This document  consists of 37 pages,  of which this is page Number 1. The
       index to Exhibits is on Page 18.


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

                                    FORM 10-Q

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

                 For the Fiscal Quarter Ended April 30, 1997, 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

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 at least the past 90 days.

                              Yes   X   No
                                   ---      ---

         As of May 31, 1997,  11,221,910 shares of the Registrant's common stock
were outstanding.

                                      -1-



                               LANDEC CORPORATION

                 FORM 10-Q For the Quarter Ended April 30, 1997

                                      INDEX

                                                                            Page

          Facing sheet                                                        1

          Index                                                               2

Part I.   Financial Information

Item 1.   Financial Statements:

          a)  Consolidated  condensed  balance sheets as of April 30, 1997
              and October 31, 1996                                            3

          b)  Consolidated  statements of operations for the three and six
              months ended April 30, 1997 and 1996                            4

          c)  Consolidated  statements  of cash  flows for the six  months
              ended April 30, 1997 and 1996                                   5

          d)  Notes to consolidated financial statements                      6

Item 2.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                               7

Part II.  Other Information

          Signature                                                          17

          Index to Exhibits                                                  18

                                      -2-


                          PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

                               LANDEC CORPORATION
                      CONSOLIDATED CONDENSED BALANCE SHEETS
                                   (Unaudited)
                                 (In thousands)

                                                         April 30,   October 31,
                                                           1997         1996
                                                         --------    --------
                                     Assets

Current Assets:
     Cash and cash equivalents                           $  2,043    $ 14,185
     Short-term investments                                19,114      22,325
     Restricted investment                                  8,838        --
     Accounts receivable, net                               2,046          23
     Inventories                                            2,295         549
     Prepaid expenses and other current assets                356         188
                                                         --------    --------
Total Current Assets                                       34,692      37,270

Property and equipment, net                                 3,888         963
Intangible assets, net                                      7,057        --
Other assets                                                  126         125
                                                         --------    --------
                                                         $ 45,763    $ 38,358
                                                         ========    ========

                      Liabilities and Stockholders' Equity

Current Liabilities:
     Accounts payable                                    $  1,398    $    484
     Accrued compensation                                     459         250
     Other accrued liabilities                                482         259
     Payable related to acquisition of Dock 
       Resins Corporation                                   9,528        --
     Current portion of long term debt                        321         229
     Deferred revenue                                         292         166
                                                         --------    --------
Total Current Liabilities                                  12,480       1,388

Non-current portion of long term debt                         159         330
Deferred compensation                                         127        --

Stockholder's Equity:
     Common stock                                          70,433      68,242
     Notes receivable from shareholders                       (13)        (13)
     Deferred compensation                                   (255)       (311)
                                                         --------    --------
     Accumulated deficit                                  (37,168)    (31,278)
                                                         --------    --------
Total Stockholders' Equity                                 32,997      36,640
                                                         --------    --------
                                                         $ 45,763    $ 38,358
                                                         ========    ========

                             See accompanying notes.

                                      -3-





                               LANDEC CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (In thousands, except per-share data)
Three Months Ended April 30, Six Months Ended April 30, 1997 1996 1997 1996 ---- ---- ---- ---- Revenues: Product sales $ 767 $ 281 $ 940 $ 412 License fees -- 600 -- 600 Research and development revenues 242 394 459 682 -------- -------- -------- -------- Total revenues 1,009 1,275 1,399 1,694 Operating costs and expenses: Cost of product sales 634 295 943 539 Research and development 1,030 945 1,946 1,898 Selling, general and administrative 1,316 733 2,250 1,224 Purchase of in-process research and development -- -- -- -- 3,022 -- 3,022 -- -------- -------- -------- -------- Total operating costs and expenses 6,002 1,973 8,161 3,661 -------- -------- -------- -------- Loss from operations (4,993) (698) (6,762) (1,967) Interest income 438 439 932 506 Interest expense (17) (8) (37) (54) -------- -------- -------- -------- Net loss $ (4,572) $ (267) $ (5,867) $ (1,515) ======== ======== ======== ======== Net loss per share $ (0.42) $ (0.03) $ (0.54) $ (0.32) ======== ======== ======== ======== Shares used in computation of net loss per share 10,829 8,874 10,794 4,713 ======== ======== ======== ======== See accompanying notes.
-4- LANDEC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Six Months Ended April 30, 1997 1996 ---- ---- Cash flows from operating activities: Net loss $ (5,867) $ (1,515) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization of assets under capital leases 251 195 Amortization of intangibles 17 -- Amortization of deferred compensation 56 56 Write-off of purchased in-process research and development 3,022 -- Changes in current assets and liabilities (net of effects of Dock Resins acquisition): Accounts receivable (69) (10) Inventories 91 (20) Prepaid expenses and other current assets (63) (122) Accounts payable (177) 7 Accrued compensation 114 24 Other accrued liabilities (71) 142 Deferred revenue 125 175 -------- -------- Total adjustments 3,296 447 -------- -------- Net cash used in operating activities (2,571) (1,068) -------- -------- Cash flows from investing activities: Purchases of property and equipment (675) (189) Increase in other assets 1 26 Acquisition of Dock Resins, net of cash acquired (3,230) -- Purchases of available-for-sale securities (14,404) (20,108) Sale of available-for-sale securities 4,041 -- Maturities of available-for-sale securities 13,550 3,000 -------- -------- Net cash used in investing activities (717) (17,271) -------- -------- Cash flows from financing activities: Purchase of restricted investment (8,838) -- Proceeds from sale of common stock 94 35,062 Proceeds from repayment of notes receivable -- 9 Payments of long-term debt (110) (136) -------- -------- Net cash (used in) provided by financing activities (8,854) 34,935 -------- -------- Net (decrease) increase in cash and cash equivalents (12,142) 16,596 Cash and cash equivalents at beginning of period 14,185 3,585 -------- -------- Cash and cash equivalents at end of period $ 2,043 $ 20,181 ======== ======== See accompanying notes.
-5- LANDEC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unaudited 1. Basis of Presentation The accompanying unaudited consolidated financial statements of Landec Corporation (the "Company" or "Landec") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations, and cash flows at April 30, 1997, and for all periods presented, have been made. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information normally included in financial statements and related footnotes prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial data should be reviewed in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996. The results of operations for the three and six month periods ended April 30, 1997 are not necessarily indicative of the results that may be expected for the fiscal year ended October 31, 1997. 2. Acquisition of Dock Resins On April 18, 1997, the Company acquired Dock Resins Corporation ("Dock Resins") a privately-held manufacturer and marketer of specialty acrylics and other polymers located in Linden, New Jersey for approximately $15.8 million comprised of $13.7 million in cash, a secured promissory note due in January 1998 and direct acquisition costs along with 396,039 shares of common stock valued at $2.1 million. A payable of $9.5 million has been recorded to recognize the promissory note and other liabilities related to the acquisition. An investment of $8.8 million has been set aside as security for payment of the promissory note. In addition, $1.5 million of the cash consideration and all of the equity consideration was set aside in escrow to cover future costs associated with obligations under the representations and warranties made by Dock Resins in connection with the acquisition. The acquisition has been accounted for using the purchase method. The purchase price has been allocated to the acquired assets and liabilities based on their relative fair values. These allocations were based on independent valuations and other studies as of the date of acquisition. The following is a summary of the purchase price allocation (in thousands): Net assets and liabilities $ 3,181 Property, plant and equipment 2,501 Covenant not to compete 77 Customer base 496 Work force in place 690 Trademark 775 Developed technology 5,036 In-process research and development 3,022 ----------- $ 15,778 =========== The intangible assets are being amortized over five to twenty years based on their individually estimated useful lives. The $3,022,000 allocated to in-process research and development technology, as determined by an independent appraisal, was expensed during the quarter ended April 30, 1997 as required under generally accepted accounting principles. The $2,501,000 allocated to property, plant and equipment is based on its fair value as determined by an independent appraisal. The Company's results of operations and cash flows for the three months and six months ended April 30, 1997 include the results of Dock Resins from April 18, 1997 through April 30, 1997. -6- 3. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market after writing-up inventories acquired from Dock Resins to their estimated fair market values net of estimated selling costs, and consisted of the following: April 30, October 31, 1997 1996 ---- ---- (in thousands) Raw materials . . . . . . . . . . . . . . $ 690 $ 149 Work in process . . . . . . . . . . . . . 173 245 Finished goods . . . . . . . . . . . . . 1,432 155 ------- ------ $ 2,295 $ 549 ======= ====== -7- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I--Item 1 of this Form 10Q and the audited consolidated financial statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended October 31, 1996 contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996. 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," and those mentioned in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996, under "Risk Factors." Overview Since its inception in October 1986, the Company has been primarily engaged in the research and development of its Intelimer(R) technology and related products. The Company launched its first product line, QuickCast(TM) splints and casts, in April 1994. The Company launched its second product line, Intellipac(TM) breathable membranes for the fresh-cut produce packaging market, in September 1995. To date, the Company has recognized $2.1 million in total QuickCast product and Intellipac breathable membrane sales. On April 18, 1997 the Company acquired Dock Resins, which is primarily engaged in the manufacturing and marketing of specialty acrylics and other polymers. For the period from the acquisition date to April 30, 1997 the Company recognized $516,000 in revenue from Dock Resins' product sales. The balance of revenues to date have resulted from license fees, collaborative arrangements and Small Business Innovative Research 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 April 30, 1997, the Company's accumulated deficit was $37.2 million. Results of Operations Total revenues were $1.0 million for the second quarter of fiscal year 1997 compared to $1.3 million for the second quarter of fiscal year 1996. Revenues from product sales increased to $767,000 in the second quarter of fiscal year 1997 from $281,000 in the second quarter of fiscal year 1996 due primarily to $516,000 of product sales from Dock Resins partially offset by lower sales of Intellipac breathable membrane products due to lower per unit sale prices. There were no revenues from license fees during the second quarter of fiscal year 1997 compared to $600,000 during the second quarter of fiscal year 1996. The decrease in license fees revenue was due to a one time payment in the second quarter of 1996 under an expanded agreement with Nitta Corporation. Revenues from research and development funding decreased to $242,000 for the second quarter of fiscal year 1997 from $394,000 for the second quarter of fiscal year 1996. The decrease in research and development revenue was due primarily to fewer research and development contracts. For the first six months of fiscal year 1997 total revenues were $1.4 million compared to $1.7 million during the same period in 1996. Revenue from product sales for the first six months in fiscal year 1997 increased to $940,000 from $412,000 during the same period in 1996 due to $516,000 of product sales from Dock Resins, a small increase in sales of QuickCast products partially offset by a small decrease in sales of Intellipac breathable membrane products. There were no revenues from license fees during the first six months of fiscal year 1997 compared to $600,000 during the same period in 1996. Revenue from research and development funding for the first six months in fiscal year 1997 decreased to $459,000 from $682,000 during the same period in 1996 due to a decrease in research and development contracts in fiscal year 1997. The Company expects product sales to increase during the remainder of fiscal year 1997 based on the historical results of Dock Resins. Cost of product sales consists of material, labor and overhead. Cost of product sales was $634,000 for the second quarter of fiscal year 1997 compared to $295,000 for the second quarter of fiscal year 1996, an increase of 115%. Cost of product sales as a percentage of product sales decreased to 83% in the second quarter of fiscal year 1997 from 105% in the second quarter of fiscal year 1996. Cost of product sales for the first six months of fiscal year 1997 was $943,000 compared to $539,000 during the same period in 1996, an increase of 75%. Cost of product sales as a percentage of product sales decreased to 100% for the first six months of fiscal year 1997 from 131% during the same period in 1996. These decreases in the cost of product sales as a percentage of product sales were primarily the result of a lower percentage cost of product sales in the Dock Resins product line. The Company anticipates that gross margins will improve during the remainder of -8- fiscal year 1997 due to revenues from Dock Resins product sales and the historically higher margins derived by Dock Resins. However, longer-term improvement is unpredictable due to the early stage commercialization of several of the Company's products and integration of certain of these products into Dock Resins' manufacturing process. Research and development expenses were $1.0 million for the second quarter of fiscal year 1997 compared to $945,000 for the second quarter of fiscal year 1996, an increase of 9%. For the first six months of fiscal years 1997 and 1996 research and development expenses were relatively flat at $1.9 million in both six-month periods. Research and development expenses increased in the second quarter of fiscal year 1997 from the second quarter of fiscal year 1996 primarily due to increased development costs for the Company's Intelimer polymer systems and Intellicoat(TM) 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 $1.3 million for the second quarter of fiscal year 1997 compared to $733,000 for the second quarter of fiscal year 1996, an increase of 80%. For the first six months of fiscal year 1997 selling, general and administrative expenses were $2.2 million compared to $1.2 million during the same period in 1996, an increase of 84%. Selling, general and administrative expenses increased primarily as a result of increased sales and marketing expenses and the additional administrative costs associated with supporting a public company for an entire six-month period (the Company's initial public offering was completed on February 15, 1996). Selling, general and administrative expenses consist primarily of sales and marketing expenses associated with the Company's product sales, business development expenses, staff and administrative expenses. Sales and marketing expenses increased to $744,000 for the second quarter of fiscal year 1997 from $378,000 for the second quarter of fiscal year 1996. For the first six months of fiscal year 1997 sales and marketing expenses increased to $1.3 million compared to $583,000 during the same period in 1996. The increase in sales and marketing expenses was primarily attributable to the costs to support four national U.S. distributors for QuickCast products including the creation of an internal sales department for QuickCast products and the creation of marketing departments for the Intelimer polymer systems and Intellicoat products. The Company expects that selling, general and administrative spending will increase in absolute dollars in future periods, although it may vary as a percentage of total revenues. Net interest income of $421,000 for the second quarter of fiscal year 1997 was relatively unchanged compared to $431,000 for the second quarter of fiscal year 1996. For the first six months of fiscal year 1997 net interest income was $895,000 compared to $452,000 during the same period in 1996. Net interest income increased due to more cash being available for investing from the Company's initial public offering in February 1996. Liquidity and Capital Resources As of April 30, 1997 the Company had unrestricted cash, cash equivalents and short-term investments of $21.2 million, a net decrease of $15.3 million from $36.5 million as of October 31, 1996. This decrease was primarily due to funding operating losses of $2.6 million for the first six months of fiscal year 1997, and the net payment of $3.2 million and restricted cash related to the acquisition of Dock Resins. The Company has payables totaling $9.5 million related to the acquisition of Dock Resins which will be distributed by the first quarter of fiscal 1998. An investment totaling $8.8 million has been set aside for payment of the related promissory note. During the first six months of fiscal year 1997, the Company purchased seed processing equipment and incurred leasehold improvements expenditures to support the development of Intellicoat products. These expenditures represented the majority of the $675,000 of property and equipment purchased during the first six months of fiscal year 1997. The Company believes that existing cash, cash equivalents and short-term investments will be sufficient to finance its operational and capital requirements through at least the next twelve months. The Company's future capital requirements, however, 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; the assimilation and integration of Dock Resins into Landec; the timing and amount, if any, of payments received under research and development agreements; the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights; the ability to comply with regulatory requirements; the emergence of competitive technology and market forces; the effectiveness of product commercialization activities and arrangements; and other factors. If the Company's currently available funds, together with the 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, bank borrowings and public or private sales of its securities. The Company has no credit facility or -9- other committed sources of capital. There can be no assurance that additional funds, if required, will be available to the Company on favorable terms. 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 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 $4.6 million and $267,000 during the second quarter of fiscal year 1997 and 1996, respectively, and the Company's accumulated deficit as of April 30, 1997 totaled $37.2 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 and there can be no assurance that the Company will be able to reach profitability at all. Uncertainty Relating to Integration of Dock Resins. The successful combination of the Company and Dock Resins will require substantial effort from each organization. The diversion of the attention of management and any difficulties encountered in the transition process could have an adverse impact on the Company's ability to realize the anticipated benefits of the acquisition. The successful combination of the two companies will also require coordination of their research and development, manufacturing, and sales and marketing efforts. In addition, the process of combining the two organizations could cause the interruption of, or a loss of momentum in, the Company's activities. There can be no assurance that the Company will be able to retain Dock Resins' key management, technical, sales and customer support personnel, or that the Company will realize the anticipated benefits of the acquisition. Early Commercialization; Dependence on New Products and Technologies; Uncertainty of Market Acceptance. While the Company recently commenced marketing certain of its Intelimer polymer products, it is in the early stage of product commercialization of these products 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 The BFGoodrich Company and Hitachi Chemical Co., Ltd. ("Hitachi") in connection with its Intelimer polymer systems, Fresh Express Farms and PrintPack, Inc. ("PrintPack) in connection with its Intellipac breathable membrane products, Nitta Corporation ("Nitta") and Hitachi in connection with its adhesive products and Smith & Nephew Medical Limited ("Smith & Nephew"), Physician Sales and Services, Inc., North Coast Medical, Inc. and Sammons Preston, Inc. in connection with its QuickCast orthopedic products. The Company is dependent on its corporate partners to -10- 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 the Company's revenues to date have been derived from commercial research and development collaborations and license agreements. In the second quarter of fiscal year 1997, development funding from these collaborative arrangements comprised approximately 24% of the Company's total revenues. Development funding from Hitachi and Nitta represented approximately 19% of the Company's revenues for the second quarter of fiscal year 1997. 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. In March of 1997, the Company terminated its relationship with Smith & Nephew for the sales and distribution of QuickCast products in certain European and Pacific Rim countries, Canada and South Africa. In May of 1997, the Company agreed to amend its co-development and marketing agreement with PrintPack in the Intellipac breathable membrane area by removing the exclusivity restrictions. This amendment will allow Landec to explore other sources of packaging material and application equipment and product development opportunities while continuing the collaboration with PrintPack on a non-exclusive basis. There can be no assurance that the Company's 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 on certain of its product sales to date. Although Dock Resins will provide practical knowledge in the scale-up of Intelimer polymer products, production in commercial-scale quantities may involve technical challenges for the Company. The Company anticipates that a substantial portion of the Company's products will be manufactured in the Linden, New Jersey facility acquired in the purchase of Dock Resins. The Company's reliance on this facility involves a number of risks, including the absence of adequate capacity, the unavailability of, or interruption in access to, certain process technologies and reduced control over delivery schedules, and manufacturing yields and costs. The Company may also need to 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 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 -11- 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 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. Customer Concentration. In the past, a limited number of customers have accounted for a substantial portion of Dock Resins' net revenues. For the three months ended March 31, 1997 and the twelve months ended December 31, 1996, sales to Dock Resins' top five customers accounted for approximately 51% of Dock Resins' net revenues, with the top customer accounting for 28% and 29%, respectively, of Dock Resins' net revenues. The Company expects that for the foreseeable future a limited number of customers may account for a substantial portion of its net revenues from the Linden, New Jersey facility acquired in the purchase of Dock Resins. Dock Resins has in the past experienced changes from year to year in the composition of its major customer base and the Company believes this pattern may continue. Dock Resins does not have long-term purchase agreements with any of its customers. The reduction, delay or cancellation of orders from one or more major customers for any reason or the loss of one or more of such major customers could materially and adversely affect the Company's business, financial condition and results of operations. In addition, since the products manufactured in the Linden facility are often sole sourced to its customers, the Company's operating results could be materially and adversely affected if one or more of its major customers were to develop other sources of supply. There can be no assurance that Dock Resins' current customers will continue to place orders with the Company, that orders by existing customers will not be canceled or will continue at the levels of previous periods or that the Company will be able to obtain orders from new customers. 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 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 has received a letter alleging that its 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 -12- 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. Environmental Regulations. Federal state and local regulations impose various environmental controls on the discharge or disposal of toxic, volatile or otherwise hazardous chemicals and gases used in certain manufacturing processes. Dock Resins is involved in various investigations and proceedings conducted by the federal Environmental Protection Agency and certain state environmental agencies regarding disposal of waste materials. Although the factual situations and the progress of each of these matters differ, the Company believes it has retained adequate reserves to account for any resultant liability, including any New Jersey Industrial Site Recovery Act remediation regarding its Linden, New Jersey facility. In most cases, the Company's liability will be limited to sharing clean-up or other remedial costs with other potentially responsible parties. Any failure by the Company to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations could subject it to substantial liability or could cause its manufacturing operations to be suspended. There can be no assurance that changes in environmental regulations will not impose the need for additional capital equipment or other requirements. Limited Sales or Marketing Experience. Although Dock Resins has experience in marketing products in certain common markets with Landec's Intelimer polymer products, the Company has only limited experience marketing and selling its Intelimer polymer products. While Dock Resins will provide consultation and in some cases direct marketing support for Landec's Intelimer polymer products, the Company intends to distribute certain of its products through its corporate partners and other distributors and 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. The Company has recently changed its distribution approach with respect to the QuickCast product line in the United States to include several national distributors. To the extent that the Company enters into distribution arrangements for the sale of its products, the Company will be dependent on the efforts of third parties. There can be no assurance that such efforts will be successful. International Operations and Sales. In the second quarter of the fiscal year 1997 and 1996, approximately 22% and 66%, 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 be an important component 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. In the past, the Company's results of operations have varied significantly from quarter to quarter and such fluctuations are expected to continue in the future. 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 -13- 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 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, the acquisition or disposal of a part of the business, 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. -14- PART II. OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities In connection with the acquisition of Dock Resins on April 18, 1997, the Company acquired all of the outstanding capital stock of Dock Resins in exchange for an aggregate of 396,039 shares of the Company's common stock and $13.7 million in cash, a secured promissory note and direct acquisition costs. The issuance of securities in this Item 2 was deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Act") in reliance on Section 4(2) of the Act as a transaction by an issuer not involving any public offering. The recipient of the securities in such transaction represented his intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in such transaction. The recipient was given adequate access to information about the Company. Item 3. Defaults in Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on March 19, 1997 the following proposals were adopted by the margins indicated: Number of Shares ---------------- Voted For Withheld --------- -------- 1. Three Class I directors were elected by the margins indicated to serve until the next odd numbered year Annual Meeting (1999) during which their successors will be elected and qualified: Ray F. Stewart 6,729,788 12,600 Stephen E. Halprin 6,729,288 13,100 Richard S. Schneider, Ph.D. 6,729,288 13,100 The four Class II directors were not up for election at the Annual Meeting. These four Class II directors, Gary T. Steele, Kirby L. Cramer, Richard Dulude, and Damion E. Wicker, M.D., will serve as Class II directors until the next even-numbered Annual Meeting (1998), when their successors will be elected and qualified. -15-
Voted Voted Broker For Against Abstain Non-Votes --- ------- ------- --------- 2. To approve the adoption of the Company's 1996 Stock 5,073,371 502,099 18,200 1,148,718 Option Plan 3. To approve an amendment to the Company's 1995 6,241,859 83,954 9,700 406,875 Directors' Stock Option Plan to provide that the options granted thereunder vest in full on the date of grant. 4. To ratify the appointment of Ernst & Young LLP as 6,735,884 3,404 3,100 0 independent public accountants of the Company for the fiscal year ending October 31, 1997.
Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.17 1996 Stock Option Plan and Form of Option Agreements 27.1 Financial Data Schedule (b) There were no reports on Form 8-K filed during the quarter ended April 30, 1997. On May 6, 1997, the Company filed a Form 8-K reporting the acquisition of Dock Resins. -16- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. LANDEC CORPORATION By:/s/ JOY T. FRY ---------------------------------------------- Joy T. Fry Vice President, Finance and Administration and Chief Financial Officer (Duly Authorized and Principal Financial and Accounting Officer) Date: June 13, 1997 -17- LANDEC CORPORATION INDEX TO EXHIBITS Exhibit Sequentially - ------- ------------ Number Exhibit Numbered Page - ------ ------- ------------- 10.17 1996 Stock Option Plan and Form of Option Agreement 19 27.1 Financial Data Schedule 37 -18-
                               LANDEC CORPORATION

                             1996 STOCK OPTION PLAN

         1. Purposes of the Plan.  The purposes of this Stock Option Plan are to
attract and retain the best  available  personnel for  positions of  substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.

                  Options  granted  hereunder  may  be  either  Incentive  Stock
Options  (as  defined  under  Section  422 of the  Code) or  Nonstatutory  Stock
Options,  at the  discretion  of the Board and as  reflected in the terms of the
written option agreement.

         2. Definitions. As used herein, the following definitions shall apply:

                  (a)  "Administrator"  shall  mean  the  Board  or  any  of its
Committees appointed pursuant to Section 4 of the Plan.

                  (b)  "Affiliate"  shall mean an entity other than a Subsidiary
(as defined below) in which the Company owns an equity interest.

                  (c)  "Applicable  Laws"  shall have the  meaning  set forth in
Section 4(a) below.

                  (d) "Board" shall mean the Board of Directors of the Company.

                  (e) "Code"  shall mean the Internal  Revenue Code of 1986,  as
amended.

                  (f)  "Committee"  shall mean the  Committee  appointed  by the
Board of  Directors  in  accordance  with  Section  4(a) of the Plan,  if one is
appointed.

                  (g) "Common Stock" shall mean the Common Stock of the Company.

                  (h)  "Company"  shall mean Landec  Corporation,  a  California
corporation.

                  (i) "Consultant" means any person,  including an advisor,  who
is engaged by the Company or any Parent or Subsidiary to render  services and is
compensated  for such  services;  provided  that the term  Consultant  shall not
include  directors who are not compensated for their services or are paid only a
director's fee by the Company.

                  (j)  "Continuous  Status as an Employee or  Consultant"  shall
mean the absence of any interruption or termination of service as an Employee or
Consultant.  Continuous  Status  as an  Employee  or  Consultant  shall  not  be
considered  interrupted in the case of sick leave,  military leave, or any other
leave of absence approved by the Administrator;  provided that such leave is for
a period of not more than 90 days or  reemployment  upon the  expiration of such
leave is guaranteed by contract or statute.  For purposes of this Plan, a change
in status from an Employee to a Consultant  or from a Consultant  to an Employee
will not constitute a termination of employment.



                  (k) "Director" shall mean a member of the Board.

                  (1)  "Employee"  shall  mean any person  (including  any Named
Executive,  Officer  or  Director)  employed  by  the  Company  or  any  Parent,
Subsidiary  or  Affiliate  of the  Company.  The  payment  by the  Company  of a
director's fee to a Director shall not be sufficient to constitute  "employment"
of such Director by the Company.

                  (m) "Exchange Act" shall mean the  Securities  Exchange Act of
1934, as amended.

                  (n) "Fair Market  Value" means,  as of any date,  the value of
Common Stock determined as follows:

                           (i) If the Common Stock is listed on any  established
stock  exchange or a national  market system  including  without  limitation the
National  Market  of  the  National  Association  of  Securities  Dealers,  Inc.
Automated  Quotation  ("Nasdaq")  System,  its Fair  Market  Value  shall be the
closing  sales  price for such  stock as  quoted  on such  system on the date of
determination  (if for a given day no sales were  reported,  the  closing bid on
that day shall be used), as such price is reported in The Wall Street Journal or
such other source as the Administrator deems reliable;

                           (ii) If the  Common  Stock is  quoted  on the  Nasdaq
System  (but not on the  National  Market  thereof)  or  regularly  quoted  by a
recognized  securities  dealer but  selling  prices are not  reported,  its Fair
Market  Value shall be the mean  between the bid and asked prices for the Common
Stock or;

                           (iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.

                  (o) "Incentive  Stock Option" shall mean an Option intended to
qualify as an incentive  stock  option  within the meaning of Section 422 of the
Code, as designated in the applicable written option agreement.

                  (p) "Named  Executive"  shall mean any individual  who, on the
last day of the  Company's  fiscal year, is the chief  executive  officer of the
Company (or is acting in such  capacity) or among the four  highest  compensated
officers of the Company (other than the chief executive  officer).  Such officer
status shall be  determined  pursuant to the executive  compensation  disclosure
rules under the Exchange Act.

                  (q)  "Nonstatutory  Stock  Option"  shall  mean an Option  not
intended  to  qualify  as an  Incentive  Stock  Option,  as  designated  in  the
applicable written option agreement.

                  (r)  "Officer"  shall  mean a person  who is an officer of the
Company  within the meaning of Section 16 of the  Exchange Act and the rules and
regulations promulgated thereunder.


                                      -2-


                  (s) "Option" shall mean a stock option granted pursuant to the
Plan.

                  (t) "Optioned Stock" shall mean the Common Stock subject to an
Option.

                  (u)  "Optionee"  shall  mean an  Employee  or  Consultant  who
receives an Option.

                  (v) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.

                  (w) "Plan" shall mean this 1996 Stock Option Plan.

                  (x) "Rule 16b-3" shall mean Rule 16b-3  promulgated  under the
Exchange  Act as the same may be  amended  from time to time,  or any  successor
provision.

                  (y)  "Share"  shall  mean a  share  of the  Common  Stock,  as
adjusted in accordance with Section 14 of the Plan.

                  (z)  "Subsidiary"  shall  mean  a  "subsidiary   corporation,"
whether now or hereafter existing, as defined in Section 424(f) of the Code.

         3. Stock Subject to the Plan.  Subject to the  provisions of Section 14
of the Plan,  the maximum  aggregate  number of shares that may be optioned  and
sold  under the Plan is  750,000  shares  of Common  Stock.  The  Shares  may be
authorized, but unissued, or reacquired Common Stock.

                  If an Option  should  expire or become  unexercisable  for any
reason without having been  exercised in full the  unpurchased  Shares that were
subject  thereto  shall,  unless  the Plan shall  have been  terminated,  become
available for future grant under the Plan.  Notwithstanding  any other provision
of the Plan,  shares issued under the Plan and later  repurchased by the Company
shall not become available for future grant under the Plan.

         4. Administration of the Plan.

                  (a) Composition of Administrator.

                           (i) Multiple  Administrative  Bodies. If permitted by
Rule 16b-3,  and by the legal  requirements  relating to the  administration  of
incentive stock option plans, if any, of applicable securities laws and the Code
(collectively,  the "Applicable Laws"), grants under the Plan may (but need not)
be made by different  administrative bodies with respect to Directors,  Officers
who are not directors and Employees who are neither Directors nor Officers.

                           (ii)  Administration  with respect to  Directors  and
Officers.  With respect to grants of Options to Employees or Consultants who are
also  Officers or Directors of the Company,  grants under the Plan shall be made
by (A) the Board, if the Board may make grants under the Plan in compliance with
Rule 16b-3 and Section  162(m) of the Code as it applies so as to qualify grants
of Options to Named Executives as performance-based

                                      -3-


compensation,  or (B) a Committee  designated  by the Board to make grants under
the Plan,  which  Committee  shall be  constituted in such a manner as to permit
grants under the Plan to comply with Rule 16b-3, to qualify grants of Options to
Named Executives as  performance-based  compensation under Section 162(m) of the
Code and otherwise so as to satisfy the Applicable Laws.

                           (iii)  Administration  with respect to Other Persons.
With respect to grants of Options to Employees  or  Consultants  who are neither
Directors nor Officers of the Company, the Plan shall be administered by (A) the
Board or (B) a  Committee  designated  by the Board,  which  Committee  shall be
constituted in such a manner as to satisfy the Applicable Laws.

                           (iv)  General.  If a  Committee  has  been  appointed
pursuant to subSection  (ii) or (iii) of this Section 4(a), such Committee shall
continue to serve in its  designated  capacity until  otherwise  directed by the
Board.  From time to time the Board may increase the size of any  Committee  and
appoint additional  members thereof,  remove members (with or without cause) and
appoint new members in substitution  therefor,  fill vacancies  (however caused)
and remove all members of a Committee and  thereafter  directly  administer  the
Plan, all to the extent  permitted by the Applicable  Laws and, in the case of a
Committee appointed under subSection (ii), to the extent permitted by Rule 16b-3
and to the extent required under Section 162(m) of the Code to qualify grants of
Options to Named Executives as performance-based compensation.

                  (b) Powers of the Administrator.  Subject to the provisions of
the Plan and in the case of a Committee,  the specific  duties  delegated by the
Board to such  Committee,  the  Administrator  shall have the authority,  in its
discretion:

                           (i) to determine  the Fair Market Value of the Common
Stock, in accordance with Section 2(m) of the Plan;

                           (ii) to select the Employees and  Consultants to whom
Options may from time to time be granted hereunder;

                           (iii) to determine whether and to what extent Options
are granted hereunder;

                           (iv) to  determine  the  number  of  shares of Common
Stock to be covered by each such award granted hereunder;

                           (v) to approve  forms of agreement  for use under the
Plan;

                           (vi) to  determine  the  terms  and  conditions,  not
inconsistent  with  the  terms  of the  Plan,  of any  award  granted  hereunder
(including,  but  not  limited  to,  the  share  price  and any  restriction  or
limitation,  or any vesting  acceleration  or waiver of forfeiture  restrictions
regarding any Option and/or the shares of Common Stock relating  thereto,  based
in each case on such factors as the Administrator  shall determine,  in its sole
discretion);

                                      -4-


                           (vii) to reduce the  exercise  price of any Option to
the then  current Fair Market Value if the Fair Market Value of the Common Stock
covered  by such  Option  shall  have  declined  since the date the  Option  was
granted.

                  (c)  Effect  of  Administrator's   Decision.   All  decisions,
determinations  and  interpretations  of the  Administrator  shall be final  and
binding on all Optionees and any other holders of any Options.

         5. Eligibility.

                  (a)  Recipients of Grants.  Nonstatutory  Stock Options may be
granted to Employees  and  Consultants.  Incentive  Stock Options may be granted
only to Employees,  provided,  however, that Employees of an Affiliate shall not
be eligible to receive  Incentive  Stock Options.  An Employee or Consultant who
has been granted an Option may, if he or she is otherwise  eligible,  be granted
an additional Option or Options.

                  (b) Type of Option.  Each Option  shall be  designated  in the
written option  agreement as either an Incentive  Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that the
aggregate  Fair Market  Value of Shares with  respect to which  Incentive  Stock
Options are  exercisable  for the first time by an Optionee  during any calendar
year  (under  all plans of the  Company  or any  Parent or  Subsidiary)  exceeds
$100,000,  such excess Options shall be treated as  Nonstatutory  Stock Options.
For purposes of this Section 5(b),  Incentive  Stock Options shall be taken into
account in the order in which they were  granted,  and the Fair Market  Value of
the Shares  shall be  determined  as of the time the Option with respect to such
Shares is granted.

                  (c) No Employment  Rights.  The Plan shall not confer upon any
Optionee any right with respect to  continuation  of  employment  or  consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's  right to terminate  his or her  employment or consulting
relationship at any time, with or without cause.

         6. Term of Plan.  The Plan shall become  effective  upon the earlier to
occur of its  adoption by the Board or its approval by the  shareholders  of the
Company as described in Section 20 of the Plan. It shall  continue in effect for
a term often (10) years unless sooner terminated under Section 16 of the Plan.

         7. Term of Option.  The term of each Option shall be the term stated in
the Option Agreement;  provided, however, that in the case of an Incentive Stock
Option,  the term  shall be no more than ten (10)  years  from the date of grant
thereof  or  such  shorter  term as may be  provided  in the  Option  Agreement.
However, in the case of an Incentive Stock Option granted to an Optionee who, at
the time the Option is granted,  owns stock  representing  more than ten percent
(10%) of the total combined  voting power of all classes of stock of the Company
or any Parent or Subsidiary, the term of the Option shall be five (5) years from
the date of grant  thereof or such shorter term as may be provided in the Option
Agreement.

                                      -5-


         8. Limitation on Grants to Employees. Subject to adjustment as provided
in this  Plan,  the  maximum  number of Shares  which may be  subject to options
granted to any one  Employee  under this Plan for any fiscal year of the Company
shall be 500,000.

         9. Option Exercise Price and Consideration.

                  (a)  Exercise  Price.  The per  Share  exercise  price for the
Shares to be issued  pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be subject to the following:

                           (i)      In the case of an Incentive Stock Option

                                    (A) granted to an Employee  who, at the time
of the grant of such Incentive Stock Option,  owns stock  representing more than
ten percent  (10%) of the voting power of all classes of stock of the Company or
any Parent or  Subsidiary,  the per Share  exercise  price shall be no less than
110% of the Fair Market Value per Share on the date of grant; or

                                    (B) granted to any other  Employee,  the per
Share  exercise  price shall be no less than 100% of the Fair  Market  Value per
Share on the date of grant.

                           (ii)     In the case of a Nonstatutory Stock Option

                                    (A)  granted to a person who, at the time of
the grant of such Option,  is a Named  Executive  of the Company,  the per share
Exercise  Price shall be no less than 100% of the Fair Market  Value on the date
of grant; or

                                    (B) granted to any person other than a Named
Executive,  the per Share  exercise  price shall be no less than 85% of the Fair
Market Value per Share on the date of grant.

                           (iii)  Notwithstanding  anything  to the  contrary in
subsections  9(a)(i) or 9(a)(ii)  above,  in the case of an Option granted on or
after the effective date of  registration of any class of equity security of the
Company pursuant to Section 12 of the Exchange Act and prior to six months after
the termination of such  registration,  the per Share exercise price shall be no
less than 100% of the Fair Market Value per Share on the date of grant.

                  (b) Permissible  Consideration.  The  consideration to be paid
for the Shares to be issued upon exercise of an Option,  including the method of
payment,  shall  be  determined  by the  Administrator  (and,  in the case of an
Incentive  Stock  Option,  shall be  determined  at the time of  grant)  and may
consist entirely of (1) cash, (2) check, (3)  authorization  from the Company to
retain from the total number of Shares as to which the Option is exercised  that
number of Shares having a Fair Market Value on the date of exercise equal to the
exercise  price  for the  total  number  of  Shares  as to which  the  Option is
exercised,  (4) delivery of a properly  executed  exercise  notice together with
irrevocable  instructions  to a broker to deliver  promptly  to the  Company the
amount of sale or loan  proceeds  required to pay the  exercise  price,  (5) any
combination of the foregoing methods of payment, or (6) such other consideration
and method of

                                      -6-


payment for the  issuance  of Shares to the extent  permitted  under  Applicable
Laws. In making its determination as to the type of consideration to accept, the
Administrator  shall  consider  if  acceptance  of  such  consideration  may  be
reasonably expected to benefit the Company.

         10. Exercise of Option.

                  (a)  Procedure  for  Exercise;  Rights as a  Shareholder.  Any
Option  granted  hereunder  shall be  exercisable  at such  times and under such
conditions as determined by the Administrator,  including  performance  criteria
with respect to the Company  and/or the  Optionee,  and as shall be  permissible
under the terms of the Plan.

                           An Option may not be  exercised  for a fraction  of a
Share.

                           An  Option  shall  be  deemed  to be  exercised  when
written notice of such exercise has been given to the Company in accordance with
the terms of the Option by the person  entitled to exercise  the Option and full
payment for the Shares with  respect to which the Option is  exercised  has been
received by the Company.  Full payment may, as authorized by the  Administrator,
consist of any  consideration and method of payment allowable under Section 9(b)
of the Plan.  Until the issuance (as evidenced by the  appropriate  entry on the
books of the Company or of a duly  authorized  transfer agent of the Company) of
the  stock  certificate  evidencing  such  Shares,  no right to vote or  receive
dividends or any other rights as a  shareholder  shall exist with respect to the
Optioned Stock,  notwithstanding  the exercise of the Option.  The Company shall
issue (or cause to be issued) such stock  certificate  promptly upon exercise of
the Option.  No adjustment  will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued,  except as
provided in Section 14 of the Plan.

                           Exercise of an Option in any manner shall result in a
decrease in the number of Shares which  thereafter  may be  available,  both for
purposes of the Plan and for sale under the  Option,  by the number of Shares as
to which the Option is exercised.

                  (b) Termination of Status as an Employee or Consultant. In the
event of  termination  of an  Optionee's  Continuous  Status as an  Employee  or
Consultant,  such  Optionee may, but only within thirty (30) days (or such other
period of time, not exceeding three (3) months in the case of an Incentive Stock
Option  or six (6)  months in the case of a  Nonstatutory  Stock  Option,  as is
determined  by the  Administrator,  with  such  determination  in the case of an
Incentive  Stock Option being made at the time of grant of the Option) after the
date of such  termination  (but in no event later than the date of expiration of
the term of such Option as set forth in the Option  Agreement),  exercise his or
her Option to the extent that he or she was  entitled to exercise it at the date
of such  termination.  To the  extent  that the  Optionee  was not  entitled  to
exercise the Option at the date of such termination, or if the optionee does not
exercise such Option (which he or she was entitled to exercise)  within the time
specified herein, the Option shall terminate.

                  (c)  Disability  of Optionee.  Notwithstanding  Section  10(b)
above,  in the event of  termination  of an Optionee's  Continuous  Status as an
Employee or Consultant as a result of his or her total and permanent  disability
(as defined in Section 22(e)(3) of the Code), he

                                      -7-


or she may,  but only  within six (6)  months (or such other  period of time not
exceeding  twelve (12) months as is determined by the  Administrator,  with such
determination in the case of an Incentive Stock Option being made at the time of
grant of the Option)  from the date of such  termination  (but in no event later
than  the date of  expiration  of the term of such  Option  as set  forth in the
Option  Agreement),  exercise  his or her  Option  to the  extent  he or she was
entitled to exercise it at the date of such  termination.  To the extent that he
or she was not entitled to exercise the Option at the date of termination, or if
he does not exercise such Option (which he was entitled to exercise)  within the
time specified herein, the Option shall terminate.

                  (d)  Death  of  Optionee.  In the  event  of the  death  of an
Optionee:

                           (i)  during the term of the Option who is at the time
of his death an Employee or Consultant of the Company and who shall have been in
Continuous  Status as an Employee or  Consultant  since the date of grant of the
Option, the Option may be exercised,  at any time within six (6) months (or such
other period of time,  not  exceeding  six (6) months,  as is  determined by the
Administrator,  with such determination in the case of an Incentive Stock Option
being made at the time of grant of the Option)  following the date of death (but
in no event later than the date of  expiration of the term of such Option as set
forth in the  Option  Agreement),  by the  Optionee's  estate or by a person who
acquired the right to exercise the Option by bequest or inheritance  but only to
the extent of the right to exercise  that would have  accrued  had the  Optionee
continued living and remained in Continuous  Status as an Employee or Consultant
three  (3)  months  (or  such  other  period  of  time as is  determined  by the
Administrator  as  provided  above)  after  the date of  death,  subject  to the
limitation set forth in Section 5(b); or

                           (ii) within thirty (30) days (or such other period of
time not exceeding three (3) months as is determined by the Administrator,  with
such  determination  in the case of an Incentive  Stock Option being made at the
time of grant of the Option) after the  termination  of Continuous  Status as an
Employee or Consultant,  the Option may be exercised, at any time within six (6)
months  following  the date of death  (but in no  event  later  than the date of
expiration of the term of such Option as set forth in the Option Agreement),  by
the  Optionee' s estate or by a person who  acquired  the right to exercise  the
Option  by  bequest  or  inheritance,  but only to the  extent  of the  right to
exercise that had accrued at the date of termination.

                  (e) Rule 16b-3.  Options granted to persons subject to Section
16(b) of the  Exchange  Act must comply with Rule 16b-3 and shall  contain  such
additional  conditions or restrictions as may be required  thereunder to qualify
for the maximum  exemption  from  Section 16 of the Exchange Act with respect to
Plan transactions.

         11.  Withholding  Taxes.  As a  condition  to the  exercise  of Options
granted   hereunder,   the  Optionee  shall  make  such   arrangements   as  the
Administrator may require for the satisfaction of any federal,  state,  local or
foreign  withholding  tax  obligations  that may  arise in  connection  with the
exercise,  receipt or vesting of such Option.  The Company shall not be required
to issue any Shares under the Plan until such obligations are satisfied.

         12. Stock  Withholding to Satisfy  Withholding Tax Obligations.  At the
discretion of the Administrator,  Optionees may satisfy withholding  obligations
as  provided  in this

                                      -8-


paragraph.  When an Optionee  incurs tax liability in connection  with an Option
which tax liability is subject to tax withholding under applicable tax laws, and
the Optionee is  obligated to pay the Company an amount  required to be withheld
under  applicable  tax laws,  the  Optionee  may  satisfy  the  withholding  tax
obligation  by one or some  combination  of the following  methods:  (a) by cash
payment, or (b) out of Optionee's current  compensation,  or (c) if permitted by
the Administrator, in its discretion, by surrendering to the Company Shares that
(i) in the case of Shares previously acquired from the Company,  have been owned
by the Optionee for more than six months on the date of surrender, and (ii) have
a fair market  value on the date of surrender  equal to or less than  Optionee's
marginal tax rate times the ordinary  income  recognized,  or (d) by electing to
have the  Company  withhold  from the Shares to be issued  upon  exercise of the
Option  that  number of Shares  having a fair  market  value equal to the amount
required to be withheld.  For this purpose,  the fair market value of the Shares
to be  withheld  shall be  determined  on the date that the  amount of tax to be
withheld is to be determined (the "Tax Date").

                  Any  surrender by an Officer or Director of  previously  owned
Shares to satisfy tax  withholding  obligations  arising  upon  exercise of this
Option must comply with the applicable provisions of Rule 16b-3.

                  All  elections  by an  Optionee  to have  Shares  withheld  to
satisfy  tax  withholding  obligations  shall  be  made  in  writing  in a  form
acceptable  to  the   Administrator  and  shall  be  subject  to  the  following
restrictions:

                  (a) the  election  must be made on or prior to the  applicable
Tax Date;

                  (b) once made,  the election  shall be  irrevocable  as to the
particular Shares of the Option as to which the election is made; and

                  (c)  all  elections   shall  be  subject  to  the  consent  or
disapproval of the Administrator.

                           In the event the election to have Shares  withheld is
made by an Optionee  and the Tax Date is deferred  under  Section 83 of the Code
because no election is filed under Section 83(b) of the Code, the Optionee shall
receive the full number of Shares with  respect to which the Option is exercised
but such  Optionee  shall be  unconditionally  obligated  to tender  back to the
Company the proper number of Shares on the Tax Date.

         13.  Non-Transferability  of  Options.  The  Option  may  not be  sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the  laws of  descent  or  distribution;  provided  that  the
Administrator  may in  its  discretion  grant  transferable  Nonstatutory  Stock
Options  pursuant to option  agreements  specifying (i) the manner in which such
Nonstatutory  Stock  Options are  transferable  and (ii) that any such  transfer
shall be subject to the Applicable  Laws. The designation of a beneficiary by an
Optionee will not constitute a transfer. An Option may be exercised,  during the
lifetime of the Optionee, only by the Optionee or a transferee permitted by this
Section 13.

                                      -9-


         14. Adjustments Upon Changes in Capitalization; Corporate Transactions.

                  (a)  Adjustment.   Subject  to  any  required  action  by  the
shareholders  of the Company,  the number of shares of Common  Stock  covered by
each  outstanding  Option,  the number of shares of Common  Stock that have been
authorized  for issuance under the Plan but as to which no Options have yet been
granted or which have been returned to the Plan upon  cancellation or expiration
of an Option, the maximum number of shares of Common Stock for which Options may
be granted to any employee  under Section 8 of the Plan, and the price per share
of Common Stock covered by each  outstanding  Option,  shall be  proportionately
adjusted for any  increase or decrease in the number of issued  shares of Common
Stock  resulting  from a stock  split,  reverse  stock  split,  stock  dividend,
combination or  reclassification  of the Common Stock,  or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of  consideration  by the Company;  provided,  however,  that  conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without  receipt  of  consideration."  Such  adjustment  shall  be  made  by the
Administrator,  whose determination in that respect shall be final,  binding and
conclusive.  Except as expressly  provided herein, no issuance by the Company of
shares of stock of any class, or securities  convertible into shares of stock of
any class,  shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.

                  (b)  Corporate  Transactions.  In the  event  of the  proposed
dissolution or liquidation of the Company, the Option will terminate immediately
prior to the consummation of such proposed action,  unless otherwise provided by
the Administrator. The Administrator may, in the exercise of its sole discretion
in such instances, declare that any Option shall terminate as of a date fixed by
the Administrator and give each Optionee the right to exercise his or her Option
as to all or any part of the Optioned  Stock,  including  Shares as to which the
Option would not  otherwise be  exercisable.  In the event of a proposed sale of
all or  substantially  all of the  assets of the  Company,  or the merger of the
Company  with or into  another  corporation,  the Option  shall be assumed or an
equivalent option shall be substituted by such successor corporation or a parent
or  subsidiary  of  such  successor   corporation,   unless  the   Administrator
determines,  in the  exercise  of  its  sole  discretion  and in  lieu  of  such
assumption or  substitution,  that the Optionee shall have the right to exercise
the Option as to some or all of the Optioned Stock, including Shares as to which
the Option would not otherwise be  exercisable.  If the  Administrator  makes an
Option  exercisable  in lieu of  assumption  or  substitution  in the event of a
merger or sale of assets,  the Administrator  shall notify the Optionee that the
Option shall be  exercisable  for a period of fifteen (15) days from the date of
such notice, and the Option will terminate upon the expiration of such period.

         15. Time of Granting Options. The date of grant of an Option shall, for
all purposes,  be the date on which the  Administrator  makes the  determination
granting such Option or such other date as is  determined by the  Administrator;
provided,  however,  that in the case of any Incentive  Stock Option,  the grant
date  shall  be the  later  of the date on which  the  Administrator  makes  the
determination  granting such Incentive  Stock Option or the date of commencement
of the  Optionee's  employment  relationship  with the  Company.  Notice  of the

                                      -10-


determination shall be given to each Employee or Consultant to whom an Option is
so granted within a reasonable time after the date of such grant.

         16. Amendment and Termination of the Plan.

                  (a)  Amendment  and  Termination.   The  Board  may  amend  or
terminate  the Plan  from  time to time in such  respects  as the Board may deem
advisable;  provided that, the following  revisions or amendments  shall require
approval of the  shareholders of the Company in the manner  described in Section
20 of the Plan:

                           (i) any  increase in the number of Shares  subject to
the Plan, other than an adjustment under Section 14 of the Plan;

                           (ii) any  change in the  designation  of the class of
persons eligible to be granted Options; or

                           (iii)  any  change  in the  limitation  on  grants to
employees  as described  in Section 8 of the Plan or other  changes  which would
require   shareholder   approval  to  qualify  options   granted   hereunder  as
performance-based compensation under Section 162(m) of the Code.

                  (b)   Shareholder   Approval.   If  any  amendment   requiring
shareholder  approval under Section 16(a) of the Plan is made  subsequent to the
first  registration  of any  class of equity  securities  by the  Company  under
Section 12 of the Exchange Act, such shareholder  approval shall be solicited as
described in Section 20 of the Plan.

                  (c) Effect of Amendment or Termination.  Any such amendment or
termination  of the Plan  shall not  affect  Options  already  granted  and such
Options  shall  remain  in full  force  and  effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.

         17.  Conditions  Upon  Issuance of Shares.  Shares  shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance  and  delivery of such Shares  pursuant  thereto  shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933,  as amended,  the  Exchange  Act,  the rules and  regulations  promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed,  and shall be further subject to the approval of counsel for the
Company with respect to such compliance.

                  As a condition to the  exercise of an Option,  the Company may
require the person  exercising  such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without  any  present  intention  to sell or  distribute  such Shares if, in the
opinion of counsel for the Company,  such a representation is required by any of
the aforementioned relevant provisions of law.

                                      -11-


         18. Reservation of Shares.  The Company,  during the term of this Plan,
will at all times reserve and keep  available  such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to  obtain  authority  from  any  regulatory  body  having  jurisdiction,  which
authority  is deemed by the  Company's  counsel  to be  necessary  to the lawful
issuance  and sale of any Shares  hereunder,  shall  relieve  the Company of any
liability  in  respect of the  failure to issue or sell such  Shares as to which
such requisite authority shall not have been obtained.

         19.  Option  Agreement.  Options  shall be evidenced by written  option
agreements in such form as the Board shall approve.

         20. Shareholder Approval.

                  (a)  Continuance  of the Plan shall be subject to  approval by
the  shareholders  of the Company  within twelve (12) months before or after the
date the Plan is adopted.  Such  shareholder  approval  shall be obtained in the
manner and to the degree required under applicable federal and state law and the
rules of any stock exchange upon which the Shares are listed.

                  (b) In the  event  that the  Company  registers  any  class of
equity  securities  pursuant to Section 12 of the  Exchange  Act,  any  required
approval of the  shareholders  of the Company  obtained after such  registration
shall  be  solicited  substantially  in  accordance  with  Section  14(a) of the
Exchange Act and the rules and regulations promulgated thereunder.

                  (c) If any required  approval by the  shareholders of the Plan
itself or of any amendment  thereto is solicited at any time  otherwise  than in
the manner  described in Section 20(b)  hereof,  then the Company  shall,  at or
prior to the first annual meeting of  shareholders  held subsequent to the later
of (1) the first  registration of any class of equity  securities of the Company
under Section 12 of the Exchange Act or (2) the granting of an Option  hereunder
to an officer or director after such registration, do the following:

                           (i)  furnish in writing to the  holders  entitled  to
vote for the Plan  substantially the same information that would be required (if
proxies  to be voted with  respect to  approval  or  disapproval  of the Plan or
amendment  were then being  solicited)  by the rules and  regulations  in effect
under  Section  14(a)  of the  Exchange  Act at the  time  such  information  is
furnished; and

                           (ii)file  with, or mail for filing to, the Securities
and Exchange  Commission four copies of the written  information  referred to in
subsection (i) hereof not later than the date on which such information is first
sent or given to shareholders.

                                      -12-


                               LANDEC CORPORATION

                             1996 STOCK OPTION PLAN

                          NOTICE OF STOCK OPTION GRANT



Optionee's Name and Address:

Optionee
OptioneeAddress1
OptioneeAddress2

         You have been  granted  an option to  purchase  Common  Stock of Landec
Corporation, (the "Company") as follows:

         Board Approval Date:                ___________________________

         Date of Grant (Later of Board
                  Approval Date or
                  Commencement of
                  Employment/Consulting):    ExercisePrice

         Exercise Price Per Share:           ExercisePrice

         Total Number of Shares Granted:     SharesGranted

         Total Price of Shares Granted:      TotalExercisePrice

         Type of Option:                     NoSharesISO Shares Incentive Stock
                                             Option
                         NoSharesNSO Shares Nonstatutory
                                             Stock Option

         Term/Expiration Date:               Term/ExpirDate

         Vesting Commencement Date:          VestingStartDate

         Vesting Schedule:                   VestingSchedule

         Termination Period:                 Option  may  be  exercised   for  a
                                             period of 30 days after termination
                                             of    employment    or   consulting
                                             relationship  except  as set out in
                                             Sections  7  and  8  of  the  Stock
                                             Option  Agreement  (but in no event
                                             later than the Expiration Date).


         By your  signature and the  signature of the  Company's  representative
below,  you and the Company agree that this option is granted under and governed
by the terms and conditions of the Landec Corporation 1996 Stock Option Plan and
the Stock  Option  Agreement,  all of which are attached and made a part of this
document.

OPTIONEE:                             LANDEC CORPORATION



____________________________          By: ________________________________
Signature

____________________________          Title: _____________________________
Print Name


                                      -2-


                               LANDEC CORPORATION


                             STOCK OPTION AGREEMENT

         1. Grant of Option. Landec Corporation,  a California  corporation (the
"Company"),  hereby  grants to the Optionee  named in the Notice of Stock Option
Grant  attached to this  Agreement  ("Optionee"),  an option (the  "Option")  to
purchase the total number of shares of Common Stock (the  "Shares") set forth in
the Notice of Stock Option Grant,  at the exercise  price per share set forth in
the Notice of Stock Option Grant (the  "Exercise  Price")  subject to the terms,
definitions and provisions of the 1996 Stock Option Plan (the "Plan") adopted by
the Company, which is incorporated in this Agreement by reference.  In the event
of a conflict between the terms of the Plan and the terms of this Agreement, the
terms of the Plan shall govern. Unless otherwise defined in this Agreement,  the
terms used in this Agreement shall have the meanings defined in the Plan.

         To the extent  designated  an  Incentive  Stock Option in the Notice of
Stock Option  Grant,  this Option is intended to qualify as an  Incentive  Stock
Option as  defined in  Section  422 of the  Internal  Revenue  Code of 1986,  as
amended  (the  "Code")  and,  to the extent not so  designated,  this  Option is
intended to be a Nonstatutory Stock Option.

         2. Exercise of Option. This Option shall be exercisable during its term
in  accordance  with the Vesting  Schedule set out in the Notice of Stock Option
Grant and with the provisions of Sections 9 and 10 of the Plan as follows:

                  (a)      Right to Exercise.

                           (i) This Option may not be  exercised  for a fraction
of a share.

                           (ii) In the event of Optionee's death,  disability or
other termination of employment, the exercisability of the Option is governed by
Sections 6, 7 and 8 below,  subject to the  limitations  contained in paragraphs
(iii) and (iv) below.

                           (iii) In no event may this Option be exercised  after
the date of  expiration of the term of this Option as set forth in the Notice of
Stock Option Grant.

                           (iv) If designated  an Incentive  Stock Option in the
Notice of Stock  Option  Grant,  in the event  that the  Shares  subject to this
Option (and all other Incentive Stock Options granted to Optionee by the Company
or any Parent or  Subsidiary)  that vest in any calendar  year have an aggregate
fair  market  value  (determined  for each  Share as of the Date of Grant of the
option  covering  such  Share) in excess of  $100,000,  the  Shares in excess of
$100,000  shall be  treated  as  subject  to a  Nonstatutory  Stock  Option,  in
accordance with Section 5 of the Plan.

                  (b)      Method of Exercise.


                           (i) This Option shall be exercisable by delivering to
the  Company a written  notice of exercise  (in the form  attached as Exhibit A)
which shall state the election to exercise  the Option,  the number of Shares in
respect of which the Option is being exercised,  and such other  representations
and agreements as to the holder's  investment intent with respect to such Shares
of Common Stock as may be required by the Company  pursuant to the provisions of
the Plan. Such written notice shall be signed by Optionee and shall be delivered
in person or by certified  mail to the  Secretary  of the  Company.  The written
notice shall be accompanied by payment of the Exercise Price.  This Option shall
be deemed to be exercised  upon  receipt by the Company of such  written  notice
accompanied by the Exercise Price.

                           (ii) As a condition  to the  exercise of this Option,
Optionee  agrees to make  adequate  provision  for  federal,  state or other tax
withholding obligations,  if any, which arise upon the exercise of the Option or
disposition of Shares, whether by withholding, direct payment to the Company, or
otherwise.

                           (iii)  No  Shares  will  be  issued  pursuant  to the
exercise of an Option unless such  issuance and such exercise  shall comply with
all relevant  provisions of law and the  requirements of any stock exchange upon
which the Shares may then be listed.  Assuming such  compliance,  for income tax
purposes the Shares shall be considered  transferred  to Optionee on the date on
which the Option is exercised with respect to such Shares.

         3.  Optionee's  Representations.  In the event the  Shares  purchasable
pursuant  to the  exercise of this  Option  have not been  registered  under the
Securities  Act of 1933,  as amended (the  "Securities  Act"),  at the time this
Option is exercised,  Optionee shall,  if required by the Company,  concurrently
with the exercise of all or any portion of this  Option,  deliver to the Company
an  investment  representation  statement in customary  form, a copy of which is
available for Optionee's review from the Company upon request.

         4. Method of Payment.  Payment of the Exercise Price shall be by any of
the following,  or a combination of the following,  at the election of Optionee:
(a) cash;  (b)  check;  (c)  surrender  of other  Shares of Common  Stock of the
Company that (i) either have been owned by Optionee for more than six (6) months
on the date of surrender or were not acquired,  directly or indirectly, from the
Company, and (ii) have a Fair Market Value on the date of surrender equal to the
aggregate  exercise  price  of the  Shares  as to  which  said  Option  shall be
exercised; (d) authorization from the Company to retain from the total number of
Shares as to which the Option is exercised  that number of Shares  having a Fair
Market value on the date of exercise  equal to the exercise  price for the total
number  of Shares as to which  the  Option  is  exercised;  or (e) if there is a
public market for the Shares and they are registered  under the Securities  Act,
delivery  of a properly  executed  exercise  notice  together  with  irrevocable
instructions  to a broker to deliver  promptly to the Company the amount of sale
or loan proceeds required to pay the exercise price.

         5.  Restrictions  on Exercise.  This Option may not be exercised  until
such time as the Plan has been approved by the  shareholders of the Company,  or
if the  issuance of such  Shares upon such  exercise or the method of payment of
consideration  for such shares would  constitute  a

                                      -2-


violation  of any  applicable  federal  or  state  securities  or  other  law or
regulation, including any rule under Part 207 of Title 12 of the Code of Federal
Regulations  ("Regulation  G") as promulgated by the Federal Reserve Board. As a
condition to the exercise of this  Option,  the Company may require  Optionee to
make any  representation  and  warranty to the Company as may be required by any
applicable law or regulation.

         6.  Termination  of  Relationship.  In  the  event  of  termination  of
Optionee's Continuous Status as an Employee or Consultant,  Optionee may, to the
extent otherwise so entitled at the date of such  termination (the  "Termination
Date"), exercise this Option during the Termination Period set out in the Notice
of Stock Option Grant.  To the extent that Optionee was not entitled to exercise
this Option at the date of such  termination,  or if Optionee  does not exercise
this Option within the time  specified in the Notice of Stock Option Grant,  the
Option shall terminate.

         7. Disability of Optionee.  Notwithstanding the provisions of Section 6
above,  in the  event of  termination  of  Optionee's  Continuous  Status  as an
Employee or Consultant as a result of total and permanent disability (as defined
in Section  22(e)(3) of the Code),  Optionee may, but only within six (6) months
from the date of termination of employment  (but in no event later than the date
of  expiration  of the term of this  Option as set forth in  Section  10 below),
exercise  the Option to the extent  otherwise  so  entitled  at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option (to the
extent otherwise so entitled)  within the time specified in this Agreement,  the
Option shall terminate.

         8. Death of Optionee. In the event of the death of Optionee:

                  (a) during the term of this  Option and while an  Employee  of
the Company and having been in  Continuous  Status as an Employee or  Consultant
since the date of grant of the Option, the Option may be exercised,  at any time
within six (6) months  following  the date of death (but in no event  later than
the date of  expiration  of the term of this  Option as set forth in  Section 10
below),  by Optionee's  estate or by a person who acquired the right to exercise
the  Option by bequest  or  inheritance,  but only to the extent of the right to
exercise that would have accrued had Optionee  continued  living and remained in
Continuous  Status as an Employee or Consultant  three (3) months after the date
of death,  subject to the limitation  contained in Section  2(i)(d) above in the
case of an Incentive Stock Option; or

                  (b)  within  thirty  (30)  days  after  the   termination   of
Optionee's  Continuous  Status as an Employee or  Consultant,  the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event  later than the date of  expiration  of the term of this  Option as set
forth in Section 10 below), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or  inheritance,  but only to the extent
of the right to exercise that had accrued at the date of termination.

         9. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution. The
designation of a beneficiary  does not  constitute a transfer.  An Option may be
exercised  during the  lifetime  of

                                      -3-


Optionee only by Optionee or a transferee  permitted by this section.  The terms
of this  Option  shall be binding  upon the  executors,  administrators,  heirs,
successors and assigns of Optionee.

         10. Term of Option.  This Option may be exercised  only within the term
set out in the Notice of Stock Option  Grant,  and may be exercised  during such
term only in accordance with the Plan and the terms of this Option.

         11. No Additional  Employment Rights.  Optionee  understands and agrees
that the vesting of Shares  pursuant  to the Vesting  Schedule is earned only by
continuing  as an Employee or Consultant at the will of the Company (not through
the act of being hired, being granted this Option or acquiring Shares under this
Agreement).  Optionee  further  acknowledges  and  agrees  that  nothing in this
Agreement, nor in the Plan which is incorporated in this Agreement by reference,
shall confer upon Optionee any right with respect to continuation as an Employee
or  Consultant  with the Company,  nor shall it interfere in any way with his or
her  right  or the  Company's  right  to  terminate  his or  her  employment  or
consulting relationship at any time, with or without cause.

         12. Tax Consequences. Optionee acknowledges that he or she has read the
brief summary set forth below of certain federal tax consequences of exercise of
this Option and disposition of the Shares under the law in effect as of the date
of grant. OPTIONEE UNDERSTANDS THAT THIS SUMMARY IS NECESSARILY INCOMPLETE,  AND
THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.  OPTIONEE SHOULD CONSULT HIS
OR HER OWN TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.

                  (a) Exercise of Incentive  Stock Option.  If this Option is an
Incentive  Stock Option,  there will be no regular  federal income tax liability
upon the exercise of the Option, although the excess, if any, of the fair market
value of the  Shares on the date of  exercise  over the  Exercise  Price will be
treated  as an item of  alternative  minimum  taxable  income  for  federal  tax
purposes and may subject Optionee to the alternative  minimum tax in the year of
exercise.

                  (b) Exercise of Nonstatutory Stock Option. If this Option does
not qualify as an Incentive  Stock Option,  Optionee may incur  regular  federal
income tax liability  upon the exercise of the Option.  Optionee will be treated
as having  received  compensation  income (taxable at ordinary income tax rates)
equal to the excess,  if any, of the fair market value of the Shares on the date
of exercise over the Exercise Price. In addition,  if Optionee is an employee of
the  Company,   the  Company  will  be  required  to  withhold  from  Optionee's
compensation  or  collect  from  Optionee  and  pay  to  the  applicable  taxing
authorities an amount equal to a percentage of this  compensation  income at the
time of exercise.

                  (c)  Disposition  of Shares.  If this  Option is an  Incentive
Stock Option and if Shares transferred  pursuant to the Option are held for more
than one year after  exercise  and more than two years  after the Date of Grant,
any gain  realized on  disposition  of the Shares  will be treated as  long-term
capital  gain for federal  income tax  purposes.  If Shares  purchased  under an
Incentive  Stock  Option  are  disposed  of before the end of either of such two
holding  periods,  then any gain realized on such disposition will be treated as
compensation income (taxable at ordinary

                                      -4-


income rates) to the extent of the excess, if any, of the lesser of (i) the fair
market value of the Shares on the date of exercise,  or (ii) the sales proceeds,
over the Exercise  Price.  If this Option is a Nonstatutory  Stock Option,  then
gain  realized  on the  disposition  of Shares will be treated as  long-term  or
short-term  capital gain depending on whether or not the disposition occurs more
than one year after the exercise date.

                  (d) Notice of Disqualifying Disposition. If the Option granted
to Optionee in this  Agreement is an  Incentive  Stock  Option,  and if Optionee
sells or  otherwise  disposes  of any of the  Shares  acquired  pursuant  to the
Incentive  Stock  Option on or before the later of (i) the date two years  after
the Date of Grant,  or (ii) the date one year after  transfer  of such Shares to
Optionee upon exercise of the Incentive Stock Option,  Optionee shall notify the
Company  in  writing  within  thirty  (30)  days  after  the  date  of any  such
disposition.  Optionee  agrees  that  Optionee  may be  subject  to  income  tax
withholding  by the Company on the  compensation  income  recognized by Optionee
from the early  disposition  by payment in cash or out of the  current  earnings
paid to Optionee.

         13. Signature.  This Stock Option Agreement shall be deemed executed by
the Company and Optionee  upon  execution by such parties of the Notice of Stock
Option Grant attached to this Stock Option Agreement.




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                                      -5-



                                    EXHIBIT A

                               NOTICE OF EXERCISE

To:               Landec Corporation
Attn:             Stock Option Administrator
Subject:          Notice of Intention to Exercise Stock Option

         This is official  notice that the undersigned  ("Optionee")  intends to
exercise  Optionee's option to purchase  __________ shares of Landec Corporation
Common Stock, under and pursuant to the Company's 1996 Stock Option Plan and the
Stock Option Agreement dated ___________, as follows:

                  Grant Number:                 ________________________________

                  Date of Purchase:             ________________________________

                  Number of Shares:             ________________________________

                  Purchase Price:               ________________________________

                  Method of Payment
                  of Purchase Price:            ________________________________


         Social Security No.:       ________________________________

         The shares should be issued as follows:

                  Name:    ________________________________

                  Address: ________________________________

                           ________________________________

                           ________________________________

                  Signed:  ________________________________

                  Date:    ________________________________

 


5 1,000 6-MOS OCT-31-1997 NOV-01-1996 APR-01-1997 2,043 27,952 2,124 (78) 2,295 34,692 6,424 (2,536) 45,763 12,480 0 0 0 70,433 (37,436) 45,763 940 1,399 943 2,889 3,022 20 37 (5,867) 0 (5,867) 0 0 0 (5,867) (.54) (.54)