

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                 For the Fiscal Year Ended October 31, 1996, or

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

                For the Transition period from _____ to_________.

                         Commission file number: 0-27446

                               LANDEC CORPORATION
             (Exact name of registrant as specified in its charter)

           California                                     94-3025618
 (State or other jurisdiction of                         (IRS Employer
 incorporation or organization)                     Identification Number)

                                3603 Haven Avenue
                          Menlo Park, California 94025
                    (Address of principal executive offices)

               Registrant's telephone number, including area code:
                                 (415) 306-1650

           Securities registered pursuant to Section 12(b) of the Act:

Title of each class                    Name of each exchange on which registered
-------------------                    -----------------------------------------
       None                                               None

           Securities registered pursuant to Section 12(g) of the Act:
                    Common Stock, par value $0.001 per share
                                (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
                                      ---     ---

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
         Item  505 of  Regulation  S-K is not  contained  herein,  and  will  be
         contained,  to the best of registrant's  knowledge, in definitive proxy
         or information statements incorporated by reference in Part III of this
         Form 10-K or any amendment to this Form 10-K. [X]

         The aggregate  market value of voting stock held by  non-affiliates  of
the Registrant was  approximately  $58,635,000 as of January 8, 1997, based upon
the closing sales price on the NASDAQ  National  Market  reported for such date.
Shares of Common  Stock held by each officer and director and by each person who
owns 10% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates.  This  determination of affiliate status
is not necessarily a conclusive determination for other purposes.

         Number of shares  outstanding of the  registrant's  common stock, as of
January 8, 1997, 10,765,267 shares of common stock, par value $0.001 per share.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the  registrant's  definitive  proxy statement  pursuant to
Regulation  14A, which statement will be filed not later than 120 days after the
end of the fiscal year covered by this report,  are incorporated by reference in
Part III hereof.

                                      -1-
<PAGE>



                               LANDEC CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                                TABLE OF CONTENTS

  Item No.                                                                  Page
                                                                            ----
   Part I

     1.        Business ...................................................    3

     2.        Properties .................................................   22

     3.        Legal Proceedings ........................ .................   22

     4.        Submission of Matters to a Vote of Security Holders ........   22

   Part II

     5.        Market for Registrant's Common Equity and     
               Related Stockholder Matters ................................   23

     6.        Selected Consolidated Financial Data .......................   24

     7.        Management's Discussion and Analysis of Financial 
               Condition and Results of Operation .........................   25

     8.        Financial Statements and Supplementary Data ................   32

     9.        Changes in and Disagreements with Accountants on 
               Accounting and Financial Disclosure ........................   32

  Part III

     10.       Directors and Executive Officers of the Registrant..........   33

     11.       Executive Compensation .....................................   33

     12.       Security Ownership of Certain Beneficial Owner 
               and Management .............................................   33

     13.       Certain Relationships and Related Transactions .............   33

   Part IV

     14.       Exhibits, Financial Statement Schedules, and  
               Reports on Form 8-K ........................................   34

                                      -2-

<PAGE>


                                     PART I
Item 1.       Business

         Except for the historical  information  contained  herein,  the matters
discussed in this document are  forward-looking  statements that involve certain
risks and uncertainties, including the risks and uncertainties discussed below.

General

         Landec  Corporation  ("Landec"  or the  "Company")  designs,  develops,
manufactures and sells  temperature-activated  polymer products for a variety of
industrial,  medical and agricultural  applications.  The Company's products are
based on its proprietary Intelimer(R) polymers, which differ from other polymers
in that they can be customized to abruptly change their physical characteristics
when  heated or  cooled  through a pre-set  temperature  switch.  For  instance,
Intelimer  polymers  can change  within the space of one or two degrees  Celsius
from a slick,  non-adhesive  state to a highly tacky,  adhesive  state;  from an
impermeable  state  to a  highly  permeable  state;  or from a solid  state to a
viscous  state.  These  abrupt  changes  are  repeatedly  reversible  and can be
tailored  by  Landec  to  occur  at  specific  temperatures,   thereby  offering
substantial  competitive advantages in the Company's target markets. The Company
believes  its  enabling  Intelimer   technology   provides  for  differentiated,
high-value  products  that  address a wide  variety  of  applications  in large,
commercial markets.

         The Company has launched and is marketing its first two product  lines.
The first product  line,  QuickCast(TM)  splints and casts,  was launched in the
United States in mid-1994 and in Europe and selected Asian countries through its
partner Smith & Nephew Medical  Limited  ("Smith & Nephew") in the fall of 1994.
The  Company  introduced  its second  product  line,  Intellipac(TM)  breathable
membranes for use in fresh-cut produce packaging, in the fall of 1995.

         The Company is  developing  and intends to launch  additional  products
during 1997 and 1998.  Products under  development  include:  Intelimer  polymer
systems for use with industrial  coatings,  adhesives,  sealants and composites;
temperature-activated, pressure-sensitive adhesives; PORT(TM) ophthalmic devices
for the treatment of dry eye; and  Intellicoat(TM)  agricultural  seed coatings.
The  Company  is  developing  products  in  collaboration  with  or for  sale to
Physician Sales & Services,  Inc.  ("Physician  Sales & Services"),  North Coast
Medical,   Inc.  ("North  Coast  Medical"),   Sammons  Preston,  Inc.  ("Sammons
Preston"), Fresh Express Farms ("Fresh Express"), Printpack, Inc. ("Printpack"),
Hitachi Chemical Co., Ltd. ("Hitachi"),  The BFGoodrich Company  ("BFGoodrich"),
and Nitta Corporation ("Nitta").

         The Company was  incorporated  in California  on October 31, 1986.  The
Company's  principal  executive offices are located at 3603 Haven Avenue,  Menlo
Park, California 94025 and its telephone number is (415) 306-1650.

Technology Overview

         Polymers are  important and  versatile  materials  found in many of the
products  of  modern  life.  Man-made  polymers  include  nylon  fibers  used in
carpeting and clothing,  coatings such as paints and finishes,  plastics such as
polyethylene,  and elastomers used in automobile tires and latex gloves. Natural
polymers include cellulose and natural rubber. Historically,  synthetic polymers
have been designed and developed  primarily for improved mechanical and physical
properties,  such as strength  and the ability to withstand  high  temperatures.
Improvements  in these and other  properties  and the ease of  manufacturing  of
synthetic  polymers  over the last 40 years  have  allowed  these  materials  to
replace wood,  metal and natural  fibers in many  applications.  More  recently,
scientists   have  focused  their   efforts  on   identifying   and   developing
sophisticated  polymers  with  novel  properties  for a  variety  of  commercial
applications.

         Landec's  Intelimer  polymers  are a  proprietary  class  of  synthetic
polymeric  materials  that  respond to  temperature  changes in a  controllable,
predictable way. Typically, polymers gradually change in adhesion,  permeability
and viscosity over broad temperature ranges.  Landec's Intelimer  materials,  in

                                      -3-

<PAGE>

contrast,  can be designed to exhibit abrupt changes in  permeability,  adhesion
and/or viscosity over temperature  ranges as narrow as 1(Degree)C to 2(Degree)C.
These  changes  can  be  designed  to  occur  at  relatively  low   temperatures
(0(Degree)C to 100(Degree)C) that fall within temperature ranges compatible with
most biological applications.  Figure 1 illustrates the effect of temperature on
Intelimer materials as compared to typical polymers.




                                [GRAPHIC OMITTED]




         Landec's  proprietary  polymer technology is based on the structure and
phase  behavior  of  Intelimer  materials.  The abrupt  thermal  transitions  of
specific Intelimer  materials are achieved through the use of chemically precise
hydrocarbon  side  chains  that are  attached  to a  polymer  backbone.  Below a
pre-determined switch temperature,  the polymer's side chains align through weak
hydrophobic  interactions resulting in a crystalline  structure.  When this side
chain  crystallizable  polymer is heated to, or above, this switch  temperature,
these  interactions  are  disrupted  and  the  polymer  is  transformed  into an
amorphous,  viscous state.  Because this transformation  involves a physical and
not a chemical change, this process is repeatedly reversible. Landec can set the
polymer  switch  temperature  anywhere  between  0(Degree)C to  100(Degree)C  by
varying  the  length of the side  chains.  The  reversible  transitions  between
crystalline and amorphous states are illustrated in Figure 2 below.





                                [GRAPHIC OMITTED]







                                      -4-
<PAGE>


         Side chain  crystallizable  polymers were first  discovered by academic
researchers in the  mid-1950's.  These polymers were initially  considered to be
merely of scientific curiosity from a polymer physics  perspective,  and, to the
Company's knowledge, no significant commercial applications were pursued. In the
mid-1980's,  Dr. Ray Stewart,  the Company's  founder,  became interested in the
idea  of  using  the  temperature-activated  permeability  properties  of  these
polymers  to  deliver  various  materials  such as drugs and  pesticides.  After
forming Landec in 1986, Dr. Stewart  subsequently  discovered broader utility of
these polymers.  After several years of basic research,  commercial  development
efforts began in the early 1990's, resulting in initial products in mid-1994.

         Landec's Intelimer materials are generally  synthesized from long chain
acrylic  monomers  that are derived  primarily  from natural  materials  such as
soybean and corn oils, and are highly purifiable and designed to be manufactured
economically through known polymerization processes.  Intelimer materials can be
made into many different forms,  including films,  coatings,  microcapsules  and
plugs.

Business Strategy

         Landec's  objective  is to become the  leader in  temperature-activated
specialty polymer products by capitalizing on its enabling Intelimer technology.
The principal elements of Landec's strategy to achieve this objective are (i) to
select  commercially   attractive  product   opportunities,   (ii)  to  leverage
established  distribution channels through distribution  agreements or corporate
partnerships  with  market  leaders  and (iii) to fully  exploit  the  Intelimer
technology  by retaining an economic  interest in joint  ventures,  spinouts and
other vehicles  created by the Company to develop  non-core  applications of the
Company's technology.

         Product Selection

         The Company believes that its Intelimer technology has the potential to
reach a broad  range of  markets  beyond  the  current  scope  of the  Company's
resources.   As  a  result,   the  Company  seeks  to   commercialize   selected
Intelimer-based products that exhibit the following characteristics:

         Large,  Established,  Growing Markets. The Company focuses on supplying
products to  established,  growing  markets with a minimum of $500 million to $2
billion in annual,  world-wide  sales and the potential to further expand due to
Landec's products.

         Attractive Margins/Low Capital Intensity. Landec develops products that
it believes  can  generate  attractive  margins when  competitively  priced.  In
addition,  the Company  generally  focuses on products  which can be  developed,
manufactured and marketed without large capital investments.

         Significant  Unmet Market  Needs.  Landec seeks to use its  temperature
switch technology to develop  differentiated  products that address  significant
market  needs not  fulfilled  by existing  products  on the market.  The Company
intends to develop new products with substantial functional benefits relative to
existing  products that are designed to gain market  acceptance more readily and
to be sold at attractive price levels.

         Strong Proprietary Position. Landec seeks to develop products that fall
within, and can expand, the Company's  proprietary position.  Currently,  Landec
has eight issued patents and numerous  additional patent  applications  covering
methods,  compositions and  applications of Landec's  Intelimer  technology.  In
addition, the Company has developed considerable  technological know-how,  trade
secrets and  registered  trademarks  in order to  establish a broad  proprietary
position in the market.

         Minimal Regulatory Risk. Landec generally selects products that are not
likely to undergo lengthy  regulatory  review processes that could both increase
costs and substantially  delay  commercialization.  For example,  the Company is
targeting medical products that can obtain FDA clearance through filing a 510(k)
notification,   rather  than   products   that  must  be  submitted   under  the
substantially longer PMA process.

                                      -5-

<PAGE>


         Established Distribution Channels

         With  respect to product  commercialization,  Landec's  strategy  is to
establish  distribution  arrangements  or  corporate  partnerships  with  market
leaders.  The  Company  currently  is  collaborating  with and  intends  to sell
products to Hitachi and Nitta in the industrial  polymers area. The Company also
has  distribution  agreements  in the splint and casting  area in the U.S.  with
Physician  Sales &  Services,  a large  national  distributor  of  doctor-office
products and North Coast Medical and Sammons Preston,  companies  focused on the
physical and occupational  therapy  markets.  In certain highly focused markets,
such as the fresh-cut  produce market,  Landec markets  products through its own
sales force.  The Company believes that this approach will allow it to focus its
resources on further  development of products  based on its Intelimer  materials
while  leveraging  the  established  sales and  marketing  organizations  of its
partners.

         Joint Ventures and Spinouts

         Another aspect of Landec's  strategy is to fully exploit the commercial
applications  of the  Company's  Intelimer  technology  by retaining an economic
interest in joint ventures,  spinouts and other vehicles  created by the Company
to develop non-core applications of the Company's technology.  For instance, the
Company  believes that its seed coating  business  represents a large commercial
opportunity that will require substantial management time to develop. Therefore,
Landec established a subsidiary,  Intellicoat  Corporation  ("Intellicoat"),  in
1995 and hired a president  and chief  executive  officer,  Thomas  Crowley,  in
November 1996 to develop the seed coating  business.  The Company  believes that
commercialization  of certain products outside of Landec will enable the Company
to better leverage its resources and more successfully  exploit the potential of
its internal  programs while retaining an economic  interest in  Intelimer-based
products.

Products

         The Company is developing products based on its Intelimer technology in
three product  areas:  industrial  membranes and polymers,  medical  devices and
agricultural  seed coatings.  The Company currently has two product lines on the
market and expects to  introduce  additional  product  lines  during  1997.  The
following table sets forth the Company's current product areas,  their principal
applications,  the attribute of the Intelimer materials utilized by the product,
the commercial status of the products and corporate partners.


                                      -6-

<PAGE>

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                   
                                                   Intelimer                            
                         Principal                 Materials                            Corporate
Product Area             Applications              Attribute      Status                Partners
------------             ------------              ---------      ------                ---------

<S>                        <C>                       <C>            <C>                   <C>
Industrial Membranes
and Polymers
    Intellipac Breathable  Fresh-cut Produce         Permeability   On Market             Fresh Express
       Membranes             Packaging                                                    Printpack

    Intelimer Polymer      Epoxy and Other           Permeability   Field Trials          BFGoodrich
       Systems               Thermosets                                                   Hitachi

    Adhesives              Industrial Uses           Adhesion       In Development        Hitachi
                                                                                          Nitta

                           Medical Uses              Adhesion       In Development        Nitta

Medical Devices
    QuickCast              Splints and Casts         Viscosity      On Market             Smith & Nephew
       Orthopedics                                                                        Physician Sales
                                                                                            & Services
                                                                                          North Coast Medical
                                                                                          Sammons Preston

    PORT Ophthalmic        Dry Eye                   Viscosity      Clinical Trials               --
       Devices             Contact Lens Wear         Viscosity      In Development                --

Agricultural Seed
Coatings
    Intellicoat Coatings   Corn, Soybean,            Permeability   Field Trials                  --
                             Canola, Cotton
                             and Sugarbeet

--------------------------------------------------------------------------------------------------------------
</TABLE>


  Industrial Membranes and Polymers

         The  Company's  main  focus  is  on  industrial  applications  for  its
Intelimer  materials.  To date, these products consist of Intellipac  breathable
membranes, Intelimer polymer systems and adhesives.

         Intellipac Breathable Membranes

         Landec began marketing its Intelimer-based breathable membranes for use
in fresh-cut  produce  packaging in September  1995.  Certain types of fresh-cut
produce can spoil or discolor  rapidly when packaged in  conventional  materials
and therefore are not widely available for commercial sale. The Company believes
its Intellipac  breathable  membranes facilitate the packaging of these types of
produce.

         Fresh-cut  produce is  pre-washed,  cut and  packaged in a form that is
ready to use by the consumer and is thus typically sold at premium price levels.
According to the International Fresh Cut Produce Association ("IFPA"),  sales of
fresh-cut  salads were estimated to be $82 million in 1989 and increased to $600
million in 1994.  The  Company  believes  that this  growth  has been  driven by
consumer  demand and  willingness  to pay for  convenience.  In  addition,  many
institutional  food  suppliers  purchase  fresh-cut  produce  due to its greater
convenience  and uniform  quality  relative to produce  prepared at the point of
sale.

                                      -7-



<PAGE>

         Although  fresh-cut  produce  companies  have had  success in the salad
market,  the industry has been slow to expand to other  fresh-cut  vegetables or
fruits due to limitations in the conventional  materials used to package the cut
produce. After harvesting,  vegetables and fruits continue to respire, consuming
oxygen and releasing carbon dioxide. Too much or too little oxygen can result in
premature spoilage and decay and/or the growth of harmful bacteria. Conventional
packaging films used today, such as polyethylene and polypropylene,  can be made
somewhat permeable to oxygen and carbon dioxide,  but often do not allow for the
optimal   atmospheric  needs  of  the  produce.   In  addition  to  having  poor
permeability  characteristics,  these  current  packages  often  have  less than
desirable strength, clarity, aesthetics and durability.  These shortcomings have
not  significantly  hindered the growth in the  fresh-cut  salad market  because
lettuce, unlike many other vegetables and fruits, respires relatively slowly and
can tolerate less than optimal packaging.

         The  respiration  rate of fresh-cut  produce  varies from  vegetable to
vegetable  and from fruit to fruit.  The  challenge  facing the  industry  is to
develop  packaging  for a  wide  variety  of  fruits  and  vegetables  that  can
automatically  adjust  the  transmission  rates of oxygen  and  carbon  dioxide.
Today's conventional  packaging films are not able to adjust to meet the varying
needs of different  vegetables and fruits.  To mirror the growth  experienced in
the fresh-cut salad market, the markets for high respiring vegetables and fruits
such as  broccoli,  cauliflower,  melons  and stone  fruit  (peaches,  apricots,
nectarines) require a better packaging solution.

         The respiration rate of fresh-cut produce also varies with fluctuations
in temperature.  As temperature increases,  fresh-cut produce generally respires
at a higher rate, which speeds up the decaying  process,  reduces the shelf life
of the produce and increases  the potential for the growth of harmful  bacteria.
As fresh-cut  produce is transported  from the processing plant through multiple
distribution steps to the food service or retail store location,  and finally to
the ultimate  consumer,  temperatures  can fluctuate  significantly.  Therefore,
managing the  "cold-chain,"  or the  refrigerated  environment,  throughout  the
distribution  process  presents a  significant  challenge  and cost factor.  The
Company believes that  conventional food packaging films are unable to adjust to
changes in temperature that exist in the fresh-cut produce distribution process.

         Using its Intelimer technology,  Landec has developed and is developing
Intellipac   breathable   membranes  that  it  believes   address  many  of  the
shortcomings  of  conventional  materials.  A membrane  is applied  over a small
cut-out  section of a standard  bag.  This  highly  permeable  window  acts as a
breathable  "valve"  supplying  most,  if  not  all,  of  the  gas  transmission
properties  of the entire  package.  These  membranes  can be designed  with the
following characteristics:

         o  Super  Permeability.  Landec's Intellipac  breathable  membranes are
            designed  to permit  transmission  of oxygen and  carbon  dioxide at
            several  thousand times the rate of  conventional  packaging  films.
            These higher  permeability  levels  facilitate the packaging of many
            types of fresh-cut produce.

         o  Ability to Selectively Transmit Oxygen and Carbon Dioxide.  Landec's
            Intellipac  breathable  membranes are designed to selectively permit
            the  transmission of oxygen and carbon dioxide at two separate rates
            that can create a more optimal environment for the produce.

         o  Temperature   Responsiveness.   Landec  is   developing   breathable
            membranes   that  can  be   designed  to  increase  or  decrease  in
            permeability in response to environmental  temperature  changes. The
            Company  is  developing   Intellipac   breathable   membranes   with
            permeability  characteristics  tailored  to  mimic  the  changes  in
            respiration  rate that are brought on by changes in temperature  for
            specific vegetables and fruits.

         Landec launched its first Intellipac  breathable  membrane, a label for
fresh-cut broccoli packages, in September 1995. This membrane incorporates super
permeability and selective oxygen and carbon-dioxide  transmission capabilities,
but not temperature  responsiveness.  The Company  launched a second  Intellipac
breathable membrane for fresh-cut  cauliflower in June 1996. The Company intends
to
                                      -8-


<PAGE>

introduce additional membranes tailored for different types of vegetables during
1997. Further membranes may incorporate temperature responsiveness.

         The Company  believes it can facilitate the packaging of high respiring
produce such as broccoli,  cauliflower and fruit with its Intellipac  breathable
membranes,  thus  addressing  currently  unmet market  needs.  These  breathable
membranes  also enable  producers to select  packaging  films that are more cost
effective,  easier to  process  (e.g.  stronger,  clearer,  printable)  and more
aesthetically  pleasing to consumers.  With the  proprietary  Intelimer  polymer
temperature switch,  Landec's Intellipac breathable membranes could also provide
protection  against breaks in the cold chain,  thereby  extending shelf life and
product quality and protecting against the growth of harmful bacteria.

         Landec  believes  that  growth of the  overall  produce  market will be
driven by the increasing demand for the convenience of fresh-cut produce as well
as by  expansion  of the  number of  produce  products  that may be  effectively
packaged.  The Company  believes  that in the future its  Intellipac  breathable
membranes  may be  useful  for  packaging  a wide  range  of  fresh-cut  produce
products.  According  to the IFPA,  sales of  fresh-cut  produce,  which in 1994
represented 9% of the total produce market,  are projected to increase to 25% of
the total produce  market by 1999.  Potential  opportunities  for using Landec's
technology  outside of the fresh-cut  produce market exist in cut flowers and in
other food products.

         In January 1995,  Landec entered into a non-exclusive  supply agreement
with Fresh Express,  the market leader in fresh-cut salad. Under this agreement,
Fresh Express is initially  purchasing Landec's Intellipac  breathable membranes
for fresh-cut  produce sold to the  institutional  food service market.  In June
1996,  Landec  entered  into  a  co-development  and  marketing  agreement  with
Printpack,  which specializes in flexible packaging for the food industry. Under
this  agreement,  Landec  and  Printpack  will  focus on  developing  integrated
membrane/film products for low cost,  high-throughput,  fresh-cut produce market
applications  such as  retail  packaging  using  Landec's  proprietary  membrane
technology and Printpack's large-scale printing and film covering expertise.

         Landec  manufactures its Intellipac  breathable  membranes in-house and
with selected outside contract  manufacturers and markets Intellipac  breathable
membranes to the limited number of large fresh-cut produce suppliers through its
own sales force.

         Intelimer Polymer Systems

         The Company is developing  and currently  conducting  field trials of a
catalyst system  incorporating its Intelimer  polymer  technology for industrial
thermoset applications.  Thermosets are plastics that, through a curing process,
undergo a chemical  reaction to form a structure that cannot be reshaped through
heating. For example, epoxy glue is a thermoset.  The majority of thermosets are
configured  in  "two-package"  systems in which one or more resins are  packaged
separately  from a curing  agent  catalyst.  When the catalyst is mixed with the
resin, the thermoset  materials cure, or "set." The period of time after the two
components  are mixed until the mixture has doubled in  viscosity is referred to
as its "pot life."

         Epoxies,  polyurethanes  and  unsaturated  polyesters  represent  three
significant  classes of  thermosets.  According  to the January  1995 edition of
Modern  Plastics,  a trade  publication,  the U.S.  market  in 1994  for  epoxy,
polyurethane  and  unsaturated  polyester  thermoset  products  was 0.6  billion
pounds, 3.8 billion pounds and 1.5 billion pounds, respectively, and the Company
believes that the world-wide market size is approximately double the U.S. market
size.  Because of their  hardness  and  corrosion  resistant  properties,  epoxy
thermosets  are widely  used in surface  coatings  for  industrial  primers  and
maintenance finishes, in fiber-reinforced  composites for printed circuit boards
and in high  performance  adhesives  in  value-added  automotive  and  aerospace
applications. Polyurethane thermosets consist of a variety of flexible and rigid
foam  materials  essential  for  inplace  insulation  (e.g.,  for  refrigeration
applications),  molded automobile bumpers, mattresses and furniture cushions and
automotive seating.  Polyurethane coatings are also used for abrasion resistance
in floor finishing and durability in transportation and aerospace  applications.
Unsaturated  polyesters,  a  third  thermoset  category,  are  fast-curing  with
excellent  hardness  characteristics  and  are  primarily  used  as  fiberglass-
reinforced

                                      -9-


<PAGE>

composites.  Principal  applications  for  unsaturated  polyesters  are  housing
construction   (shower  modules,   bathtub  and  sink   constructions),   marine
construction  (boats) and  transportation  products (truck bodies and panels and
automotive trim).

         Two-package thermoset systems suffer from a number of drawbacks.  These
systems  require  extensive  mixing  equipment to ensure proper mixing ratios to
provide  expected  product  performance at the time of use. The thermoset resins
and catalysts must be kept in separate packages until the time of use to prevent
them from pre-reacting with each other. A finite pot life results in significant
waste  when the  thermoset  reacts or cures  prior to  application.  Two-package
thermoset  systems  frequently  result in limited  control of reaction time (the
time  between the  initiation  and  completion  of the curing  process)  causing
incomplete mold fills and waste.  While a limited number of currently  available
single  package  thermoset  systems offer the potential for  addressing  many of
these drawbacks, these systems typically must be refrigerated to prevent curing,
must be used  very  quickly  once  activated  and/or  must be cured at very high
temperatures.  These  limitations  have  hindered  market  acceptance  of  these
systems.

         The  Company is  developing  catalyst  systems  based on its  Intelimer
technology  for  use  in  one-package  thermoset  systems.   These  systems  can
incorporate  catalysts,  accelerators  and curing  agents in a way that prevents
interaction  by  these  agents  with  the  resin  while  the  polymer  is in its
impermeable  state. This  characteristic  allows all components of the Intelimer
thermoset to be pre-mixed and have a longer shelf life. For example, some Landec
thermoset systems are  storage-stable for up to one year.  Landec's  one-package
system can be designed  with a pre-set  temperature  switch to  correspond  with
elevated temperatures applied during standard manufacturing processes.  When the
thermoset is exposed to the pre-set switch  temperature,  the Intelimer  polymer
abruptly changes to its permeable state,  exposing the catalyst to the resin and
initiating  the curing  process.  In  addition,  the  Intelimer  polymer  can be
designed  to change  state over a  predetermined  temperature  range in order to
achieve a desired reaction time.

         The Company believes that its thermoset catalyst systems will eliminate
the need for costly on-site  mixing  equipment  and,  because  thermosets can be
pre-mixed by the manufacturer, will minimize sub-optimal product performance due
to incorrect component mixing ratios. Furthermore, since the thermosets will not
cure until  exposed  to  elevated  temperatures,  pot life  should be  extended,
resulting in significantly reduced waste and labor expense. The Company believes
that the ability to control reaction time also provides advantages over existing
thermoset systems.

         Landec is targeting  epoxies for its first  thermoset  catalyst  system
because epoxies are typically used in high-value industrial  applications,  such
as in the electronic,  aerospace and automotive industries. In addition, epoxies
are  generally  used in  applications  involving  elevated  temperature  curing;
consequently,  curing an epoxy thermoset  using the Company's  product would not
add steps to the end-user's  production process.  The Company believes that this
product  will  also  have  broad  applicability  for use with  polyurethane  and
unsaturated polyester thermosets.

         The  Company's   thermoset   catalyst  systems  address  the  different
drawbacks of existing epoxy,  polyurethane and unsaturated  polyester  thermoset
systems.  Shelf  life is the most  significant  limitation  for  epoxy  systems.
Polyurethane  systems are often used in applications  for which reaction time is
critical.  Currently available unsaturated polyester systems exhibit significant
drawbacks in both shelf life and pot life. The Company  believes its one-package
catalyst  systems  address  the  main  limitations  in each of  these  types  of
thermoset systems.

                                      -10-

<PAGE>


<TABLE>
                                           Thermoset Market Opportunity

-------------------------------------------------------------------------------------------------------------------------
<CAPTION>

Area                  1994 U.S. Market (Lbs.)*     Typical Application                Landec Benefits
----                  ------------------------     -------------------                ---------------
<S>                   <C>                          <C>                                <C>
Epoxies               602 million                  Adhesives and coatings for         o Improved shelf life
                                                   electronics, auto and aerospace    o Pre-mixed formulas
                                                                                      o Lower cost of labor and waste

Polyurethanes         3,755 million                Foams for auto, aerospace and      o Controlled reaction times
                                                   furniture.  Coatings, adhesives    o Better mold filling
                                                   and elastomers                     o Lower cost of labor and waste

Unsaturated           1,496 million                Composites and molded products     o Improved pot life
   Polyesters                                      for auto, boat and construction    o Lower cost of labor and waste

<FN>

*Source: Modern Plastics, January 1995

-------------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>



         Landec has entered  into  licensing  and  distribution  agreements  for
one-package   thermoset   catalyst   systems   exclusively   with   Hitachi  and
non-exclusively  with  BFGoodrich.  Both of these  companies are large specialty
chemical  companies with strengths in the electronics,  automotive and aerospace
markets  for  thermoset  systems.  BFGoodrich  has in the  past and  Hitachi  is
currently  sponsoring  research  and  development  activities  with  respect  to
Intelimer  technology.  The Company's  agreement with Hitachi  contemplates that
Hitachi,  upon successful  completion of field testing,  will purchase materials
from  Landec for resale or for  incorporation  into fully  formulated  products.
Landec has retained manufacturing rights in both of these collaborations and has
granted exclusive  marketing rights in Asia to Hitachi and non-exclusive  rights
in the United States and other  territories  outside of Asia to BFGoodrich.  See
"Corporate Collaborations."

         Adhesives

         Landec   is   utilizing   its    Intelimer    technology   to   develop
temperature-activated,   pressure-sensitive   adhesive  ("PSA")   materials  for
industrial  applications.  PSA  materials  are  used  for  applications  such as
adhering  the  component  parts of silicon  devices,  applying  automotive  side
moldings  and  trim,  assembling  appliances  and  adhering  labels  to  various
surfaces.  According to Adhesives Age, the U.S.  market for PSA industrial  tape
products  was $2.7  billion in 1994.  Typically,  the  removal of PSA  materials
damages  or tears the  adhered  surface  and  leaves a resin  residue.  To avoid
tearing or resin residue,  traditional  removal methods involve the use of toxic
solvents and/or labor-intensive washing steps.

         The  Company  is  developing  PSA  materials  based  on  its  Intelimer
technology that have demonstrated the capability to have adhesion levels reduced
by over 70% with  cooling  or  heating.  This  capability  can be used in a wide
variety of  applications  to adhere  metals,  woods,  composites and plastics to
surfaces and then easily remove these materials with changes in temperature. For
example,  two surfaces that are adhered  together  using  Landec's PSA materials
during a  silicon  wafer  mounting  process  for the  production  of  electronic
components can be easily  separated  without toxic solvents or multiple  washing
steps by running the bonded parts through a heating or cooling process.

         Landec's  PSA  materials  are  currently  in  development.  The Company
entered into a non-exclusive  license agreement with Hitachi in October 1994 and
a co-exclusive  license agreement with Nitta, a specialty  materials company, in
March  1995,  both with a focus on  industrial  applications.  These  agreements
provide Hitachi and Nitta with the right to manufacture and distribute  Landec's
adhesive  products for industrial  applications  in Asia in exchange for license
fees and royalties on future  product sales.  Landec has retained  manufacturing
and  distribution  rights  elsewhere in the world.  First  commercial  sales are
expected to build on the strength of Landec's  partners in the  electronics  and

                                      -11-

<PAGE>


automotive industries. The Company believes that additional growth opportunities
for Landec's adhesives technology exist in medical applications.  In February of
1996, the Company extended its agreement with Nitta to include  exclusive rights
for adhesive medical  applications in Asia in return for license fees,  research
and development payments and royalties.

Medical Devices

         In  addition  to  industrial  applications,  the  Company is  currently
developing or commercializing medical devices based on its Intelimer technology.
These  products  consist  of  QuickCast  splints  and casts and PORT  ophthalmic
devices.

         QuickCast Splints and Casts

         Landec has  developed  and is  currently  marketing  splints  and casts
incorporating its Intelimer polymer technology. According to Frost & Sullivan, a
market research organization, the U.S. market for orthopedic soft goods and cast
room products was estimated to be approximately $818 million in 1994. The growth
in the market for  orthopedic  soft goods and cast room products is being driven
by a number of factors,  including  an increase in  participation  in sports and
recreational  activities and the aging of the U.S. population.  In addition, the
trend towards managed care has increased the need for cost-effective  treatment.
Managed care has also  resulted in  occupational  and physical  therapists,  and
primary care physicians and other non-specialists performing an increasing range
of  procedures,  including the treatment of selected  orthopedic  injuries.  The
Company believes the simplicity of the application of its QuickCast  splints and
casts is especially attractive to non-specialists.

         Traditional   casting  and  splinting   methods   suffer  from  several
drawbacks.  Casts made from  plaster of Paris or synthetic  cast tape  generally
require specialized training. In addition, these casts require a "cast room," as
the  preparation  and  application of plaster of Paris or synthetic cast tape is
messy. Traditional casts must also be cut off and replaced as the muscles in the
casted limb atrophy or as a  particular  therapy  procedure  requires a new cast
position. Splints using conventional thermoplastic sheets must be cut to conform
to varying limb sizes. The nature of the materials used in traditional casts and
splints  make them  difficult  to  properly  conform to the  patient's  anatomy,
resulting in the  possibility  of an incorrect  cast or splint fit. In addition,
the  application  of casts and splints are usually  performed  by two  different
groups of specialists.  Casts are generally applied by orthopedic surgeons while
splints are typically applied by occupational and physical therapists.

         The Company's  QuickCast  splints and casts shrink to fit injured limbs
upon the application of heat from a hair dryer. These splints and casts are made
from an elastic  fiberglass  mesh  coated  with  Landec's  temperature-activated
materials. This material is made into pre-formed tubular devices that are placed
on injured  hands,  wrists,  arms and legs. The heat from the hair dryer softens
the polymer and allows the device to relax and conform to the patient's  anatomy
in approximately two minutes. QuickCast splints and casts are pliable when warm,
allowing  the  clinician  to mold and form the splint or cast and to reshrink or
reposition  the  splints  or casts as  needed.  Upon  removal  of the heat,  the
products cool and harden.  The Company believes that QuickCast splints and casts
provide the following advantages over traditional methods:

         o Help ensure a proper therapeutic cast or splint fit

         o Allow for easy  removal  of the  splint or cast  using  scissors,  as
           compared  to the  necessity  of  sawing  off a  plaster  of  Paris or
           synthetic cast

         o Allow for reheating,  remolding or reshrinking to change the shape or
           position  of the device as required  by therapy or to  accommodate  a
           reduction in limb size due to muscle  atrophy,  reducing the wasteful
           discarding of casts and splints that can increase  overall  treatment
           costs

         o Enable primary care physicians and other  non-specialists  to perform
           both splinting and casting

                                      -12-

<PAGE>

         o Permit easy conversion of QuickCast casts to splints

         o Allow the cast to be applied in any exam  room,  physician  office or
           rehabilitation facility or at the patient's bedside, thus eliminating
           the need for a special "cast room"

         The QuickCast products received 510(k) clearance by the FDA in February
1994,  and the Company  commenced  sales of QuickCast  products to regional U.S.
orthopedic  distributors  in April 1994.  In early  1996,  Landec  entered  into
distribution  relationships  with  Physician  Sales &  Services  in the  area of
orthopedic and primary care  physicians  sales.  Physician  Sales & Services has
over 700 sales  representatives  in 50  states.  In  addition,  in 1996,  Landec
entered into non-exclusive  distribution  relationships with North Coast Medical
and  Sammons  Preston,  distributors  of medical  products to  occupational  and
physical  therapists.  The addition of the  distribution  partners  broadens the
market  access  for the  Company's  QuickCast  products.  Outside  of the United
States,  Smith  &  Nephew  has  been  the  exclusive   distributor  of  Landec's
heat-shrinkable  casting and splinting  products in  approximately 25 countries.
The Company  anticipates  that it will terminate its  relationship  with Smith &
Nephew in early 1997 and, as a result,  the Company is  currently in the process
of initiating distribution  relationships with other independent distributors in
selected countries. In addition, QuickCast products are sold through independent
distributors in approximately nine other countries.

         Landec  received  a 1995 R&D 100 Award in  recognition  of  QuickCast's
innovative  features and benefits.  This award is given annually by R&D Magazine
to  selected  companies  with  new  products  that  represent   significant  new
innovations in America.  Landec is working with leaders in orthopedics,  primary
care and  rehabilitation  to assist the  Company in  developing  new product and
application  ideas. In early 1996, Landec introduced  several QuickCast products
for lower leg fractures and sprains,  which  complement  the company's  existing
QuickCast product line for upper extremity fractures and sprains.

         PORT Ophthalmic Device

         Landec is  developing a PORT  (Punctal  Occluder  for the  Retention of
Tears) ophthalmic device that is designed to allow the eye to retain its natural
tear fluids. The Company is targeting patients with a condition known as dry eye
for the first PORT application.  In patients  suffering from dry eye, either the
lacrimal gland produces an insufficient volume of tears or the lacrimal drainage
duct clears the tears too quickly from the eye.  Either  condition may result in
blurred vision,  intolerance to bright light, grittiness,  redness, burning and,
in some cases, damage to the corneal surface.

         Dry eye  syndrome is a common yet poorly  diagnosed  condition  that is
estimated to affect 30 million  Americans,  primarily  patients over 50 years of
age.  According to the American Academy of  Ophthalmology,  approximately 25% of
the general population suffers from dry eye syndrome at some time. Approximately
7.5 million cases can be  classified as severe or moderate.  Landec is initially
targeting  this  market.  According  to the Dry Eye and  Tear  Research  Center,
approximately 175,000 dry eye patients in the United States undergo some type of
corrective  procedure each year. The Company  believes that the  opportunity for
dry  eye  products  will  expand  due to  factors  such as  increased  physician
awareness  of dry eye,  an aging  population,  poor air  quality,  improved  and
standardized  diagnostic  techniques,  and recent changes allowing reimbursement
for punctum plug procedures and products.

         Existing  methods  for  treating  dry eye have  significant  drawbacks.
Silicone punctum plugs often do not provide complete obstruction of the drainage
duct and may not conform to the  contours  of a  particular  patient's  drainage
duct. In addition,  punctum plugs either must be inserted deep into the drainage
duct or rest at the top of the  drainage  duct,  where they are  susceptible  to
coming loose.  Collagen plugs and artificial tear solutions offer only temporary
relief.  Laser  surgery,  which is used to close the drainage duct, is expensive
and difficult to reverse.

         Using the PORT product, a physician  introduces  Intelimer polymer into
the lacrimal  drainage duct in a fluid state where it quickly  solidifies into a
form-fitting,  solid plug.  Occlusion of the lacrimal  drainage  duct allows the
patient to retain tear fluid. The Company has developed an applicator containing

                                      -13-


<PAGE>

sterile,  solid Intelimer material that will transform into a flowable,  viscous
state when heated  slightly above body  temperature.  A physician  activates the
battery powered PORT applicator that heats the Intelimer  material,  inserts the
applicator tip directly into the locally anesthetized punctal eye opening of the
lacrimal  drainage  duct and  dispenses  the  Intelimer  material.  This  entire
treatment  can be  completed  on an  out-patient  basis in five to ten  minutes.
Subsequently,  if the physician  believes that occlusion is no longer necessary,
the PORT plug can be removed  using a warm saline  flush,  which  activates  the
temperature  switch,  causing the polymer to return to its viscous  state and be
flushed from the patient's drainage duct.

         The Company  has  conducted  animal  tests to assess the safety of PORT
plugs to treat dry eye patients by intentionally  obstructing the eye's lacrimal
drainage duct.  Human clinical  studies are currently  underway in San Francisco
and Boston  where  approximately  25 patients  will be enrolled by the middle of
fiscal year 1997.  Subsequently,  a larger  multi-center study will be conducted
with about 90 patients at some ten centers nationwide.  The Company is currently
in  discussions  regarding  marketing  rights with selected  leading  ophthalmic
companies.  The Company intends to retain  manufacturing  rights with respect to
the PORT applicator.

         The Company  believes that PORT plugs will have  additional  ophthalmic
applications beyond the dry eye market, including people who cannot wear contact
lenses due to limited tear fluid retention,  and patients receiving  therapeutic
drugs via eye drops that require longer retention in the eye.

Agricultural Seed Coatings

         Landec has developed and is conducting  field trials of its Intellicoat
seed coating, an Intelimer-based agricultural material designed to increase crop
yields and extend the crop planting  window.  These coatings are initially being
applied to corn and soybean seeds. According to the U.S. Agricultural Statistics
Board,  the total planted  acreage in 1994 in the United States was 79.2 million
for corn and 61.9 million for soybean.

         Currently,  farmers  are  required  to guess the  proper  time to plant
seeds.  If the seeds are  planted  too  early,  they may rot or suffer  chilling
injury due to the  absorption  of water at cold soil  temperatures.  If they are
planted too late, the growing  season may end prior to the plants  reaching full
maturity.  In either case, the resulting crop yields are  suboptimal.  Moreover,
the planting  window can be fairly  brief,  requiring the farmer to focus almost
exclusively  on planting  during this time.  Seeds also  germinate  at different
times due to variations in absorption of water, thus providing for variations in
the growth rate of the crops.

         The  Company's  Intellicoat  seed coating  prevents  planted seeds from
absorbing  water  when the ground  temperature  is below the  coating's  pre-set
switch  temperature.  Intellicoat  seed  coatings are designed to enable  coated
seeds  to be  planted  early  without  risk of  chilling  damage  caused  by the
absorption  of water at cold  soil  temperatures.  As spring  advances  and soil
temperatures  rise  to the  pre-determined  switch  temperature,  the  polymer's
permeability increases and the coated seeds absorb water and begin to germinate.
The Company  believes  that  Intellicoat  seed  coatings  provide the  following
advantages:

         o More flexible timing for planting

         o Avoidance of chilling injury

         o Uniform germination and crop growth

         o Protection against harmful fungi

         As a result,  the Company believes that Intellicoat seed coatings offer
the potential for significant improvements in crop yields.

                                      -14-

<PAGE>

         In the  seed  industry,  yield  increases  of 4% to 5%  are  considered
significant because of their impact on per acre  profitability.  Field trials of
Intellicoat  seed  coatings on corn and soybean crops during the past four years
have  resulted in yield  increases of as much as 5% to 20%. The Company plans to
initially  develop  seed  coating  products  for corn and  soybean  markets  for
distribution  through  regional seed  companies in the United States in parallel
with  continued  field  evaluations  with  global  seed  companies.  The Company
believes  that with larger seed  companies,  an  additional  one to two years of
field  trials  will be needed to support  initiation  of  commercial  sales.  In
addition,  Intellicoat  seed  coatings  are being  independently  tested by seed
companies and  universities.  Future crops under  consideration  include cotton,
canola, sugar beet and other vegetables.

Corporate Collaborations

         The Company believes its technology has commercial  potential in a wide
range of industrial,  medical and agricultural applications. In order to exploit
these  opportunities,  the  Company  has entered  into  collaborative  corporate
agreements for product  development  and/or  distribution in certain fields. The
Company is currently  engaged in discussions  with  potential new  collaborative
partners.

         To date, the Company has entered into  collaborative  arrangements with
BFGoodrich and Hitachi in connection with its Intelimer  polymer systems,  Fresh
Express and  Printpack in connection  with its  Intellipac  breathable  membrane
products,  Nitta and Hitachi in connection with its industrial adhesive products
and Smith & Nephew,  Physician Sales & Services, North Coast Medical and Sammons
Preston in connection  with its QuickCast  orthopedic  products.  The Company is
dependent on its corporate partners to develop,  test, manufacture and/or market
certain of its  products.  Although  the Company  believes  that its partners in
these  collaborations have an economic motivation to succeed in performing their
contractual  responsibilities,  the amount and timing of resources to be devoted
to these activities are not within the control of the Company.

         A  significant  portion of Landec's  revenues to date have been derived
from commercial research and development  collaborations and license agreements.
In fiscal year 1996,  development funding from these collaborative  arrangements
comprised  approximately  62% of the Company's total revenues and in fiscal year
1995, comprised approximately 82% of the Company's revenues. Development funding
and license fees from and product sales to Hitachi, BFGoodrich, Nitta, and Smith
& Nephew  represented  approximately  65% and 91% of the Company's  revenues for
fiscal years 1996 and 1995,  respectively.  Moreover,  research and  development
revenue and license fees from Hitachi and Nitta each accounted for more than 10%
of the Company's revenues for fiscal years 1996 and 1995.

         There  can be no  assurance  that  such  partners  will  perform  their
obligations as expected or that the Company will derive any  additional  revenue
from such  arrangements.  There can be no assurance that the Company's  partners
will pay any additional  option or license fees to the Company or that they will
develop and market any products under the agreements.  Moreover,  certain of the
collaborative  agreements  provide that they may be terminated at the discretion
of the corporate  partner,  and certain of the collaborative  agreements provide
for termination under certain circumstances.  There can be no assurance that the
partners will not pursue  existing or alternative  technologies in preference to
the  Company's  technology.  Furthermore,  there  can be no  assurance  that the
Company will be able to negotiate additional  collaborative  arrangements in the
future on acceptable terms, if at all, or that such  collaborative  arrangements
will be successful.  To the extent that the Company  chooses not to or is unable
to  establish  such   arrangements,   it  would  experience   increased  capital
requirements to undertake research, development,  manufacture, marketing or sale
of its current and future  products in such  markets.  There can be no assurance
that the Company will be able to independently develop, manufacture,  market, or
sell its  current  and future  products  in the  absence  of such  collaborative
agreements. See "Additional Factors That May Affect Future Results -- Dependence
on Collaborative Partners".

         Hitachi. The Company has entered into two separate  collaborations with
Hitachi in the areas of industrial  adhesives and Intelimer polymer systems.  On
October 1, 1994, the Company entered into a non-exclusive license agreement with
Hitachi in the industrial  adhesives area. The agreement provides Hitachi with a
non-exclusive  license to manufacture and sell products using Landec's Intelimer
materials

                                      -15-

<PAGE>

in certain Asian countries.  Landec received  up-front license fees upon signing
the agreement and is entitled to future  royalties based on net sales by Hitachi
of the licensed products. Any fees paid to the Company are non-refundable.

         On August 10, 1995, the Company  entered into the second  collaboration
with Hitachi in the  Intelimer  polymer  systems area.  The  agreement  provides
Hitachi with an exclusive  license to use and sell  Landec's  Intelimer  polymer
systems in industrial latent curing products in certain Asian countries.  Landec
is entitled to be the exclusive supplier of Intelimer polymer systems to Hitachi
for at least seven years. In addition, Hitachi also received limited options and
rights for certain other technology applications in its Asian territory.  Landec
received an up-front license payment upon signing this agreement and is entitled
to  receive  research  and  development  funding  over  three  years and  future
royalties based on net sales by Hitachi of the licensed products.  Any fees paid
to the Company are  non-refundable.  This  agreement is  terminable at Hitachi's
option. In conjunction with this agreement, Hitachi purchased Series E Preferred
Stock for $1.5 million which converted to common stock on the Company's  initial
public offering.

         BFGoodrich.   On  October  13,  1993,   the  Company   entered  into  a
collaboration  with  BFGoodrich.  On March 29, 1996,  the Company and BFGoodrich
decided to amend their license,  development  and  manufacturing  agreement to a
non-exclusive  agreement. The agreement provides BFGoodrich with a non-exclusive
worldwide  (excluding Asia) license to use and sell Landec's  Intelimer  polymer
systems in  industrial  latent  curing  products.  Landec is  entitled to be the
exclusive supplier of Intelimer polymer systems to BFGoodrich during the term of
the  agreement.   BFGoodrich   must  meet  certain   requirements   to  maintain
non-exclusive  rights to fields of use.  Landec  received  an  up-front  license
payment  upon  signing  and  additional  license  fees  upon  achieving  certain
milestones.  Under the  agreement,  development  was  funded by  BFGoodrich  for
several  years  and such  funding  was  terminated  as a result  of the  amended
agreement. The Company is also entitled to receive future royalties based on net
sales by  BFGoodrich  of the  licensed  products.  Fees paid to the Company were
non-refundable. This agreement is terminable at BFGoodrich's option.

         Nitta. On March 14, 1995, the Company entered into a license  agreement
with Nitta in the industrial adhesives area. The agreement provides Nitta with a
co-exclusive  license to manufacture and sell products using Landec's  Intelimer
materials in certain Asian countries. Landec received up-front license fees upon
signing the agreement and is entitled to future  royalties based on net sales by
Nitta of the licensed products. Any fees paid to the Company are non-refundable.
In addition,  Nitta also received  limited options for certain other  technology
applications  in its Asian  territory.  This  agreement is terminable at Nitta's
option.  Nitta and the Company  entered  into an  additional  exclusive  license
arrangement in February, 1996 covering Landec's medical adhesives technology for
use in Asia. The Company  received  up-front  license fees upon execution of the
agreement  and is entitled to receive  research  and  development  payments  and
royalties under this agreement. Any fees paid to the Company are non-refundable.

         Fresh  Express.  On  January  18,  1995,  the  Company  entered  into a
non-exclusive  supply agreement with Fresh Express.  Fresh Express  collaborates
with the Company in biological  product testing.  Fresh Express has the right to
become a non-exclusive customer for certain future products.

         Printpack.  On June 21,  1996,  the Company  entered  into an exclusive
co-development  and marketing  agreement  with  Printpack.  Under the agreement,
Landec and Printpack will focus on developing  integrated membrane film products
for low cost,  high-throughput,  fresh-cut product market applications,  such as
retail packaging,  using Landec's  proprietary  Intellipac  breathable  membrane
technology and Printpack's large-scale printing and film converting expertise.

         Smith & Nephew.  On  September  30, 1994,  the Company  entered into an
exclusive  distribution  agreement with Smith & Nephew for QuickCast products in
certain  European and Pacific Rim countries,  Canada and South Africa.  Products
distributed   under   this   agreement   are  sold   under   Smith  &   Nephew's
"Dynacast*Rapide" tradename. As discussed above, the Company anticipates that it
will terminate this relationship in early 1997.

                                      -16-

<PAGE>

         Physician Sales & Services. On March 18, 1996, the Company entered into
a  distribution   agreement  with  Physician  Sales  &  Services  for  QuickCast
orthopedic  and splinting  products.  Under this  agreement,  Physician  Sales &
Services is granted  exclusive  rights to distribute such products in the United
States to primary care  physicians and  co-exclusive  rights to distribute  such
products in the United  States to  orthopedic  surgeons,  cast  technicians  and
physician assistants.  There are more than 83,000 primary care physicians in the
United States.

          North Coast Medical.  On January 3, 1996,  the Company  entered into a
distribution  agreement  with North Coast Medical for QuickCast  orthopedic  and
splinting  products.  Under  the  agreement,  North  Coast  Medical  is  granted
non-exclusive  rights to  distribute  such  products in the United States to the
occupational and physical therapy market.

         Sammons  Preston.  On  June  18,  1996,  the  Company  entered  into  a
distribution  agreement  with  Sammons  Preston  for  QuickCast  orthopedic  and
splinting   products.   Under  the   agreement,   Sammons   Preston  is  granted
non-exclusive  rights to  distribute  such  products in the United States to the
occupational and physical therapy market.

Sales and Marketing

         The  Company's  products  fall into two  groups:  those  intended to be
marketed  and  sold  by  the  Company  and  those  expected  to be  marketed  by
distributors and corporate  partners.  The Company intends to provide  technical
support for all of its products, irrespective of the sales and marketing channel
of a particular  product.  With respect to the Company's  Intellipac  breathable
membrane products, the Company has entered into a non-exclusive supply agreement
with Fresh  Express.  Since there are a limited number of suppliers of fresh-cut
produce,  the  Company  believes  that a  small  sales  force  can  successfully
introduce these products in this concentrated  marketplace.  The Company intends
to  develop  its  internal  sales  capacity  as more  products  progress  toward
commercialization.   The  Company's  other  commercially   available   products,
QuickCast splints and casts, are sold in the United States through the Company's
national distribution partners,  Physician Sales & Services, North Coast Medical
and Sammons Preston, in conjunction with the Company's internal sales force.

Manufacturing

         Landec intends to manufacture its own products whenever possible, as it
believes that there is  considerable  manufacturing  margin  opportunity  in its
products. In addition,  the Company believes that know-how and trade secrets can
be better maintained through Landec retaining manufacturing capability in-house.

         The  Company  currently   manufactures  its  QuickCast  and  Intellipac
breathable  membrane  products at its  facilities in Menlo Park,  California and
with selected outside contract manufacturers.  The manufacturing process for the
Company's  initial  Intellipac  breathable  membrane  products is  comprised  of
polymer manufacturing,  membrane coating and label conversion.  Portions of this
process are done at the Company on pilot-scale  equipment while the remainder is
performed by a third-party manufacturer.  As volume increases, the Company plans
to have the entire process completed by third party  manufacturers.  Manufacture
of the Company's QuickCast products is performed by the Company.  Components and
new materials for QuickCast are purchased from vendors.  QuickCast  products and
Intellipac  breathable  membranes  are  required to be  manufactured  under Good
Manufacturing  Practices  as required by the FDA and  California  Department  of
Health Services.

         Many  of  the  raw  materials  used  in  manufacturing  certain  of the
Company's products are currently purchased from a single source, such as certain
monomers to  synthesize  Intelimer  polymers  and  substrate  materials  for the
Company's  Intellipac  breathable  membrane  products.   The  Company  believes,
however,  that it currently has adequate inventories and that additional sources
of supply are  available.  Upon an increase  in  manufacturing  capability,  the
Company may enter into alternative supply arrangements. To date, the Company has
not  experienced  difficulty  acquiring this material for the manufacture of its
products. However, no assurance can be given that interruptions in supplies will
not occur in the future,  that the Company  could obtain  substitute  vendors or
that the Company  will be able to procure  comparable

                                      -17-

<PAGE>

raw  materials at similar  prices and terms within a reasonable  time.  Any such
interruption  of supply could have a material  adverse  effect on the  Company's
ability to  manufacture  its products and,  consequently,  could  materially and
adversely  affect  the  Company's  business,  operating  results  and  financial
condition.

         The   Company   intends  to  build  or  acquire   large-scale   polymer
manufacturing  facilities by 1998. In the interim, the Company believes that its
current  facilities and readily  available  additional  facilities will meet its
manufacturing  needs.  The  Company  believes  that by  1998,  in-house  polymer
manufacturing  capability will be necessary to support its polymer requirements.
Polymer  manufacturing  facilities  will be  separate  from  the  QuickCast  and
Intellipac breathable membrane manufacturing facilities.

         Production  in   commercial-scale   quantities  may  involve  technical
challenges  for the Company.  Establishing  its own  manufacturing  capabilities
would require  significant  scale-up  expenses and  additions to facilities  and
personnel.  There can be no  assurance  that the Company will be able to develop
commercial-scale  manufacturing  capabilities at acceptable  costs or enter into
agreements with third parties with respect to these activities.

Research and Development

         Landec is focusing  its  research  and  development  resources  both on
existing and new applications of its Intelimer technology.  Examples of research
and development for product line extensions  include QuickCast  products for the
lower  extremities,   additional   Intellipac  breathable  membranes  for  other
vegetables  and fruits and flowers and new  catalyst  systems for latent  curing
products.  Landec is focusing  additional  research on new product forms such as
composites, films, and laminates. The Company intends to periodically seek funds
for applied materials  research programs from U.S.  government  agencies such as
the National Institutes of Health, as well as from commercial entities. To date,
much of Landec's  research has been funded by the U.S.  Government and corporate
partners.  As of  January  8, 1997  Landec  had 23  employees  in  research  and
development  (seven of whom have Ph.D.s) with experience in polymer,  analytical
and formulation chemistry and chemical engineering.

Competition

         The Company operates in highly competitive and rapidly evolving fields,
and new developments are expected to continue at a rapid pace.  Competition from
large industrial, food packaging, medical and agricultural companies is expected
to  be  intense.  In  addition,  the  nature  of  the  Company's   collaborative
arrangements may result in its corporate  partners  becoming  competitors of the
Company.  Many of these  competitors have  substantially  greater  financial and
technical resources and production and marketing  capabilities than the Company,
and many have substantially  greater experience in conducting clinical and field
trials,   obtaining   regulatory   approvals  and  manufacturing  and  marketing
commercial  products.  There can be no assurance that these competitors will not
succeed  in  developing  alternative  technologies  and  products  that are more
effective,  easier to use or less  expensive  than those  which have been or are
being developed by the Company or that would render the Company's technology and
products obsolete and non-competitive.

Patents and Proprietary Rights

         The  Company's  success  depends in large part on its ability to obtain
patents,  maintain trade secret protection and operate without infringing on the
proprietary  rights of third  parties.  The Company has been granted  eight U.S.
patents  with  expiration  dates  ranging  from  2007  to  2012  and  has  filed
applications  for  additional  U.S.  patents,  as well as certain  corresponding
patent  applications  outside  the  United  States,  relating  to the  Company's
technology.   The  Company's   issued  patents   include   claims   relating  to
compositions,  devices and use of a class of temperature sensitive polymers that
exhibit distinctive  properties of permeability,  adhesion and viscosity.  There
can be no  assurance  that  any of  the  pending  patent  applications  will  be
approved, that the Company will develop additional proprietary products that are
patentable, that any patents issued to the Company will provide the Company with
competitive  advantages  or will not be  challenged by any third parties or that
the  patents  of others  will not  prevent  the  commercialization  of  products
incorporating the Company's technology.  Furthermore,  there can be no assurance
that others will not independently  develop similar  products,  duplicate any of
the

                                      -18-



<PAGE>

Company's  products or if patents are issued to the Company,  design  around the
Company's  patents.  Any of the foregoing  results could have a material adverse
effect on the Company's business, operating results and financial condition.

         The commercial success of the Company also will depend, in part, on its
ability to avoid infringing  patents issued to others. The Company has received,
and  may in the  future  receive,  from  third  parties,  including  some of its
competitors, notices claiming that it is infringing third party patents or other
proprietary  rights. For example,  the Company received a letter in January 1996
alleging that the Company's  Intellipac  breathable  membrane product  infringes
patents of another party. The Company has investigated  this matter and believes
that its Intellipac  breathable membrane product does not infringe the specified
patents of such party.  The Company  has  received an opinion of patent  counsel
that the  Intellipac  breathable  membrane  product  does not infringe any valid
claims of such patents.  If the Company were  determined  to be  infringing  any
third-party  patent,  the Company  could be required to pay  damages,  alter its
products or processes, obtain licenses or cease certain activities. In addition,
if patents are issued to others  which  contain  claims that compete or conflict
with  those  of the  Company  and  such  competing  or  conflicting  claims  are
ultimately  determined to be valid,  the Company may be required to pay damages,
to obtain licenses to these patents, to develop or obtain alternative technology
or to cease  using such  technology.  If the  Company is  required to obtain any
licenses,  there can be no  assurance  that the Company will be able to do so on
commercially  favorable  terms,  if at all.  The  Company's  failure to obtain a
license to any  technology  that it may require to  commercialize  its  products
could  have a  material  adverse  impact on the  Company's  business,  operating
results and financial condition.

         Litigation, which could result in substantial costs to the Company, may
also be necessary to enforce any patents issued or licensed to the Company or to
determine  the  scope  and  validity  of  third-party   proprietary  rights.  If
competitors of the Company  prepare and file patent  applications  in the United
States that claim  technology also claimed by the Company,  the Company may have
to  participate  in  interference  proceedings  declared by the U.S.  Patent and
Trademark  Office to  determine  priority of  invention,  which could  result in
substantial cost to and diversion of effort by the Company, even if the eventual
outcome  is  favorable  to the  Company.  Any such  litigation  or  interference
proceeding,  regardless of outcome,  could be expensive  and time  consuming and
could subject the Company to significant  liabilities to third parties,  require
disputed  rights to be  licensed  from third  parties or require  the Company to
cease using such  technology  and  consequently,  could have a material  adverse
effect on the Company's business, operating results and financial condition.

         In addition  to patent  protection,  the  Company  also relies on trade
secrets, proprietary know-how and technological advances which the Company seeks
to protect,  in part,  by  confidentiality  agreements  with its  collaborators,
employees and consultants.  There can be no assurance that these agreements will
not be breached, that the Company will have adequate remedies for any breach, or
that the  Company's  trade secrets and  proprietary  know-how will not otherwise
become known or be independently discovered by others.

FDA and Other Government Regulations

         The  Company's  products  and  operations  are  subject to  substantial
regulation in the United States and foreign countries.

         Medical  Products.  The  Company's  medical  products  are  subject  to
stringent government regulation in the United States and other countries. In the
United States,  the Food,  Drug,  and Cosmetic Act, as amended ("FDC Act"),  and
other  statutes and  regulations  govern or influence the testing,  manufacture,
safety, labeling,  storage, record keeping, approval,  advertising and promotion
of such products.  Failure to comply with applicable  requirements can result in
fines, recall or seizure of products, total or partial suspension of production,
withdrawal of existing  product  approvals or clearances,  refusal to approve or
clear new applications or notices and criminal prosecution.

         The regulatory  process is lengthy,  expensive and uncertain.  Prior to
commercial  sale in the United  States,  most  medical  devices,  including  the
Company's products, must be cleared or approved by

                                      -19-


<PAGE>

the FDA.  Securing FDA approvals and  clearances  may require the  submission of
extensive clinical data and supporting information to the FDA.

         Under the FDC Act,  medical  devices are  classified  into one of three
classes  (i.e.,  class I, II or III) on the basis of the  controls  necessary to
reasonably ensure their safety and  effectiveness.  Safety and effectiveness can
reasonably  be  assured  for class I devices  through  general  controls  (e.g.,
labeling,  premarket notification and adherence to Good Manufacturing Practices)
and for class II devices through the use of general and special  controls (e.g.,
performance  standards,  postmarket  surveillance,  patient  registries  and FDA
guidelines). Generally, class III devices are those which must receive premarket
approval  by  the  FDA  to  ensure   their  safety  and   effectiveness   (e.g.,
life-sustaining,  life-supporting  and implantable  devices or new devices which
have been found not to be substantially equivalent to legally marketed devices.)

         Before a new device can be introduced to the market,  the  manufacturer
generally  must  obtain  FDA  clearance   through  either  a  510(k)   premarket
notification or a PMA. A 510(k)  clearance will be granted if the submitted data
establishes that the proposed device is "substantially  equivalent" to a legally
marketed  class I or class II medical  device,  or to a class III medical device
for which the FDA has not  called  for PMAs.  It  generally  takes  from four to
twelve months from submission to obtain 510(k) premarket clearance,  although it
may  take  longer.  The  FDA may  determine  that  the  proposed  device  is not
substantially  equivalent,  or that additional clinical data are needed before a
substantial equivalence determination can be made. Modifications or enhancements
to products that are cleared through the 510(k) process that could significantly
affect safety or  effectiveness  or effect a major change in the intended use of
the device  require  new 510(k)  submissions.  The  Company is also  required to
adhere to FDA Good  Manufacturing  Practices  and  similar  regulation  in other
countries,   which  include  testing,  control  and  documentation  requirements
enforced by periodic inspections.

         The Company's  QuickCast  products have received  clearance through the
510(k)  process  and the  Company  intends to obtain  clearance  for its medical
products  pursuant  to  Section  510(k) of the FDC Act  whenever  possible.  The
Company  plans to seek 510(k)  clearance  for its PORT  ophthalmic  device.  The
Company is conducting clinical trials under an Investigational  Device Exemption
("IDE")  that is granted  by the FDA to permit  testing of a device in a limited
number of human beings in clinical  trials  conducted  at a restricted  group of
clinical sites. The Company has completed a pilot clinical study and anticipates
additional  clinical studies with an expanded patient  population.  No assurance
can be given that the necessary  clearances for its products will be obtained by
the Company on a timely basis,  if at all, or that  extensive  clinical data and
supporting  information or a PMA application will not be required. FDA clearance
is subject to  continual  review,  and later  discovery  of  previously  unknown
problems may result in  restrictions  on a product's  marketing or withdrawal of
the product from the market.

         The Company understands that the FDA has recently been requiring a more
rigorous  demonstration  of substantial  equivalence  in connection  with 510(k)
notifications  and that in many  cases the time  periods  required  for  product
approvals have  increased.  If additional data is requested by the FDA, it could
delay  the  Company's  market  introduction  of its  products.  There  can be no
assurance that the FDA will not require additional data or that the Company will
receive marketing clearance from the FDA for any of its products.

         If a product is found to be not  substantially  equivalent to a legally
marketed  device or if it is a class III device for which the FDA has called for
PMAs, a premarket  approval  application must be filed with the FDA. To obtain a
PMA, a device must undergo extensive clinical trials to establish its safety and
effectiveness.  The  PMA  process  can  be  expensive,  uncertain  and  lengthy,
typically  requiring  several  years,  with no guarantee  of ultimate  approval.
Determination by the FDA that any of the Company's  products or applications are
subject to the PMA process could have a material adverse effect on the Company's
business.

         Food Packaging Products. The Company's food packaging products are also
subject to  regulation  under the FDC Act.  The  manufacture  of food  packaging
materials is subject to Good Manufacturing  Practices regulations.  In addition,
under the FDC Act any  substance  that when used as intended may  reasonably  be
expected to become, directly or indirectly,  a component or otherwise affect the

                                      -20-



<PAGE>

characteristics  of any food may be  regulated  as a food  additive  unless  the
substance  is generally  recognized  as safe  ("GRAS").  Food  additives  may be
substances  added directly to food,  such as  preservatives,  or substances that
could  indirectly  become a  component  of food,  such as waxes,  adhesives  and
packaging materials.

         A food  additive,  whether  direct or  indirect,  must be  covered by a
specific food additive  regulation  issued by the FDA. The Company  believes its
Intellipac  breathable  membrane  products are not subject to regulation as food
additives  because these products are not expected to become a component of food
under their  expected  conditions of use. If the FDA were to determine  that the
Company's  Intellipac  breathable  membrane  products  are food  additives,  the
Company may be required to submit a food  additive  petition.  The food additive
petition process is lengthy, expensive and uncertain. A determination by the FDA
that a food additive  petition is necessary would have a material adverse effect
on the Company.

         Agricultural  Products. The Company's agricultural products are subject
to regulations of the United States  Department of Agriculture  ("USDA") and the
EPA.  The  Company  believes  its  current  Intellicoat  seed  coatings  are not
pesticides as defined in the Federal Insecticide,  Fungicide and Rodenticide Act
("FIFRA") and are not subject to pesticide regulation requirements.  The process
of  meeting  pesticide  registration  requirements  is  lengthy,  expensive  and
uncertain,  and may require additional  studies by the Company.  There can be no
assurance that future products will not be regulated as pesticides. In addition,
the  Company  believes  that its  Intellicoat  seed  coatings  will not become a
component of the  agricultural  products  which are  produced  from the seeds to
which the coatings are applied and  therefore  are not subject to  regulation by
the FDA as a food additive.  While the Company  believes that it will be able to
obtain  approval from such agencies to distribute its products,  there can be no
assurance that the Company will obtain necessary  approvals without  substantial
expense or delay, if at all.

         Polymer Manufacture.  The Company's  manufacture of polymers is subject
to  regulation  by the EPA under  the Toxic  Substances  Control  Act  ("TSCA").
Pursuant to TSCA,  manufacturers  of new  chemical  substances  are  required to
provide  pre-manufacturing  notice  ("PMN")  to the EPA which  can then  require
extensive testing to establish the safety of a new chemical or limit or prohibit
the manufacture,  use or distribution of such chemical.  The EPA has promulgated
an exemption from PMN requirements for certain polymers which it believes are of
low concern due to their lack of reactivity and their  molecular  structure.  To
date,  the Company's  polymers have  qualified for the exemption and the Company
believes any future polymers it plans to develop will also qualify. No assurance
can be given  that  future  products  will  qualify  for the  exemption  or that
additional studies or restrictions will not be required by the EPA.

         Other.  The  Company and its  products  under  development  may also be
subject to other federal, state and local laws, regulations and recommendations.
Although  Landec  believes  that it will be able to comply  with all  applicable
regulations  regarding  the  manufacture  and sale of its  products  and polymer
materials,  such  regulations are always subject to change and depend heavily on
administrative  interpretations  and the country in which the products are sold.
There can be no assurance that future changes in regulations or  interpretations
made by the FDA,  EPA or other  regulatory  bodies,  with  possible  retroactive
effect,  relating to such matters as safe  working  conditions,  laboratory  and
manufacturing  practices,  environmental  controls,  fire  hazard  control,  and
disposal of hazardous or  potentially  hazardous  substances  will not adversely
affect the Company's  business.  There can also be no assurance that the Company
will not be  required  to incur  significant  costs to comply with such laws and
regulations  in the  future,  or that such laws or  regulations  will not have a
material adverse effect upon the Company's ability to do business.  Furthermore,
the  introduction  of the  Company's  products in foreign  markets might require
obtaining  foreign  regulatory  clearances.  There can be no assurance  that the
Company will be able to obtain  regulatory  clearances  for its products in such
foreign markets.

Employees

         As of October 31, 1996, Landec had 52 full-time  employees,  of whom 33
were  dedicated to research,  development,  manufacturing,  quality  control and
regulatory affairs and 19 were dedicated to sales,  marketing and administrative
activities. Landec intends to recruit additional personnel in

                                      -21-
<PAGE>

connection with the  development,  manufacturing  and marketing of its products.
None of  Landec's  employees  is  represented  by a union,  and Landec  believes
relationships with its employees are good.

Item 2.       Properties

         Landec leases and occupies  approximately 30,000 square feet of office,
laboratory  and  manufacturing  space  in  Menlo  Park,  California.   Of  these
facilities,  approximately  21,000 square feet is leased  through  December 1997
with two  three-year  renewal  options,  3,500 sq.  feet of  warehouse  space is
subleased  through  December  1996  and the  remaining  manufacturing  space  is
subleased  through  December  1998.  The Company  believes  that it will require
additional space in 1998.

Item 3.       Legal Proceedings

         The Company is currently not a party to any material legal proceedings.

         In October 1995, a customer of the Company  received a letter  alleging
that the Company's  Intellipac  breathable membrane product infringes patents of
another  party.  The  Company  received a similar  letter in January  1996.  The
Company has investigated this matter and believes that its Intellipac breathable
membrane  product  does not infringe the  specified  patents of such party.  The
Company has received an opinion of patent counsel that the Intellipac breathable
membrane  product does not infringe  any valid  claims of such  patents.  If the
Company were  determined to be infringing any  third-party  patent,  the Company
could be required  to pay  damages,  alter its  products  or  processes,  obtain
licenses or cease certain activities.

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

         There were no matters  submitted to a vote of security  holders  during
the fourth quarter of the Company's fiscal year ending October 31, 1996.

                                      -22-


<PAGE>

                                     PART II


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

         The Common Stock is traded in the over-the-counter market and is quoted
on the NASDAQ  National  Market  under the symbol  "LNDC".  The Common Stock was
initially  offered to the public on  February  15, 1996 at a price of $12.00 per
share.  The following table sets forth for each period indicated during 1996 the
high and low  sales  prices  for the  Common  Stock as  reported  on the  NASDAQ
National Market.

                                                             High          Low
                                                             ----          ---
        4th Quarter ending October 31, 1996.............    $16.00        $ 8.38

        3rd Quarter ending July 31, 1996................    $20.75        $14.88

        2nd Quarter ending April 30, 1996
          (commencing February 15, 1996)................    $19.00        $12.00

         There were  approximately 112 holders of record of 10,753,711 shares of
outstanding  Common Stock as of October 31,  1996.  The Company has not paid any
dividends on the Common Stock since its inception. The Company presently intends
to retain all future  earnings for its business and does not  anticipate  paying
cash dividends on its Common Stock in the foreseeable future.


                                      -23-
<PAGE>

<TABLE>

Item 6.       Selected Consolidated Financial Data

         The information  set forth below is not  necessarily  indicative of the
results  of  future  operations  and  should  be read in  conjunction  with  the
information  contained  in Item 7 -  Management's  Discussion  and  Analysis  of
Financial  Condition and Results of Operations  and the  Consolidated  Financial
Statements and Notes to Consolidated Financial Statements contained in Item 8 of
this report.

<CAPTION>

                                                                    Year Ended October 31,
                                                --------------------------------------------------------------
                                                   1996         1995        1994         1993        1992
                                                   ----         ----        ----         ----        ----
                                                             (In thousands, except per share data)
<S>                                            <C>          <C>         <C>         <C>          <C>       
Statement of Operations Data:
Revenues:
   Product sales............................   $     755    $     601   $     335   $       --   $       --
   License fees.............................         600        2,650         400          350          475
   Research and development revenues........       1,096          796         965          821          811
                                               ---------    ---------   ---------   ----------   ----------
      Total revenues........................       2,451        4,047       1,700        1,171        1,286
Operating costs and expenses:                  
   Cost of product sales....................       1,004          987         897           --           --
   Research and development.................       3,808        3,715       3,283        3,740        2,846
   Selling, general and administrative......       3,288        2,236       2,067        1,598          987
                                               ---------    ---------   ---------   ----------   ----------
      Total operating costs and expenses....       8,100        6,938       6,247        5,338        3,833
                                               ---------    ---------   ---------   ----------   ----------
                                               
Operating loss..............................      (5,649)      (2,891)     (4,547)      (4,167)      (2,547)
Net interest income.........................       1,449          132         192           51          119
                                               ---------    ---------   ---------   ----------   ----------
Net loss....................................     $(4,200)   $  (2,759)  $  (4,355)  $   (4,116)  $   (2,428)
                                               =========    =========   =========   ==========   ==========
                                               
Net loss per share..........................   $    (.55)
                                               =========
Shares used in computation of net loss per     
share.......................................       7,699
                                               =========
                                               
Supplemental net loss per share (1).........   $    (.43)   $    (.38)
                                               =========    =========
Shares used in computation of supplemental     
   net loss per share (1)...................       9,697        7,175
                                                =========    =========
</TABLE>                                        

<TABLE>
<CAPTION>
                                                                     October 31,
                                             -------------------------------------------------------------
                                                1996         1995        1994        1993         1992
                                                ----         ----        ----        ----         ----
                                                                    (in thousands)
<S>                                            <C>        <C>         <C>         <C>          <C>      
Balance Sheet Data:
 Cash, cash equivalents and short-term
    investments..............................  $36,510    $  5,549    $  5,706    $  9,772     $ 1,975
 Total assets................................   38,358       7,347       7,521      11,253       2,786
 Redeemable convertible preferred stock......       --      31,276      27,656      25,567      11,881
 Accumulated deficit.........................  (31,278)    (26,538)    (21,658)    (15,213)     (9,804)
 Total shareholders' equity (net capital                                                      
    deficiency)..............................  $36,640    $(26,429)   $(21,584)   $(15,159)    $(9,766)
                                                                                            
<FN>                                                                           

(1)      Computed on a  supplemental  basis as  described  in Note 1 of Notes to
         Consolidated Financial Statements.
</FN>
</TABLE>

                                      -24-

<PAGE>


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

         The  following  discussion  should  be read  in  conjunction  with  the
Company's  Consolidated Financial Statements contained in Item 8 of this report.
Except for the historical information contained herein, the matters discussed in
this  report are  forward-looking  statements  that  involve  certain  risks and
uncertainties that could cause actual results to differ materially from those in
the  forward-looking  statements.  Potential  risks and  uncertainties  include,
without  limitation,  those  mentioned  in this report and, in  particular,  the
factors  described  below  under  "Additional  Factors  That May  Affect  Future
Results".

Overview

         Since its  inception in October  1986,  the Company has been  primarily
engaged in the research and development of its Intelimer  technology and related
products.  The Company  launched its first product line,  QuickCast  splints and
casts, in April 1994. The Company  launched its second product line,  Intellipac
breathable  membranes for the fresh-cut  produce  packaging market, in September
1995.  To date,  the  Company has  recognized  $1.7  million in total  QuickCast
product and Intellipac  breathable  membrane sales. The balance of revenues from
inception  through  October  31,  1996  have  resulted  from  license  fees  and
collaborative arrangements and, through October 31, 1994 have also resulted from
Small Business  Innovative  Research ("SBIR") government grants. The Company has
been  unprofitable  since its inception and expects to incur additional  losses,
primarily due to the continuation of its research and development activities and
expenditures  necessary  to further  develop  its  manufacturing  and  marketing
capabilities. From inception through October 31, 1996, the Company's accumulated
deficit was $31.3 million.

Results of Operations

         Fiscal  Year Ended  October  31,  1996  Compared  to Fiscal  Year Ended
         October 31, 1995

         Total  revenues were $2.5 million for fiscal year 1996 compared to $4.0
million for fiscal year 1995,  a decrease of 39%.  Revenues  from  research  and
development funding increased to $1.1 million for fiscal year 1996 from $796,000
for fiscal  year 1995 due to an increase  in the effort  spent on  research  and
development contracts in fiscal year 1996. Revenues from product sales increased
to  $755,000  for fiscal  year 1996 from  $601,000  for fiscal  year 1995 due to
increased sales volume of Intellipac  breathable  membrane products in the first
three  quarters of fiscal year 1996. In August 1996,  Fresh  Express  decided to
suspend  orders  of  the  Company's  Intellipac  breathable  membranes  for  its
fresh-cut  broccoli  and  cauliflower  packaging  primarily  due to cost issues.
Subsequent to this decision,  however,  the Company worked with Fresh Express to
reduce costs,  and as a result,  in October 1996, Fresh Express resumed ordering
the  Company's  Intellipac  breathable  membranes.  License  fees  decreased  to
$600,000 for fiscal year 1996 from $2.7  million for fiscal year 1995  primarily
due to non-recurring license fee revenue recognized during the fourth quarter of
fiscal year 1995 under the Company's  agreement with Hitachi.  In  consideration
for the license fees and  research and  development  funding  received  from its
corporate partners, the Company granted certain licenses and product rights. See
"Business - Corporate Collaborations."

         Cost of product sales consists of material, labor and overhead. Cost of
product  sales was $1.0  million for fiscal year 1996  compared to $987,000  for
fiscal year 1995,  an increase of 2%. Cost of product  sales as a percentage  of
product  sales  decreased  to 133% in fiscal  year 1996 from 164% in fiscal year
1995.  This decrease was  primarily  the result of the  increased  volume of the
Intellipac breathable membrane product sales and increased labor efficiencies in
both the QuickCast device and Intellipac  breathable membrane product lines. The
Company has experienced  negative gross margins for its product sales due to the
early stage of  commercialization  of the Company's products and related product
start-up  costs.  The Company  anticipates  that if revenues  from product sales
increase, gross margins will improve as the fixed portion of the cost of product
sales will be allocated over higher sales.  Improvements in gross margins due to
increased  product  sales,  if any,  may be offset in the future if the  Company
increases the fixed portion of cost of product sales.  Due to the early stage of
commercialization,  however, the Company is unable to predict with any certainty
future gross margins.

                                      -25-

<PAGE>

         Research  and  development  expenses  were $3.8 million for fiscal year
1996  compared  to $3.7  million  for fiscal  year 1995,  an increase of 3%. The
Company's research and development expenses arise from the development,  process
scale-up  and  efforts  to  protect  the  intellectual  property  content of its
enabling side-chain crystallizable polymer technology, which is the basis of the
Company's  products.  In future  periods,  the Company expects that spending for
research and development will continue to increase in absolute dollars, although
it may vary as a percentage of total revenues.

         Selling,  general and  administrative  expenses  were $3.3  million for
fiscal year 1996  compared to $2.2 million for fiscal year 1995,  an increase of
47%. Selling, general and administrative expenses consist primarily of sales and
marketing  expenses  associated  with  the  Company's  product  sales,  business
development and  administrative  expenses.  Selling,  general and administrative
expenses  increased  as a result  of  expenses  associated  with  the  Company's
withdrawal  of a planned  secondary  public  offering and  business  development
initiatives  totaling $340,000 or $.04 per share,  increased sales and marketing
expenses and the additional  administrative  costs  associated with supporting a
public company.  Sales and marketing  expenses were $1.3 million for fiscal year
1996 compared to $905,000 for fiscal year 1995, an increase of 47%. The increase
in sales and  marketing  expenses was  attributable  to the costs to support the
market  introduction of the breathable membrane products launched in late fiscal
year 1995 and the cost of launching  three new national  U.S.  distributors  for
QuickCast  products  in fiscal  year 1996.  The Company  expects  that  selling,
general  and  administrative  spending  will  continue  to  increase in absolute
dollars, although it may vary as a percentage of total revenues.

         Net interest  income was $1.4 million for fiscal year 1996  compared to
$132,000 for fiscal year 1995.  Net interest  income  increased  due to interest
income earned on the Company's initial public offering proceeds.

         Fiscal  Year Ended  October  31,  1995  Compared  to Fiscal  Year Ended
         October 31, 1994

         Total  revenues were $4.0 million for fiscal year 1995 compared to $1.7
million for fiscal year 1994,  an increase of 138%.  Revenues  from research and
development funding increased to $796,000 for fiscal year 1995 from $680,000 for
fiscal year 1994. The Company  received no revenues from SBIR  government  grant
funding for fiscal year 1995 compared to $285,000 for fiscal year 1994. Revenues
from product sales  increased to $601,000 for fiscal year 1995 from $335,000 for
fiscal year 1994 primarily due to increased sales volume for QuickCast  products
and a small increase in their average selling prices.  License fees increased to
$2.7 million for fiscal year 1995 from $400,000 for fiscal year 1994.

         Cost of product sales consists of material, labor and overhead. Cost of
product  sales was $987,000 for fiscal year 1995 compared to $897,000 for fiscal
year 1994,  an increase of 10%. Cost of product sales as a percentage of product
sales  decreased to 164% in fiscal year 1995 from 268% in fiscal year 1994. This
decrease  was  primarily  the  result of  increased  volumes  and  manufacturing
efficiencies for the QuickCast products.  The Company experienced negative gross
margins for its product sales due to the early stage of commercialization of the
Company's products and related product start-up costs. Cost of product sales did
not  increase  at the same  rate as  revenues  from  product  sales due to these
start-up  costs,  and the fact that  fiscal year 1995 was the first full year of
product sales.

         Research  and  development  expenses  were $3.7 million for fiscal year
1995 compared to $3.3 million for fiscal year 1994, an increase of 13%. Research
and development  expenses  increased  primarily as a result of increased process
development  costs  associated  with  the  launch  of the  Company's  Intellipac
breathable  membrane  products and  development of the PORT  ophthalmic  device,
which  were  offset by a decline in  development  expenses  associated  with the
QuickCast product line launched in fiscal year 1994.

         Selling,  general and  administrative  expenses  were $2.2  million for
fiscal year 1995  compared to $2.1 million for fiscal year 1994,  an increase of
8%. Sales and marketing expenses increased to $905,000 for fiscal year 1995 from
$823,000 for fiscal year 1994,  primarily due to marketing and sales  activities
for the QuickCast product line.

                                      -26-



<PAGE>

         Net  interest  income was  $132,000  for fiscal  year 1995  compared to
$192,000  for  fiscal  year 1994,  a  decrease  of 31%.  The  decrease  resulted
primarily  from  interest  expense of $42,000  associated  with the  convertible
promissory notes issued in March 1995.

Liquidity and Capital Resources

         The Company  completed its initial  public  offering of common stock in
February  1996,  raising   approximately  $35.0  million,  net  of  underwriting
discounts and commissions,  and issuance costs.  Prior to the Company's  initial
public offering,  the Company financed its operations  primarily through private
sales of its equity securities,  issuances of convertible debt,  equipment lease
financings  and  license  and  development  fees.  Through  October 31, 1996 the
Company has received net offering  proceeds of approximately  $23.8 million from
private sales of equity  securities,  $700,000 from the issuance of  convertible
notes in March 1995 and $1.1 million from lease financing.

         Cash used in  operating  activities  increased  by $1.4 million to $3.6
million in fiscal year 1996 from $2.2 million in fiscal year 1995.  The increase
is primarily  due to an increase in the  Company's  net loss in fiscal year 1996
compared to fiscal year 1995.

         The Company has not made significant  outlays for capital  expenditures
since  inception.  During  fiscal  year  1996 the  Company  spent  approximately
$367,000 on capital  expenditures.  Capital  expenditures to date have consisted
primarily of purchases of laboratory and manufacturing equipment,  computers and
related peripheral equipment, furniture and fixtures and leasehold improvements.
The Company currently  anticipates that capital expenditures in fiscal year 1997
will be approximately $1.0 million.  Such expenditures will include purchases of
additional  laboratory  and  manufacturing  equipment,   computers  and  related
peripheral equipment and leasehold improvements.

         The Company believes that existing cash, cash equivalent and short-term
investments, which totaled $36.5 million at October 31, 1996, will be sufficient
to finance its  capital  requirements  through at least the next twelve  months.
However,  the  Company's  future  capital  requirements  will depend on numerous
factors,  including the progress of its research and development  programs;  the
development of commercial scale manufacturing  capabilities;  the development of
marketing,  sales and distribution  capabilities;  the ability of the Company to
maintain  existing  collaborative  arrangements  and  establish and maintain new
collaborative  arrangements;  payments  received under research and  development
agreements; the costs involved in preparing, filing, prosecuting,  defending and
enforcing intellectual property rights;  complying with regulatory requirements;
competing  technological and market  developments;  the effectiveness of product
commercialization  activities  and  arrangements;  and  other  factors.  If  the
Company's currently available funds and internally  generated cash flow, are not
sufficient to satisfy its financing needs, the Company would be required to seek
additional  funding  through other  arrangements  with  collaborative  partners,
through bank  borrowings and through public or private sales of its  securities,
including  equity  securities.  The  Company  has no  credit  facility  or other
committed  sources of capital.  There can be no assurance that additional funds,
if required, will be available to the Company on favorable terms.

         The Company has not  generated  taxable  income to date. At October 31,
1996,  the net operating  losses  available to offset future  taxable income for
federal  income tax  purposes  were  approximately  $17.7  million.  Because the
Company  has  experienced   ownership   changes,   future   utilization  of  the
carryforwards may be limited in any one fiscal year pursuant to Internal Revenue
Code regulations.  The  carryforwards  expire at various dates beginning in 2001
through 2011, if not utilized.  As a result of the annual limitation,  a portion
of these carryforwards may expire before ultimately becoming available to reduce
federal income tax liabilities.

Additional Factors That May Affect Future Results

         The Company  desires to take advantage of the "Safe Harbor"  provisions
of the  Private  Securities  Litigation  Reform Act of 1995.  Specifically,  the
Company wishes to alert readers that the following important factors, as well as
other factors,  could in the future affect,  and in the past have affected,  the

                                      -27-


<PAGE>

Company's  actual  results  and could  cause the  Company's  results  for future
quarters  to differ  materially  from  those  expressed  in any  forward-looking
statements made by or on behalf of the Company.

         History of Operating  Losses and Accumulated  Deficit.  The Company has
incurred net losses in each year since its  inception,  including  net losses of
approximately  $4.2 million and $2.8 million  during fiscal years 1996 and 1995,
respectively,  and the  Company's  accumulated  deficit as of October  31,  1996
totaled $31.3 million.  The Company expects to incur  additional  losses for the
foreseeable  future.  The amount of future net losses and time  required  by the
Company to reach profitability are highly uncertain.

         Early  Commercialization;  Dependence on New Products and Technologies;
Uncertainty of Market Acceptance. While the Company recently commenced marketing
certain of its products,  it is in the early stage of product  commercialization
and many of its potential products are in development. The Company believes that
its  future  success  will  depend in large part on its  ability to develop  and
market new products in its target markets and in new markets. In particular, the
Company  expects  that  its  ability  to  compete   effectively   with  existing
industrial,  food  packaging,  medical and  agricultural  companies  will depend
substantially  on successfully  developing,  commercializing,  achieving  market
acceptance  of and reducing the cost of producing  the  Company's  products.  In
addition,  commercial  applications of the Company's  temperature switch polymer
technology are  relatively new and evolving.  There can be no assurance that the
Company will be able to  successfully  develop,  commercialize,  achieve  market
acceptance of or reduce the cost of producing the  Company's  products,  or that
the Company's competitors will not develop competing  technologies that are less
expensive  or  otherwise  superior  to those  of the  Company.  There  can be no
assurance  that the Company will be able to develop and  introduce  new products
and technologies in a timely manner or that new products and  technologies  will
gain  market  acceptance.  The failure to develop  and market  successfully  new
products  could  have a  material  adverse  effect  on the  Company's  business,
operating results and financial condition.

         The  success of the  Company  in  generating  significant  sales of its
products  will depend in part on the ability of the Company and its  partners to
achieve market acceptance of the Company's  products and technology.  The extent
to which, and rate at which,  market  acceptance and penetration are achieved by
the  Company's  current  and future  products  is a function  of many  variables
including, but not limited to, price, safety, efficacy, reliability,  conversion
costs and marketing and sales efforts,  as well as general  economic  conditions
affecting  purchasing  patterns.  There can be no assurance that markets for the
Company's  products will develop or that the Company's  products and  technology
will be accepted and adopted.  The failure of the Company's  products to achieve
market  acceptance  could  have a  material  adverse  effect  on  the  Company's
business, operating results and financial condition.

         Dependence on Collaborative  Partners.  The Company's  strategy for the
development,  clinical and field testing,  manufacturing,  commercialization and
marketing of certain of its current and future products  includes  entering into
various  collaborations with corporate partners,  licensees and others. To date,
the  Company  has  entered  into  collaborative  arrangements  with  Hitachi and
BFGoodrich in connection with its Intelimer  polymer systems,  Fresh Express and
Printpack in connection with its Intellipac breathable membrane products,  Nitta
and Hitachi in  connection  with its  industrial  adhesive  products and Smith &
Nephew,  Physician Sales & Services,  North Coast Medical and Sammons Preston in
connection with its QuickCast orthopedic  products.  The Company is dependent on
its corporate  partners to develop,  test,  manufacture and/or market certain of
its  products.  Although  the  Company  believes  that  its  partners  in  these
collaborations  have an  economic  motivation  to  succeed in  performing  their
contractual  responsibilities,  the amount and timing of resources to be devoted
to these  activities  are not within the control of the Company.  A  significant
portion of Landec's revenues to date have been derived from commercial  research
and development  collaborations and license agreements.  Development funding and
license fees from product sales to Hitachi, BFGoodrich, Nitta and Smith & Nephew
represented  approximately  65% of the Company's  revenues for fiscal year 1996.
Moreover, research and development revenue from Hitachi and Nitta each accounted
for more than 10% of the Company's  total  revenues for fiscal year 1996.  There
can be no  assurance  that such  partners  will  perform  their  obligations  as
expected  or that the  Company  will  derive any  additional  revenue  from such
arrangements. There can be no assurance that the Company's partners will pay any
additional  option or license  fees to the Company or that they will develop and
market any products under the agreements. Moreover, certain of


                                      -28-

<PAGE>

the  collaborative  agreements  provide  that  they  may  be  terminated  at the
discretion of the corporate partner, and certain of the collaborative agreements
provide for termination under certain circumstances.

         In March  of 1996,  the  Company  agreed  to  amend  its  research  and
development  collaboration with BFGoodrich in the Intelimer polymer systems area
by removing certain exclusivity  restrictions.  This amendment will allow Landec
to explore  direct  distribution  and other  licensing  and product  development
opportunities   while  continuing  the   collaboration   with  BFGoodrich  on  a
non-exclusive basis.

         In August 1996,  Fresh Express informed the Company that it had decided
to suspend orders of Landec's Intellipac breathable membranes for Fresh Express'
fresh-cut  broccoli  and  cauliflower  packaging  primarily  due to cost issues.
Subsequent to this decision,  however,  the Company worked with Fresh Express to
reduce these cost issues, and as a result, in October 1996 Fresh Express resumed
ordering the Company's  Intellipac  breathable  membranes.  In October 1996, the
Company also began  shipping its  Intellipac  breathable  membrane for fresh-cut
broccoli  packaging  to a second  produce  customer.  However,  there  can be no
assurance  that  Fresh  Express  will  continue  to  order  Landec's  Intellipac
breathable membranes or that other customers will order such products.

         The Company  anticipates that it will terminate its  relationship  with
Smith & Nephew in early 1997 for  QuickCast  products  in certain  European  and
Pacific Rim countries, Canada and South Africa, and, as a result, the Company is
currently in the process of  initiating  distribution  relationships  with other
independent distributors in selected countries.

         There can be no assurance that the partners will not pursue existing or
alternative technologies in preference to the Company's technology. Furthermore,
there can be no assurance that the Company will be able to negotiate  additional
collaborative arrangements in the future on acceptable terms, if at all, or that
such  collaborative  arrangements  will be  successful.  To the extent  that the
Company  chooses not to or is unable to establish  such  arrangements,  it would
experience  increased capital  requirements to undertake research,  development,
manufacture,  marketing  or sale of its  current  and  future  products  in such
markets.   There  can  be  no  assurance  that  the  Company  will  be  able  to
independently  develop,  manufacture,  market,  or sell its  current  and future
products in the absence of such collaborative agreements.

         Competition and  Technological  Change.  The Company operates in highly
competitive and rapidly  evolving  fields,  and new developments are expected to
continue at a rapid pace.  Competition  from large  industrial,  food packaging,
medical and agricultural  companies is expected to be intense. In addition,  the
nature of the Company's  collaborative  arrangements may result in its corporate
partners  becoming  competitors of the Company.  Many of these  competitors have
substantially  greater  financial and technical  resources  and  production  and
marketing  capabilities  than the Company,  and may have  substantially  greater
experience  in  conducting  clinical  and  field  trials,  obtaining  regulatory
approvals and manufacturing and marketing commercial  products.  There can be no
assurance  that these  competitors  will not succeed in  developing  alternative
technologies  and  products  that  are  more  effective,  easier  to use or less
expensive  than those which have been or are being  developed  by the Company or
that  would  render  the  Company's   technology   and  products   obsolete  and
non-competitive.

         Limited  Manufacturing  Experience;  Dependence on Third  Parties.  The
Company's  success is  dependent  in part upon its  ability to  manufacture  its
products in commercial quantities in compliance with regulatory requirements and
at acceptable costs.  There can be no assurance that the Company will be able to
achieve this. The Company has experienced negative gross margins for its product
sales to date.  The  Company  intends  to build or acquire  large-scale  polymer
manufacturing   and   formulations    facilities   by   1998.    Production   in
commercial-scale  quantities may involve  technical  challenges for the Company.
Establishing  its  own  manufacturing  capabilities  would  require  significant
scale-up  expenses and additions to facilities  and  personnel.  The Company may
also  consider  seeking  collaborative  arrangements  with  other  companies  to
manufacture  certain of its  products.  If the Company is  dependent  upon third
parties for the manufacture of its products,  then the Company's  profit margins
and its ability to develop and deliver  such  products on a timely  basis may be
adversely affected.  Moreover,  there can be no assurance that such parties will
adequately perform and any failures by third parties may delay the submission of
products  for  regulatory  approval,  impair  the  Company's  ability to deliver
products  on a timely  basis,  or  otherwise  impair the  Company's  competitive
position.  The occurrence of any of these factors could have a

                                      -29-

<PAGE>


material  adverse  effect  on the  Company's  business,  operating  results  and
financial  condition.  The manufacture of the Company's products will be subject
to periodic inspection by regulatory authorities. There can be no assurance that
the Company will be able to obtain  necessary  regulatory  approvals on a timely
basis or at all.  Delays in receipt of or failure to receive  such  approvals or
loss of previously  received  approvals would have a material  adverse effect on
the Company's business, financial condition and results of operations.

         Dependence on Single Source  Suppliers.  Many of the raw materials used
in manufacturing  certain of the Company's products are currently purchased from
a  single  source,  including  certain  monomers  used to  synthesize  Intelimer
polymers  and  substrate  materials  for  the  Company's  Intellipac  breathable
membrane  products.  Upon  manufacturing  scale-up,  the  Company may enter into
alternative  supply   arrangements.   Although  to  date  the  Company  has  not
experienced  difficulty acquiring materials for the manufacture of its products,
no assurance can be given that  interruptions  in supplies will not occur in the
future,  that the Company will be able to obtain substitute vendors, or that the
Company will be able to procure comparable materials at similar prices and terms
within a reasonable time. Any such  interruption of supply could have a material
adverse  effect on the  Company's  ability  to  manufacture  its  products  and,
consequently,  could  materially  and adversely  affect the Company's  business,
operating results and financial condition.

         Patents and Proprietary  Rights. The Company's success depends in large
part on its ability to obtain  patents,  maintain  trade secret  protection  and
operate without infringing on the proprietary rights of third parties. There can
be no assurance that any pending patent applications will be approved,  that the
Company will develop additional  proprietary products that are patentable,  that
any patents  issued to the Company  will  provide the Company  with  competitive
advantages or will not be challenged by any third parties or that the patents of
others will not  prevent the  commercialization  of products  incorporating  the
Company's technology.  The Company may in the future receive from third parties,
including some of its competitors,  notices claiming that it is infringing third
party patents or other  proprietary  rights.  For example,  the Company received
within the past year a letter alleging that the Company's Intellipac  breathable
membrane   product   infringes   patents  of  another  party.  The  Company  has
investigated  this matter and believes that its Intellipac  breathable  membrane
product does not infringe the specified  patents of such party.  The Company has
received an opinion of patent  counsel that the Intellipac  breathable  membrane
product does not infringe any valid claims of such patents.  If the Company were
determined  to be  infringing  any  third-party  patent,  the  Company  could be
required to pay damages,  alter its products or  processes,  obtain  licenses or
cease  certain  activities.  If the Company is required to obtain any  licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. Litigation,  which could result in substantial costs
to and diversion of effort by the Company,  may also be necessary to enforce any
patents issued or licensed to the Company or to determine the scope and validity
of  third-party   proprietary   rights.  Any  such  litigation  or  interference
proceeding,  regardless of outcome,  could be expensive  and time  consuming and
could subject the Company to significant  liabilities to third parties,  require
disputed  rights to be  licensed  from third  parties or require  the Company to
cease using such technology  and,  consequently,  could have a material  adverse
effect on the Company's business, operating results and financial condition.

         Government  Regulation.  The  Company's  products  and  operations  are
subject to  substantial  regulation in the United States and foreign  countries.
Although  Landec  believes  that it will be able to comply  with all  applicable
regulations  regarding  the  manufacture  and sale of its  products  and polymer
materials,  such  regulations are always subject to change and depend heavily on
administrative  interpretations  and the country in which the products are sold.
There can be no assurance that future changes in regulations or  interpretations
relating  to  such  matters  as  safe   working   conditions,   laboratory   and
manufacturing  practices,  environmental  controls, and disposal of hazardous or
potentially  hazardous  substances  will  not  adversely  effect  the  Company's
business.  There can be no  assurance  that the Company  will not be required to
incur  significant costs to comply with such laws and regulations in the future,
or that such laws or regulations  will not have a material adverse effect on the
Company's business, operating results and financial condition. Failure to comply
with the applicable  regulatory  requirements can, among other things, result in
fines,  injunctions,  civil  penalties,  suspensions or withdrawal of regulatory
approvals,   product  recalls,   product   seizures,   including   cessation  of
manufacturing and sales, operating restrictions and criminal prosecution.

                                      -30-


<PAGE>

      Limited  Sales or  Marketing  Experience.  The Company has only limited
experience  marketing  and selling its  products.  While the Company  intends to
distribute  certain of its  products  through its  corporate  partners and other
distributors,  the Company  intends to sell  certain  other  products  through a
direct sales force.  Establishing  sufficient marketing and sales capability may
require significant  resources.  There can be no assurance that the Company will
be able to recruit and retain skilled sales management,  direct  salespersons or
distributors,  or that the Company's sales efforts will be successful. In fiscal
year 1996,  the Company  changed its  distribution  approach with respect to the
QuickCast  product  line  in the  United  States  to  include  several  national
distributors.   The  Company  has  entered  into  distribution  agreements  with
Physician Sales & Services,  North Coast Medical,  and Sammons Preston.  Each of
the Company's  distributors  can cease  marketing  the  Company's  products with
limited  notice and with little or no  penalty.  There can be no  assurance  the
Company's distributors will continue to offer the Company's products or that the
Company will be able to recruit additional or replacement distributors. The loss
of one or more of the Company's major distributors would have a material adverse
effect on the Company's business, operating results and financial condition.

         International  Operations and Sales. During fiscal years 1996 and 1995,
approximately  60% and 73%,  respectively,  of the Company's total revenues were
derived from product sales to and  collaborative  agreements with  international
customers,  and the Company expects that international revenues will continue to
account for a significant  portion of its total revenues.  A number of risks are
inherent in international  transactions.  International sales and operations may
be limited or disrupted by the regulatory approval process, government controls,
export  license  requirements,  political  instability,  price  controls,  trade
restrictions,  changes in tariffs  or  difficulties  in  staffing  and  managing
international  operations.  Foreign  regulatory  agencies  have or may establish
product standards  different from those in the United States,  and any inability
to obtain foreign  regulatory  approvals on a timely basis could have an adverse
effect on the Company's  international  business and its financial condition and
results of operations.  While the Company's foreign sales are priced in dollars,
fluctuations in currency  exchange rates may reduce the demand for the Company's
products by increasing  the price of the  Company's  products in the currency of
the  countries to which the products  are sold.  There can be no assurance  that
regulatory,  geopolitical  and  other  factors  will not  adversely  impact  the
Company's  operations in the future or require the Company to modify its current
business practices.

         Quarterly  Fluctuations in Operating Results.  The Company's results of
operations  have  varied  significantly  from  quarter  to  quarter.   Quarterly
operating  results will depend upon several  factors,  including  the timing and
amount of expenses  associated  with  expanding  the Company's  operations,  the
timing of collaborative agreements with, and performance of, potential partners,
the  timing of  regulatory  approvals  and new  product  introductions,  the mix
between  pilot  production  of new  products  and  full-scale  manufacturing  of
existing  products and the mix between  domestic and export sales.  In addition,
the Company cannot  predict rates of licensing fees and royalties  received from
its  partners  or  ordering  rates  by its  distributors,  some of  which  place
infrequent stocking orders, while others order at regular intervals. As a result
of these and other  factors,  the  Company  expects to  continue  to  experience
significant  fluctuations in quarterly  operating  results,  and there can be no
assurance that the Company will become or remain consistently  profitable in the
future.

         Product Liability Exposure and Availability of Insurance.  The testing,
manufacturing,  marketing,  and  sale of the  products  being  developed  by the
Company involve an inherent risk of allegations of product  liability.  While no
product liability claims have been made against the Company to date, if any such
claims  were made and  adverse  judgments  obtained,  they could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  Although the Company has taken and intends to continue to take what
it  believes  are  appropriate  precautions  to  minimize  exposure  to  product
liability  claims,  there can be no  assurance  that it will  avoid  significant
liability.  The Company currently  maintains medical product liability insurance
in the minimum  amount of $2.0  million  per  occurrence  with a minimum  annual
aggregate limit of $2.0 million and non-medical  product liability  insurance in
the  minimum  amount  of $5.0  million  per  occurrence  with a  minimum  annual
aggregate limit of $5.0 million. There can be no assurance that such coverage is
adequate or will  continue to be available at an  acceptable  cost, if at all. A
product liability claim, product recall or other claim with respect to

                                      -31-

<PAGE>

uninsured  liabilities or in excess of insured liabilities could have a material
adverse  effect on the  Company's  business,  operating  results  and  financial
condition.

         Possible  Volatility of Stock Price.  Factors such as  announcements of
technological  innovations,  the attainment of (or failure to attain) milestones
in the commercialization of the Company's technology,  new products, new patents
or  changes  in  existing   patents,   or  development  of  new,   collaborative
arrangements  by the  Company,  its  competitors  or other  parties,  as well as
government regulations,  investor perception of the Company, fluctuations in the
Company's  operating  results and general market  conditions in the industry may
cause the market price of the Company's Common Stock to fluctuate significantly.
In addition,  the stock market in general has recently experienced extreme price
and volume fluctuations,  which have particularly  affected the market prices of
technology companies and which have been unrelated to the operating  performance
of such  companies.  These broad  fluctuations  may adversely  effect the market
price of the Company's Common Stock.

Item 8.       Financial Statements and Supplementing Data

              See Item 14 of Part IV of this report.

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

              Not applicable.

                                      -32-

<PAGE>

                                    PART III

Item 10.      Directors and Executive Officers of the Registrant

              This  information  required  by  this  item  is  contained  in the
              Registrant's  definitive proxy statement which the Registrant will
              file with the Commission no later than February 28, 1997 (120 days
              after the Registrant's fiscal year end covered by this Report) and
              is incorporated herein by reference.

Item 11.      Executive Compensation

              This  information  required  by  this  item  is  contained  in the
              Registrant's  definitive proxy statement which the Registrant will
              file with the Commission no later than February 28, 1997 (120 days
              after the Registrant's fiscal year end covered by this Report) and
              is incorporated herein by reference.

Item 12.      Security Ownership of Certain Beneficial Owners and Management

              This  information  required  by  this  item  is  contained  in the
              Registrant's  definitive proxy statement which the Registrant will
              file with the Commission no later than February 28, 1997 (120 days
              after the Registrant's fiscal year end covered by this Report) and
              is incorporated herein by reference.

Item 13.      Certain Relationships and Related Transactions

              This  information  required  by  this  item  is  contained  in the
              Registrant's  definitive proxy statement which the Registrant will
              file with the Commission no later than February 28, 1997 (120 days
              after the Registrant's fiscal year end covered by this Report) and
              is incorporated herein by reference.


                                      -33-


<PAGE>

                                     PART IV


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

1(a)          Consolidated   Financial   Statements   and  Schedules  of  Landec
              Corporation and Subsidiaries

                                                                            Page
                                                                            ----
     Independent Auditors' Report                                             35

     Consolidated Balance Sheets at October 31, 1996 and 1995                 36

     Consolidated Statements of Operations for the Years Ended                37
     October  31, 1996, 1995 and 1994

     Consolidated   Statement  of  Changes  in   Redeemable   Convertible     38
     Preferred Stock and  Shareholders'  Equity (Net Capital  Deficiency)
     for the Years Ended October 31, 1996, 1995 and 1994

     Consolidated  Statements  of Cash Flows for the Years Ended              39
     October 31, 1996, 1995 and 1994 

     Notes to Consolidated Financial Statements                               40

Schedules:

     II       Valuation and  Qualifying  Account for the Years Ended          50
              October 31, 1996, 1995 and 1994


                                      -34-

<PAGE>


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Board of Directors and Shareholders
Landec Corporation

         We have audited the accompanying  consolidated balance sheets of Landec
Corporation  as of  October  31,  1996 and 1995,  and the  related  consolidated
statements of operations,  changes in redeemable convertible preferred stock and
shareholders'  equity (net  capital  deficiency)  and cash flows for each of the
three years in the period ended  October 31, 1996.  Our audits also included the
financial  statement schedule listed in the index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  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 Landec
Corporation  at October  31, 1996 and 1995 and the  consolidated  results of its
operations  and its cash flows for each of the three  years in the period  ended
October 31, 1996 in conformity with generally  accepted  accounting  principles.
Also, in our opinion, the related financial statement schedule,  when considered
in relation to the basic financial statements taken as a whole,  presents fairly
in all material respects the information set forth therein.


                                                   ERNST & YOUNG LLP

Palo Alto, California
December 6, 1996

                                      -35-


<PAGE>

<TABLE>
                                            LANDEC CORPORATION
                                        CONSOLIDATED BALANCE SHEETS
                            (in thousands, except share and per share amounts)
<CAPTION>

                                                                                        October 31,
                                                                                    --------------------
                                                                                      1996       1995
                                                                                    --------    --------
<S>                                                                                 <C>         <C>     
                                             ASSETS
Current assets:
   Cash and cash equivalents ....................................................   $ 14,185    $  3,585
   Short-term investments .......................................................     22,325       1,964
   Accounts receivable, less allowance for doubtful accounts of $32
      at October 31, 1996 and 1995 ..............................................         23          53
   Inventory ....................................................................        549         488
   Prepaid expenses and other current assets ....................................        188         115
                                                                                    --------    --------
       Total current assets .....................................................     37,270       6,205

   Property and equipment, net ..................................................        963         993
   Other assets .................................................................        125         149
                                                                                    --------    --------
                                                                                    $ 38,358    $  7,347
                                                                                    ========    ========
                    LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
   Convertible notes payable ....................................................   $   --      $    700
   Accounts payable .............................................................        484         291
   Accrued compensation .........................................................        250         302
   Other accrued liabilities ....................................................        259         281
   Current portion of capital lease obligations .................................        229         239
   Deferred revenue .............................................................        166         129
                                                                                    --------    --------
       Total current liabilities ................................................      1,388       1,942
Noncurrent portion of capital lease obligations .................................        330         558
Commitments
Redeemable  convertible  preferred stock at accreted value;  none
   and 6,674,415 shares issued and outstanding at October 31, 1996 and
   1995, respectively ...........................................................       --        31,276

Shareholders' equity (net capital deficiency):
   Preferred stock, $0.001 par value; 2,000,000 shares authorized,
      issuable in series ........................................................       --          --
   Common stock, $0.001 par value; 50,000,000 shares authorized;
      10,753,711 and 547,678 shares issued and outstanding at
      October 31, 1996 and 1995, respectively ...................................     68,242         536
   Notes receivable from shareholders ...........................................        (13)        (20)
   Deferred compensation ........................................................       (311)       (407)
   Accumulated deficit ..........................................................    (31,278)    (26,538)
                                                                                    --------    --------
       Total shareholders' equity (net capital deficiency) ......................     36,640     (26,429)
                                                                                    --------    --------
                                                                                    $ 38,358    $  7,347
                                                                                    ========    ========
<FN>
                                       See accompanying notes.
</FN>
</TABLE>

                                                -36-

<PAGE>

<TABLE>

                                            LANDEC CORPORATION
                                   CONSOLIDATED STATEMENTS OF OPERATIONS
                                 (in thousands, except per share amounts)
<CAPTION>

                                                                            Year Ended October 31,
                                                                        ------------------------------
                                                                          1996     1995        1994
                                                                        -------   -------    -------
<S>                                                                   <C>        <C>        <C>    
Revenues:                                                             
   Product sales....................................................  $   755    $   601    $   335
   License fees ....................................................      600      2,650        400
   Research and development revenues ...............................    1,096        796        965
                                                                      -------    -------    -------
      Total revenues ...............................................    2,451      4,047      1,700
                                                                      
Operating costs and expenses:                                         
   Cost of product sales ...........................................    1,004        987        897
   Research and development ........................................    3,808      3,715      3,283
   Selling, general and administrative .............................    3,288      2,236      2,067
                                                                      -------    -------    -------
                                                                        8,100      6,938      6,247
                                                                      -------    -------    -------
                                                                      
Operating loss .....................................................   (5,649)    (2,891)    (4,547)
Interest income ....................................................    1,548        282        273
Interest expense ...................................................      (99)      (150)       (81)
                                                                      -------    -------    -------
Net loss............................................................  $(4,200)   $(2,759)   $(4,355)
                                                                      =======    =======    =======
Net loss per share..................................................  $  (.55)
                                                                      =======    
Shares used in computation of net loss per share....................    7,699
                                                                      =======    
Supplemental net loss per share.....................................  $  (.43)   $  (.38)
                                                                      =======    =======    
Shares used in computation of supplemental net loss per share.......    9,697      7,175
                                                                      =======    =======    
                                                                     

<FN>
                                         See accompanying notes.
</FN>
</TABLE>

                                                  -37-

<PAGE>

<TABLE>

                                                         LANDEC CORPORATION
                             CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
                                          AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
                                          (in thousands, except share and per share amounts)

<CAPTION>
                                                                                                              Shareholders' 
                                                                                                     Equity (Net Capital Deficiency)
                                                                                            ----------------------------------------
                                                                                                                             Notes
                                                               Redeemable Convertible                                     Receivable
                                                                   Preferred Stock                Common Stock            From Sale
                                                               -----------------------      -------------------------      of Common
                                                                Shares         Amount        Shares           Amount         Stock 
                                                               --------       --------      --------         --------      ---------
<S>                                                           <C>          <C>                <C>           <C>            <C>     
Balances at October 31, 1993 ............................     6,484,692    $    25,567        521,617       $     86       $   (32)
Return of common stock and cancellation and                                                                                
   repayment of notes receivable ........................          --             --           (2,433)            (1)            9
Issuance of common stock at $0.58 per share .............          --             --           20,700             12          --   
Accretion of redemption price differential on                                                                              
   redeemable convertible preferred stock ...............          --            2,089           --             --            --   
Net loss ................................................          --             --             --             --            --   
                                                            -----------    -----------    -----------       --------       -------
Balances at October 31, 1994 ............................     6,484,692    $    27,656        539,884       $     97       $   (23)
                                                            -----------    -----------    -----------       --------       -------
Issuance of Series E redeemable convertible                                                                                
   preferred stock for cash at $7.91 per share ..........       189,723          1,500           --             --            --   
Issuance of common stock at $0.58 to $0.86 per share ....          --             --            7,968              5          --   
Return of common stock and cancellation and                                                                                
   repayment of notes receivable ........................          --             --             (174)          --               3
Accretion of redemption price differential on                                                                              
   redeemable convertible preferred stock ...............          --            2,120           --             --            --   
Deferred compensation related to grant of stock                    
   options ..............................................          --             --             --              434          --   
Amortization of deferred compensation ...................          --             --             --             --            --   
Unrealized loss on available-for-sale securities ........          --             --             --             --            --   
Net loss ................................................          --             --             --             --            --   
                                                            -----------    -----------    -----------       --------       -------
Balances at October 31, 1995 ............................     6,674,415    $    31,276        547,678       $    536       $   (20)
                                                            -----------    -----------    -----------       --------       -------
                                                                                                                           
Initial Public Offering of common stock, $12.00 per                                                                        
   share, net of issuance costs .........................          --             --        3,220,000         35,035          --   
Accretion of redemption price differential on                                                                              
   redeemable convertible preferred stock ...............          --              556           --             --            --   
Conversion of Series B, C, D and E redeemable                                                                              
   convertible preferred stock into common stock ........    (6,674,415)       (31,832)     6,674,415         31,832          --   
Conversion of convertible notes payable .................          --             --          176,432            700          --   
Deferred compensation related to grant of stock                    
   options ..............................................          --             --             --               17          --   
Issuance of common stock at $0.58 to $10.20 per share ...          --             --          135,186            122          --   
Repayment of notes receivable ...........................          --             --             --             --               7
Amortization of deferred compensation ...................          --             --             --             --            --   
Unrealized gain on available-for-sale securities ........          --             --             --             --            --   
Net loss ................................................          --             --             --             --            --   
                                                            -----------    -----------    -----------       --------       -------
Balance at October 31, 1996 .............................          --      $      --       10,753,711       $ 68,242       $   (13)
                                                            ===========    ===========    ===========       ========       =======

                                                                                                     (Table continued on next page.)
</TABLE>

<PAGE>

<TABLE>

                                            LANDEC CORPORATION
               CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK
                      AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)--(Continued)
                           (in thousands, except shares and per share amounts)

<CAPTION>

                                                           Shareholders' Equity (Net Capital Deficiency)
                                                        -------------------------------------------------
                                                                                               Total     
                                                                                           Shareholders' 
                                                                                            Equity (Net  
                                                          Deferred        Accumulated         Capital    
                                                        Compensation        Deficit         Deficiency)  
                                                        ------------        -------         -----------
<S>                                                       <C>             <C>               <C>      
Balances at October 31, 1993 ........................     $   --          $(15,213)         $(15,159)
Return of common stock and cancellation and                                                
   repayment of notes receivable ....................         --              --                   8
Issuance of common stock at $0.58 per share .........         --              --                  12
Accretion of redemption price differential on                                              
   redeemable convertible preferred stock ...........         --            (2,090)           (2,090)
Net loss ............................................         --            (4,355)           (4,355)
                                                          --------        --------          --------
Balances at October 31, 1994 ........................     $   --          $(21,658)         $(21,584)
                                                          --------        --------          --------
Issuance of Series E redeemable convertible                                                
   preferred stock for cash at $7.91 per share ......         --              --                --   
Issuance of common stock at $0.58 to $0.86 per share          --              --                   5
Return of common stock and cancellation and                                                
   repayment of notes receivable ....................         --              --                   3
Accretion of redemption price differential on                                              
   redeemable convertible preferred stock ...........         --            (2,120)           (2,120)
Deferred compensation related to grant of stock               
   options ..........................................         (434)           --                --   
Amortization of deferred compensation ...............           27            --                  27
Unrealized loss on available-for-sale securities ....         --                (1)               (1)
Net loss ............................................         --            (2,759)           (2,759)
                                                          --------        --------          --------
Balances at October 31, 1995 ........................     $   (407)       $(26,538)         $(26,429)
                                                          --------        --------          --------
Initial Public Offering of common stock, $12.00 per                                        
   share, net of issuance costs .....................         --              --              35,035
Accretion of redemption price differential on                                              
   redeemable convertible preferred stock ...........         --              (556)             (556)
Conversion of Series B, C, D and E redeemable                                              
   convertible preferred stock into common stock ....         --              --              31,832
Conversion of convertible notes payable .............         --              --                 700
Deferred compensation related to grant of stock                
   options ..........................................          (17)           --                --   
Issuance of common stock at $0.58 to $10.20 per share         --              --                 122
Repayment of notes receivable .......................         --              --                   7
Amortization of deferred compensation ...............          113            --                 113
Unrealized gain on available-for-sale securities ....         --                16                16
Net loss ............................................         --            (4,200)           (4,200)
                                                          --------        --------          --------
Balance at October 31, 1996 .........................     $   (311)       $(31,278)         $ 36,640
                                                          ========        ========          ========
                                                                                         


<FN>
                                         See accompanying notes.
</FN>
</TABLE>
                                                                -38-
<PAGE>

<TABLE>
                                            LANDEC CORPORATION
                                   CONSOLIDATED STATEMENTS OF CASH FLOWS
                                              (in thousands)

<CAPTION>
                                                                                                      Year Ended October 31,
                                                                                             ---------------------------------------
                                                                                               1996           1995           1994
                                                                                             --------       --------       --------
<S>                                                                                          <C>            <C>            <C>      
Increase (Decrease) in cash and cash equivalents
Cash flows from operating activities:
   Net loss ...........................................................................      $ (4,200)      $ (2,759)      $ (4,355)
   Adjustments to reconcile net loss to net cash used in operating activities:
      Depreciation and amortization ...................................................           397            378            362
      Loss on disposal of fixed assets ................................................          --               25             17
      Amortization of deferred compensation ...........................................           113             27           --
      Changes in assets and liabilities:
        Accounts receivable ...........................................................            30            132              2
        Inventory .....................................................................           (61)          (288)          (200)
        Prepaid expenses and other current assets .....................................           (73)           (16)           155
        Accounts payable ..............................................................           193            (53)            25
        Accrued compensation ..........................................................           (52)            93             55
        Other accrued liabilities .....................................................           (22)            89             49
        Deferred revenue ..............................................................            37            129           --
                                                                                             --------       --------       --------
              Total adjustments .......................................................           562            516            465
                                                                                             --------       --------       --------
 Net cash used in operating activities ................................................        (3,638)        (2,243)        (3,890)
                                                                                             --------       --------       --------

 Cash flows from investing activities:
   Purchases of property and equipment ................................................          (367)           (48)           (84)
   Decrease (increase) in other assets ................................................            24            (28)           (70)
   Purchases of available-for-sale securities .........................................       (26,345)        (6,470)        (8,188)
   Maturities of available-for-sale securities ........................................         6,000          7,800          4,893
                                                                                             --------       --------       --------
 Net cash provided by (used in) investing activities ..................................       (20,688)         1,254         (3,449)
                                                                                             --------       --------       --------

 Cash flows from financing activities:
   Proceeds from sale of common stock, net of repurchases .............................        35,157              5             10
   Proceeds from sale of preferred stock ..............................................          --            1,500           --
   Proceeds from repayment of notes receivable ........................................             7              3              9
   Payments on capital lease obligations ..............................................          (238)          (183)          (223)
   Proceeds from issuance of convertible notes payable ................................          --              700           --
   Proceeds from capital lease financing of prior year capital expenditures ...........          --              138            182
                                                                                             --------       --------       --------
 Net cash provided by (used in) financing activities ..................................        34,926          2,163            (22)
                                                                                             --------       --------       --------
 Net increase (decrease) in cash and cash equivalents .................................        10,600          1,174         (7,361)
 Cash and cash equivalents at beginning of period .....................................         3,585          2,411          9,772
                                                                                             --------       --------       --------
 Cash and cash equivalents at end of period ...........................................      $ 14,185       $  3,585       $  2,411
                                                                                             ========       ========       ========

 Supplemental disclosure of cash flows information:
   Cash paid during the period for interest ...........................................      $     99       $    108       $     94
                                                                                             ========       ========       ========
 Supplemental schedule of noncash investing and financing activities:
   Equipment acquired under capital leases ............................................      $   --         $    154       $    516
                                                                                             ========       ========       ========
   Conversion of convertible notes payable into common stock ..........................      $    700       $   --         $   --
                                                                                             ========       ========       ========

<FN>
                                                       See accompanying notes.
</FN>
</TABLE>


                                                                -39-

<PAGE>

                               LANDEC CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.       Organization and Summary of Significant Accounting Policies

Organization

         Landec  Corporation  (the  "Company") was  incorporated in the State of
California  on  October  31,  1986 for the  purpose  of  designing,  developing,
manufacturing  and selling  temperature-activated  polymer and membrane products
for a variety of industrial, medical and agricultural applications.

         The consolidated  financial  statements comprise the accounts of Landec
Corporation   and  its  wholly   owned   subsidiary,   Intellicoat   Corporation
("Intellicoat"),  which was incorporated in the State of Delaware in March 1995.
All intercompany transactions and balances have been eliminated.

Cash, Cash Equivalents and Investments

         Effective  November 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in
Debt and Equity Securities," the cumulative effect of which was immaterial.

         Management determines the appropriate classification of debt securities
at the time of purchase  and  reevaluates  such  designation  as of each balance
sheet date. As of October 31, 1996 and 1995, the Company's  debt  securities are
carried at fair value and classified as  available-for-sale,  as the Company may
not hold these  securities  until  maturity in order to take advantage of market
conditions.  The Company records all highly liquid  securities with three months
or less  from  date of  purchase  to  maturity  as cash  equivalents.  All other
available-for-sale securities are recorded as short-term investments. Unrealized
gains  and  losses  are  reported  in  shareholders'  equity.  The  cost of debt
securities is adjusted for  amortization  of premiums and discounts to maturity.
This  amortization is included in interest income.  Realized gains and losses on
available-for-sale  securities are also included in interest income. The cost of
securities sold is based on the specific identification method.

Concentrations of Credit Risk

         Cash,  cash  equivalents  and  short-term   investments  are  financial
instruments  which  potentially  subject the Company to  concentrations of risk.
Corporate  policy limits,  among other things,  the amount of credit exposure to
any one issuer and to any one type of investment,  other than securities  issued
or guaranteed by the U.S. government.

Inventories

         Inventories  are  stated  at the  lower  of cost  (first-in,  first-out
method) or market. As of October 31, 1996 and 1995 inventories  consisted of (in
thousands):

                                                             October 31,
                                                          ---------------
                                                          1996        1995
                                                          ----        ----
        Raw materials ..............................      $149        $123
        Work in process ............................       245         169
        Finished goods .............................       155         196
                                                          ----        ----
        
                                                          $549        $488
                                                          ====        ====


                                      -40-
<PAGE>

1.       Organization and Summary of Significant Accounting Policies (continued)

Net Loss Per Share

         Except  as noted  below,  net loss per  share  is  computed  using  the
weighted average number of common shares  outstanding.  Common equivalent shares
are excluded from the computation as their effect is anti-dilutive, except that,
pursuant to the  Securities  and Exchange  Commission  ("SEC") Staff  Accounting
Bulletins,  common  and  common  equivalent  shares  (stock  options,  warrants,
convertible notes payable and preferred stock) issued during the 12-month period
prior to the initial  filing of an offering at prices below the public  offering
price have been included in the calculation as if they were  outstanding for all
periods presented (using the treasury stock method for stock options).

<TABLE>
         Net loss per share information is as follows (in thousands,  except per
share data):

<CAPTION>
                                                               Year Ended October 31,
                                                      -----------------------------------------
                                                          1996          1995          1994
                                                          ----          ----          ----
    <S>                                                   <C>           <C>          <C>    
    Net loss per share................................    $ (.55)       $(2.33)      $(3.75)
    Shares used in computing net loss per share.......     7,699         1,182        1,162

</TABLE>

         Supplemental  per share data is provided to show the  calculation  on a
consistent  basis for the periods  presented.  It has been computed as described
above, but excludes the  anti-dilutive  effect of common  equivalent shares from
stock  options  and  warrants  issued at prices  substantially  below the public
offering  price  during the 12-month  period prior to the initial  filing of the
public offering,  and also gives retroactive effect from the date of issuance to
the  conversion  of preferred  stock and  promissory  notes which  automatically
converted  to common  shares upon the closing of the  Company's  initial  public
offering.

Revenue Recognition

         Revenues related to research  contracts are recognized ratably over the
related  funding  periods for each  contract,  which is generally as research is
performed.   Revenues   related  to  license   agreements  with   noncancelable,
nonrefundable  terms and no significant  future  obligations are recognized upon
inception of the agreements. Product sales are recognized upon shipment.

         Revenues  from  customers  representing  10% or more of  total  revenue
during fiscal years 1996, 1995 and 1994 are as follows:

                                     1996     1995      1994
                                     ----     ----      ----
                   Customer:    
                       A              35%      11%        0%
                       B              20%      53%       15%
                       C              14%       0%        0%
                       D               8%      18%       21%
                       E               3%       2%       12%
                       F               0%       0%       14%
                       G               0%       2%       12%
       
         Export product sales were approximately $136,000, $378,000 and $143,000
in the years ended October 31, 1996, 1995 and 1994, respectively.


                                      -41-
<PAGE>

1.       Organization and Summary of Significant Accounting Policies (continued)

Research and Development Expenses

         Costs related to both research  contracts and  Company-funded  research
are  included in research and  development  expenses.  Research and  development
costs  approximated  the associated  research and  development  revenues for the
three years ended October 31, 1996.

Property and Equipment

         Furniture,   fixtures  and   equipment  are  stated  at  cost  and  are
depreciated using the straight-line  method over their estimated useful lives of
three to five years. Leasehold improvements are amortized over the lesser of the
economic  life of the  improvement  or the life of the lease on a  straight-line
basis.

         In 1995,  the Financial  Accounting  Standards  Board released SFAS No.
121,  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived
Assets to Be Disposed  Of." SFAS No. 121 requires  recognition  of impairment of
long-lived  assets in the event the net book value of such  assets  exceeds  the
future  undiscounted  cash flows  attributable  to such assets.  SFAS No. 121 is
effective for fiscal years beginning  after December 15, 1995.  Adoption of SFAS
No. 121 is not  expected to have a material  impact on the  Company's  financial
position or results of operations.

Accounting for Stock-Based Compensation

         The Company  accounts for its stock option plans and its employee stock
purchase plans in accordance  with the  provisions of the Accounting  Principles
Board Opinion No. 25 (APB 25)  "Accounting  for Stock Issued to  Employees."  In
1995,  the  Financial   Accounting   Standards  Board  released  SFAS  No.  123,
"Accounting for Stock-Based  Compensation." SFAS No. 123 provides an alternative
to APB 25 and is effective for fiscal years  beginning  after December 15, 1995.
The  Company  expects to continue  to account  for its  employee  stock plans in
accordance  with the  provision  of APB 25.  Accordingly,  SFAS  No.  123 is not
expected to have any  material  impact on the  Company's  financial  position or
results of operations.

Use of Estimates

         The  preparation of financial  statements in conformity  with generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the amounts  reported in the financial  statements  and
accompanying notes. Actual results could differ from those estimates.

2.       Collaborative Agreements

         To facilitate the  commercialization  of its products,  the Company has
established  a number  of  strategic  alliances  in which the  Company  receives
license  payments,  research and development  funding and/or future royalties in
exchange for certain technology or marketing rights.

 Hitachi. The Company has entered into two separate  collaborations with Hitachi
in the areas of industrial  adhesives and Intelimer polymer systems.  On October
1, 1994, the Company entered into a non-exclusive license agreement with Hitachi
in the industrial adhesives area.


                                      -42-
<PAGE>

2.       Collaborative Agreements (continued)

The agreement  provides Hitachi with a non-exclusive  license to manufacture and
sell products using  Landec's  Intelimer  materials in certain Asian  countries.
Landec received up-front license fees upon signing the agreement and is entitled
to future royalties based on net sales by Hitachi of the licensed products.  Any
fees paid to the Company are non-refundable.

         On August 10, 1995,  the Company  entered  into a second  collaboration
with Hitachi in the  Intelimer  polymer  systems area.  The  agreement  provides
Hitachi with an exclusive  license to use and sell Landec's  catalyst systems in
industrial  Intelimer  polymer systems products in certain Asian  countries.  In
addition,  Hitachi also  received  limited  options and rights for certain other
technology  applications  in its Asian  territory.  Landec  received an up-front
license payment upon signing this agreement and is entitled to receive  research
and development funding over three years and future royalties based on net sales
by  Hitachi  of  the  licensed  products.  Any  fees  paid  to the  Company  are
non-refundable. This agreement is terminable at Hitachi's option. In conjunction
with this  agreement,  Hitachi  purchased  189,723  shares of Series E Preferred
Stock for $1.5 million  (which was converted into 189,723 shares of common stock
in connection with the Company's initial public offering).

BFGoodrich.  On October 13, 1993, the Company entered into a collaboration  with
BFGoodrich.  The agreement was amended on July 29, 1995 and again in March 1996,
and provides BFGoodrich with a nonexclusive  worldwide  (excluding Asia) license
to use and sell  Landec's  catalyst  systems  in  industrial  Intelimer  polymer
systems products.  Landec is entitled to be the exclusive  supplier of Intelimer
catalyst  systems to  BFGoodrich  for at least seven years.  Landec  received an
up-front license payment upon signing and additional license fees upon achieving
certain  milestones.  Under the agreement,  development was funded by BFGoodrich
for the first year, was extended to subsequent  years,  and was concluded during
the second  quarter of fiscal  year 1996.  The  Company is  entitled  to receive
future royalties based on net sales by BFGoodrich of the licensed products.  Any
fees paid to the Company are non-refundable.

Nitta.  On March 14, 1995,  the Company  entered into a license  agreement  with
Nitta in the  industrial  adhesives  area.  The agreement  provides Nitta with a
co-exclusive  license to manufacture and sell products using Landec's  Intelimer
materials in certain Asian countries. Landec received up-front license fees upon
signing the agreement and is entitled to future  royalties based on net sales by
Nitta of the licensed products. Any fees paid to the Company are non-refundable.
In addition,  Nitta also received  limited options for certain other  technology
applications  in its Asian  territory.  This  agreement is terminable at Nitta's
option. In March 1996, this agreement was expanded to provide Nitta an exclusive
license to use and sell products using the Company's  Intelimer materials in the
medical  adhesives area in certain Asian  countries.  The Company received an up
front license fee upon signing the expanded  agreement and is entitled to future
royalties based on net sales by Nitta of the licensed products.

         The  Company  has  also  entered  into  several   other   collaborative
arrangements, principally to support research and development for its Intellipac
breathable  membrane and ophthalmic products as well as other technologies being
pursued  by the  Company.  Under  the  terms of these  agreements,  the  Company
generally  receives  research  and  development  funding  and  rights  to future
royalties from product  sales,  in exchange for granting  certain  technology or
distribution rights.

         In  addition,   the  Company  has  entered  into  several  distribution
agreements for its QuickCast orthopedic and splinting products.  Under the terms
of these agreements,  the Company has granted exclusive and non-exclusive rights
to  have  its  QuickCast  products  distributed  to  orthopedic  surgeons,  cast
technicians, physical assistants and the occupational and physical therapists.


                                      -43-
<PAGE>

<TABLE>

3.       Available-for-Sale Securities

         The  following  is  a  summary  of  available-for-sale  securities  (in
thousands):

<CAPTION>
                                                                                          Gross          Gross
                                                                                       Unrealized      Unrealized         Estimated
                                                                     Amortized Cost       Gains          Losses           Fair Value
                                                                     --------------       -----          ------           ----------
<S>                                                                       <C>               <C>           <C>              <C>    
                October 31, 1996 
U.S. government and agency obligations ........................           $20,263           $ 9           $--              $20,272
Corporate bonds ...............................................            12,940             9            --               12,949
Other corporate securities ....................................             2,027            --            (2)               2,025
                                                                          -------           ---           ---              -------
Total securities ..............................................           $35,230           $18           $(2)             $35,246
                                                                          =======           ===           ===              =======
                                                                                                                      
Amounts included in:                                                                                                  
Cash equivalents ..............................................           $12,921           $--           $--              $12,921
Short-term investments ........................................            22,309            18            (2)              22,325
                                                                          -------           ---           ---              -------
Total securities ..............................................           $35,230           $18           $(2)             $35,246
                                                                          =======           ===           ===              =======
                                                                                                                      
                October 31, 1995                                                                                      
U.S. government and agency obligations ........................           $ 4,959           $--           $(1)             $ 4,958
                                                                          =======           ===           ===              =======
Amounts included in:                                                                                                  
Cash equivalents ..............................................           $ 2,994           $--           $--              $ 2,994
Short-term investments ........................................             1,965            --            (1)               1,964
                                                                          -------           ---           ---              -------
Total securities ..............................................           $ 4,959           $--           $(1)             $ 4,958
                                                                          =======           ===           ===              =======
                                                                                                                    
</TABLE>

The contractual  maturities of debt securities included in temporary investments
at October 31, 1996 were as follows (in thousands):

                                                                Estimated
                                               Amortized Cost   Fair Value
                                               --------------   ----------
 Due within one year.........................    $16,891         $16,895
 Due within one to two years.................      5,418           5,430
                                                 -------         -------
    Total short-term investments.............    $22,309         $22,325
                                                 =======         =======


                                      -44-
<PAGE>

4.       Property and Equipment

         Property and equipment consists of the following (in thousands):

                                                                 October 31,
                                                            --------------------
                                                             1996         1995
                                                             ----         ----
Laboratory and manufacturing equipment ...............     $ 1,775      $ 1,530
Computer equipment ...................................         322          261
Furniture and fixtures ...............................         161          134
Leasehold improvements ...............................         990          986
                                                           -------      -------
                                                             3,248        2,911
 Less accumulated depreciation and amortization ......      (2,285)      (1,918)
                                                           -------      -------
                                                           $   963      $   993
                                                           =======      =======

         Property and equipment includes approximately $973,000 and $1.1 million
recorded  under  capital  leases at  October  31,  1996 and 1995,  respectively.
Accumulated  amortization related to leased assets total approximately  $537,000
and $389,000 at October 31, 1996 and 1995, respectively.

5.       Redeemable Convertible Preferred Stock and Warrants

         Upon closing of the Company's initial public offering in February 1996,
all outstanding shares of redeemable  convertible  preferred stock (an aggregate
of 6,674,415 shares) were converted into 6,674,415 shares of common stock.

         In connection  with the sale of Series D preferred  stock in July 1993,
the Company  issued  warrants to purchase  186,349  shares of common stock at an
exercise price of $4.31 per share for $5,357 in cash.  The warrants  expire five
years from the date of issuance.  No warrants have been  exercised as of October
31, 1996.

6.       Shareholders' Equity

         Common Stock, Stock Purchase Plans and Stock Option Plans

         In December  1995,  the Board  approved a  one-for-2.875  reverse stock
split of its  common  stock and  preferred  stock  through an  amendment  to the
Articles of  Incorporation.  All share and per share amounts in the accompanying
financial statements have been retroactively adjusted to reflect this event. The
Board has also approved an amendment to the Articles of  Incorporation to change
the  number of  authorized  shares  of common  stock to  50,000,000  shares  and
Preferred  Stock to 2,000,000  shares upon the closing of the Company's  initial
public offering.

         On February 15, 1996 the Company  completed an initial public  offering
of  2,800,000  shares of common  stock at a price of $12.00 per  share.  The net
proceeds to the Company  from the initial  public  offering  were  approximately
$30.3 million, after deducting underwriting discounts, commissions and expenses.

         In March 1996, the underwriters exercised their overallotment option to
purchase  420,000  shares of common  stock for  $12.00 per  share.  The  Company
received an  additional  $4.7  million in  offering  proceeds,  after  deducting
underwriting discounts, commissions and expenses.

         The Company has 2,838,565  common shares  reserved for future  issuance
under all stock option plans,  outstanding  warrants and employee stock purchase
plans.


                                      -45-
<PAGE>

6.       Shareholders' Equity (continued)

         The Company has a 1988 Stock Purchase Plan for issuance of common stock
to employees  and  consultants.  The price of the shares to be purchased and the
terms of payment are  determined by the Company's  Board of Directors,  provided
that such  price  cannot be less than the fair  market  value on the date of the
grant.  Shares  purchased  under the plan vest over a period of four years;  the
Company  may  repurchase  any  unvested  shares in the event of  termination  of
employment.  As of October 31,  1996,  143,965  shares of common  stock had been
purchased  under the plan at prices  ranging  from $0.29 to $0.58 per share,  of
which no shares were subject to repurchase.  The plan was terminated in December
1995.

         The  Company  established  the 1988 Stock  Option  Plan under which the
Board of Directors  may grant  incentive  stock  options or  nonqualified  stock
options to its employees and outside  consultants.  As of October 31, 1996,  the
Company had reserved  1,574,161 shares of common stock for future issuance under
the plan. The exercise price of incentive stock options and  nonqualified  stock
options may be no less than 100% and 85%, respectively, of the fair market value
of the Company's  common stock as determined by the Board of Directors.  Options
are  exercisable   upon  grant  and  generally  vest  ratably  over  four  years
(commencing  one  year  after  an  employee's  hire  date)  and are  subject  to
repurchase if exercised before being vested.

         In December  1995,  the Board also  approved  the  adoption of the 1995
Employee Stock Purchase Plan (the "Purchase Plan") and the 1995 Directors' Stock
Option Plan (the  "Directors'  Plan"),  which authorizes the issuance of 300,000
and 200,000  shares,  respectively,  under the plans.  The Purchase Plan permits
eligible  employees  to purchase  common  stock,  which may not exceed 10% of an
employee's compensation, at a price equal to the lower of 85% of the fair market
value of the Company's  common stock at the beginning of the offering  period or
on the purchase date. The Directors'  Plan provides that each person who becomes
a nonemployee  director of the Company,  who has not received a previous  grant,
shall be granted a nonstatutory stock option to purchase 20,000 shares of common
stock on the date on which the optionee first becomes a nonemployee  director of
the Company.  Thereafter, on the date of each annual meeting of the shareholders
each  non-employee  Director  shall be granted an additional  option to purchase
5,000  shares of common  stock if, on such date,  he or she shall have served on
the  Company's  Board of Directors  for at least six months prior to the date of
such annual  meeting.  The exercise price of the options will be the fair market
value of the Company's common on the date the options are granted. In June 1996,
the Board amended the  Directors'  Plan to provide that options are  exercisable
and vest upon grant.  Such  amendment is subject to  shareholder  approval to be
recommended by the Company at its next meeting of shareholders.

         In  September  1996,  the  Board  approved  the  adoption  of the  1996
Non-Executive  Stock Option Plan which authorizes the issuance of 750,000 shares
under the plan. The Board of Directors may grant  non-qualified stock options to
employees  and outside  consultants  who are not  officers or  directors  of the
Company.  The  exercise  price of the  options  will be equal to the fair market
value of the Company's common stock on the date the options are granted. Options
are  exerciseable  upon grant and generally vest ratably over four years and are
subject to repurchase if exercised before being vested.

         In October  1996,  the Board of Directors of  Intellicoat  approved the
adoption of the 1996  Intellicoat  Stock Plan which  authorizes  the issuance of
2,000,000  shares of  Intellicoat  common  stock  under  the plan.  The Board of
Directors  of  Intellicoat  may grant stock  purchase  rights,  incentive  stock
options or non-statutory stock options to employees and outside consultants. The
exercise  price of the  stock  purchase  rights,  incentive  stock  options  and
non-statutory stock options may be no less than 85%, 100% and 85%, respectively,
of the fair  market  value  of  Intellicoat's  common  stock  as  determined  by
Intellicoat's  Board of  Directors.  Options  are  exercisable  upon  grant  and
generally vest ratably over four


                                      -46-
<PAGE>

6.       Shareholders' Equity (continued)

years and are subject to repurchase if exercised before being vested.  No shares
have been granted under this plan as of October 31, 1996.

<TABLE>
         Activity under all Stock Option Plans is as follows:

<CAPTION>
                                                     Options                     Outstanding Options         
                                                   Available for      --------------------------------------  
                                                      Grant           Number of Shares      Price Per Share
                                                  --------------      -----------------     ----------------
<S>                                                <C>                  <C>                 <C>         
 Balance at October 31, 1993.................        164,407              706,011              $0.58
    Additional shares reserved...............        347,826                 --                 --
    Options granted..........................       (188,145)             188,145           $0.58-$0.86
    Options exercised........................           --                (20,700)             $0.58
    Options canceled.........................         50,448              (50,448)          $0.58-$0.86
                                                   ---------            ---------          --------------
 Balance at October 31, 1994.................        374,536              823,008           $0.58-$0.86
    Additional shares reserved...............        347,826                 --                 --
    Options granted..........................       (410,570)             410,570           $0.86-$1.44
    Options exercised........................           --                 (7,968)          $0.58-$0.86
    Options canceled.........................         13,691              (13,691)          $0.58-$0.86
                                                   ---------            ---------          --------------
                                                                                           
 Balance at October 31, 1995.................        325,483            1,211,919           $0.58-$1.44
    Additional shares reserved...............        950,000                 --                 --
    Options granted..........................       (128,959)             128,959           $3.59-$20.75
    Options exercised........................           --               (131,537)          $0.58-$1.44
    Options canceled.........................         30,993              (30,993)          $0.58-$19.00
                                                   ---------            ---------          --------------
                                                                                           
 Balance at October 31, 1996.................      1,177,517            1,178,348           $0.58-$20.75
                                                   =========            =========          ===============
</TABLE>
                                                                               
         At October 31, 1996 and 1995,  options to purchase  744,355 and 602,991
common shares were vested, respectively. No options have been exercised prior to
being vested.

         For options granted through October 31, 1996, the Company recognized an
aggregate  of  $451,000 as  deferred  compensation  for the excess of the deemed
value for  accounting  purposes of the common stock issuable on exercise of such
options  over  the  aggregate  exercise  price  of such  options.  The  deferred
compensation  expense is being amortized  ratably over the vesting period of the
options.

7.       Notes Payable

         In  March  1995,  the  Company  issued  notes  payable  to two  current
investors for $700,000.  The notes and accrued interest were payable upon demand
of the holder, and in no event later than three years from the date of issuance.
The notes bear interest at a rate of 10% per annum.  Upon the  completion of the
Company's  initial  public  offering,  the  principal  value of the  notes  were
converted into 176,432 shares of common stock (converted at $3.97 per share) and
all accrued interest was forgiven.



                                      -47-
<PAGE>

8.       Income Taxes

         As  of  October  31,  1996,   the  Company  had  net   operating   loss
carryforwards of approximately  $17,700,000 for federal income tax purposes. The
net operating loss  carryforwards will expire at various dates beginning in 2001
through 2011, if not utilized.

         Utilization of the net operating losses and credit carryforwards may be
subject  to  a  substantial  annual  limitation  due  to  the  ownership  change
limitations provided by the Internal Revenue Code of 1986.

         Significant  components  of the  Company's  deferred  tax assets are as
follows (in thousands):

                                                      Years ended October 31,
                                                     -------------------------
                                                        1996          1995
                                                        ----          ----
      Deferred tax assets:
        Net operating loss carryforwards ........     $ 6,300      $ 5,500
        Research credit carryforwards ...........         800          800
        Capitalized research costs ..............       2,100        1,400
                                                      -------      -------
     Total deferred tax assets ..................       9,200        7,700
     Valuation allowance ........................      (9,200)      (7,700)
                                                      =======      =======
     Net deferred tax assets ....................     $  --        $  --
                                                      =======      =======

         Due to the Company's  absence of earning history,  the net deferred tax
asset has been fully offset by a valuation allowance.

         The valuation  allowance  increased by $1,200,000 and $1,400,000 during
the years ended October 31, 1995 and 1994, respectively.

9.       Commitments

         Leases

         The Company leases office and laboratory  space and certain  equipment.
Rent  expense  for  the  years  ended  October  31,  1996,  1995  and  1994  was
approximately $370,000, $349,000 and $328,000, respectively.

         During  1994,  the  Company  arranged  for a lease  line of  credit  of
$2,000,000 to purchase capital assets.  The lease term under this line of credit
is 48 months.  The interest rate on these leases is based on a lease rate factor
and approximates 15% per annum. Amounts outstanding under the capital leases are
collateralized  by the  underlying  property and  equipment.  The line of credit
expired in December  1995 and was not  renewed by the  Company.  Future  minimum
lease  obligations  as of October  31,  1996 under all leases are as follows (in
thousands):

                                                Capital Leases  Operating Leases
                                                --------------  ----------------
1997 ..........................................      $ 295        $ 397
1998 ..........................................        269          105
1999 ..........................................         93           16
                                                     -----        -----
Total minimum lease payments ..................        657        $ 518
                                                                  =====
Less amount representing interest .............        (98)
                                                     -----
Present value of future lease payments ........        559
Less current portion ..........................       (229)
                                                     -----
Noncurrent obligations under capital lease ....      $ 330
                                                     =====


                                      -48-
<PAGE>

10.      Subsequent Events

         In  November  1996,  the  Company's  Board of  Directors  approved  the
adoption of the 1996 Stock Option Plan which  authorizes the issuance of 750,000
shares  under the  plan.  This  stock  option  plan is  subject  to  shareholder
approval.



                                      -49-
<PAGE>


<TABLE>
                                           LANDEC CORPORATION

                                    VALUATION AND QUALIFYING ACCOUNTS

                                             (in thousands)

                                                                                           SCHEDULE II
<CAPTION>
                                                                Additions 
                                                 Balance at     charged to   
                                                 beginning      costs and                   Balance at
                                                 of period       expenses    Deductions   end of period
                                                 ---------       --------    ----------   -------------
<S>                                               <C>             <C>            <C>          <C>  
Year ended October 31, 1994                      
     Allowance for doubtful accounts............. $   --          $  18          $  --        $  18
Year ended October 31, 1995
     Allowance for doubtful accounts............. $   18          $  14          $  --        $  32
Year ended October 31, 1996
     Allowance for doubtful accounts............. $   32          $  --          $  --        $  32

</TABLE>


                                                  -50-
<PAGE>

(b)      No  reports  on Form 8-K were  filed by the  Company  during the period
August 1, 1996 to October 31, 1996.

(c)      Exhibits

         3.1(1)    Amended and Restated Bylaws of Registrant.
         3.2(2)    Ninth  Amended  and  Restated  Articles of  Incorporation  of
                   Registrant. 
          4.1(3)   Form of Common Stock Certificate.
         10.1(3)   Form of Indemnification Agreement.
         10.2(3)   1988 Stock Option Plan and form of Option Agreements.
         10.3      1995 Employee Stock  Purchase  Plan, as amended,  and form of
                   Subscription Agreement.  
         10.4      1995  Directors'  Stock Option Plan, as amended,  and form of
                   Option Agreement.
         10.5(3)   Investors' Rights Agreement dated as of August 10, 1995 among
                   the   Registrant   and  certain   security   holders  of  the
                   Registrant.  
         10.6(3)   Industrial  Real Estate Lease dated March 1, 1993 between the
                   Registrant  and Wayne R. Brown & Bibbits  Brown,  Trustees of
                   the  Wayne  R.  Brown &  Bibbits  Brown  Living  Trust  dated
                   December 30, 1987.
         10.7(3)   Agreement  dated as of July 29, 1995  between the  Registrant
                   and the BFGoodrich  Company.  
         10.8(3)   License and Development Agreement dated as of August 10, 1995
                   between the Registrant and Hitachi Company, Ltd.
         10.9(3)   Technical License Agreement dated October 1, 1994 between the
                   Registrant  and Hitachi Co., Ltd.  
         10.10(3)  Agreement  dated March 14, 1995  between the  Registrant  and
                   Nitta Corporation.
         10.11(3)  Note  Purchase  Agreement  dated March 27,  1995  between the
                   Registrant and H&Q Healthcare Investors and H&Q Life Sciences
                   Investors,  as  amended  by  a  Notice  of  Conversion  dated
                   December 20, 1995.
         10.12(4)  Agreement  dated February 26, 1996 between the Registrant and
                   Nitta Corporation.
         10.13(4)  Letter dated March 29, 1996 regarding the Agreement  dated as
                   of July  29,  1995  between  the  Registrant  and  BFGoodrich
                   Company.
         10.14     Consulting Agreement dated May 1, 1996 between the Registrant
                   and Richard Dulude.
         10.15     1996  Intellicoat  Stock  Option  Plan  and  form  of  Option
                   Agreements.  
         10.16     1996  Non-Executive  Stock  Option  Plan and  form of  Option
                   Agreements.
         11.1      Calculation of Loss Per Share.
         23.1      Consent of Independent Auditors.
         24.1      Power of Attorney.  See page 52.
         27.1      Financial Data Schedule

-------------------

         (1)       Incorporated   by   reference   to  Exhibit  3.4  filed  with
                   Registrant's  Registration  statement  on Form S-1  (File No.
                   33-80723) declared effective on February 12, 1996.

         (2)       Incorporated   by   reference   to  Exhibit  3.5  filed  with
                   Registrant's  Registration  statement  on Form S-1  (File No.
                   33-80723) declared effective on February 12, 1996.

         (3)       Incorporated  by  reference  to  the   identically   numbered
                   exhibits filed with the Registrant's  Registration  Statement
                   on  Form  S-1  (File  No.  33-80723)  declared  effective  on
                   February 12, 1996.

         (4)       Incorporated  by  reference  to  the   identically   numbered
                   exhibits filed with the Registrant's  Form 10-Q filed for the
                   quarter ended April 30, 1996.

(d)      Financial Statement Schedules

                   Schedule II  Valuation and Qualifying Accounts

Schedules not listed above have been omitted because the information required to
be set forth therein is not  applicable or is shown in the financial  statements
or notes.


                                      -51-
<PAGE>

                                   SIGNATURES

         Pursuant  to the  requirements  of the  Securities  Act  of  1933,  the
Registrant  has duly  caused this Report on Form 10-K to be signed on its behalf
by the undersigned,  thereunto duly authorized, in the City of Menlo Park, State
of California, on January 29, 1997.

                            LANDEC CORPORATION

                            By:   /s/ Joy T. Fry
                                  ----------------------------------------------
                                      Joy T. Fry
                                      Vice President of Finance and
                                      Administration and Chief Financial Officer


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears below hereby constitutes and appoints Gary T. Steele and Joy T. Fry, and
each of them, as his attorney-in-fact,  with full power of substitution, for him
in any and all capacities, to sign any and all amendments to this Report on Form
10-K,  and to file the  same,  with  exhibits  thereto  and other  documents  in
connection  therewith,  with the  Securities  and  Exchange  Commission,  hereby
ratifying  and  confirming  our  signatures  as they may be  signed  by our said
attorney to any and all amendments to said Report on Form 10-K.

<TABLE>

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this Report on Form 10-K has been signed by the following  persons in the
capacities and on the dates indicated:

<CAPTION>
                      Signature                                              Title                              Date
                      ---------                                              -----                              ----

<S>                                                   <C>                                                  <C>    
                 /s/ Gary T. Steele
------------------------------------------------------
                   Gary T. Steele                     President and Chief Executive Officer (Principal     January 29, 1997
                                                      Executive Officer)

                   /s/ Joy T. Fry
------------------------------------------------------
                     Joy T. Fry                       Vice President of Finance and Administration and     January 29, 1997
                                                      Chief Financial Officer (Principal Financial and
                                                      Accounting Officer)

------------------------------------------------------
                  Mitchell J. Blutt                   Director                                             January 29, 1997


                 /s/ Kirby L. Cramer
------------------------------------------------------
                   Kirby L. Cramer                    Director                                             January 29, 1997


                /s/ Richard  Dulude
------------------------------------------------------
                  Richard  Dulude                   Director                                             January 29, 1997


               /s/ Stephen E. Halprin
------------------------------------------------------
                 Stephen E. Halprin                   Director                                             January 29, 1997


              /s/ Richard S. Schneider
------------------------------------------------------
                Richard S. Schneider                  Director                                             January 29, 1997


                 /s/ Ray F. Stewart
------------------------------------------------------
                   Ray F. Stewart                     Director                                             January 29, 1997

</TABLE>

                                      -52-
<PAGE>

                                  EXHIBIT INDEX

        Exhibit
         Number                             Exhibit Title
         ------                             --------------

         10.3      1995 Employee Stock  Purchase  Plan, as amended,  and form of
                   Subscription Agreement.

         10.4      1995  Directors'  Stock Option Plan, as amended,  and form of
                   Option Agreement.

         10.14     Consulting Agreement dated May 1, 1996 between the Registrant
                   and Richard Dulude.

         10.15     1996  Intellicoat  Stock  Option  Plan  and  form  of  option
                   agreements.

         11.1      Calculation of Loss Per Share.

         23.1      Consent of Independent Auditors

         27.1      Financial Data Schedule


                                      -53-

