Lifecore Biomedical (LCBM) 10-K/A 2005 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 1)

þ Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended June 30, 2005

Commission file number: 0-4136

LIFECORE BIOMEDICAL, INC.

(Exact name of registrant as specified in its charter)

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

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. Yesþ Noo

     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. Yesþ Noo

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

     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, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, was $133,556,684. 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 29, 2005 was 13,040,162 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Certain responses to Part III are incorporated by reference to information contained in the Company’s definitive Proxy Statement for its 2005 Annual Meeting to be filed with the Commission within 120 days after the end of the registrant’s 2005 fiscal year.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (“Form 10-K/A”) to our Annual Report on Form 10-K for the fiscal year ended June 30, 2005, initially filed with the Securities and Exchange Commission (the “SEC”) on September 13, 2005 (the “Original Filing”), is being filed to amend the Original Filing as follows:

•      Item 9A is amended solely to add the name of our independent registered public accounting firm to the signature line of the Report of Independent Registered Public Accounting Firm contained therein; and

•      The consolidated financial statements and schedule and notes thereto included on pages F-1 through F-20 and S-1 are amended solely to add the name of our independent registered public accounting firm to the signature line of the Report of Independent Registered Public Accounting Firm contained on page F-1.

Item 8, which incorporates by reference pages F-1 through F-20 and S-1, is being re-filed in this Form 10-K/A without change. In addition, pursuant to the rules of the SEC, Item 15 of Part IV of the Original Filing has been amended to contain (1) a revised consent from our independent registered public accounting firm, and (2) currently-dated certifications from our Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Such consent and certifications are attached to this
Form 10-K/A as Exhibits 23.1, 31.1, 31.2, 32.1 and 32.2.

No other information in the Original Filing is amended hereby. Except for the foregoing amended information, this Form 10-K/A continues to describe conditions as of the date of the Original Filing, and we have not updated the disclosures contained herein to reflect events that occurred at a later date.

1

PART II

Item 8. Financial Statements and Supplementary Data

     The consolidated financial statements and schedule and notes thereto are included on pages F-1 through F-20 and S-1 of this report and are incorporated herein by reference. Summarized unaudited quarterly financial data for 2005 and 2004 follows:

	Quarter (Unaudited)
	First			Second		Third			Fourth
Year ended June 30, 2005
Net sales	$	12,195,000		$	14,093,000	$	14,134,000		$	14,799,000
Gross profit		7,209,000			8,763,000		8,660,000			8,676,000
Net income		1,279,000			2,380,000		2,108,000			11,744,000
Net income per share
Basic	$	0.10		$	0.18	$	0.16		$	0.90
Diluted	$	0.10		$	0.18	$	0.15		$	0.87
Weighted average common and common equivalent shares outstanding
Basic		12,932,606			12,945,903		12,993,379			13,028,016
Diluted		12,965,549			13,270,519		13,670,465			13,544,347
Year ended June 30, 2004
Net sales	$	9,947,000		$	11,558,000	$	12,537,000		$	12,994,000
Gross profit		5,178,000			6,695,000		6,952,000			7,728,000
Net income (loss)		(843,000	)		597,000		(49,000	)		1,002,000
Net income (loss) per share
Basic and diluted	$	(0.07	)	$	0.05	$	(0.00	)	$	0.08
Weighted average common and common equivalent shares outstanding
Basic		12,889,113			12,891,083		12,898,331			12,912,589
Diluted		12,889,113			12,938,352		12,898,331			12,971,547

Item 9A. Controls and Procedures

Evaluation of Disclosure 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 Rules 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 were effective.

Changes in Internal Controls

     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 Rules 13a-15(f) and 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.

2

Managements Responsibility for Financial Information

     Company management is responsible for the preparation and integrity of the consolidated financial statements appearing in the Annual Report. The consolidated financial statements were prepared in conformity with United States generally accepted accounting principles and include amounts based on management’s estimates and judgments. All other financial information in this report has been presented on a basis consistent with the information included in the financial statements.

     The Company’s control environment is the foundation for its system of internal controls over financial reporting and is embodied in its Code of Business Conduct and Ethics. It sets the tone of the organization and includes factors such as integrity and ethical values. Internal controls over financial reporting are supported by formal policies and procedures which are reviewed, modified and improved as changes occur in business conditions and operations.

     The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with members of management and the independent registered public accounting firm to review and discuss internal controls over financial reporting and accounting and financial reporting matters. The independent registered public accounting firm reports to the Audit Committee and accordingly has full and free access to the Audit Committee at any time.

Management’s Report on Internal Control over Financial Reporting

     Management is also responsible for establishing and maintaining adequate internal control over financial reporting. A system of internal controls that is designed to provide reasonable assurance as to the fair and reliable preparation and presentation of the consolidated financial statements, as well as to safeguard our assets from unauthorized use or disposition is maintained.

     Management has conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of the controls and a conclusion on this evaluation. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on its evaluation, management has concluded that internal control over financial reporting was effective as of June 30, 2005.

     Grant Thornton LLP, an independent registered public accounting firm, has audited management’s assessment of the effectiveness of internal control over financial reporting as of June 30, 2005 as stated in their report, which is included herein.

3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Lifecore Biomedical, Inc.

          We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Lifecore Biomedical, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of June 30, 2005, based on the criteria established inInternal Control – Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

          We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

          A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

          In our opinion, management’s assessment that Lifecore Biomedical, Inc. and subsidiaries maintained effective internal control over financial reporting as of June 30, 2005, is fairly stated, in all material respects, based on the criteria established inInternal Control – Integrated Frameworkissued by COSO. Also, in our opinion, Lifecore Biomedical, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2005, based on the criteria established inInternal Control – Integrated Frameworkissued by COSO.

          We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Lifecore Biomedical, Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005 and our report dated September 6, 2005 expressed an unqualified opinion on those financial statements.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
September 6, 2005

4

PART IV

Item 15. Exhibits and Financial Statement Schedules

     Documents filed as part of the report:

		Form 10-K
		Page Reference
1.	Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm	F-1
	Consolidated Balance Sheets - June 30, 2005 and 2004	F-2 and F-3
	Consolidated Statements of Operations - years ended June 30, 2005,
	2004 and 2003	F-4
	Consolidated Statements of Shareholders’ Equity - years ended June 30, 2005,
	2004 and 2003	F-5
	Consolidated Statements of Cash Flows - years ended June 30, 2005,
	2004 and 2003	F-6
	Notes to Consolidated Financial Statements	F-7 through F-20
2.	Consolidated Financial Statement Schedule
	Schedule II - Valuation and Qualifying Accounts	S-1
3.	Exhibits

	Description
2.1+	Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993 (includes $2 million 5% Promissory Note dated July 28, 1993 as Exhibit A and Security Agreement as Exhibit B) (incorporated by reference to Exhibit 2.1 to Form 8-K dated July 8, 1993)
3.1	Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997)
3.2	Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995)

5

	Description
3.3	Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996)
4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970])
4.2	Indenture of Trust, dated as of August 1, 2004, between City of Chaska, Minnesota and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended June 30, 2004)
10.1+	Hyaluronan Purchase Agreement dated March 28, 1990 between the Company and Alcon (incorporated by reference to Exhibit 10 to Form 8-K dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as amended on July 17, 1992, (incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended June 30, 1992)
10.2	Form of Indemnification Agreement entered into between the Company and directors and officers (incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)
10.3*	1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No. 33-38914]) as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 1994), as amended by Amendment No. 2 (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended June 30, 1997)
10.4+	Conveyance, License, Development and Supply Agreement dated August 8, 1994 between Lifecore Biomedical, Inc. and ETHICON, INC. (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June 30, 1994)
10.5*	1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to S-8 Registration Statement [File No. 333-18515])
10.6*	2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended June 30, 2004)
10.7	Revolving Credit and Security Agreement dated December 18, 2002 between M & I Marshall & Ilsley Bank and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 2002)
10.8	Amendment No. 1 to Revolving Credit and Security Agreement dated June 27, 2003 between M & I Marshall & Ilsley Bank and the Company (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended June 30, 2003)
10.9	Loan Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota and the Company (incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended June 30, 2004)
10.10	Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended June 30, 2004)
10.11	Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended June 30, 2004)
10.12	Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.12 to Form 10-K for the year ended June 30, 2004)
10.13	Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 2004)
10.14	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June 30, 2004)
10.15	Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended June 30, 2004)
10.16	Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley Bank and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.16 to Form 10-K for the year ended June 30, 2004

6

	Description
10.17	Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.17 to Form 10-K for the year ended June 30, 2004)
10.18*	Form of Restricted Stock Agreement for participants under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 1, 2004)
10.19*	Form of Option Agreement for employees under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004)
10.20*	Form of Option Agreement for directors under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004)
10.21*	Form of Change of Control Agreement between the Company and certain executive officers (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2004)
10.22*	Change of Control Agreement, dated as of June 17, 2004, between the Company and Dennis J. Allingham (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2004)
10.23*	Form of Noncompetition Agreement between the Company and certain executive officers (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2004)
10.24	Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 2004)
10.25+	Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a subsidiary of Alcon, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended December 31, 2004)
10.26*	Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling Thacker, Ph.D. (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended December 31, 2004)
#10.27*	Separation Agreement, dated May 10, 2005, between the Company and Andre P. Decarie
23.1	Consent of Grant Thornton LLP
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
#99.1	Risk Factors

+	Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
*	Denotes management contract or compensatory plan, contract or arrangement.
#	Previously filed with the original Form 10-K for the fiscal year ended June 30, 2005.

7

SIGNATURES

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

	LIFECORE BIOMEDICAL, INC.
Dated: September 20, 2005	/s/Dennis J. Allingham
	Dennis J. Allingham
	President, Chief Executive Officer and Secretary

8

Exhibit Index

	Description
2.1+	Stock Purchase Agreement between ISS and Lifecore dated July 28, 1993 (includes $2 million 5% Promissory Note dated July 28, 1993 as Exhibit A and Security Agreement as Exhibit B) (incorporated by reference to Exhibit 2.1 to Form 8-K dated July 8, 1993)
3.1	Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 19(a) to Amendment No. 1 on Form 8, dated July 13, 1988, to Form 10-Q for the quarter ended December 31, 1987), as amended by Amendment No. 2 (incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended June 30, 1997)
3.2	Amended Bylaws (incorporated by reference to Exhibit 3.2 to Form 10-K/A for the year ended June 30, 1995)
3.3	Form of Rights Agreement, dated as of May 23, 1996, between the Company and Norwest Bank Minnesota, National Association (incorporated by reference to Exhibit 1 to the Company’s Form 8-A Registration Statement dated May 31, 1996)
4.1	Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to 1987 S-2 Registration Statement [File No. 33-12970])
4.2	Indenture of Trust, dated as of August 1, 2004, between City of Chaska, Minnesota and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to Form 10-K for the year ended June 30, 2004)
10.1+	Hyaluronan Purchase Agreement dated March 28, 1990 between the Company and Alcon (incorporated by reference to Exhibit 10 to Form 8-K dated April 10, 1990, as amended on Form 8 dated May 23, 1990) as amended on July 17, 1992, (incorporated by reference to Exhibit 10.5 to Form 10-K for the year ended June 30, 1992)
10.2	Form of Indemnification Agreement entered into between the Company and directors and officers (incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended June 30, 1995)
10.3*	1990 Stock Plan (incorporated by reference to Exhibit 4(a) to S-8 Registration Statement [File No. 33-38914]) as amended by Amendment No. 1 (incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 1994), as amended by Amendment No. 2 (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended June 30, 1997)
10.4+	Conveyance, License, Development and Supply Agreement dated August 8, 1994 between Lifecore Biomedical, Inc. and ETHICON, INC. (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June 30, 1994)
10.5*	1996 Stock Option Plan (incorporated by reference to Exhibit 4.1 to S-8 Registration Statement [File No. 333-18515])
10.6*	2003 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Form 10-K for the year ended June 30, 2004)
10.7	Revolving Credit and Security Agreement dated December 18, 2002 between M & I Marshall & Ilsley Bank and the Company (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 2002)
10.8	Amendment No. 1 to Revolving Credit and Security Agreement dated June 27, 2003 between M & I Marshall & Ilsley Bank and the Company (incorporated by reference to Exhibit 10.21 to Form 10-K for the year ended June 30, 2003)
10.9	Loan Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota and the Company (incorporated by reference to Exhibit 10.9 to Form 10-K for the year ended June 30, 2004)
10.10	Remarketing Agreement, dated as of August 1, 2004, between the Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.10 to Form 10-K for the year ended June 30, 2004)
10.11	Tax Exemption Agreement, dated as of August 1, 2004, between City of Chaska, Minnesota, the Company and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 to Form 10-K for the year ended June 30, 2004)

9

	Description
10.12	Irrevocable Letter of Credit, dated as of August 19, 2004, from M&I Marshall & Ilsley Bank to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.12 to Form 10-K for the year ended June 30, 2004)
10.13	Reimbursement Agreement, dated as of August 1, 2004, between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.13 to Form 10-K for the year ended June 30, 2004)
10.14	Mortgage, Security Agreement, Assignment of Leases and Rents and Fixture Financing Statement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.14 to Form 10-K for the year ended June 30, 2004)
10.15	Security Agreement, dated as of August 1, 2004, from the Company to M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended June 30, 2004)
10.16	Pledge and Security Agreement, dated as of August 1, 2004, between the Company, M&I Marshall & Ilsley Bank and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.16 to Form 10-K for the year ended June 30, 2004)
10.17	Bond Purchase Agreement, dated as of August 19, 2004, by and between City of Chaska, Minnesota, the Company and Northland Securities, Inc. (incorporated by reference to Exhibit 10.17 to Form 10-K for the year ended June 30, 2004)
10.18*	Form of Restricted Stock Agreement for participants under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 1, 2004)
10.19*	Form of Option Agreement for employees under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2004)
10.20*	Form of Option Agreement for directors under the Lifecore Biomedical, Inc. 1996 Stock Plan (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2004)
10.21*	Form of Change of Control Agreement between the Company and certain executive officers (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended September 30, 2004)
10.22*	Change of Control Agreement, dated as of June 17, 2004, between the Company and Dennis J. Allingham (incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended September 30, 2004)
10.23*	Form of Noncompetition Agreement between the Company and certain executive officers (incorporated by reference to Exhibit 10.5 to Form 10-Q for the quarter ended September 30, 2004)
10.24	Amendment No. 2 dated November 17, 2004 to the Revolving Credit and Security Agreement between the Company and M&I Marshall & Ilsley Bank (incorporated by reference to Exhibit 10.1 to Form 10-Q for the quarter ended December 31, 2004)
10.25+	Supply Agreement, dated December 22, 2004, between the Company and Alcon Pharmaceuticals Ltd., a subsidiary of Alcon, Inc. (incorporated by reference to Exhibit 10.2 to Form 10-Q for the quarter ended December 31, 2004)
10.26*	Noncompetition and Nonsolicitation Agreement, dated January 7, 2005, between the Company and Kipling Thacker, Ph.D. (incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended December 31, 2004)
#10.27*	Separation Agreement, dated May 10, 2005, between the Company and Andre P. Decarie
23.1	Consent of Grant Thornton LLP
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

10

	Description
#99.1	Risk Factors

+	Pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, confidential portions of these exhibits have been deleted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.
*	Denotes management contract or compensatory plan, contract or arrangement.
#	Previously filed with the original Form 10-K for the fiscal year ended June 30, 2005.

11

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Lifecore Biomedical, Inc.

          We have audited the accompanying consolidated balance sheets of Lifecore Biomedical, Inc. and subsidiaries as of June 30, 2005 and 2004, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended June 30, 2005. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lifecore Biomedical, Inc. and subsidiaries as of June 30, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2005, in conformity with accounting principles generally accepted in the United States of America.

          Our audits were conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The accompanying Schedule II of Lifecore Biomedical, Inc. and subsidiaries is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements for each of the three years in the period ended June 30, 2005 and, in our opinion, is fairly stated in all material respects in relation to the basic consolidated financial statements taken as a whole.

          We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of June 30, 2005, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 6, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ Grant Thornton LLP

Minneapolis, Minnesota
September 6, 2005

F-1

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS
June 30,

	2005			2004
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	18,508,000		$	8,553,000
Accounts receivable, less allowances		10,171,000			8,626,000
Inventories		9,456,000			9,491,000
Deferred income taxes		4,190,000			—
Prepaid expenses		780,000			705,000
Total current assets		43,105,000			27,375,000
PROPERTY, PLANT AND EQUIPMENT — AT COST
Land		249,000			249,000
Building		23,970,000			23,970,000
Equipment		19,669,000			17,672,000
Land and building improvements		3,512,000			3,507,000
		47,400,000			45,398,000
Less accumulated depreciation		(24,211,000	)		(22,200,000	)
		23,189,000			23,198,000
OTHER ASSETS
Intangibles		4,799,000			4,663,000
Security deposits		7,000			837,000
Inventories		2,409,000			3,891,000
Deferred income taxes		6,062,000			—
Other		295,000			354,000
		13,572,000			9,745,000
	$	79,866,000		$	60,318,000

F-2

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS — (continued)
June 30,

	2005			2004
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations	$	285,000		$	177,000
Accounts payable		3,418,000			2,467,000
Accrued compensation		1,920,000			1,362,000
Accrued expenses		1,293,000			1,677,000
Total current liabilities		6,916,000			5,683,000
LONG-TERM OBLIGATIONS		5,089,000			5,809,000
COMMITMENTS AND CONTINGENCIES		—			—
SHAREHOLDERS’ EQUITY
Preferred stock — authorized, 25,000,000 shares of $1.00 stated value; none issued		—			—
Preferred stock, Series A Junior Participating — authorized, 500,000 shares of $1.00 par value; none issued		—			—
Common stock — authorized, 50,000,000 shares of $.01 stated value; issued and outstanding, 13,054,312 and 12,931,758 shares at June 30, 2005 and 2004		130,000			129,000
Accumulated currency translation adjustment		(656,000	)		(422,000	)
Additional paid-in capital		91,194,000			89,116,000
Deferred stock-based compensation		(321,000	)		—
Accumulated deficit		(22,486,000	)		(39,997,000	)
		67,861,000			48,826,000
	$	79,866,000		$	60,318,000

The accompanying notes are an integral part of these statements.

F-3

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended June 30,

	2005			2004			2003
Net sales	$	55,221,000		$	47,036,000		$	42,441,000
Cost of goods sold		21,913,000			20,483,000			20,379,000
Gross profit		33,308,000			26,553,000			22,062,000
Operating expenses
Research and development		4,212,000			4,519,000			4,067,000
Marketing and sales		14,851,000			13,782,000			12,353,000
General and administrative		6,175,000			6,372,000			5,543,000
Restructuring charges		—			1,136,000			—
		25,238,000			25,809,000			21,963,000
Operating income		8,070,000			744,000			99,000
Other income (expense)
Interest income		217,000			52,000			49,000
Interest expense		(280,000	)		(642,000	)		(757,000	)
Bond retirement expense		(290,000	)		—			—
Currency transaction gains		299,000			650,000			356,000
Other, net		366,000			70,000			(15,000	)
		312,000			130,000			(367,000	)
Income (loss) before income taxes		8,382,000			874,000			(268,000	)
Provision (benefit) for income taxes		(9,129,000	)		167,000			87,000
Net income (loss)	$	17,511,000		$	707,000		$	(355,000	)
Net income (loss) per common share
Basic	$	1.35		$	0.05		$	(0.03	)
Diluted	$	1.31		$	0.05		$	(0.03	)
Weighted average common and common equivalent shares outstanding
Basic		12,974,730			12,897,737			12,881,863
Diluted		13,344,642			12,957,726			12,881,863

The accompanying notes are an integral part of these statements.

F-4

Lifecore Biomedical, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

					Accumulated
	Common Stock				Currency			Additional		Deferred
	Shares				Translation			Paid-In		Stock-based			Accumulated
	Issued		Amount		Adjustment			Capital		Compensation			Deficit			Total
Balances at June 30, 2002		12,867,742	$	129,000	$	—		$	88,768,000		—		$	(40,349,000	)	$	48,548,000
Exercise of stock options and stock awards		17,675		—		—			114,000		—			—			114,000
Comprehensive loss:
Net loss		—		—		—			—		—			(355,000	)		(355,000	)
Addition to accumulated currency translation adjustment		—		—		87,000			—		—			—			87,000
Comprehensive loss																	(268,000	)
Balances at June 30, 2003		12,885,417		129,000		87,000			88,882,000		—			(40,704,000	)		48,394,000
Exercise of stock options and stock awards		46,341		—		—			234,000		—			—			234,000
Comprehensive income:
Net income		—		—		—			—		—			707,000			707,000
Addition to accumulated currency translation adjustment		—		—		(509,000	)		—		—			—			(509,000	)
Comprehensive income																	198,000
Balances at June 30, 2004		12,931,758		129,000		(422,000	)		89,116,000		—			(39,997,000	)		48,826,000
Exercise of stock options and stock awards		102,554		1,000		—			768,000		—			—			769,000
Issuance of restricted stock		20,000		—		—			512,000		(321,000	)		—			191,000
Tax benefits from exercise of stock options		—		—		—			798,000		—			—			798,000
Comprehensive income:
Addition to accumulated currency translation adjustment		—		—		(234,000	)		—		—			—			(234,000	)
Net income		—		—		—			—		—			17,511,000			17,511,000
Comprehensive income																	17,277,000
Balances at June 30, 2005		13,054,312	$	130,000	$	(656,000	)	$	91,194,000	$	(321,000	)	$	(22,486,000	)	$	67,861,000

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,

	2005			2004			2003
Cash flows from operating activities:
Net income (loss)	$	17,511,000		$	707,000		$	(355,000	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,087,000			2,520,000			2,874,000
Deferred income taxes		(10,252,000	)		—			—
Tax benefits from stock options		798,000			—			—
Stock-based compensation		191,000			—			—
Allowance for doubtful accounts		90,000			(7,000	)		89,000
Accumulated currency translation adjustment		(234,000	)		(509,000	)		87,000
Changes in operating assets and liabilities
Accounts receivable		(1,635,000	)		(823,000	)		(2,000	)
Inventories		1,517,000			985,000			759,000
Prepaid expenses		(74,000	)		61,000			231,000
Accounts payable		951,000			587,000			(1,620,000	)
Accrued liabilities		174,000			1,086,000			158,000
Net cash provided by operating activities		11,124,000			4,607,000			2,221,000
Cash flows from investing activities:
Purchases of property, plant and equipment		(2,002,000	)		(666,000	)		(744,000	)
Purchases of intangibles		(200,000	)		—			—
Decrease in security deposits		830,000			6,000			2,000
Decrease in other assets		47,000			300,000			218,000
Net cash used in investing activities		(1,325,000	)		(360,000	)		(524,000	)
Cash flows from financing activities:
Payments on long-term obligations		(256,000	)		(139,000	)		(128,000	)
Issuance of industrial revenue bonds		5,630,000			—			—
Retirement of industrial revenue bonds		(5,986,000	)		—			—
Proceeds from stock options exercised		768,000			234,000			114,000
Net cash provided by (used in) financing activities		156,000			95,000			(14,000	)
Net increase in cash and cash equivalents		9,955,000			4,342,000			1,683,000
Cash and cash equivalents at beginning of year		8,553,000			4,211,000			2,528,000
Cash and cash equivalents at end of year	$	18,508,000		$	8,553,000		$	4,211,000
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	330,000		$	645,000		$	713,000
Taxes		494,000			87,000			61,000

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 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, 2005 and 2004, 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 15%, 35% and 9% of total receivables, respectively, at June 30, 2005 and 16%, 31% and 8% of total receivables, respectively, at June 30, 2004. The Company maintains allowances for potential credit losses, which were $496,000 and $407,000 at June 30, 2005 and 2004, respectively.

F-7

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

4.Inventories

     Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist mainly of finished hyaluronan powder, aseptic units and oral restorative products and related raw materials. The 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:

	As of June 30,
	2005		2004
Raw materials	$	3,102,000	$	2,756,000
Work-in-process		426,000		416,000
Finished goods-current		5,928,000		6,319,000
		9,456,000		9,491,000
Finished goods-long term		2,409,000		3,891,000
	$	11,865,000	$	13,382,000

5.Depreciation

     Depreciation is provided in amounts sufficient to charge the cost of depreciable assets to operations over their estimated service lives principally on a straight-line method for financial reporting purposes and on straight-line and accelerated methods for income tax reporting purposes. Depreciation expense was approximately $2,011,000, $2,379,000 and $2,627,000 for the years ended June 30, 2005, 2004 and 2003, respectively. Lives used in straight-line depreciation for financial reporting purposes are as follows:

	Number of
	years
Building	7-40
Equipment	3-7
Land and building improvements	7-40

6.Intangibles

     Intangibles consist primarily of the cost of goodwill related to acquisitions, patents and distribution rights and licenses. All intangibles relate to the Oral Restorative Division.

     Also 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

     Goodwill is tested for impairment on an annual basis, and between annual tests in certain circumstances, and written down when impaired. The Company performs an impairment assessment by applying a fair-value based test in the first quarter of each year. Purchased intangible assets other than goodwill are amortized over their useful lives unless these lives are determined to be indefinite. There was no impairment recorded in fiscal years 2005 and 2004.

     Intangibles consisted of the following at June 30:

	2005			2004
Goodwill	$	4,352,000		$	4,352,000
Patents		387,000			387,000
Distribution rights and licenses		350,000			150,000
Less accumulated amortization		(290,000	)		(226,000	)
	$	4,799,000		$	4,663,000

7.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.

8. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

9.Comprehensive Income (Loss)

     Comprehensive income (loss) generally represents all changes in stockholders’ equity except those resulting from transaction with stockholders. The Company’s translation adjustments represent the components of comprehensive income (loss) that are excluded from the net income (loss).

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 income (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. For the fiscal year ended June 30, 2005 and 2004, 369,912 and 59,989 shares of common stock equivalents, respectively, were included in the computation of diluted net income per share. For the fiscal year ended June 30, 2003 the common share equivalents that would have been included in the computation of diluted net income per share were 62,539 had net income been achieved.

     Options to purchase 479,418, 2,334,340 and 2,620,145 shares of common stock with a weighted average exercise price of $16.23, $12.26 and $12.37 were outstanding at June 30, 2005, 2004, and 2003, 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.

F-10

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

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:

	2005			2004			2003
Net income (loss), as reported	$	17,511,000		$	707,000		$	(355,000	)
Deduct: Total stock-based employee compensation expense determined under fair value method for awards, net of related tax effects (no tax effect in 2004 and 2003)		(834,000	)		(1,978,000	)		(1,799,000	)
Pro forma net income (loss)	$	16,677,000		$	(1,271,000	)	$	(2,154,000	)
Net income (loss) per common equivalent share:
Basic — as reported	$	1.35		$	0.05		$	(0.03	)
Diluted — as reported	$	1.31		$	0.05		$	(0.03	)
Basic — pro-forma	$	1.29		$	(0.10	)	$	(0.17	)
Diluted — pro-forma	$	1.25		$	(0.10	)	$	(0.17	)

     The weighted average fair value of options granted in 2005, 2004 and 2003 was $4.94, $4.20 and $4.39 per share, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used:

	2005			2004			2003
Risk-free interest rate		3.9	%		3.8	%		3.8	%
Expected volatility		69.6	%		81.6	%		86.6	%
Expected life (in years)		5.4			6.2			6.0
Dividend yield		—			—			—

12.Recent Accounting Pronouncements

     In November 2004, the Financial Accounting Standards Board, or FASB, issued FASB Statement No. 151 “Inventory Costs, an Amendment of ARB No. 43 Chapter 4” (“FAS 151”). FAS 151 is applicable for inventory costs incurred during fiscal years beginning after June 15, 2005. FAS 151 requires that items such as idle facility expense, excessive spoilage, double freight, and re-handling be recognized as current-period charges rather than being included in inventory regardless of whether the costs meet the criterion of abnormal as defined in ARB 43. The Company does not believe the adoption of FAS 151 will have any financial impact, since the Company has historically expensed such costs as incurred.

F-11

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

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

     On December 16, 2004, the FASB issued Statement No. 123R, “Share-Based Payment,” which requires companies to record compensation expense for stock options issued to employees at an amount determined by the fair value of the options. SFAS No. 123R will be effective for the Company beginning July 1, 2005. As such, effective with the Company’s first fiscal quarter of fiscal 2006, SFAS No. 123R will eliminate our ability to account for stock options using the method permitted under APB 25 and instead require us to recognize compensation expense should the Company issue stock options to its employees or non-employee directors. The Company intends to apply the Modified Prospective method and estimates that the adoption of SFAS No. 123R will result in approximately $600,000 of compensation expense in fiscal 2006.

NOTE B — LINE OF CREDIT

     The Company has a $5,000,000 credit facility with a bank which has a maturity date of December 31, 2006. The agreement allows for advances against eligible accounts receivable, subject to a borrowing base certificate. Under the renewed credit facility, interest will accrue at the prime rate (6.25% at June 30, 2005) minus .5% or LIBOR (3.34% at June 30, 2005) plus 2.25%, at the Company’s option. Under the previous credit facility, interest was accrued at a prime rate of 4.00% as of June 30, 2004. At June 30, 2005 and June 30, 2004, 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 profitability. At June 30, 2005 and June 30, 2004, the Company was in compliance with all covenants.

NOTE C — LONG-TERM OBLIGATIONS

Industrial Development Revenue Bonds

     On August 19, 2004, the Company issued variable rate industrial revenue bonds. The proceeds from these bonds were used to retire the then existing 10.25% fixed rate industrial revenue bonds on September 1, 2004. The aggregate principal amount of the new bonds was $5,630,000 and the bonds bear interest at a variable rate set weekly by the bond remarketing agent (2.28% on June 30, 2005). The bonds are collateralized by a Bank Letter of Credit which is secured by a first mortgage on the facility. The Company is required to make monthly principal and interest payments to a sinking fund. 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). In addition, the Company pays an annual remarketing fee equal to .125% and an annual letter of credit fee of 1.0%. As a result of calling the fixed rate bonds for redemption the Company incurred an early redemption premium of approximately $120,000 and wrote off unamortized deferred financing costs of approximately $170,000, both of which were recorded in the first quarter of fiscal 2005.

F-12

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE C — LONG-TERM OBLIGATIONS—(continued)

     Deferred financing costs associated with the newly issued bonds of approximately $196,000 is being amortized over the life of the new bonds, which are scheduled to be fully repaid in 2020.

     Long-term obligations consist of the following:

	As of June 30,
	2005			2004
Industrial development revenue bonds	$	5,374,000		$	5,986,000
Less current maturities		(285,000	)		(177,000	)
	$	5,089,000		$	5,809,000

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

2006	$	285,000
2007		290,000
2008		304,000
2009		314,000
2010		324,000
Thereafter		3,857,000
	$	5,374,000

NOTE D — INCOME TAXES

     The provision for income taxes consists of the following at June 30:

	2005			2004		2003
Current
Federal	$	129,000		$	23,000	$	—
State		57,000			—		—
Foreign		139,000			144,000		87,000
Deferred		2,468,000			—		—
Benefit from release of valuation allowance		(11,922,000	)		—		—
	$	(9,129,000	)	$	167,000	$	87,000

F-13

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE D — INCOME TAXES — (continued)

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

	2005			2004
Current deferred tax assets:
Net operating loss carryforward	$	3,000,000		$	1,500,000
Inventories		798,000			1,892,000
Other		461,000			419,000
Current deferred tax asset before valuation allowance		4,259,000			3,811,000
Current deferred tax liabilities:
Prepaid expenses		(69,000	)		(197,000	)
Current deferred tax liabilities		(69,000	)		(197,000	)
Net current deferred tax asset before valuation allowance		4,190,000			3,614,000
Valuation allowance		—			(3,614,000	)
Net current deferred tax asset	$	4,190,000		$	—
Long-term deferred tax assets:
Net operating loss carryforward	$	7,550,000		$	9,822,000
Tax credit carryforward		1,213,000			1,054,000
Amortization of intangibles		15,000			15,000
Long-term deferred tax assets before valuation allowance		8,778,000			10,891,000
Long-term deferred tax liabilities:
Depreciation		(1,042,000	)		(805,000	)
Customer list		—			(20,000	)
Long-term deferred tax liabilities before valuation allowance		(1,042,000	)		(825,000	)
Net long-term deferred tax asset before valuation allowance		7,736,000			10,066,000
Valuation allowance		(1,674,000	)		(10,066,000	)
Net long-term deferred tax asset	$	6,062,000		$	—

     Management periodically evaluates the recoverability of the deferred tax assets and recognizes the tax benefit only as reassessment demonstrates that they are realizable. At such time, if it is determined that it is more likely than not that the deferred tax assets are realizable, the valuation allowance will be adjusted. At June 30, 2004, the Company provided a valuation allowance against its deferred tax assets due to the uncertainty regarding their realizability. During the fourth quarter of 2005, the Company determined it is more likely than not that a portion of these deferred tax assets will be realized and released $12.6 million of the valuation allowance related to domestic deferred tax assets. Of the $12.6 million, $11.9 million was recorded as a current year benefit related to the release of the beginning of the year valuation allowance. The remaining $697,000 was added to additional paid in capital to reflect the tax difference related to stock options. The remaining valuation allowance relates principally to the Company’s foreign net operating loss carryforwards.

     At June 30, 2005, the Company had approximately $25.1 million and $4.6 million in federal and foreign net operating loss carryforwards, respectively, to reduce future taxable income. The federal carryforwards expire from 2007 through 2025, if not utilized. There are no material limitations on the foreign net operating loss carryforwards.

F-14

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE D — INCOME TAXES — (continued)

     At June 30, 2005, the Company had tax credits carryforwards of approximately $738,000 and $720,000 for federal and state income tax purposes, respectively. If not utilized, the federal and state research and development tax credit carryforwards will expire from 2007 through 2020. The federal and state Alternative Minimum Tax credits can be carried forward indefinitely.

     In October 2004, the American Jobs Creation Act of 2004 (the “Act”) was signed into law by the President. Among other provisions, the Act provides for a phase-out of the extraterritorial income exclusion deduction. During fiscal 2005, the Company had a $1.9 million benefit from this deduction. This deduction will phase out during fiscal 2006 and 2007. However, the Act provides a new deduction for domestic manufacturing activity. The Company will not benefit from this deduction until all domestic net operating losses have been utilized. In addition, the Act contains other benefits which are not expected to have a significant impact on the Company.

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

	2005			2004			2003
Statutory income tax rate		34.0	%		34.0	%		(34.0	)%
State taxes, net of federal benefit		2.3	%		1.1	%		0.0	%
Research and development credits		(0.8	)%		(13.7	)%		(85.1	)%
Foreign sales deduction		(7.9	)%		(30.5	)%		(95.1	)%
Other permanent differences		0.8	%		7.8	%		19.1	%
Benefit from release of valuation allowance		(142.2	)%		0.0	%		0.0	%
Change in valuation allowance		7.3	%		24.1	%		227.7	%
Other		(2.4	)%		(3.7	)%		0.0	%
		(108.9	)%		19.1	%		32.5	%

NOTE E — SHAREHOLDERS’ EQUITY

Stock Option Plans

     The Company has three stock option plans. In November 1990, the shareholders adopted the 1990 Stock Plan (the “1990 Plan”) to provide for options to be granted to certain eligible employees, non-employee members of the Board of Directors and other non-employee persons as defined in the 1990 Plan. In November 1993, the 1990 Plan was amended to provide for a total of 1,000,000 shares of common stock reserved for issuance under the 1990 Plan. In November 1996, the shareholders adopted the 1996 Stock Plan (the “1996 Plan”) to provide for options to be granted to certain eligible employees, non-employee members of the Board of Directors and other non-employee persons as defined in the 1996 Plan. A total of 3,000,000 shares of common stock are reserved for issuance under the 1996 Plan. In November 2003, the shareholders adopted the 2003 Stock Plan (the “2003 Plan”) to provide for options to be granted to certain eligible employees, non-employee members of the Board of Directors and other non- employee persons as defined in the 2003 Plan. A total of 1,000,000 shares of common stock are reserved for issuance under the 2003 Plan. No stock options have been issued under the 2003 Plan. Options will be granted under all plans at exercise prices that are determined by a committee appointed by the Board of Directors. Options granted to date under all plans have been at exercise prices equal to the fair market value of the Company’s stock on the date of grant. Each grant awarded specifies the period for which the options are exercisable and provides that the options shall expire at the end of such period.

F-15

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE E — SHAREHOLDERS’ EQUITY — (continued)

     Option transactions under the 1990 and 1996 Stock Option Plans during the three years ended June 30, 2005 are summarized as follows:

	Number of			Weighted Average
	Shares			Exercise Price
Outstanding at June 30, 2002		2,823,210		$	11.87
Granted		203,267			7.62
Exercised		(17,575	)		6.41
Canceled		(70,599	)		11.46
Outstanding at June 30, 2003		2,938,303			11.66
Granted		342,000			6.48
Exercised		(46,341	)		5.07
Canceled		(482,322	)		10.48
Outstanding at June 30, 2004		2,751,640			11.28
Granted		189,000			9.84
Exercised		(102,554	)		7.51
Canceled		(1,117,380	)		13.06
Outstanding at June 30, 2005		1,720,706		$	10.19

	Number of		Weighted Average
	Shares		Exercise Price
Options exercisable at June 30:
2005		1,395,106	$	10.66
2004		2,329,865		11.62
2003		2,213,838		12.10

F-16

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE E — SHAREHOLDERS’ EQUITY — (continued)

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

			Options Outstanding
Range of			Number		Weighted Average Remaining	Weighted Average
Exercise Price			Outstanding		Contractual Life	Exercise Price
$   3.55	—	5.82		125,250	6.6 years	$	5.27
5.83	—	8.75		747,038	7.1 years		7.22
8.76	—	13.12		393,375	6.3 years		10.11
13.13	—	19.68		424,043	2.6 years		16.10
19.69	—	23.38		31,000	2.5 years		21.55
				1,720,706		$	10.19

			Options Exercisable
Range of			Number		Weighted Average
Exercise Price			Exercisable		Exercise Price
$   3.55	—	5.82		86,150	$	5.31
5.83	—	8.75		584,163		7.16
8.76	—	13.12		269,750		10.16
13.13	—	19.68		424,043		16.10
19.69	—	23.38		31,000		21.55
				1,395,106	$	10.66

     On June 16, 2005 the Company accelerated of the vesting of 74,375 stock options which had an exercise price greater than the closing price on that date. The accelerated vesting enabled the Company to avoid recognizing in its income statement compensation expense associated with these options in future periods upon the adoption by the Company of FASB Statement No. 123(R) “Share-Based Payment” in July 2005.

Issuance of Restricted Stock

     During fiscal 2005, the Company granted 60,000 restricted common stock awards to its officers. 50,000 of the shares were awarded at a price of $9.30 and 6,667 of those shares were forfeited during the year ended June 30, 2005. 10,000 of the shares were awarded at a price of $10.79. The restricted shares will vest at the earlier of four years from the date of issuance or upon achievement of financial performance criteria for fiscal years 2005, 2006 and 2007. The Company achieved the financial performance criteria in fiscal 2005, and as a result, 20,000 shares vested. The employee forfeits unvested shares upon the termination of employment prior to the end of the vesting period. Stock compensation expense recognized related to these grants totaled $191,000 during fiscal 2005.

F-17

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE E — SHAREHOLDERS’ EQUITY — (continued)

Shareholder Rights Plan

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

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

NOTE F — COMMITMENTS AND CONTINGENCIES

Royalty Agreements

     The Company has entered into agreements that provide for royalty payments based on a percentage of net sales of certain products. Royalty expense under these agreements was $291,000, $184,000 and $128,000 for the years ended June 30, 2005, 2004 and 2003, respectively.

Severance Agreements

     The Company has an agreement with each officer that provides severance pay benefits if there is a change in control of the Company (as defined) and the officer is involuntarily terminated (as defined). The maximum potential liability under these agreements at June 30, 2005 was approximately $970,000.

Legal Proceedings

     Lifecore is a party in 73 pending lawsuits filed by 76 different plaintiffs, all of which allege that the plaintiffs suffered injuries due to the defective nature of INTERGEL Solution manufactured by Lifecore and marketed by ETHICON. Under the terms of its Conveyance, License, Development and Supply Agreement dated August 8, 1994 with ETHICON, ETHICON is obligated to indemnify and hold Lifecore harmless from all claims related to the sale and use of INTERGEL Solution, unless it is ultimately determined that a plaintiff’s injuries were caused by a breach of Lifecore’s limited contractual warranty to Ethicon. Lifecore believes that ETHICON will be obligated to fully indemnify Lifecore in connection with all of the pending claims relating to INTERGEL Solution. Lifecore also has product liability insurance that it believes would cover their exposure, if any, related to these claims.

F-18

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE G — EMPLOYEE BENEFIT PLAN

     The Company has a 401(k) profit sharing plan for eligible employees. The Company, at the discretion of the Board of Directors, may set a matching percentage that is proportionate to the amount of the employees’ elective contributions each year. During the years ended June 30, 2005, 2004 and 2003, the Board of Directors authorized a company matching contribution to the plan of $93,000, $92,000 and $81,000, respectively.

NOTE H — SEGMENT INFORMATION

     The Company operates two business segments. The Hyaluronan Division manufactures, markets and sells products containing hyaluronan and provides contract aseptic packaging services. The Oral Restorative Division produces and markets various oral restorative products in the area of implant dentistry. Currently, products containing hyaluronan are sold primarily to customers pursuant to supply agreements. Sales to Alcon under such agreements were 16%, 16% and 16% of total consolidated sales in 2005, 2004 and 2003, respectively. The Company’s Oral Restorative Division markets products directly to clinicians and dental laboratories in the United States, Italy, Germany and Sweden and primarily through distributorship arrangements in other foreign locations. Sales to customers located principally in Europe accounted for 39%, 44% and 35% of total consolidated sales during the years ended June 30, 2005, 2004 and 2003, respectively.

     Segment information for the Company is as follows:

	Year ended June 30,
	2005		2004			2003
Net sales
Hyaluronan products	$	18,488,000	$	15,719,000		$	15,659,000
Oral restorative products		36,733,000		31,317,000			26,782,000
	$	55,221,000	$	47,036,000		$	42,441,000
Operating income (loss)
Hyaluronan products	$	3,485,000	$	(379,000	)	$	33,000
Oral restorative products		4,585,000		1,123,000			66,000
	$	8,070,000	$	744,000		$	99,000
Capital expenditures
Hyaluronan products	$	1,316,000	$	369,000		$	444,000
Oral restorative products		686,000		297,000			300,000
	$	2,002,000	$	666,000		$	744,000
Depreciation and amortization expense
Hyaluronan products	$	1,172,000	$	1,823,000		$	2,120,000
Oral restorative products		915,000		697,000			724,000
	$	2,087,000	$	2,520,000		$	2,844,000

	As of June 30,
	2005		2004
Identifiable assets
Hyaluronan products	$	35,838,000	$	31,899,000
Oral restorative products		25,878,000		20,847,000
General corporate		18,150,000		7,572,000
	$	79,866,000	$	60,318,000

F-19

Lifecore Biomedical, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

NOTE I — AGREEMENTS

     On September 20, 2004, the Company secured worldwide marketing rights to its ferric hyaluronan adhesion prevention product from Ethicon, Inc. Lifecore’s product, which was previously marketed by Gynecare, a division of Ethicon, Inc. (“Gynecare”), under the trademark GYNECARE INTERGEL* Adhesion Prevention Solution, was voluntarily withdrawn from the market by Gynecare on March 27, 2003 to assess information obtained from its usage in the treatment of patients. Under the agreement, Gynecare will have no responsibility for any aspect of the future manufacture, marketing, sale or distribution of the product nor will it derive any financial benefit therefrom. A payment of $250,000, included in other income, was received during the second quarter of 2005 from Ethicon, Inc. in conjunction with the above mentioned agreement.

*Trademark of ETHICON

NOTE J — RESTRUCTURING PLAN

     During the fiscal year ended June 30, 2004, the Company announced and implemented a restructuring plan (the “Restructuring Plan”). The Restructuring Plan was implemented to bolster future profitability by aligning resources for future revenue growth. The Restructuring Plan included a workforce reduction of 10% and resulted in a one-time restructuring charge of $1,136,000. The components of the restructuring charge for the fiscal year were $1,072,000 for employee severance costs and $64,000 for outplacement fees. In fiscal 2004, the Hyaluronan Division was allocated $523,000 of the restructuring charges, while $613,000 was allocated to the Oral Restorative Division.

     The following table summarizes the Restructuring Plan accrual, which was included in accrued expenses:

	Employee
	Severance			Outplacement
	Costs			Fees			Total
Balances at June 30, 2003	$	—		$	—		$	—
Restructuring charges		1,072,000			64,000			1,136,000
Amounts utilized		(621,000	)		(38,000	)		(659,000	)
Balances at June 30, 2004		451,000			26,000			477,000
Amounts utilized		(451,000	)		(26,000	)		(477,000	)
Balances at June 30, 2005	$	—		$	—		$	—

NOTE K — RECLASSIFICATIONS

     Certain 2004 and 2003 amounts have been reclassified to conform to the 2005 presentation.

F-20

Lifecore Biomedical, Inc. and Subsidiaries

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

	Balance at		Charged to		Charged to
	Beginning		Costs and		Other					Balance at End
Description	of Period		Expenses		Accounts		Deductions			of Period
Year ended June 30, 2005 Accounts receivable allowance	$	407,000	$	227,000	$	—	$	(138,000	)(A)	$	496,000
Year ended June 30, 2004 Accounts receivable allowance		414,000		194,000		—		(201,000	)(A)		407,000
Year ended June 30, 2003 Accounts receivable allowance		325,000		171,000		—		(82,000	)(A)		414,000

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

S-1