. |  | Intangibles
|-- |  | -----------

Intangibles consist primarily of the cost of the technology and regulatory
rights related to the SUSTAIN Dental Implant System product line acquired in
May 1992, the goodwill related to the July 1993 acquisition of Implant Support
Systems, Inc., the cost of the technology and regulatory rights related to the
TefGen Regenerative Membrane product line acquired in May 1997 and the cost of
acquiring the customer list from a former distributor in Spain in April 1999.

On an ongoing basis, the Company reviews the valuation and amortization of
intangibles to determine possible impairment by comparing the carrying value to
projected undiscounted future cash flows of the related assets. The cost of the
technology and regulatory rights and the goodwill are being amortized on the
straight-line method over 15 years, their estimated useful lives. The cost of
the customer list is being amortized on the straight-line method over 5 years.
Accumulated amortization of intangibles was $4,342,000 and $3,644,000 at June
30, 2001 and 2000.

In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business
Combinations. SFAS No. 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted for
by the purchase method for which the

F-8



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE A  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  continued

date of acquisition is after June 30, 2001. SFAS No. 141 requires that all
business combinations be accounted for under the purchase method and that
certain acquired intangible assets in a business combination be recognized as
assets apart from goodwill. The Company does not expect SFAS No. 141 to have an
impact on the Companys financial statements.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 is effective for fiscal years beginning after December
15, 2001. SFAS No. 142 requires, among other things, the cessation of the
amortization of goodwill. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill,
and the identification of reporting units for the purposes of assessing
potential future impairments of goodwill. SFAS No. 142 also requires the
Company to complete a transitional goodwill impairment test six months from the
date of adoption. The Company is currently assessing the impact of this new
statement on its consolidated financial position and results of operations and
has not yet determined the impact of adoption.



|7. |  | Other Assets
|-- |  | ------------

Included within other assets are costs incurred to register patents and
trademarks, which are capitalized as incurred. Amortization of these costs
commences when the related patent or trademark is granted. The costs are
amortized over the estimated useful life of the patent or trademark, not to
exceed 17 years. Patents and trademarks consist of the following:

|                              |  |                |          |   |      |   |          |  
|----------------------------- |  | -------------- | -------- | - | ---- | - | -------- | -
|                              |  | As of June 30, |         
|                              |  |                |         
|                              |  | 2001           |          |   | 2000 |  
|                              |  |                |          |   |      |  
|Patents and trademarks        |  | $              | 377,000  |   |      | $ | 333,000  |  
|                             
|                             
|                             
|                             
|Less accumulated amortization |  |                | (162,000 | ) |      |   | (144,000 | )
|                              |  |                |          |   |      |  
|                              |  | $              | 215,000  |   |      | $ | 189,000  |  
|                              |  |                |          |   |      |  



|8. |  | Revenue Recognition and Product Warranty
|-- |  | ----------------------------------------

The Company recognizes revenue when product is shipped or otherwise
accepted by the customer. Under the terms of a contract covering sales of
ophthalmic hyaluronan, the Companys product is under warranty against
non-compliance with product specifications. A provision is made for the
estimated cost of replacing or further processing any product not complying
with the warranted product specifications.



|9. |  | Net Income (Loss) Per Common Share
|-- |  | ----------------------------------

The Companys basic net income (loss) per share amounts have been computed
by dividing net income (loss) by the weighted average number of outstanding
common shares. The Companys diluted net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of outstanding common
shares and common share equivalents relating to stock options, when dilutive.
For the fiscal year ended June 30, 1999, 110,059 shares of common stock
equivalents were included in the computation of diluted net income per share.
For the fiscal years ended June 30, 2001 and 2000, the common share equivalents
that would have been included in the computation of diluted net income per
share were 21,448 and 177,558, had net income been achieved.

F-9



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE A  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES  continued

Options
to purchase 2,580,065, 1,480,836, and 1,359,943 shares of common stock with a weighted average exercise price of $12.67, $16.52 and $16.53 were
outstanding at June 30, 2001, 2000, and 1999, but were excluded from the
computation of common share equivalents because their exercise prices were
greater than the average market price of the common shares.

NOTE B  ACQUISITION OF TEFGEN REGENERATIVE MEMBRANE PRODUCT LINE

In May 1997, the Company acquired the technology and regulatory rights in
the TefGen membrane product line from Bridger Biomed, Inc. As consideration
for the $2,400,000 acquisition price, the Company paid $800,000 in cash and
issued a 6% note payable for $1,600,000. The agreement contained the option
for the Company to satisfy the principal payments in cash or the Companys
common stock. The Company exercised its option to make the July 1998 principal
payment of $400,000 plus interest in the form of the Companys common stock,
and accordingly, 28,413 shares of common stock were issued in July 1998 under
the formula described in the note. The remaining $1,200,000 principal payment
plus interest was paid in March 2000 through the issuance of 118,238 shares of
common stock under the formula described in the note. The cost of the
technology and regulatory rights is being amortized on a straight-line basis
over 15 years.

NOTE C  LINE OF CREDIT

The Company has an agreement with a bank for a $5,000,000 line of credit.
The agreement allows for advances against eligible accounts receivable and
inventories, subject to a borrowing base certificate. Interest is accrued at
the prime rate, which was 6.75% and 9.50% at June 30, 2001, and 2000,
respectively. The agreement has a maturity date of December 28, 2001. At June
30, 2001 and 2000 there was no balance outstanding under this line of credit.
The terms of the agreement require the Company to comply with various financial
covenants including minimum net worth, capital expenditure limitations and
liabilities to tangible net worth ratio. At June 30, 2001, the Company was in
compliance with all covenants.

NOTE D  LONG-TERM OBLIGATIONS

Long-term obligations consist of the following:

|                                     |  |                |           |   |      |   |           |  
|------------------------------------ |  | -------------- | --------- | - | ---- | - | --------- | -
|                                     |  | As of June 30, |          
|                                     |  |                |          
|                                     |  | 2001           |           |   | 2000 |  
|                                     |  |                |           |   |      |  
|Industrial development revenue bonds |  | $              | 6,369,000 |   |      | $ | 6,479,000 |  
|                                    
|                                    
|                                    
|                                    
|Notes payable                        |  |                | 98,000    |   |      |   | 205,000   |  
|                                    
|                                    
|                                    
|                                    
|Other                                |  |                | 9,000     |   |      |   | 36,000    |  
|                                     |  |                |           |   |      |  
|                                     |  |                | 6,476,000 |   |      |   | 6,720,000 |  
|                                    
|                                    
|                                    
|                                    
|Less current maturities              |  |                | (227,000  | ) |      |   | (243,000  | )
|                                     |  |                |           |   |      |  
|                                     |  | $              | 6,249,000 |   |      | $ | 6,477,000 |  
|                                     |  |                |           |   |      |  

F-10



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE D  LONG-TERM OBLIGATIONS
 (continued)

Industrial Development Revenue Bonds

In 1990, the Company completed a $7,000,000 transaction to finance its
manufacturing and administrative facility through the issuance of 30-year
industrial development revenue bonds by the municipality where the facility is
located. The bonds are collateralized by a first mortgage on the facility and
bear interest at 10.25%. The Company is required to make debt service payments
on the bonds of approximately $775,000 per year through 2021. The payments are
required to be made monthly to a sinking fund. At June 30, 2001 and 2000, the
Company had approximately $700,000 on deposit with the bond trustee to cover
the reserve fund requirement. The Company has the right to redeem the bonds
upon the payment of the outstanding principal balance plus accrued interest and
a premium. The premium is 5% of the principal amount during the year
commencing September 1, 2001 and declines during subsequent years.

The terms of the loan agreement require the Company to comply with various
financial covenants including minimum current ratio, fixed charges coverage and
cash flow coverage requirements and maximum debt to net worth limitation. The
fixed charges coverage and cash flow coverage requirements have been waived by
the bondholder through fiscal 2002. The debt to net worth ratio covenant has
the effect of restricting the payment of cash dividends or repurchases of
common stock.

Notes Payable

In April 1999, the Company issued a non-interest bearing note payable in
the amount of $375,000 to a former distributor in exchange for a customer list.
Annual payments of $125,000 were made in March 2001 and 2000. The final
payment of $125,000 is due in March 2002. The Company is using an effective
interest rate of 8% to impute interest on the note payable.

The aggregate minimum annual principal payments of long-term obligations
for the years ending June 30 are as follows:

|           |  |   |           | 
|---------- |  | - | --------- | 
|2002       |  | $ | 227,000   | 
|          
|          
|          
|          
|2003       |  |   | 135,000   | 
|          
|          
|          
|          
|2004       |  |   | 145,000   | 
|          
|          
|          
|          
|2005       |  |   | 165,000   | 
|          
|          
|          
|          
|2006       |  |   | 180,000   | 
|          
|          
|          
|          
|Thereafter |  |   | 5,624,000 | 
|           |  |   |          
|           |  | $ | 6,476,000 | 
|           |  |   |          

NOTE E  CUSTOMERS DEPOSITS

In December 1999, the Company received a $5,000,000 cash advance from
Alcon Laboratories, Inc. (Alcon) against future contract purchases. As
security for the cash advance, the Company granted Alcon a right to accelerate
delivery of certain finished hyaluronan inventory limited to the amount that
could be purchased by the outstanding cash advance based upon the contract
price. At June 30, 2001, the cash advance had been reduced to zero through
purchases.

F-11



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE F  INCOME TAXES

Deferred tax assets and liabilities represent the tax effects, based on
current tax law, of future deductible or taxable amounts attributable to events
that have been recognized in the financial statements. Deferred tax assets
(liabilities) consist of the following at June 30:

|                                                  |                                 |   |             |            |   |      |             |            |  
|------------------------------------------------- | ------------------------------- | - | ----------- | ---------- | - | ---- | ----------- | ---------- | -
|                                                  |                                 |   | 2001        |            |   | 2000 |            
|                                                  |                                 |   |             |            |   |      |            
|Deferred
tax assets                              
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Net operating loss carryforward |   | $           | 10,048,000 |   |      | $           | 9,768,000  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Tax credit carryforward         |   |             | 300,000    |   |      |             | 428,000    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Inventories                     |   |             | 1,728,000  |   |      |             | 2,071,000  |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Other                           |   |             | 247,000    |   |      |             | 250,000    |  
|                                                  |                                 |   |             |            |   |     
|                                                  | Total deferred tax assets       |   |             | 12,323,000 |   |      |             | 12,517,000 |  
|                                                 
|                                                 
|                                                 
|                                                 
|Deferred tax liabilities                         
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Depreciation                    |   |             | (937,000   | ) |      |             | (1,059,000 | )
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Customer list                   |   |             | (156,000   | ) |      |             | (164,000   | )
|                                                  |                                 |   |             |            |   |     
|                                                  | Total deferred tax liabilities  |   |             | (1,093,000 | ) |      |             | (1,223,000 | )
|                                                  |                                 |   |             |            |   |     
|Net deferred tax asset before valuation allowance |                                 |   | 11,230,000  |            |   |      | 11,294,000  |           
|                                                 
|                                                 
|                                                 
|                                                 
|Valuation allowance                               |                                 |   | (11,230,000 | )          |   |      | (11,294,000 | )         
|                                                  |                                 |   |             |            |   |     
|Net deferred tax asset                            |                                 | $ |            |            |   | $    |            |           
|                                                  |                                 |   |             |            |   |     

At June 30, 2001, the Company had net operating loss carryforwards of
approximately $24,800,000 for tax reporting purposes, which expire as follows:

|            |  |   |            | 
|----------- |  | - | ---------- | 
|2005        |  | $ | 557,000    | 
|           
|           
|           
|           
|2006  2021 |  |   | 24,243,000 | 

The Company also has general business credit carryforwards of
approximately $300,000, which expire in 2002 through 2016.

Differences between income tax expense (benefit) and amounts derived by
applying the statutory federal income tax rate to income (loss) before income
taxes are as follows for fiscal years ending June 30:

|                              |  |      |       |   |      |  |       |      |  |  |       |   
|----------------------------- |  | ---- | ----- | - | ---- |  | ----- | ---- |  |  | ----- | --
|                              |  | 2001 |       |   | 2000 |  |       | 1999 | 
|                              |  |      |       |   |      |  |       |      | 
|U.S. federal statutory rate   |  |      | 34.0  | % |      |  | 34.0  | %    |  |  | (34.0 | )%
|                             
|                             
|                             
|                             
|Change in valuation allowance |  |      | (34.0 | ) |      |  | (34.0 | )    |  |  | 34.0  |   
|                              |  |      |       |   |      |  |       |      | 
|                              |  |     |       |   |     |  |       |     | 
|                              |  |      |       |   |      |  |       |      | 

F-12



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE G  SHAREHOLDERS EQUITY

Stock Option Plans

The Company has three stock option plans. In November 1987, the
shareholders adopted the 1987 Stock Plan (the 1987 Plan) to provide for
options to be granted to certain eligible salaried employees and non-employee
members of the Board of Directors. A total of 300,000 shares of common stock
are reserved for issuance under the 1987 Plan. In November 1990, the
shareholders adopted the 1990 Stock Plan (the 1990 Plan) to provide for
options to be granted to certain eligible employees, non-employee members of
the Board of Directors and other non-employee persons as defined in the 1990
Plan. In November 1993, the 1990 Plan was amended to provide for a total of
1,000,000 shares of common stock reserved for issuance under the 1990 Plan. In
November 1996, the shareholders adopted the 1996 Stock Plan (the 1996 Plan)
to provide for options to be granted to certain eligible employees,
non-employee members of the Board of Directors and other non-employee persons
as defined in the 1996 Plan. A total of 3,000,000 shares of common stock are
reserved for issuance under the 1996 Plan. Options will be granted under all
plans at exercise prices that are determined by a committee as appointed by the
Board of Directors. Options granted to date under all plans have been at fair
market value. Each grant awarded specifies the period for which the options
are exercisable and provides that the options shall expire at the end of such
period.

Option transactions under the 1987, 1990 and 1996 Stock Plans during the
three years ended June 30, 2001 are summarized as follows:

|                             |           |  |           |          |   |                  |       |       | 
|---------------------------- | --------- |  | --------- | -------- | - | ---------------- | ----- | ----- | 
|                             |           |  | Number of |          |   | Weighted Average |      
|                             |           |  | Shares    |          |   | Exercise Price   |      
|                             |           |  |           |          |   |                  |      
|Outstanding at July 1, 1998  |           |  | 1,641,056 |          |   | $                | 14.83 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |           | 332,000  |   |                  |       | 9.23  | 
|                            
|                            
|                            
|                            
|                             | Exercised |  |           | (61,680  | ) |                  |       | 4.88  | 
|                            
|                            
|                            
|                            
|                             | Canceled  |  |           | (48,375  | ) |                  |       | 15.78 | 
|                             |           |  |           |          |   |                 
|Outstanding at June 30, 1999 |           |  | 1,863,001 |          |   |                  | 14.12 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |           | 416,000  |   |                  |       | 13.13 | 
|                            
|                            
|                            
|                            
|                             | Exercised |  |           | (60,857  | ) |                  |       | 7.06  | 
|                            
|                            
|                            
|                            
|                             | Canceled  |  |           | (66,750  | ) |                  |       | 13.96 | 
|                             |           |  |           |          |   |                 
|Outstanding at June 30, 2000 |           |  | 2,151,394 |          |   |                  | 14.12 |      
|                            
|                            
|                            
|                            
|                             | Granted   |  |           | 762,600  |   |                  |       | 7.39  | 
|                            
|                            
|                            
|                            
|                             | Exercised |  |           | (22,000  | ) |                  |       | 3.08  | 
|                            
|                            
|                            
|                            
|                             | Canceled  |  |           | (168,921 | ) |                  |       | 9.08  | 
|                             |           |  |           |          |   |                 
|Outstanding at June 30, 2001 |           |  | 2,723,073 |          |   | $                | 12.27 |      
|                             |           |  |           |          |   |                 

|                                |      |  |           |           |  |                  |   |       | 
|------------------------------- | ---- |  | --------- | --------- |  | ---------------- | - | ----- | 
|                                |      |  | Number of |           |  | Weighted Average |  
|                                |      |  | Shares    |           |  | Exercise Price   |  
|                                |      |  |           |           |  |                  |  
|Options exercisable at June 30: |      |  |           |           |  |                  |   |      
|                               
|                               
|                               
|                               
|                                | 2001 |  |           | 1,644,019 |  |                  | $ | 13.39 | 
|                               
|                               
|                               
|                               
|                                | 2000 |  |           | 1,258,517 |  |                  |   | 14.18 | 
|                               
|                               
|                               
|                               
|                                | 1999 |  |           | 998,668   |  |                  |   | 13.79 | 

F-13



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE G  SHAREHOLDERS
EQUITY  continued

The following tables summarize information concerning currently
outstanding and exercisable stock options:

|                    |               |             |           |           |                            |  |           |                  |  |   |       |  | 
|------------------- | ------------- | ----------- | --------- | --------- | -------------------------- |  | --------- | ---------------- |  | - | ----- |  | 
|Options Outstanding |              
|                   
|Range of            |               | Number      |           |           | Weighted Average Remaining |  |           | Weighted Average | 
|Exercise Prices     |               | Outstanding |           |           | Contractual Life           |  |           | Exercise Price   | 
|                    |               |             |           |           |                            |  |           |                  | 
|$                   | 3.63 - 5.44   |             |           | 117,508   |                            |  | 7.3 years |                  |  | $ | 4.83  | 
|                   
|                   
|                   
|                   
|                    | 5.45 - 8.16   |             |           | 754,254   |                            |  | 8.4 years |                  |  |   | 7.60  | 
|                   
|                   
|                   
|                   
|                    | 8.17 - 12.24  |             |           | 500,250   |                            |  | 6.4 years |                  |  |   | 9.47  | 
|                   
|                   
|                   
|                   
|                    | 12.25 - 18.36 |             |           | 1,135,311 |                            |  | 5.8 years |                  |  |   | 15.94 | 
|                   
|                   
|                   
|                   
|                    | 18.37 - 23.38 |             |           | 215,750   |                            |  | 5.9 years |                  |  |   | 19.83 | 
|                    |               |             |           |           |                            |  |           |                  |  |   |      
|                    |               |             | 2,723,073 |           |                            |  |           |                  |  |   |       | 
|                    |               |             |           |           |                            |  |           |                  |  |   |      

|                    |               |             |           |         |                  |  |   |       |  | 
|------------------- | ------------- | ----------- | --------- | ------- | ---------------- |  | - | ----- |  | 
|Options Exercisable
|                   
|Range of            |               | Number      |           |         | Weighted Average | 
|Exercise Prices     |               | Exercisable |           |         | Exercise Price   | 
|                    |               |             |           |         |                  | 
|$                   | 3.63 - 5.44   |             |           | 43,108  |                  |  | $ | 4.66  | 
|                   
|                   
|                   
|                   
|                    | 5.45 - 8.16   |             |           | 281,222 |                  |  |   | 7.49  | 
|                   
|                   
|                   
|                   
|                    | 8.17 - 12.24  |             |           | 314,753 |                  |  |   | 9.71  | 
|                   
|                   
|                   
|                   
|                    | 12.25 - 18.36 |             |           | 943,811 |                  |  |   | 16.35 | 
|                   
|                   
|                   
|                   
|                    | 18.37 - 23.38 |             |           | 61,125  |                  |  |   | 20.16 | 
|                    |               |             |           |         |                  |  |  
|                    |               |             | 1,644,019 |         |                  |  |   |      
|                    |               |             |           |         |                  |  |  

The weighted average fair value of options granted in 2001, 2000 and 1999
was $6.12, $10.70, and $6.10 per share. 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 2001, 2000,
and 2000: no dividend yield; risk-free rate of return of 6%; volatility of
91.7%, 98.7%, and 66.4%; and an average term of 6.0 years. The Companys 1999
proforma net income and basic net income per share would have been $199,000 and
$.02 and the 2001 and 2000 proforma net loss and basic net loss per share would
have been $6,272,000 and $3,324,000 or $.50 and $.27 per share had the fair
value method been used for valuing options granted during 1999, 2001 and 2000.
These effects may not be representative of the future effects of applying the
fair value method.

Employee Stock Purchase Savings Plan

The 1990 Employee Stock Purchase Savings Plan (ESPSP) provides for the
purchase by eligible employees of Company common stock at a price equal to 85%
of the market price on either the anniversary date of such plans commencement
or the termination date of the plan, whichever is lower. Participants may
authorize payroll deductions up to 10% of their base salary during the plan
year to purchase the stock. Since inception of the ESPSP a total of 123,317
shares have been issued, including 6,178 shares for approximately $29,000 in
2001, 14,050 shares for approximately $115,000 in 2000, and 4,227 shares for
approximately $37,000 in 1999. At June 30, 2001, the Company had 26,683 shares
reserved for future issuance under the ESPSP.

F-14



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE G  SHAREHOLDERS EQUITY  continued

Shareholder Rights Plan

In May 1996 the Board of Directors unanimously adopted a shareholder
rights plan designed to ensure that all of the Companys shareholders receive
fair and equal treatment in the event of any proposal to acquire the Company.
The Board declared a distribution of one Right for each share of common stock
outstanding on June 15, 1996. Each Right entitles the holder to purchase
1/100th of a share of a new series of Junior Participating Preferred Stock of
Lifecore at an initial exercise price of $110.00. Initially, the Rights will
be attached to the common stock and will not be exercisable. They become
exercisable only following the acquisition by a person or group, without the
prior consent of the Companys Board of Directors, of 15 percent or more of the
Companys voting stock, or following the announcement of a tender offer or
exchange offer to acquire an interest of 15 percent or more.

In the event that the Rights become exercisable, each Right will entitle
the holder to purchase, at the exercise price, common stock with a market value
equal to twice the exercise price and, should the Company be acquired, each
Right would entitle the holder to purchase, at the exercise price, common stock
of the acquiring company with a market value equal to twice the exercise price.
Rights that are owned by the acquiring person would become void. In certain
specified instances, the Company may redeem the Rights. If not redeemed, they
will expire on June 15, 2006.

NOTE H  COMMITMENTS AND CONTINGENCIES

Royalty Agreements

The Company has entered into agreements that provide for royalty payments
based on a percentage of net sales of certain products. Royalty expense under
these agreements was $165,000, $176,000 and $256,000 for the years ended June
30, 2001, 2000 and 1999.

Severance Agreements

The Company has an agreement with each officer that provides severance pay
benefits if there is a change in control of the Company (as defined) and the
officer is involuntarily terminated (as defined). The maximum contingent
liability under these agreements at June 30, 2001 is approximately $1,490,000.

NOTE I  EMPLOYEE BENEFIT PLAN

The Company has a 401(k) profit sharing plan for eligible employees. The
Company, at the discretion of the Board of Directors, may set a matching
percentage that is proportionate to the amount of the employees elective
contributions each year. During the years ended June 30, 2001 and 2000, the
Board of Directors authorized a company matching contribution to the plan of
$60,000 and $61,000. During the year ended June 30, 1999, there were no
Company contributions to the plan.

F-15



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE J  SEGMENT INFORMATION

The Company operates two business segments. The Hyaluronan Division
manufactures, markets and sells products containing hyaluronan and provides
contract aseptic packaging services. The Oral Restorative Division produces
and markets various oral restorative products in the area of implant dentistry.
Currently, products containing hyaluronan are sold primarily to customers
pursuant to supply agreements. Sales to Alcon under such agreements were 19%,
18% and 10% of total sales in 2001, 2000 and 1999. The Companys Oral
Restorative Division markets products directly to clinicians and dental
laboratories in the United States, Italy, Germany and Sweden and primarily
through distributorship arrangements in other foreign locations. Sales to
customers located principally in Europe accounted for 40%, 31% and 26% of total
Company sales during the years ended June 30, 2001, 2000 and 1999. The
operations of the Companys Italian subsidiary, Lifecore Biomedical SpA, and
the Companys German subsidiary, Lifecore Biomedical GmbH have not been
material to the consolidated financial statements.

Segment information for the Company is as follows:

|                                      |                           |   |                      |            |   |      |            |            |      |   |            |            | 
|------------------------------------- | ------------------------- | - | -------------------- | ---------- | - | ---- | ---------- | ---------- | ---- | - | ---------- | ---------- | 
|                                      |                           |   | Years ended June 30,
|                                      |                           |   |                     
|                                      |                           |   | 2001                 |            |   | 2000 |            |            | 1999 |  
|                                      |                           |   |                      |            |   |      |            |            |      |  
|Net
sales                            
|                                     
|                                     
|                                     
|                                     
|                                      | Hyaluronan products       |   | $                    | 14,185,000 |   |      | $          | 12,765,000 |      |   | $          | 8,190,000  | 
|                                     
|                                     
|                                     
|                                     
|                                      | Oral restorative products |   |                      | 19,951,000 |   |      |            | 20,058,000 |      |   |            | 19,131,000 | 
|                                      |                           |   |                      |            |   |      |            |            |     
|                                      |                           | $ | 34,136,000           |            |   | $    | 32,823,000 |            |      | $ | 27,321,000 |           
|                                      |                           |   |                      |            |   |      |            |           
|                                     
|                                     
|                                     
|                                     
|Operating
income (loss)              
|                                     
|                                     
|                                     
|                                     
|                                      | Hyaluronan products       |   | $                    | (1,724,000 | ) |      | $          | (1,446,000 | )    |   | $          | 212,000    | 
|                                     
|                                     
|                                     
|                                     
|                                      | Oral restorative products |   |                      | (1,248,000 | ) |      |            | 684,000    |      |   |            | 2,086,000  | 
|                                      |                           |   |                      |            |   |      |            |            |     
|                                      |                           | $ | (2,972,000           | )          |   | $    | (762,000   | )          |      | $ | 2,298,000  |           
|                                      |                           |   |                      |            |   |      |            |           
|                                     
|                                     
|                                     
|                                     
|Capital expenditures                 
|                                     
|                                     
|                                     
|                                     
|                                      | Hyaluronan products       |   | $                    | 336,000    |   |      | $          | 668,000    |      |   | $          | 1,373,000  | 
|                                     
|                                     
|                                     
|                                     
|                                      | Oral restorative products |   |                      | 357,000    |   |      |            | 333,000    |      |   |            | 237,000    | 
|                                      |                           |   |                      |            |   |      |            |            |     
|                                      |                           | $ | 693,000              |            |   | $    | 1,001,000  |            |      | $ | 1,610,000  |           
|                                      |                           |   |                      |            |   |      |            |           
|                                     
|                                     
|                                     
|                                     
|Depreciation and amortization expense
|                                     
|                                     
|                                     
|                                     
|                                      | Hyaluronan products       |   | $                    | 2,074,000  |   |      | $          | 2,100,000  |      |   | $          | 2,281,000  | 
|                                     
|                                     
|                                     
|                                     
|                                      | Oral restorative products |   |                      | 1,232,000  |   |      |            | 1,201,000  |      |   |            | 823,000    | 
|                                      |                           |   |                      |            |   |      |            |            |     
|                                      |                           | $ | 3,306,000            |            |   | $    | 3,301,000  |            |      | $ | 3,104,000  |           
|                                      |                           |   |                      |            |   |      |            |            |     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                     
|                                      |                           |   | As of June 30,       |           
|                                      |                           |   |                      |           
|                                      |                           |   | 2001                 |            |   | 2000 |           
|                                      |                           |   |                      |            |   |      |           
|Identifiable assets                  
|                                     
|                                     
|                                     
|                                     
|                                      | Hyaluronan products       |   | $                    | 46,535,000 |   |      | $          | 49,951,000 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Oral restorative products |   |                      | 13,851,000 |   |      |            | 15,056,000 |     
|                                     
|                                     
|                                     
|                                     
|                                      | General corporate         |   |                      | 2,310,000  |   |      |            | 1,101,000  |     
|                                      |                           |   |                      |            |   |     
|                                      |                           | $ | 62,696,000           |            |   | $    | 66,108,000 |           
|                                      |                           |   |                      |            |   |     

F-16



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Continued

NOTE K  AGREEMENTS

Lifecore and ETHICON have entered into a Conveyance, License, Development
and Supply Agreement (the ETHICON Agreement).

Under the terms of the ETHICON Agreement, ETHICON transferred to Lifecore
its ownership in certain technology related to research and development
previously conducted on the Companys sodium hyaluronan material. The
technology transferred to Lifecore includes written technical documents related
to ETHICONs research and development of a product to inhibit the formation of
postsurgical adhesions. These documents include product specifications, methods
and techniques, technology, know-how and certain patent applications. Lifecore
has assumed responsibility for continuing the anti-adhesion development project
including conducting human clinical trials on INTERGEL Solution, a
second-generation hyaluronan-based product. Lifecore has granted ETHICON
exclusive worldwide marketing rights through 2008 to the products developed by
Lifecore within defined fields of use.

The Company has made and continues to make a significant investment in the
development and testing of INTERGEL Adhesion Prevention Solution, a product
designed to reduce the incidence of postsurgical adhesions. The Company
submitted an application for FDA Pre-Market Approval (PMA) in March 1999,
which was accepted by the FDA in May 1999 for expedited review. In January
2000, an advisory panel to the FDA recommended to the FDA that INTERGEL
Solution not be approved for use in the United States. After consulting with
the FDA, the Company prepared and submitted a major amendment to the PMA in
June 2000 to address concerns raised at the January 2000 panel meeting. After
review of the amendment, FDAs Office of Device Evaluation (ODE) determined
that, while the results of clinical testing may appear to be encouraging, in
their opinion there was not sufficient information to demonstrate reasonable
assurance of safety and effectiveness. Thus, ODE concluded in November 2000
that the PMA was not approvable at that time and notified the Company of the
option for Medical Devices Dispute Resolution Panel (MDDRP) review. That
Panel reviewed the Companys PMA in a public meeting on September 6, 2001. The
Panel voted unanimously to recommend approval to the FDAs Director of the
Center for Devices and Radiological Health regarding INTERGEL Solution. That
approval is expected to be forthcoming. However, even if the Company receives
approval from the FDA, there can be no assurance that it will receive market
acceptance. Failure to achieve significant sales of the product could have a
material adverse effect on future prospects for the Companys operations.

NOTE L  LEGAL PROCEEDINGS

The Company is subject to various legal proceedings in the normal course
of business. Management believes that these proceedings will not have a
material adverse effect on the consolidated financial statements.

NOTE M  RECLASSIFICATIONS

Certain 2000 amounts have been reclassified to conform to the 2001
presentation.

F-17



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##### Table of Contents



Lifecore Biomedical, Inc. and Subsidiaries




SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

|                                                          |  |            |         |  |            |           |         |            |  |          |            |  |  |           |                |      |  |   |         | 
|--------------------------------------------------------- |  | ---------- | ------- |  | ---------- | --------- | ------- | ---------- |  | -------- | ---------- |  |  | --------- | -------------- | ---- |  | - | ------- | 
|                                                          |  |            |         |  |            | Additions |         |            |  |          |            |  |  |           |               
|                                                          |  |            |         |  |            |           |         |            |  |          |            |  |  |           |               
|Column A                                                  |  | Column B   |         |  | Column C   |           |         | Column D   |  | Column E |           
|                                                          |  |            |         |  |            |           |         |            |  |          |           
|                                                          |  | Balance at |         |  | Charged to |           |         | Charged to |  |          |            |  |  |           |                |      | 
|                                                          |  | Beginning  |         |  | Costs and  |           |         | Other      |  |          |            |  |  |           | Balance at End
|Description                                               |  | of Period  |         |  | Expenses   |           |         | Accounts   |  |          | Deductions |  |  | of Period |               
|                                                          |  |            |         |  |            |           |         |            |  |          |            |  |  |           |               
|Year
ended June 30, 2001
Accounts receivable
   Allowance |  | $          | 186,000 |  |            | $         | 65,000  |            |  | $        |           |  |  | $         | (106,000       | )(A) |  | $ | 145,000 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Year
ended June 30, 2000
Accounts receivable
   Allowance |  |            | 372,000 |  |            |           | 110,000 |            |  |          |           |  |  |           | (296,000       | )(A) |  |   | 186,000 | 
|                                                         
|                                                         
|                                                         
|                                                         
|Year
ended June 30, 1999
Accounts receivable
   Allowance |  |            | 346,000 |  |            |           | 63,000  |            |  |          |           |  |  |           | (37,000        | )(A) |  |   | 372,000 | 



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|(A) |  | Deductions represent accounts receivable balances written-off during the year.
|--- |  | ------------------------------------------------------------------------------

S-1