UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

LIFECORE BIOMEDICAL, INC.

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

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 par value)
Preferred Stock Purchase Rights
(Title of Class)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act. Yes x No o

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant based upon the closing price of the registrant’s stock, as quoted on the Nasdaq National Market on December 31, 2003, the last business day of the registrant’s most recently completed second fiscal quarter, as quoted on the Nasdaq National Market, was $57,560,609. Shares of common stock held by each officer and director and by each person or group who owns 5% or more of the outstanding common stock have been excluded given that such persons or groups may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of August 27, 2004 was 12,932,958 shares.

Certain responses to Part III are incorporated by reference to information contained in the Company’s definitive Proxy Statement for its 2004 Annual Meeting to be filed with the Commission within 120 days after the end of the registrant’s fiscal year.

Table of Contents

PART I

Item 1. Business

     Lifecore Biomedical, Inc. (“Lifecore” or the “Company”) manufactures biomaterials and medical devices for use in various surgical markets. The Company was incorporated in the State of Minnesota in 1965. 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. Also, Lifecore makes available free of charge through its internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.

     The Company’s Hyaluronan Division is principally involved in the development and manufacture of products utilizing hyaluronan, a naturally occurring polysaccharide that is widely distributed in the extracellar matrix of connective tissues in both animals and humans.

     The Hyaluronan Division primarily sells into three medical segments: 1) Ophthalmic, 2) Orthopedic, and 3) Veterinary. In addition, the Company developed and marketed a product using its patented ferric hyaluronan adhesion prevention technology. The product, GYNECARE INTERGEL Adhesion Prevention Solution (“INTERGEL Solution”), has been clinically proven to reduce the incidence of post-surgical adhesions following surgical trauma. The Company’s exclusive worldwide marketing partner, GYNECARE, a division of ETHICON, INC. (“ETHICON”), a Johnson & Johnson company, began marketing INTERGEL Solution outside the United States in June 1998 for reducing the incidence of post-surgical adhesions. INTERGEL Solution was approved by the FDA for the U.S. market in November 2001. INTERGEL Solution was voluntarily withdrawn from the market by ETHICON in March 2003 in order to assess information obtained from postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies). The Company is working with ETHICON to complete the post-marketing evaluation and determine the opportunities for returning the product to market.

     Lifecore also supplies hyaluronan to customers pursuing other medical applications, such as wound care, aesthetic surgery, medical device coatings, tissue engineering, drug delivery and pharmaceuticals. The Company leverages its hyaluronan manufacturing expertise to provide expanded hyaluronan product offerings and specialized aseptic manufacturing of hyaluronan products.

     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 dental implants are permanently implanted in the jaw for tooth replacement therapy as long-term support for crowns, bridges, and dentures.

     The Oral Restorative Division also offers innovative bone regenerative products for the repair of bone defects resulting from periodontal disease and tooth loss. Additionally, the Oral Restorative Division provides professional support services to its dental surgery clients through comprehensive education curricula, as provided in the Company’s various Support Plus™ programs and surgical courses. These professional continuing education programs are designed to train restorative clinicians and their auxiliary teams in the principles of tooth replacement therapy and practice management. The Company’s Increasing Case Acceptance Program (“ICA”) offers clients the marketing and consultative tools and training to foster higher patient acceptance of dental implants.

     The Oral Restorative Division’s products are marketed in the United States through the Company’s direct sales force. Internationally, the Division’s products are marketed through direct subsidiaries in Italy, Germany and Sweden, and through 25 national distributors covering 35 additional countries.

     Financial information regarding the Company’s two business segments is contained in Note H to the Company’s Consolidated Financial Statements.

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Trademarks

     The following trademarks are the property of Lifecore: LUROCOAT® Ophthalmic Solution; RENOVA™, RESTORE® and SUSTAIN® Dental Implant Systems; STAGE-1™ Single Stage Implant System; Quick-Cap™ Impression System; CAPSET® Calcium Sulfate Bone Graft Barrier; SlowSet™; TefGen Regenerative Membrane™; and Support Plus™.

     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, Inc.; HY-50® is a registered trademark of Bexco Pharma, Inc. Rayvisc Ophthalmic Viscoelastic Solution is a registered trademark of Rayner: ENDOGEL Ophthalmic Viscoelastic Solution is a registered trademark of IOLTECH; and DBX® Demineralized Bone Matrix is a registered trademark of the Musculoskeletal Transplant Foundation.

Hyaluronan Division

Background

     Hyaluronan, a naturally occurring polysaccharide, is a component of many tissues in the body and of physiological fluids that lubricate or otherwise protect the body’s soft tissues. Due to its widespread presence in tissues, critical role in normal physiology, and its high degree of biocompatibility, the Company believes that hyaluronan will continue to be used for an increasing variety of medical applications. The Company produces hyaluronan through a proprietary fermentation process.

     Hyaluronan was first demonstrated to have commercial medical utility as a viscoelastic solution in cataract surgery. In this application, it is used for maintaining the shape of the anterior chamber and protecting corneal tissue during the removal and implantation of intraocular lenses. 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 either by rooster comb extraction or 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 world. The Company’s hyaluronan is also used as the primary raw material for making INTERGEL Solution; as an aseptic solution which is used as a carrier vehicle for allogeneic demineralized, freeze-dried bone provided to orthopedic surgeons; as a component of devices to treat the symptoms of osteoarthritis; and as a component to provide increased lubricity to medical devices. The Company’s hyaluronan has been utilized in veterinary applications such as an embryo cryopreservation media and as a veterinary drug and device to treat traumatic arthritis.

Strategy

     The Company intends to use its proprietary fermentation process and aseptic formulation and filling expertise 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 the market leading companies Alcon, Inc. and Advanced Medical Optics in ophthalmology; Hexal AG in generic devices and drugs, and Musculoskeletal Transplant Foundation (“MTF”), the world’s largest bone tissue procurement and distribution service.

     • Expand medical applications for hyaluronan. Due to the growing knowledge of the unique characteristics of hyaluronan and the role it plays in normal physiology, the Company continues to identify and pursue further uses for hyaluronan in other medical applications, such as wound care, aesthetic surgery, adhesion prevention, drug delivery, device coatings and pharmaceuticals.

     • 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 global corporate partners. Lifecore’s role in these relationships extends from supplier of raw materials to manufacturer of aseptically-packaged sterile products. In addition, the Company may develop its own proprietary products.

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Hyaluronan Division Products

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

+ For many of the products listed above, government regulatory approvals 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 approved in new markets.

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Ophthalmic Applications

     Cataract Surgery. Currently, a primary commercial application for the Company’s hyaluronan is in cataract surgery. Hyaluronan, in the form of a viscoelastic solution, is used to maintain a deep chamber during anterior segment surgeries (including cataract extraction and intraocular lens implantation) and to protect the corneal endothelium and other ocular tissue. 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 Alcon, Inc. (“Alcon”) the leading producer of ophthalmic surgical products in the world, for inclusion in Viscoat® Ophthalmic Viscoelastic Solution. The Company also has agreements with two European ophthalmic companies to supply its hyaluronan based LUROCOAT Solution (discussed below) under private label outside the United States and Canada.

     The Company’s relationship with Alcon and its predecessors commenced in 1983. 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 2002, is a non-exclusive agreement for a term of two years through December 31, 2004. Management expects that the Company will be able to negotiate an extension of this supply agreement. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

     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 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 supplies LUROCOAT Solution outside the United States under private label agreements. Export shipments of LUROCOAT Solution began in 1997.

     The Company signed an agreement with Advanced Medical Optics (“AMO”) to supply Lifecore’s hyaluronan based viscoelastic under private label with sales commencing in fiscal year 2005. The AMO agreement is for a term of three years through May 2007 with renewal provisions.

     Lifecore estimates that its hyaluronan has been used in approximately 25 million ophthalmic patients globally since 1983.

Orthopedic Applications

     The Company supplies an aseptic hyaluronan solution to BioCon, Inc., the non-profit controlling affiliate of MTF, which utilizes the solution as a carrier vehicle for its allogeneic demineralized, freeze-dried bone in a final putty composition trademarked as “DBX® Demineralized Bone Matrix”. This bone putty is provided by MTF to orthopedic surgeons through MTF’s distribution channels. The Company has a supply agreement with MTF through December 2009.

Veterinary Applications

     The Company manufactures Bexco Pharma, Inc.’s HY-50® product, an aseptically packaged hyaluronan solution for use as a veterinary orthopedic device or veterinary orthopedic injectible drug, under a supply agreement expiring July 11, 2005. Bexco Pharma, Inc. has the option to renew the agreement for an additional two years with the same terms and conditions as the original agreement.

     Lifecore estimates that its veterinary hyaluronan product has been used in over 500,000 equine procedures worldwide.

Adhesion Prevention Opportunities with ETHICON

     The Company has developed a product using a version of its patented ferric hyaluronan technology, INTERGEL Solution, for reducing the incidence of post-surgical adhesions. ETHICON has worldwide, exclusive distribution rights for INTERGEL Solution.

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     ETHICON began marketing INTERGEL Solution outside the United States in June 1998. The Company received FDA clearance for marketing INTERGEL Solution in the United States in November 2001, and ETHICON began marketing it in the United States during the first calendar quarter of 2002. INTERGEL Solution was voluntarily withdrawn from the market by ETHICON in March 2003 in order to assess information obtained from postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies). The Company is working with ETHICON to complete the post-marketing evaluation and determine the opportunities for returning the product to market.

Product Development

     The Hyaluronan Division undertakes its own product development activities for 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.

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

Oral Restorative Division

Background

     Dental implant systems 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 screw-shaped implant is categorized by shape and method of implantation. For example, the threaded cylinder implant is surgically 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 roughened to create added surface area for bone-to-implant contact or coated with materials such as hydroxylapatite. The annual worldwide dental implant market is trending to exceed $1 billion in 2005.

     Bone graft substitutes and bone regeneration membranes are used for the restoration of deteriorated bone caused by periodontal disease and tooth loss. Historically, autologous bone (self-donated from another part of the patient’s own body) has been used to treat and regenerate deteriorated bone. Cadaver, synthetic and animal-derived bone graft substitutes emerged to address the issues of limited quantity and second surgical site morbidity associated with use of autologous bone. The current annual U.S. market for synthetic and animal-derived bone substitute products exceeds $36 million. And the addition of supplemental bone regeneration barrier membranes has expanded the U.S. dental bone regeneration market to approximately $75 million. The Company’s TefGen Regenerative Membrane™ and CAPSET® Calcium Sulfate Bone Graft Barrier products, along with additional new product development, target this market opportunity.

Strategy

     The Company is committed to providing the dental community with comprehensive treatment solutions and practice-building support through:

•		Development or acquisition of a broad line of dental implants, technology and related dental surgery support products that facilitate the transition from competitive systems to the Lifecore system.
•		Development and delivery of unique customer support programs and materials concentrating on the principles of tooth replacement therapy, practice management techniques, and marketing and consulting skills training to foster higher patient acceptance of dental implants.
•		Expansion of international markets by direct selling efforts and 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:

Implant Products

     The RENOVA Internal Hex Implant System design provides the stability of an internal hex connection, while providing surgical treatment flexibility of both straight and tapered implants, improved thread design, indexability, superior esthetics and ease of clinician handling. The RENOVA system was commercially launched in June 2004.

     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. (“ISS”), a manufacturer of dental implant products. The Company has since enhanced and expanded the original ISS line into a broad range of implant options. The Company now markets its line of external hex implants, prosthetics and associated instrumentation under the RESTORE System name.

     The SUSTAIN System is based on a design that embraces both threaded and press-fit cylinder formats with added “bone-like” hydroxylapatite (“HA”). 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. SUSTAIN HA-Coated Dental Implants are now marketed under the RESTORE System name.

     The STAGE-1 Single Stage Implant System was designed by the Company to allow for a one-stage surgical procedure. The STAGE-1 Implant design allows placement in a single surgical procedure that reduces treatment time. The system’s reliable Morse taper prosthetic connection simplifies restorative procedures for the dentist. Commercial sales began in September 1999. In March 2001, the Company added the RBM STAGE-1 Single Stage Implant System to this line.

     The Quick-Cap™ Impression System greatly improves the restorative dentist’s ease and accuracy of impressioning for subsequent laboratory construction of the final crown, bridge or denture.

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     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 which offers practitioners maximum flexibility in choice of treatment modalities and several innovations that enhance ease-of-use by the clinician. Additionally, the Oral Restorative Division assists its dental surgery clients by developing comprehensive continuing education curricula, as provided in the Company’s various Support Plus™ programs, to train restorative clinicians and their auxiliary teams in the principles of tooth replacement therapy and practice management. The Company’s Increasing Patient Case Acceptance Program offers client personnel the marketing and selling skills training to foster higher patient acceptance of dental implants. The Company recently introduced Support Plus Overdentures, a program that teaches a step-by-step approach to obtain predictable and profitable results for attachment retained overdenture implant restorations.

Bone 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 proprietary medical grade calcium sulfate technology developed by and licensed from Wright Medical, Inc., an orthopedic product manufacturer based in Memphis, Tennessee. CAPSET Barrier and CAPSET SlowSet Barriers provide guided bone regeneration containment barriers to prevent migration of bone graft materials used to fill oral bone defects. 510(k) clearance was received in 1996 to market the calcium sulfate powder in the Capset package reserve cup for use as a binder for bone graft materials. This addition markedly improves the handling properties of various types of bone graft materials and also enhances the bone regeneration process.

     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. A TefGen Regenerative Membrane allows the dental surgeon to cover treated defect in bone to prevent the invasion of unwanted soft tissue while the slower growing bone tissue underneath the membrane regenerates.

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.

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 has an agreement with ETHICON for exclusive distribution of INTERGEL Solution. INTERGEL Solution was voluntarily withdrawn from the market by ETHICON in March 2003 in order to assess information obtained from postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies). The Company is working with ETHICON to complete the post-marketing evaluation and determine the opportunities for returning the product to market. No assurance can be given that INTERGEL Solution will be returned to the market. Further, there is no assurance that if INTERGEL Solution is returned to the market, that the market will accept a product that has been previously withdrawn.

     The Company also sells various forms of medical grade hyaluronan directly to academic and corporate research customers for development and evaluation of new applications.

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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 27 individuals dedicated to sales in the United States and four U.S. based international sales personnel. The Oral Restorative Division products are marketed internationally in 35 countries through 25 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 domestic sales force and its international business base, 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 implants and accessories market of approximately $20 billion compared to the actual current U.S. market size of approximately $400 million.

Manufacturing

     The commercial production of hyaluronan by the Company requires fermentation, separation and purification capabilities, and aseptic packaging of product in a variety of bulk and single dose configurations. In addition, the production of the INTERGEL Solution requires formulation of viscous fluids, contract Blow-Fill-Seal filling and secondary sterilization.

     The Company produces its hyaluronan through a proprietary fermentation process. Until the introduction of the Company’s medical grade hyaluronan, the only commercial source for medical hyaluronan was through a process of extraction from rooster combs. 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.

     The Company’s 110,000 square foot facility is primarily used for the proprietary hyaluronan manufacturing process, formulation and aseptic syringe filling, and the formulation of INTERGEL Solution. As a result of the voluntary withdrawal of INTERGEL, the hyaluronan manufacturing requirements have been limited, and therefore the Company has noted the associated unused manufacturing capacity charges, which negatively affected the Company’s profitability. 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 manufacturing of various types of finished products. Currently, the Company supplies several different forms of hyaluronan in a variety of molecular weight fractions as powders, solutions and gels, and in a variety of bulk and single-use finished packages. The Hyaluronan Division continues to conduct development work designed to improve production efficiencies and expand the Company’s capabilities to achieve a wider range of hyaluronan product specifications in order to address the broadening opportunities for using hyaluronan in medical applications.

     The Company’s facility was designed to meet applicable regulatory requirements and has been cleared 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 conduct intensive regulatory audits of the facility. The Company also periodically contracts with independent regulatory consultants to conduct audits of the Company’s operations. The Company maintains a Quality System which assures conformance to all applicable current standards (21 CFR820, 21 CFR210-211, ISO 9001 : 1994, ISO 13485 : 1996, 9/42/MDDEEL, and Canadian Medical Device Regulation : 1998). 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.

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     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 calcium sulfate-based products 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, and is under a supply agreement with the Company through September 2006. 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 produce hyaluronan through a fermentation process, including Genzyme, Inc., Savient, Fidia SpA, IOLTECH, Kyowa Hakko, Kibun and Bayer. In addition, several companies manufacture hyaluronan by using rooster comb extraction methods. These companies primarily include Anika Therapeutics, Inc., Genzyme, Inc., Fidia SpA, Pharmacia and Kibun. The Company believes that its 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.”

     Several companies are pursuing anti-adhesion product development, including, but not limited to, Alliance Pharmaceuticals, Inc., Angiotech Pharmaceuticals, Inc., Anika Therapeutics, Inc., Confluent Surgical, ETHICON, Fidia SpA, FzioMed, Genzyme Corporation, Life Medical Sciences, M.L. Labs, W.L. Gore & Associates, Inc. and Wright Medical Group, Inc. If any or all of the competing products are successfully developed and obtain regulatory approval and commercial acceptance, the Company’s prospects for INTERGEL Solution may be adversely affected.

     The Company believes that competition in the ophthalmic and medical grade hyaluronan market is primarily based on product performance, manufacturing capacity and 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 costs and delays because supplemental FDA review may be required.

Oral Restorative Products

     The dental implant market is also highly competitive. Major market competitors include Biomet, Inc., Zimmer (Centerpulse) Dental, Dentsply International, Inc., Nobel Biocare AB and Straumann AG. 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 International, Inc., Geistlich, W. L. Gore (GORE-TEX), and Zimmer (Centerpulse) Dental. 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.

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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 U.S. 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 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 a self-tapping dental implant design.

     The Company believes that patent protection is important 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 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 Pre-Market Approval, or 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.

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     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 is necessary, the manufacturer or distributor is ordinarily required to obtain an Investigational Device Exemption, or 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 may be 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 a 90 day period in which to respond to a 510(k) Notification. Dependent on the specific submission and subsequent agency requirements, the 510(k) Notification process can take significantly longer to complete. 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, 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 has received market clearance through a 510(k) Notification but is 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 regarding 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.

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Product Liability

     Product liability claims may be asserted with respect to the Company’s products. In addition, the Company may be subject to product liability claims for the products of its customers that incorporate Lifecore’s materials. The Company maintains product liability insurance coverage in amounts the Company deems to be adequate. 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 27, 2004 the Company employed 183 persons on a full-time basis, 8 part-time employees and 6 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.

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.

     Dennis J. Allingham. Mr. Allingham, 53 years old, was appointed President and Chief Executive Officer and to the Board of Directors in February 2004. Mr. Allingham previously served as Executive Vice President of the Company since 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.

     David M. Noel. Mr. Noel, 47 years old, was appointed Vice President of Finance and Chief Financial Officer in March 2004. Mr. Noel, a Certified Public Accountant, joined the Company as Controller in February 2002. From 1996 to 2001, Mr. Noel was Controller of Nilfisk-Advance, Inc., a manufacturer of floor maintenance equipment.

     Andre P. Decarie. Mr. Decarie, 58 years old, 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.

     Larry A. Hiebert. Mr. Hiebert, 48 years old, was appointed Vice President of Operations in March 2004. Mr. Hiebert had been the Director of Operations since 1996 and has held various manufacturing and materials management positions within the Company since 1983.

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.

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Item 3. Legal Proceedings

     Lifecore has been named as a defendant in 41 product liability lawsuits filed by 37 different plaintiffs (four plaintiffs have filed more than one case) alleging that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. In the majority of the cases, Lifecore has not yet been served with the complaints. Lifecore has been served in the following cases as of August 31, 2004:

1.		Linda Authement and Michael Ray Lavergne v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04
2.		Barbara Black v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/16/04
3.		Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Northern District of California); served 9/15/03
4.		Renee Contratto v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Superior Court of the State of California, County of Alameda); served 2/4/04
5.		Nancy Susan Drinkwitz v. Lifecore Biomedical, Inc., Johnson & Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District Court, State of Minnesota); served 8/20/04
6.		April Ferrell and Michael Ferrell, Jr. v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc., (Florida); served 8/20/04
7.		Michelle Frosh Bernard v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04
8.		Pamela Gregory and Darrell Gregory v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida);served 8/20/04
9.		Kristin Manning v. Johnson & Johnson, Ethicon, Inc., d/b/a Gynecare Worldwide and Lifecore Biomedical, Inc. (D. Kansas); served 1/29/04
10.		Elizabeth M. Manning v. Lifecore Biomedical, Inc., Johnson & Johnson, Ethicon, Inc. and Gynecare Worldwide (Carver County District Court, State of Minnesota) - this case was settled in June 2004
11.		Melissa Powers v. Gynecare Through Ethicon, Inc., Johnson & Johnson, Lifecore Biomedical, Inc. and George B. Morris, IV, M.D. (Civil District Court for the Parish of Orleans, State of Louisiana); served 6/3/04
12.		Rebecca J. Rezendes v. Lifecore Biomedical, Inc., Johnson &Johnson, Ethicon, Inc. and Gynecare Worldwide; served 6/4/04
13.		Natalie M. Sanders v. Johnson & Johnson, Inc., Gynecare Worldwide, Ethicon, Inc., and Lifecore Biomedical, Inc. (District of New Jersey); served 5/21/04
14.		Monika Shumbo-Poissant v. Lifecore Biomedical, Inc., et al. (Superior Court of Connecticut); served 7/19/04
15.		Siobhan Sprecace and David Sprecace v. Ethicon, Inc., d/b/a Gynecare Worldwide, Johnson & Johnson, Lifecore Biomedical, Inc. and Vital Pharma, Inc. (Florida); served 8/20/04

     ETHICON is defending Lifecore in the above-listed lawsuits.

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     Lifecore has also received claim letters alleging claims similar to the complaints listed above as follows:

1.		Heather Dunne, letter dated October 9, 2003
2.		Margery LeRoux, letter dated September 9, 2003
3.		Kenna Schaller, letter dated July 10, 2003
4.		Julia Smith, letter dated May 10, 2004

     ETHICON is responding to the above-listed claim letters on behalf of Lifecore. In addition to the above-listed claim letters, Lifecore has received a claim letter on behalf of Melody Whitfield, dated October 2, 2003, relating to injuries unrelated to INTERGEL Solution suffered in a second-look surgery as part of a clinical trial. Whitfield is seeking $195,000 in damages. Lifecore has not received any response to its letter dated February 19, 2003 disputing her claim. ETHICON has denied Lifecore’s tender of defense of Whitfield’s claim.

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, Related Stockholder Matters and Issuer Purchases of Equity Securities

     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 2004 and 2003 the range of high and low closing sale prices of the Common Stock on the Nasdaq National Market.

     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 C to Consolidated Financial Statements.

     At August 26, 2004, the Company had 587 shareholders of record.

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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, 2004 has been derived from the Company’s Consolidated Financial Statements audited by Grant Thornton LLP, independent registered public accounting firm. Such data should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included elsewhere herein and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

Critical Accounting Policies

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions in certain circumstances that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers and other outside sources and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition:

     The Company’s revenues are recognized when products are shipped to or otherwise accepted by unaffiliated customers pursuant to customers orders, the price is defined and collection is reasonably assured. The Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition” provides guidance on the application of generally accepted accounting principles to selected revenue recognition issues. The Company has concluded that its revenue recognition policy is appropriate and in accordance with generally accepted accounting principles and SAB No. 101.

Allowance for Uncollectible Accounts Receivable:

     Accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future. The Company extends credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of its customers and bases the estimated allowance on these evaluations.

Inventories:

     Inventories are stated at the lower of cost (first-in, first-out method) or market and have been reduced to the lower of cost or market for obsolete, excess or unmarketable inventory. The lower of cost or market adjustment is based on management’s review of inventories on hand compared to estimated future usage and sales.

Goodwill, Intangible and Other Long-Lived Assets:

     Intangible and certain other long-lived assets with a definite life are amortized over their useful lives. Useful lives are based on management’s estimates of the period that the assets will generate revenue.

     The Company does not amortize goodwill and reviews goodwill for impairment on a regular basis, at least annually.

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

General

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

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     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. 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, 2004. The agreement contains minimum purchase requirements totaling $2.5 million in each of calendar years 2003 and 2004. ETHICON began marketing INTERGEL Solution outside the United States in June 1998. The Company received FDA approval to market INTERGEL Solution in the United States in November 2001, and ETHICON began marketing it in the United States during the first calendar quarter of 2002. INTERGEL Solution was voluntarily withdrawn from the market by ETHICON in March 2003 in order to complete an assessment of information obtained during postmarketing experience with the product, including allegations of adverse events associated with off-label use in non-conservative surgical procedures (such as hysterectomies). The Company is working with ETHICON to complete the post-marketing evaluation and determine the opportunities for returning the product to market.

     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, 2004 compared with year ended June 30, 2003.

     Net Sales. Net sales increased $4,595,000 or 11% in fiscal 2004 from fiscal 2003. Hyaluronan Division sales increased $60,000 and Oral Restorative Division sales increased $4,535,000 or 17%.

     Hyaluronan Division sales increased to $15,719,000 in fiscal 2004 from $15,659,000 in fiscal 2003 due to increased sales of ophthalmic and veterinary products. Sales of ophthalmic products to a single customer were $7,435,000 in fiscal 2004 compared with $6,725,000 for fiscal 2003. This sales increase was partially offset by a reduction in INTERGEL Solution sales due to ETHICON’s voluntary withdrawal of INTERGEL Solution from the market.

     Oral Restorative Division sales increased to $31,317,000 in fiscal 2004 from $26,782,000 in fiscal 2003. Domestic sales increased 12% due to the continued expansion of our sales representatives, the introduction of the RENOVA Internal Hex Implant System and growth in market acceptance of the STAGE-1 Single Stage Implant System. Sales in the international markets increased by 22% due to sales increases at our subsidiary operations and a favorable impact from currency translations.

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     Gross profit. Consolidated gross profit, as a percentage of net sales, was 56% in fiscal 2004 and 52% in fiscal 2003. The gross profit for the Hyaluronan Division increased to 42% in fiscal 2004 from 38% in fiscal 2003. The increase in gross profit is due to a favorable product mix and cost savings, partially offset by an increase in unused manufacturing capacity charges associated with decreased hyaluronan production. Gross profit for the Oral Restorative Division increased to 64% in fiscal 2004 from 60% in fiscal 2003 due to sales mix, reduced discounting and lower material costs.

     Research and development. Research and development expenses increased $452,000 or 11% in fiscal 2004 from fiscal 2003. The increase is due to additional consulting and professional fees associated with the market withdrawal of INTERGEL Solution in March 2003.

     Marketing and sales. Marketing and sales expenses increased by $1,429,000 or 12% in fiscal 2004 from fiscal 2003. The increase was due mainly to costs associated with the expansion of the oral restorative’s domestic sales force and international operations.

     General and administrative. General and administrative expenses increased by $829,000 or 15% in fiscal 2004 from fiscal 2003. The increase is principally related to increases in legal, insurance, subsidiary operations and Sarbanes-Oxley compliance costs.

     Restructuring charges. Restructuring charges of $1,136,000 were recorded as part of a 10% workforce reduction. The restructuring charges consisted of $1,072,000 for employee severance costs and $64,000 for professional fees.

     Other income (expense). Net other expense, as shown on the Condensed Consolidated Statements of Operations, decreased $497,000 for the current fiscal year as compared to the last fiscal year. The decrease is due to the $294,000 increase in currency transaction gains realized on Euro denominated intercompany transactions and a reduction of interest expense of $115,000.

Year ended June 30, 2003 compared with year ended June 30, 2002.

     Net Sales. Net sales increased $3,647,000 or 9% in fiscal 2003 from fiscal 2002. Hyaluronan Division sales increased $415,000 or 3%, and Oral Restorative Division sales increased $3,232,000 or 14%.

     Hyaluronan Division sales increased to $15,659,000 in fiscal 2003 from $15,244,000 in fiscal 2002 due to increased sales of ophthalmic and orthopedic products. Sales of ophthalmic products to a single customer were $6,725,000 in fiscal 2003 compared with $5,359,000 for fiscal 2002. This sales increase was partially offset by a reduction in INTERGEL Solution sales due to ETHICON’s voluntary withdrawal of INTERGEL Solution from the market.

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     Oral Restorative Division sales increased to $26,782,000 in fiscal 2003 from $23,550,000 in fiscal 2002. Domestic sales increased 4% due to continued growth in market acceptance of the STAGE-1 Single Stage Implant System and the RBM coated implant lines. Sales in the international markets increased by 27% due to sales increases at our subsidiary operations and a favorable impact from currency translations.

     Gross profit. Consolidated gross profit, as a percentage of net sales, was 52% in fiscal 2003 and 43% in fiscal 2002. The gross profit for the Hyaluronan Division increased to 38% in fiscal 2003 from 20% in fiscal 2002. The increase in gross profit is due to absorption of unused manufacturing capacity charges associated with increased hyaluronan production and product mix. Gross profit for the Oral Restorative Division increased to 60% in fiscal 2003 from 58% in fiscal 2002 due to sales mix and reduced material costs.

     Research and development. Research and development expenses decreased $798,000 or 16% in fiscal 2003 from fiscal 2002. The decrease is due to the decline in consulting and professional fees related to the regulatory review process of INTERGEL Solution which received FDA approval in fiscal 2002.

     Marketing and sales. Marketing and sales expenses increased by $1,579,000 or 15% in fiscal 2003 from fiscal 2002. The increase was due mainly to costs associated with the international expansion of the oral restorative business.

     General and administrative. General and administrative expenses increased by $508,000 or 10% in fiscal 2003 from fiscal 2002. The increase is principally related to costs associated with subsidiary operations and higher legal expenses in the 2003 fiscal year as compared to the 2002 fiscal year.

     Other income (expense). Net other expense decreased $267,000 for the 2003 fiscal year as compared to the 2002 fiscal year. The decrease is primarily due to the $291,000 increase in other income from currency gains realized on Euro-denominated intercompany transactions.

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 inventory. The finished hyaluronan inventory is maintained in a frozen state and has a shelf life of ten years. Total inventory decreased by $985,000 and $759,000 in fiscal 2004 and 2003, respectively, as the Company decreased production of hyaluronan powder.

     The Company had positive cash flow from operations in fiscal 2004, 2003 and 2002. Charges for unused manufacturing capacity associated with the Company’s hyaluronan production, additional costs associated with the withdrawal of INTERGEL Solution from the market, and restructuring charges have negatively impacted operating results in the current fiscal year. Also, marketing and sales expenses for the oral restorative products are expected to continue at a high level due to continued international expansion and increased personnel costs. Prior to the current fiscal year, charges for unused capacity were due to an unanticipated delay in receiving INTERGEL Solution marketing approval in the United States from the FDA.

     In October 2001, the Company issued an aggregate of 21,647 shares of common stock to Lancet as the final payment under a consulting 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. A Registration Statement on Form S-3 was filed and declared effective by the Securities and Exchange Commission in November 2001.

     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 June 2004 to waive the fixed charge coverage ratio and the cash flow coverage ratio through June 30, 2005. On July 27, 2004, the Company gave notice to the bond trustee of its intention to redeem the bonds on September 1, 2004. The Company repaid the existing bonds with the proceeds of a new issuance of industrial revenue bonds which closed on August 19, 2004. The aggregate principal amount of the new bonds is $5,630,000 and the bonds will bear interest at a variable rate set weekly by the bond Remarketing Agent (1.28% on date of closing). In addition, the Company will pay an annual remarketing fee equal to .125% and an annual letter of credit fee of 1.0%.

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     The Company has a $5,000,000 credit facility with a bank which has a maturity date of December 31, 2005. The agreement allows for advances against eligible accounts receivable and inventories, subject to a borrowing base certificate. Interest is accrued at the prime rate at June 30, 2004 and 2003, which was 4.0% and 4.25%, respectively. At June 30, 2004 and 2003, there were no balances outstanding under the line of credit. The terms of the agreement require the Company to comply with various financial covenants including minimum tangible net worth, liabilities to tangible net worth ratio and net income (loss). At June 30, 2004 and 2003, 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 uncertainty associated with the future market status of INTERGEL Solution, the complex governmental regulatory environment for new medical products and the early stage of certain of these markets. Similarly, expansion of the Company’s Oral Restorative Division sales is also dependent upon increased revenue from new and existing customers, as well as successfully competing in a more mature market. The Company expects its cash generated from anticipated operations and the availability under the line of credit to satisfy cash flow needs in the near term. No assurance can be given that the Company will maintain positive cash flow from operations. While the Company’s capital resources appear adequate today, the Company may seek additional financing in the future. If additional financing is necessary, no assurance can be given that such financing will be available and, if available, will be on terms favorable to the Company and its shareholders.

Contractual Obligations

     The Company’s “off-balance sheet” financing activities consist of operating leases for office equipment. See the amount of contractual obligations for operating leases in the table below. The effect of these operating leases is not material.

     Payments due by period for our contractual obligations at June 30, 2004 are as follows:

     Subsequent to the end of the year, on August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The new bond obligation is $5,630,000 and the variable interest rate at the date of issuance was 1.28%. The five year scheduled maturity of this new issuance beginning 2005 and ending in 2009 is: $280,000, $285,000, $290,000, $305,000, $315,000; and $4,155,000 thereafter.

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 relate to market acceptance and demand for the Company’s products, 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 revenues, expense levels and 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 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) the uncertainty associated with the future market status of INTERGEL

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Solution; (ii) obtaining the necessary regulatory approvals for new hyaluronan and oral restorative products; (iii) 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; (iv) intense competition in the markets for the Company’s principal products and (v) other factors discussed in the risk factors filed as Exhibit 99.1 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 short-term corporate debt securities. All investments are held to maturity. The market risk on such investments is minimal.

     Receivables from sales to foreign customers are denominated in U.S. dollars. Transactions at the Company’s foreign subsidiaries are denominated in European Euros at Lifecore Biomedical SpA and Lifecore Biomedical GmbH and are denominated in Swedish Krona at Lifecore Biomedical AB. The Company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business from sales to its foreign subsidiaries. Because the Company’s products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. The Company does not use derivative financial instruments to manage foreign currency fluctuation risk.

     At June 30, 2004, the Company’s outstanding long-term debt carries interest at a fixed rate. As a result, there is no material market risk. However, the Company will repay the existing bonds with the proceeds of a new issuance of industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds is $5,630,000, and the new bonds will bear interest at a variable rate set weekly by the bond Remarketing Agent. The effective rate on August 19, 2004 was 1.28%. A ten percent change in this variable rate would be approximately $10,000 annually.

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Item 8. Financial Statements and Supplementary Data

     The consolidated financial statements and schedule are listed under Item 15 of this report. Summarized unaudited quarterly financial data for 2004 and 2003 is as follows:

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

     None.

Item 9A. Controls and Procedures

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

     During the Company’s most recent fiscal quarter, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information

     None.

24

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 2004 Annual Meeting of Shareholders to be held November 11, 2004, which is incorporated herein by reference. See also “Executive Officers of the Registrant” in Item 1 above.

Code of Business Conduct and Ethics

     The Company has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all officers, directors and employees. The Code and the charters of the Audit and Governance and Nominating committees are posted on the Company’s website at www.Lifecore.com. The Company intends to post any amendments to or waivers from the Code on its website.

Item 11. Executive Compensation

     A description of our executive officers’ compensation is set forth in the sections titled “Executive Compensation”, “Option Grants”, “Option Exercises and Option Values” and “Executive Agreements” of the Company’s Proxy Statement for its 2004 Annual Meeting of Shareholders, which is incorporated herein by reference.

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

     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 2004 Annual Meeting of Shareholders, which is incorporated herein by reference.

Securities authorized for issuance under equity compensation plans

     The following table provides information on equity compensation plans under which equity securities of the Company are authorized for issuance, as of June 30, 2004:

(1)

Includes the Company’s 1990 Stock Plan and 1996 Stock Plan.

(2)

The Company has not granted shares of restricted stock under the 1996 Stock Plan or any shares under the 2003 Stock Plan.

25

Item 13. Certain Relationships and Related Transactions

     None.

Item 14. Principal Accountant Fees and Services.

     A description of the fees paid to our independent registered public accounting firm is set forth in the section titled “Independent Registered Public Accountants” of the Company’s Proxy Statement for its 2004 Annual Meeting of Shareholders and is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a) Documents filed as part of the report

1.

Consolidated Financial Statements

2.

Consolidated Financial Statement Schedule

3.

Exhibits and Exhibit Index

26

27

     (b) Reports on Form 8-K

     The Company filed the following Current Reports on Form 8-K on the dates and for the purposes indicated:

28

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.

     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.

29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and Board of Directors
Lifecore Biomedical, Inc.

     We have audited the accompanying consolidated balance sheets of Lifecore Biomedical, Inc. and Subsidiaries as of June 30, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit 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, 2004 and 2003, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended June 30, 2004, 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, 2004. In our opinion, this schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be set forth therein.

/s/ GRANT THORNTON LLP

Minneapolis, Minnesota

July 29, 2004 (except for the last paragraph of Note C, as to which the date is September 1, 2004)

F-1

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

ASSETS

F-2

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS — (continued)

LIABILITIES AND SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these statements.

F-3

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended June 30,

The accompanying notes are an integral part of these statements.

F-4

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

The accompanying notes are an integral part of these statements.

F-5

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended June 30,

The accompanying notes are an integral part of these statements.

F-6

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 original equipment manufacturers and contract manufacturing alliances in gynecologic, ophthalmologic and orthopedic surgery and veterinary medicine. 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. 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, 2004 and 2003, 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 16%, 31% and 8% of total receivables, respectively, at June 30, 2004 and 12%, 35% and 9% of total receivables, respectively, at June 30, 2003. The Company maintains allowances for potential credit losses, which were $407,000 and $414,000 at June 30, 2004 and 2003, respectively.

F-7

Lifecore Biomedical, Inc. and Subsidiaries

NOTE 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 Company’s inventory has been reduced to lower of cost or market for obsolete, excess or unmarketable inventory. The lower of cost or market adjustment is based on management’s review of inventories on hand compared to estimated future usage and sales. The portion of finished hyaluronan powder inventory not expected to be consumed within the next 12 months is classified as a long-term asset. The finished hyaluronan inventory is maintained in a frozen state and has a shelf life of ten years. Inventories consist of the following:

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 $2,379,000, $2,627,000 and $2,603,000 for the years ended June 30, 2004, 2003 and 2002, respectively. Lives used in straight-line depreciation for financial reporting purposes are as follows:

6. Intangibles

     Intangibles consist primarily of the cost of technology and regulatory rights, the goodwill related to acquisitions and the cost of acquiring a customer list. All intangibles relate to the oral restorative segment.

     Included within intangibles 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.

F-8

Lifecore Biomedical, Inc. and Subsidiaries

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

     Effective July 1, 2001, the Company adopted Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under the provisions of SFAS No. 142 the Company ceased amortization of goodwill and technology and regulatory rights effective July 1, 2001, while the customer list continued to be amortized on the straight-line method over 5 years and was fully amortized as of June 30, 2004. On an ongoing basis the Company reviews the valuation of intangibles to determine possible impairment by comparing the carrying value to projected undiscounted future cash flows of the related assets. As a result, an impairment loss of $40,000 and $160,000 was recorded in general and administrative expenses in fiscal 2003 and 2002, respectively. There was no impairment recorded in fiscal 2004.

     Intangibles consisted of the following at June 30:

7. Other Assets

     Other assets consist of the following at June 30:

     Amortization of these costs commences when the related asset is placed in service. The costs are amortized over the estimated useful life of the asset ranging from 3 to 20 years.

8. Revenue Recognition

     The Company recognizes revenue when product is shipped, or otherwise accepted by the customer, pursuant to customers orders, the price is fixed and collection is reasonably assured.

9. Income taxes

     Deferred income taxes are provided on the liability method whereby deferred tax assets and deferred tax liabilities are recognized for the effects of taxable temporary differences. Temporary differences are the differences between reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

F-9

Lifecore Biomedical, Inc. and Subsidiaries

NOTE TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE A — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – (continued)

10. 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 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, 2004, 59,989 shares of common stock equivalents were included in the computation of diluted net income per share. For the fiscal years ended June 30, 2003 and 2002, the common share equivalents that would have been included in the computation of diluted net income per share were 62,539 and 308,513, respectively, had net income been achieved.

     Options to purchase 2,334,340, 2,620,145 and 1,532,793 shares of common stock with a weighted average exercise price of $12.26, $12.37 and $15.52 were outstanding at June 30, 2004, 2003, and 2002, respectively, 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.

11. Stock Based Compensation

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