SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON
      D. C. 20549





**FORM 10-KSB**





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





For
      the fiscal year ended June 30, 2006





Commission
      File Number 0-10683





**HYDROMER,
                INC****.**(Exact
                name of registrant as specified in its charter)New
                Jersey
            
            22-2303576(State
                of incorporation)
            
            (I.R.S.
                EmployerIdentification
                No.)





35
                Industrial Parkway, Branchburg, New Jersey
            
            08876-3424(Address
                of principal executive offices)
            
            (Zip
                Code)Registrant's
                telephone number, including area code:
            
            (908)
                722-5000Securities
                registered pursuant to Section 12 (b) of the Act:
            
            NoneSecurities
                registered pursuant to Section 12 (g) of the Act:Common
                Stock Without Par Value(Title
                of class)




Check
      whether the issuer (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 report(s)
      and
      (2) has been subject to such filing requirements for the past 90 days. Yes x No o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of


registrant's
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB x




The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant at September 1, 2006 was approximately $3,947,539.




The
      number of shares of Registrant's Common Stock outstanding on September 1, 2006
      was 4,644,164.




Portions
      of the Audited Financials Statements for the year ended June 30, 2006 are
      incorporated by reference in Part II of this report. Portions of the Proxy
      Statement of


Registrant
      dated September 15, 2006 are incorporated by reference in Part III of this
      report.















**PART I**







**Item
      1. BUSINESS**


**General**


Hydromer,
      Inc (the “Company”) is a bio-polymer research and development company organized
      as a New Jersey Corporation in 1980 for the purposes of developing polymeric


complexes
      for commercial use in the medical, commercial, cosmetics and veterinary sciences
      markets.





Until
      September 1982, approximately 99% of the outstanding common stock, without
      par
      value (the “Common Stock”), of the Company, was owned by Biosearch


Medical
      Products Inc. (“BMPI”), which in turn was controlled by Manfred Dyck, who is the
      Company’s current Chief Executive Officer, Director and the Chairman of the
      Board.


On
      September 16, 1982, BMPI distributed its shareholdings in the Company pro rata
      to the holders of its common stock. In connection with this distribution, the
      Company granted to


BMPI
      an
      exclusive, worldwide perpetual, royalty-free license for the use of Hydromer
      technology in connection with the development, manufacture and marketing of


biomedical
      devices for enteral feeding applications. On February 4, 2000, the Company
      acquired all outstanding stock of BMPI for $0.20 per share, and now manages
      BMPI
      as a


subsidiary.





The
      Company owns several process and applications patents for Hydromer ® coatings
      (“Hydromer”). These polymers become extremely lubricious (slippery) when wet.


Techniques
      have been developed for grafting or applying this substance onto a broad variety
      of materials, including other polymers like polyurethane, polyvinyl chloride,


and
      silicone elastomers, ceramics and metals. The Company has also been issued
      patents for permanent anti-fog materials, hydrophilic polyurethane foams,


hydrophilic
      polyurethane blends, hydrophilic polyvinylbutyral alloys, several biocompatible
      hydrogels and an anti-bacterial medical material. The
      Company continues to


actively
      evaluate other new market opportunities for its polymer technology specifically
      in neurology and cardiology.





The
      Company also owns various trademarks, including AQUADAPT ® ,
      a
      medical hydrogel, AQUAMERE ® ,
      a water
      resistant film former product with cosmetic applications,


AQUATRIX ® ,
      a
      cosmetic hydrogel, Dermaseal ® ,
      a
      dermal barrier film product for the prevention of contact dermatitis,
      Sea-Slide ® ,
      a
      coating for watercraft hulls, and


T-HEXX ® ,
      a
      barrier teat dip product for the prevention of mastitis in dairy animals.





The
      Company’s patents are typically broad based, having a multitude of different
      applications across various industries. Accordingly, the Company currently


operates
      in the medical, commercial, cosmetics and veterinary sciences markets.





***MEDICAL***




From
      its
      inception in 1980 to mid-1984, the Company was primarily engaged in R&D
      activities related to Hydromer coatings used on medical devices. Since then
      and


until
      the
      acquisition of BMPI, the Company’s business in the medical field consisted of
      the sale of lubricious coatings and the licensing of its lubricious coating


technologies.
      With the acquisition of BMPI in February 2000, the Company now offers a
      horizontally integrated breadth of services including medical device


manufacturing,
      contract coating, equipment building and design, and as of more recently,
      R&D servicing and government contracts.





The
      Company continues to focus on its coatings technologies as the nucleus of its
      participation in the medical field. As of June 30, 2006, the Company has three


patents
      pending, one on a non-leaching anti-microbial coating and two on teat dip
      technology. The Company was granted a patent on water-based lubricious coatings
      in fiscal 2006.





HYDROMER ® Lubricious Coatings




When
      treated with Hydromer polymers, a medical device becomes very slippery when
      wet,
      allowing for easy insertion into any orifice of the body, in penetration of
      the


skin
      or
      for device-on-device (i.e. guidewire-catheter) use. Hydromer coatings are
      permanently bonded to the device unlike silicone lubricants, which must be
      applied


after
      each use and are often left behind in the bloodstream and body cavities.
      Hydromer coatings can also be coated on complex surfaces and on the inside
      walls
      of


devices,
      unlike the treatments by major competition. Hydromer has also been shown in
      numerous studies to reduce the risk of thrombogenesis or clot formation on
      devices.


Drugs
      and
      other substances can be readily incorporated into Hydromer, both in a bound
      and
      unbounded fashion, allowing for controlled release from the device for


therapeutic
      purposes or the creation of permanent biocidal or biostatic surfaces. The
      Company believes that the polymer-water interface of Hydromer provides surface


lubricity
      superior to the quality of other currently marketed silicone-based lubricants
      to
      treat medical devices.





Option
      and License Agreements




A
      portion
      of the Company's revenues is derived from option and license agreements (see
      “Patents and Trademarks” section). Option agreements provide customers
      the


right
      for
      a finite period of time (i) to use the Hydromer process to determine whether
      the
      customer's products lend themselves to treatment with the process and
      (ii)


to
      test
      market such products. The option agreements have also given the customers the
      right to subsequently enter into a license agreement with the Company


and
      to
      the market product(s) treated with Hydromer, which typically provides the
      Company an initial flat fee, followed by periodic royalty payments based on
      sales.





The
      Company has previously reported license agreements in effect and expiring
      relating to applications of the Hydromer as follows: Annual Report on Form
      10-K
      for the


fiscal
      years ended June 30, 1983 through 1996 and Form 10-KSB for fiscal years ended
      1997 through 2005.





As
      of
      June 30, 2006, the Company has license agreements with seven companies covering
      the application of Hydromer coatings to the following devices: enteral
      feeding


products,
      guidewires, certain urological devices, infusion microcatheters, central venous
      catheters, guiding and umbilical catheters, razor








cartridges
      (non-medical related), orthodontic accessories, angioplasty balloon catheters,
      embolization delivery devices, inter/intra-ocular lenses and biliary


and
      pancreatic stents. The Company is actively seeking new licensing
      opportunities.





**Licensee/Application**


Applied
      Medical - certain urological and vascular devices




Corneal,
      Ltd. - inter-ocular lenses




Eveready
      - Schick / Warner / Wilkinson Sword Ltd. - razor cartridges




Gallini
      -
      certain urological devices




MXM
      -
      intraocular lens inserter systems




Nemed
      -
      inter-ocular lenses




Tyco
      International / Kendall HealthCare Products - certain urological devices and
      enteral feeding systems







Supply
      and Support Agreements




In
      order
      to avail our customers to a continued material source or of technical support
      on
      our products, certain supply or support agreements may be entered
      into.


Depending
      on the specific requirements of each agreement, the Company would provide
      continued support in terms of product availability or technical know-how,


some
      including the escrow of formulas or data with independent agents.







Hydrogels,
      Drug Delivery, Wound Dressing




Applications
      of the Company’s Hydrogels are being developed for wound care, implants, drug
      delivery, burn care, conductive hydrogel electrodes, ultrasonic


couplants
      and cosmetic uses for several customers. The Company is also identifying
      strategic partners to offer hydrogel coating services to clients who do


not
      have
      rolled goods coating capability and to license Hydrogel technology for cosmetic
      and medical use, including drug release.





The
      Company’s hydrogel technology offers biocompatibility, flexibility, and ease of
      use and processing. It also allows for the stabilization of biomolecules, cell
      cultures,


drugs
      and
      other active substances without potentially damaging external energy sources.
      It
      is absorbent, inherently self-adhesive but peels away cleanly and is naturally


soothing.
      Other than our bio-adhesives and medical coatings, which are one part systems,
      to form the gel entails simply to mix the two parts together - no heat, no
      chemical


cross
      linkers nor expensive high energy processing is required. Many competitive
      technologies are much more process intensive and require external energy to
      crosslink.


The
      Company believes these products are synergistic to our existing hydrogel
      technologies, and offer further opportunities in electrodes and internal and
      topical


actives
      delivery. The Company has a pilot coating machine to facilitate the
      commercialization of its hydrogel technologies. The Company is exploring other
      medical and


dental
      as
      well as cosmetic applications for this technology.





Aquadapt ® is the
      Company’s hydrophilic polyurethane foam technology. The Company has 510K
      approvals from the FDA for medical use applications in the U.S.


The
      Company also has a patent on its chitosan-PVP hydrogel technology as well as
      patents granted in 2000 and 2002 on polyaldehyde hydrogels.







OEM
      Medical Devices




Through
      its Biosearch Medical Products subsidiary, ISO 13485 certified and FDA
      registered, the Company offers 510K/CE marked medical devices. The current
      product


portfolio
      includes: bipolar coagulation probes; biliary catheters and stents; jejunal
      and
      enteral feeding accessories; guidewires; biofeedback devices for fecal and
      urinary


incontinence;
      and other endoscopic accessories. The Company also contract manufactures
      products for several large multi-national marketers of medical devices on an
      OEM
      basis.





HYDROMER ® Coating Services




The
      acquisition of BMPI allowed for the Company to realize another venue of
      revenues: Coating Services. Utilizing the acquired medical device manufacturing
      know how


and
      by
      applying its coatings technologies, the Company began offering Coating services,
      in which the Company coats third party devices with its own lubricious coatings.


The
      Company’s knowledge in coatings technologies allows for it to coat various types
      of material, such as silicone, stainless steel, Pebax and polypropylene cost
      effectively,


whereas
      some of the competition is unable to. A global client is using this service
      in
      the urology market.





The
      Company continues to expand its activity in Coating services and is actively
      seeking new opportunities to provide contract development, coating and
      manufacturing


services
      to the medical, commercial and personal care industry, utilizing its Hydromer
      and Anti-Fog coating technology and expertise. The Company further continues
      to


believe
      that these services will enable a broader range of customers to use our
      materials in market on accelerated timelines in a more cost effective
      manner.





R&D
      and Engineering Services




The
      medical device market continues to undergo a shift toward consolidation by
      very
      large multi-national players with small, entrepreneurial start-up companies
      looking to


exploit
      niche opportunities or unique device designs. The Company’s experience and
      knowledge can significantly speed development, assessment and market readiness
      for


our
      clients, large and small through its research and development and engineering
      services.





For
      example, for medical devices such as coronary stents and brain catheters, the
      Company can develop the coatings, including drug eluting coatings, establish
      the
      manufacturing


and
      QA
      protocols, design and build the coating equipment, start up scale prototype
      production and eventually transfer the process assisting the customer in the
      transition.





The
      Company believes that offering prototyping, process development and small-medium
      scale coating/ manufacturing services is fundamental to the expansion of the


Hydromer
      coatings business, and a strategic imperative. The Company will endeavor to
      become a “one stop” supplier of high performance coatings and services.








***INDUSTRIAL/COMMERCIAL***




Hydromer
      Anti-Fog/Condensation Control is an optical coating which prevents the
      accumulation of vision-obscuring condensation under high humidity conditions.


The
      Company is selling this material in bulk to manufacturers of greenhouse panels,
      refrigerator freezer doors, industrial and medical safety and swim goggles,


aircraft
      windows, automotive headlight assemblies and gauge and meter manufacturers
      in
      the U.S. and internationally, including China.





The
      Company also offers Sea-Slide ® ,
      a
      Hydromer-based drag reducing coating that reduces friction between hull and
      water, and can be used over most anti-fouling paints.


A
      U.S.
      patent covering this coating and other potential uses was issued in 1987.
      Independent testing has confirmed that this technology significantly improves
      fuel


economy
      and the hull speed of watercraft. Sea-Slide is marketed through HammerHead
      Products, Inc., via an exclusive distribution agreement.





***COSMETICS***




The
      Aquamere ® series
      of the Company’s cosmetic intermediaries are sold to major cosmetic companies
      worldwide for use in hair dyes, hair conditioners, mascaras, eye shadows,


sunscreens
      and body lotions. They are currently in test for use in shampoos, hair styling
      aids, OTC dermal drug delivery and topical disinfectants. The Aquamere series
      of


cosmetic
      polymer solutions, introduced in 1988, are both aqueous and hydro-alcoholic
      based systems. They are also offered with cationic and silicone grafted
      modifications.


Formulations
      have also been developed internally utilizing this technology and are being
      offered for sale as turnkey products to smaller marketers of personal care
      products.





The
      Company’s Dermaseal ® line, a patented
      film-forming hydrogel technology, is
      currently being sold to major cosmetic companies as a base for foundations
      and
      other skin


care
      products. It is also being tested for use in broader skin care, cosmetic and
      OTC
      drug delivery. Dermaseal is the registered trademark for barrier film
      compositions,


patented
      in fiscal 2000 along with the method for preventing contact dermatitis. Clinical
      testing has demonstrated that these compositions protect the user from the
      effects


of
      contact with poison ivy, oak or sumac plant allergens. Technical testing has
      also demonstrated protection from latex proteins, nickel and other contact
      allergens.





In
      2006,
      the Company added a unique anti-microbial polymer to its product line. When
      used
      for beauty cosmetics, contamination and infections can be reduced.





***VETERINARY
      SCIENCES***




In
      Fiscal
      Year 1999, the Company’s polymer technology was used to launch the Company’s
      entry into the Animal Health field to combat clinical and sub-clinical mastitis,
      a


problem
      that costs U.S. Dairy farmers an estimated $3-5 billion per year.  Marketed
      under the *T-HEXX* ® brand,
      initially through U.S. licensees, the *T-HEXX* ****** Barrier
      Dips and Sprays


offer
      dairy farmers exceptional value and unsurpassed protection as ****** the
      first ****** no-drip
      and water resistant barrier products on the market preventing ****** environmental
      water


containing
      mastitis-causing organisms, including mycoplasma, from reaching the teat
      surface. The Company has received three patents for its unique barrier teat
      dip
      compositions


with
      an
      application on a fourth patent pending .





The ****** annual
      U.S. market for ****** barrier
      teat dips is estimated to be $100-130 million at the farm level.  The *T-HEXX* Barrier
      products contain protocol-proven active ingredients that


kill
      mastitis-causing bacteria within 30 seconds of contact while continuing to
      remain active up to 12 hours later ***.*** *T-HEXX* Barriers
      are superior performers in its niche market


while
      priced comparably or less than barrier dip products manufactured by the leading
      sanitary chemical companies in the world. Our products are compatible with
      existing


mechanical
      equipment and milking procedures and most importantly, are easily removed using
      traditional ****** pre-milking
      methods. Based on field tests, our product has


been
      demonstrated to stay on the cow teat better than the competition, protecting
      the
      cow during the complete 8-12 hour milking cycle .





In
      fiscal
      2002, the Company launched a complementary product, *T-HEXX* ® Dry Teat
      Protection Sealant, to protect cows during the non-lactation (“dry cow”) period. *T-HEXX*


Dry
      is
      used as a non-irritating low-cost sealant during the dry-off and the critical
      pre-calving period where it is estimated that over 50% of new mastitis cases
      are
      believed to start.


*T-HEXX* Dry is
      the first dry cow dip product with an antimicrobial that remains on the teat
      for
      3-7 days. Clinical studies show that *T-HEXX* Dry is
      impervious to


National
      Mastitis Council (NMC) recognized mastitis-causing organisms for seven days,
      yet
      is comparably priced to existing dry cow teat sealants that does not offer
      such


protection.
      Our product is suggested to be used on cows just prior to their release to
      the
      dry cow pen, in conjunction with existing antibiotic therapy or internal teat
      sealants.


In
      fiscal 2004, two customers launched our Dry product under their private-label
      name, reflecting the strength of our product .





Patent
      pending and under development is a *T-HEXX*  teat
      plug, which when launched, would allow the Company to provide complete
      protection against mastitis for the


entire
      bovine working cycle.





The
      Company has invested significantly in clinical research, patents, promotion,
      vendor partnerships and advertising via print media, trade shows and the
      Internet to


support
      this business and continues to do so. In fiscal 2004, the Company initiated
      a
      claim against a former licensee and other parties citing infringement on the


Company’s
      patented technology in this area. In total, through June 30, 2006, the Company
      spent approximately $510,000 ($257,000 in fiscal 2006) in direct legal costs,


which
      has
      been expensed in the related year’s results. Settlement was made in early
      calendar 2006, with the discounted value on $300,000 recorded in Other Income.





**Products**




Coating
      solutions for use on medical devices, cosmetic intermediaries, hydrogels and
      teat barrier dips/sprays are manufactured and sold by the Company to its
      licensees


and
      others. The Company is selling bulk quantities of anti-fog solution to
      manufacturers of greenhouse panels, refrigerator freezer doors, swim goggles,
      industrial safety


equipment,
      aircraft










windows
      and meter covers, both in the U.S. and foreign countries. The Company also
      sells
      OEM medical devices through its Biosearch Medical Products
      subsidiary.





The
      Company has no long-term contracts with any of its suppliers and believes that
      there are adequate alternative sources of supply available for all raw materials
      that it currently uses.








**Dependence
      Upon Customers**




The
      Company derives its revenues from two primary business segments: (1) polymer
      research and the products derived there from, and (2) the sales of medical
      products.


During
      the fiscal years ended June 30, 2006 and June 30, 2005, the Company recognized
      revenues from two major customers: Johnson & Johnson’s Cordis Division and


Cook
      Endoscopy, formerly Wilson Cook Medical, Inc.




Product
      sales and/or royalty payments and support fees from these customers accounted
      for 32% and 29% of the Company’s total revenues for the years ended June 30,
      2006


and
      June
      30, 2005, respectively.





**Potential
      Applications**




The
      Company continues to explore other applications of the complexing capabilities
      of polymeric substances, such as anti-microbial agents. The Company currently
      is


working
      on further applications of its patented technologies to existing products of
      other companies, including cosmetics, wound dressings, personal care and a
      wide


variety
      of medical devices, including vascular stents. Some of these products and
      applications are in the preliminary development stage and are subject to
      substantial


further
      development before their feasibility can be verified.





On
      the
      basis of its market analyses, as well as laboratory and in-vitro testing of
      certain applications of Hydromer, the Company believes that Hydromer's potential
      product


applications,
      classified with reference to salient Hydromer characteristics, are as
      follows:




1. *Low
      Coefficient of Friction* .
      Hydromer is a hydrophilic coating which when contacted by water becomes
      extremely lubricious. The Company believes that this unique


feature
      would prove beneficial to any medical device that is inserted into the body.
      Medical products that would so benefit include:




urinary
      products - urethral catheters, stents and urinary drainage systems;




rectal
      products - enemas, rectal tubes, examination gloves and proctoscopy devices
      (disposable);




nasal/oral
      products - suction catheters, oxygen catheters and endotracheal
      tubes;




cardiovascular
      and related products - grafts, cardiac assist catheters heart-lung tubing,
      stents.




2. *Ability
      to be Complexed with Other Functional Chemicals.* The
      Hydromer hydrophilic polymer coating can be complexed with other chemicals.
      For
      example,


Hydromer
      coating complexed with iodine forms an effective anti-microbial barrier. The
      Company believes that this unique feature would lend itself to application
      on a


wide
      variety of currently marketed medical products, including vascular stents,
      Foley
      catheters, wound drains, wart and corn dressings, burn dressings, intravenous


catheters,
      surgical dressings and adhesive bandages. One of the Company’s recent patents in
      the coating area, issued in April 2000, involves the covalent bonding of


infection
      resistant materials into the coating, providing a non-leaching, anti-infective
      surface. The Company was also granted a patent in July 2003 for covalently


bonded
      radio-opaque polymeric compositions to improve the radio-opacity of materials
      without needing high solid loading, metal plating or ion implantation for
      applications


like
      stents and vascular catheters.




3. *Cross-link
      Density Can be Controlled.* The
      Hydromer hydrophilic polymer coating, through controlled cross-linking, has
      been
      further developed into a special anti-fog


coating.
      Such a coating is (a) resistant to fogging under a wide range of
      temperature/humidity conditions; (b) transparent and has heat/light stability;
      (c) long lasting,


i.e.,
      will not chip or peel and offers more scratch resistance than do most commercial
      plastics; (d) inert to most commercial glass cleaners; (e) less prone to static


dirt
      pickup; and (f) applicable by dip, spray or roll coating. A U.S. Patent for
      this
      material was first issued to the Company in August 1984 (patent expired). This


anti-fog
      product has use on greenhouse panels, refrigerator freezer doors, sports
      goggles, windows, mirrors and other products, either by direct application
      or by


coating
      of an adhesive backed film.





**Research
      and Development**




The
      Company's research and development activities presently are, and during the
      next
      year are expected to be devoted primarily to the development and enhancement
      of
      the


products
      described above and to the design and development of new products, either for
      its own account, jointly with another company or strictly as a sub-contractor.


The
      Company sponsors all of such activities from its own internal funding or through
      charges to the contracting company. The major portion of R&D expenses was


applied
      toward salaries and other expenses of personnel employed on a regular basis
      in
      such work. See the "Employees" section.





**Competition**




The
      Company considers the most significant competitive factors in its market for
      its
      patented coatings to be product capability and performance (including
      reliability


and
      ease
      of use), in addition to price and terms of purchase.





The
      Company currently owns nineteen process and applications patents for Hydromer
      coatings (see "Patents and Trademarks"). Although the medical products


market
      is
      highly competitive, the Company does not believe that there is any other product
      available which performs functions significantly better than those


which
      are
      performed by the Company in terms of lubricity, complexing capabilities,
      durability and cost.







While
      management believes the Company has a strong position in the market for medical
      device coatings in which it competes, and that its hydrophilic
      foam,


anti-fog
      coatings and hydrogel products are technologically superior to other products
      in
      the market, there can be no assurance that alternatives, with similar








properties
      and applications, could not be developed by other companies. The Company is
      aware that there are other similar


technologies
      available and/or being developed by others. The industry in which the Company
      competes is characterized by rapid technological advances


and
      includes competitors that possess significantly greater financial resources
      and
      research and manufacturing capabilities, larger marketing and sales staffs


and
      longer established relationships with customers than the Company does, at
      present or will for the foreseeable future.





**Marketing**




The
      Company markets its products and services through five principal
      means:




1. *Commercialization
      of its existing technologies:* The
      Company intends to expand its efforts to market its current technology to the
      medical, industrial, personal


care
      and
      veterinary sciences markets. The Company has expanded its capabilities to
      prototype and manufacture for customers to demonstrate the value of
      Hydromer


technology.
      The Company will also seek opportunities to apply its technology in new
      applications where the technology will offer a benefit. Further, the


Company
      will seek customers for technologies that have been developed but are not
      currently generating revenue, capitalize on the technology that has been


created
      through its R&D efforts and to expand the application of current
      technologies.




2. *Sale
      of Development Services:* The
      Company intends to continue moving its effort away from straight technology
      licensing and toward contract product


development,
      contract manufacturing and coating services (see “5. Coating Services”). The
      Company has significant expertise in polymer development and applications.


By
      exhibiting at an increased number of trade shows in the medical device fields,
      the Company expects to generate interest in its technology and products, with
      a
      view


toward
      acting as an outside product development arm and development supplier for
      companies in these fields.




3. *Joint
      Development:* The
      Company will continue to seek joint development programs, co-marketing programs
      and other business arrangements with potential partners.




4. *Licensing:* The
      Company will continue its endeavors to license its technology to current market
      leaders in the medical device, pharmaceutical and other fields, whereby


t he
      Company will grant exclusive or non-exclusive rights for the Hydromer coating
      treatment of existing or new products, and the development of specific products


utilizing
      its foam and hydrogel technology under its patents. In return, the Company
      generally would earn royalties based on sales of such treated or new
      products.


Such
      licenses will usually be very narrow. The activities leading to the consummation
      of a license agreement normally are lengthy and require establishing
      a


scientific
      dialogue with potential customers, treating samples supplied by that customer
      with Hydromer coatings, determining if the treatment is feasible and cost


e ffective,
      testing the coated products in a laboratory and then negotiating a mutually
      acceptable option agreement. An option fee may be paid by the customer
      which


would
      give the customer exclusive rights to use the Hydromer treatment on the
      specified product for a defined time period. During such period, the
      optionee can test market


the
      coated product and/or determine its ability to treat the product in its own
      manufacturing process. If the customer determines that the subject product
      should be treated


with
      Hydromer coating on a commercial basis, it may either perform the Hydromer
      coating treatment itself under a license agreement with the Company, through
      the


Company’s
      Contract Coating unit or it may have a third party perform the Hydromer coating
      treatment.




5. *Coating
      Services:* The
      Company will serve the customer who needs products coated with lubricious or
      anti-fog coatings in production runs that are economically


feasible
      without substantial investments in fixturing and automation. Typically this
      would be prototypes or runs of low volume, high value products. Higher volume


products
      could be accommodated if they were physically small and did not require
      extensive fixturing or because for technical reasons they could not be automated


and
      were
      of high enough value to warrant the added cost. The Company will pursue large
      volume projects if they fall within a technical area where the Company has


particular
      expertise.





Business
      segments in Coating Services which are of particular interest include medical
      devices (catheters and guidewires) and transparencies (lenses, face shields).


Contacts
      will be pursued in conjunction with marketing of Hydromer coatings, at trade
      shows, in mass mailings and advertisement in appropriate trade publications.


The
      Company is continually upgrading its advertising copy and promotional literature
      as needed to graphically highlight the properties and advantages of its
      technologies.




The
      same
      marketing tools (traditional means of tradeshow contacts, mass mailings,
      advertising, promotional activities, etc.) as well as alternative methods (such
      as the Internet)


a re
      used
      by the Company in its focus of expanding sales globally to the medical,
      commercial, personal care and veterinary sciences community.





**Patents
      and Trademarks**




Management
      believes that the protection afforded by the Hydromer patents will be a
      significant factor in the Company's ability to market its products. Anticipating


patent
      expiration, the Company has focused on licensing and developing products based
      upon its newer technologies. A U.S. patent was issued in October 1985 for a


hydrophilic
      polyurethane foam that is expected to have numerous medical applications.
      Foreign patents covering this material were issued in July 1990. A U.S. patent
      for


hydrophilic
      polymer blends, which covers the Company's coating for boats and the cosmetic
      formulations, was issued in February 1987. U.S. and foreign patents
      have


also
      been
      issued for an anti-bacterial medical material that can be incorporated in foam
      or as a coating. The Company was issued a U.S. patent for non-leaching biostatic


coatings
      and three United States patents for its new composition, barrier film, and
      method for preventing contact dermatitis developed by the Company’s research and


development
      staff. The Company has also been issued United States and foreign patents for
      a
      permanent anti-fog. The Company also has two patents for Chitosan gels,


which
      expires in 2014. These patents are part of the new gel technology with
      applications in medical, industrial, cosmetic and personal care markets. The
      Company was issued


three
      U.S. Patents for barrier teat dip compositions.










One
      U.S.
      patent that contributed approximately $2,100,000 in annual royalties expired
      on
      May 6, 2005. The Company was successful in reaching new supply or support


agreements
      with all four former licensees of the expired patent for an approximate annual
      value of $1,500,000. These new supply/support agreements have


varying
      terms and cancellation provisions. It is the Company’s practice to replace any
      discontinuances of income stream with other sources, including new product


revenues,
      new service revenues and other license or contract revenues.





One
      new
      patent was awarded to the Company during the fiscal year ended June 30, 2006.
      This patent covers the application of water based surface modifications for
      use
      in


l ubricity,
      anti-microbial, drug release, hydrogel, radio-opaque, animal care and unique
      anti-fog/anti-frost applications.





As
      of
      June 30, 2006, the Company has 19 U.S. patents, three U.S. applications and
      various foreign counterparts.





The
      Company owns the registered trademarks “Aquadapt”, “Aquamere”, “Aquatrix”,
“Dermaseal”, "Hydromer", “Sea-Slide” and “T-HEXX” in the United States and other


countries.





**Employees**




As
      of
      June 30, 2006, the Company and its subsidiary had eighty-five active full-time
      employees. The Chief Executive Officer is Manfred F. Dyck, who is also Chairman
      of the Board.


The
      Company does not have a collective bargaining agreement with any of its
      employees and considers its relationship with its employees to be very
      good.





**Government
      Regulations**




The
      uses
      of the Company's medical, agricultural and cosmetic products come under the
      jurisdiction of the FDA, as well as other federal, state and local agencies,
      and
      similar


agencies
      in other countries.





In
      connection with the Company's license agreements, it is generally the obligation
      of the licensee to conform to any required FDA pre-market notification or other
      regulations.


To
      the
      Company's knowledge, all such licensees who are marketing FDA regulated licensed
      products are in such compliance. The Company may in the future desire to


market
      additional applications of Hydromer to existing products, or products introduced
      by it, which may be subject to such FDA approval procedures as proof of safety


and
      effectiveness of the applications or products, or adherence to prescribed design
      standards. There can be no assurance that such approvals would be forthcoming
      or
      of


c ompliance
      with such standards. Any such failure to obtain approvals or non-compliance
      might have a significant adverse effect on the Company. However, the


Company
      intends to make every effort to obtain all necessary approvals and to comply
      with such standards, and in the case of its licensed applications, to require
      the


licensees
      to obtain such approvals.





The
      Company manufactures medical products through its Biosearch Medical Products
      subsidiary (“Biosearch”), whose activities come under the jurisdiction of the
      FDA.


I t
      is the
      policy of the Company to use the FDA regulations as guidelines during
      manufacturing of Hydromer coatings.





The
      Company is also subject to federal and state regulations dealing with
      occupational health and safety and environmental protection. It is the policy
      of
      the Company to


comply
      with these regulations and be responsive to its obligations to its employees
      and
      the public.





The
      Company’s electronically filed reports are available at www.sec.gov .





**Executive
      Officers**






The
                executive officers of the Company are as follows:
            Age
                as ofName
            Position
                with Company
            
            Aug
                31, 2006Manfred
                F. Dyck -
            Chairman
                of the Board,Chief
                Executive Officer and President
            
            71Martin
                C. Dyck -
            Executive
                Vice-President,Operations
                and President BiosearchMedical
                Products subsidiary
            
            44Rainer
                Gruening -
            Vice-President,Intellectual
                Property
            
            63John
                Konar -
            Vice-President,
                Quality Assuranceand
                Director of Human Resources
            
            57Robert
                Y. Lee -
            Vice-President,
                Finance,Chief
                Financial Officer and Treasurer
            
            40Robert
                J. Moravsik
            Senior
                Vice-President, General Counsel and Secretary
            
            63




Manfred
      F. Dyck has been Chairman of the Board of the Company since June 1983 and a
      Director of the Company since its inception. Mr. Dyck served as


Chief
      Executive Officer of the Company from its inception until October 1986, and
      as
      of August 1989, reassumed the duties of Chief Executive Officer. Mr. Dyck was


President
      of Biosearch Medical Products Inc. from 1975 until 1998 and a Director of
      Biosearch Medical Products Inc. from 1975 until 2000.




Martin
      C.
      Dyck has been Executive Vice-President, Operations since June of 2001. He was
      previously Vice-President of Operations since February 2000 when the


Company
      purchased Biosearch Medical Products. Mr. Dyck has been President of Biosearch
      since 1998, a position which he still maintains. Mr. Dyck has been employed
      by


Biosearch
      since 1986 and has served in various capacities including Director of New
      Product Development, where he developed several new medical devices and authored


six
      FDA
      510(k) pre-market submissions. After becoming President of Biosearch in 1998,
      Mr. Dyck changed the focus of Biosearch to become a contract medical coatings
      service


provider
      using proprietary technology unique to Biosearch.




Rainer
      Gruening joined the Company as Vice-President of Research and Development in
      June 2001, and in May 2006 became VP of Intellectual Property. With a PhD in


Chemistry
      from the University of Marburg in Germany, his background










includes
      service with Bayer AG/Deutsche Solvay Werke, Troy, G+G International and AM
      Cosmetics in areas including international regulatory affairs, coatings
      technology


and
      anti-microbials. Mr. Gruening authored and/or co-authored 17 patents and 35
      publications on synthesis and formulation of anti-microbials for paint and
      coatings,


cosmetics,
      personal care products, adhesives, marine anti-fouling and metal working fluids
      and developed dossiers, safety assessments and GMP documentation.


Additionally,
      he implemented FDA/CTFA, European and Japanese compliance requirements for
      raw
      materials and formulation restrictions.




John
      Konar has been the Vice-President of Quality Assurance since February 2004
      and
      Director of Human Resources since February 2000. Mr. Konar joined Biosearch
      in
      1986


and
      served as the Director of Human Resources with Biosearch from 1996 until its
      acquisition by the Company in 2000, when he then assumed responsibilities for
      both


c ompanies.
      He also served, with Biosearch, as the Director of Sales from 1996 until 2000,
      Director of Manufacturing from 2000 to 2001 and Director of QA from 1998 until
      2004.




Robert
      Y.
      Lee joined the Company in the capacities of Vice-President of Finance, Chief
      Financial Officer and Treasurer in June 2001. He earned a MBA in Finance and


International
      Business, and a Bachelors of Science in Accounting and Information Systems,
      both
      from New York University's Stern School of Business. His professional


experience
      includes tenure with the New York office of Coopers & Lybrand (currently
      Pricewaterhouse Coopers) in their Emerging Business Group, the Bristol Myers


Squibb
      Internal Auditing group, ASARCO's Southern Peru Copper Corporation, now Southern
      Copper Corporation, part of Grupo Mexico, and Citigroup.




Robert
      J.
      Moravsik has been Senior Vice-President, General Counsel and Secretary since
      February 2000. He holds a B.S. in Aerospace Engineering, an M.S. in
      Computer


Science
      and a Doctorate in Law. He was Vice-President and General Counsel since April
      1998. He also serves in the same capacity for Biosearch Medical Products, Inc.
      an


affiliated
      company since 1987. Prior to that, he was Vice-President and General Counsel
      to
      Fisher Stevens, Inc., a subsidiary of the Bureau of National Affairs. He is
      an
      attorney


admitted
      in the state of New Jersey and New York.


**Item
      2. PROPERTIES**




In
      June
      1998, the Company purchased the building and land at 35 Industrial Parkway,
      Branchburg, NJ from Biosearch Medical Products, then an affiliated party. The
      facility,


c urrently
      its sole facility, is secured by mortgages through banks. See the financial
      statements included herein for the terms of the agreements.




In
      2002,
      the Company completed its 10,400 square feet expansion at its primary location
      of 35 Industrial Parkway. This allowed the Company to consolidate certain


manufacturing
      and quality assurance functions operations formerly located on leased space.




The
      expanded facility will be adequate for the Company’s operations for the
      foreseeable future.








**Item
      3. LEGAL PROCEEDINGS**




The
      Company has been named as a defendant in two product liability actions. Both
      actions are covered within the Company’s Product Liability Insurance
      policy.








**Item
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




Not
      applicable.










**PART
      II**









**Item
      5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**




Prior
      to
      January 9, 1986, the Company’s Common Stock was traded in the over-the-counter
      market on the National Association of Securities Dealer’s Automated


Quotation
      System (NASDAQ) under the symbol “HYDI”. Subsequent to January 9, 1986,
      reporting of trading was transferred to the National Daily Quotation
      Service


(commonly
      known as the “Pink Sheets”). For the past twenty years, trading in the Company’s
      stock has been limited.




On
      February 13, 2002 the Company became a listed security on the Boston Stock
      Exchange (“BSX”) under the trading symbol “HDO”. Hydromer remains listed as
“HYDI”


on
      the
      OTC reporting services.




The
      Company’s common stock traded at prices ranging between $0.75 and $1.35 in the
      fiscal year 2006 and between $0.80 and $3.05 in the fiscal year 2005. These
      prices


may
      not
      include retail mark-ups or mark-downs or any commission to the broker
      dealer.




The
      approximate number of holders of record of the Common Stock on September 1,
      2006
      was 232. There are approximately 700 individual shareholders of the common
      stock.








**Item
      6. MANAGEMENT DISCUSSION AND ANALYSIS**




The
      below
      discussion analyzes major factors and trends regarding the results of operations
      and the financial condition of the Company as of June 30, 2006,


and
      its
      results of operations for the prior fiscal period. It should be read in
      conjunction with the Financial Statements and Notes thereto.




**Revenues
      for the year ended June 30, 2006 were $7,869,729 as compared to $8,501,374
      for
      the same period last year, a decrease of $631,645 (-7.4%).**




Product
      sales and services revenues were $5,993,167 for the 2006 fiscal year as compared
      to $6,200,992 the prior fiscal year, a 3.4% decrease or $207,825.




License
      royalties and option payments were $1,876,562 in fiscal 2006, down 18.4% from
      fiscal 2004’s results of $2,300,382.




**Management
      Comment:** Lower
      customer orders in the medical device business negated the fiscal 2006 growth
      from our contract coating services and medical coating sales.


In
      fiscal
      2006, there were two medical device customers with reduced volume: one which
      is
      transferring their orders to in-house production and the second, who purchased
      the


OEM
      product line from another of our customers, lost focus on the product line
      during the transition. The Company expects a turn around from these particular
      customers,


as
      in the
      former, the Company will replace lost medical device revenues with the sales
      of
      lubricious coatings (along with a cost reduction to staffing from the
      elimination of a


product
      line). With regards to the second customer, the Company has brought to their
      attention of the business reduction and we are currently working on
      re-establishing


v olume.
      In
      addition, there was an one-time $250,000 in technology transfer revenues in
      fiscal 2005.




The
      Company’s patent 4,642,267 expired on May 6, 2005. It was the subject of four
      licenses which provided approximately $1.9 million of royalty and option income
      in


fiscal
      2005. The Company was able to enter into supply agreements or support fees,
      with
      varying terms and termination conditions, with all four of the licensees,


recovering
      $1.6 million of the former royalty stream in fiscal 2006.





**Total
      Expenses for the year ended June 30, 2006 were $8,649,106, $416,913 or 5.1%
      higher than fiscal year 2005’s results of $8,232,123.**




Cost
      of
      Goods Sold was $3,526,039 for fiscal 2006 as compared to $3,228,875 for fiscal
      2005. Operating expenses were $5,494,366 and $4,783,188, for the years ended


June
      30,
      2006 and 2005, respectively. There was a $238,172 impairment of goodwill charge
      in fiscal 2006. Fiscal 2006 includes Other income of $143,974 compared with


Other
      Expenses of $109,995 in fiscal 2005. There was a Benefit from Income Taxes
      of
      $465,497 in fiscal 2006 as compared with a provision for Income taxes of
      $110,065 for


the
      twelve months ended June 30, 2005.




**Management
      Comment:** A
      change
      in the Company’s inventory standard costs impacted the beginning fiscal 2006
      inventory value by $138,459, which is included in the fiscal


2006
      Cost
      of Sales. Higher wages and benefits paid added another $99,879 to Cost of Sales
      in fiscal 2006. A portion of the capital expenditures incurred have been for
      equipment


to
      automate production -- to increase productivity. The redesign of various medical
      devices, including that of the component materials used, is expected to reduce
      a
      portion


of
      Cost
      of Sales in the future. This initiative is underway and first requires the
      acceptance of the redesign by our customers.




The
      capitalization of [inventory] overhead on higher June 30, 2005 ending inventory
      levels reduced fiscal 2005 Operating Expenses by $290,112. A SBIR (Small
      Business


Innovation
      Research) grant of $93,650 further reduced fiscal 2005 costs. These reductions
      to the fiscal 2005 costs were compounded with higher fiscal 2006 expenses,


primarily
      of $82,885 in higher litigation expenses related to our patent infringement
      claim (see below and the following page) and a $74,900 bad debt write-off
      relating to


R&D
      services performed in 2005 which is now deemed uncollectible, yielding the
      large
      swing that we see in Operating Expenses year-over-year. Our patent
      infringement


claim
      against a former licensee and other parties has been settled, entailing over
      $509,000 expended in legal fees since 2004. Taking this action not only
      substantiated the


validity
      of our patents, but put the world on notice that we would not allow for
      infringement of our intellectual property. With the settlement, we are now
      able
      to focus


on
      selling our products with reduced concerns of counterfeit products stealing
      our
      markets once we establish them. We do not anticipate any significant amounts
      to


be
      spent
      further on this matter. Also included in Operating Expenses is the Company’s
      investment into Research and Development (primarily salaries and benefits)


of
      $1,000,987 and $1,012,091, or 18.2% and 21.2% of total Operating
      Expenses,










for
      the
      years ended June 30, 2006 and 2005, respectively, and the amortized investment
      on the patent estate ($144,327 and $151,175 for the years ended June 30, 2006
      and 2005, respectively).




After
      years of realized synergies, the most recent evaluation of the Company’s
      carrying value of goodwill, created from the acquisition of Biosearch in 2000,
      determined an


impairment
      of goodwill of $238,172, recorded in the year ended June 30, 2006, eliminating
      the remaining balance of goodwill carried. There was no required charge for
      the
      year


ended
      June 30, 2005. This charge in fiscal 2006 did not provide for a current tax
      benefit resulting in a lower tax benefit realized.




Other
      income in fiscal 2006 includes $284,238, the discounted value on $300,000,
      from
      the settlement of a patent infringement case against a former licensee and
      other
      parties.


Reducing
      Other income is interest expense from the Company’s mortgage loans and
      Line-of-Credit borrowings, which is the primary component of Other Expenses
      for
      fiscal 2005.




An
      Income
      Tax Benefit was recorded for the year ended June 30, 2006 based on the pre-tax
      loss. This benefit includes provisions for federal income taxes, state income
      taxes


and
      R&D tax credits as offset by the non-current deductibility of the impairment
      of goodwill charge (which resulted in a deferred tax asset, however as
      realization is highly


unlikely,
      a valuation allowance fully reserving for the benefit has been recorded). This
      compares with a tax provision for the year ended June 30, 2005.





**A** **Net
      Loss of $779,377 is reported for the 2006 fiscal year compared with Net Income
      of $269,251 for the 2005 fiscal year.**




A
      Net
      Loss of $779,377 or $0.17 per share is reported for fiscal 2006 as compared
      with
      Net Income of $269,251 or $0.06 per share for fiscal 2005.




**Management
      Comment:** Lower
      revenues combined with higher expenses, including an impairment charge of
      $238,172 to goodwill, as reduced by a tax benefit arising from the


operating
      loss, resulted in a net loss of $779,377.




The
      conclusion of various matters (patent infringement costs, impairment of goodwill
      charges) and the cost reduction initiatives underway along with new developments


a nd
      projects, is expected to improve the Company’s results down the
      road.








**Liquidity
      and Capital Resources**




**Working
      Capital as of June 30, 2006 was $970,111, down from $2,471,207 the prior
      year.**




Long-term
      investments (capital expenditures and the funding of the patent estate) along
      with the working capital needs arising from operations decreased working capital


during
      the 2006 fiscal year.




**Management
      Comment:** We
      continue our re-investment back into the Company, primarily in terms of R&D
      (personnel as well as equipment) and to our patent estate, to support


future
      growth of our business. During the fiscal year ended June 30, 2006, the Company
      expended $338,283 for capital expenditures and $213,449 in patent and trademarks
      costs.


In
      addition, long-term debt was reduced by $177,679.








**Item
      7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**




For
      information concerning this item, see pages F-1 through F-8 of the “Audited
      Financial Statements for the year ended June 30, 2006,” which information is
      incorporated


herein
      by
      reference.








**Item
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




Not
      applicable.







**Item
      8a. DISCLOSURE CONTROLS AND PROCEDURES**




As
      of the
      period covered by this report, the Company carried out an evaluation, under
      the
      supervision and with the participation of our management, including the


Chief
      Executive Officer and President and the Chief Financial Officer, of the
      effectiveness of the design and operation of the disclosure controls and
      procedures.





Based
      upon this evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that, our disclosure controls and procedures were effective and that
      there


were
      no
      changes to our Company’s internal control over financial reporting that have
      materially affected, or is reasonably likely to materially affect the Company’s


internal
      control over financial reporting during the period covered by the Company’s
      annual report.













**PART
      III**




**Item
      9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**




For
      information concerning this item, see "Item 1. Business - Executive Officers"
      and pages 3 through 9 in the Proxy Statement filed with respect to the 2006


Annual
      Meeting of Shareholders (the “Proxy Statement”), which information is
      incorporated herein by reference.








**Item
      10. EXECUTIVE COMPENSATION**




For
      information concerning this item, see page 7 of the Proxy Statement, which
      information is incorporated herein by
      reference.








**Item
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**




For
      information concerning this item, see page 8 of the Proxy Statement, which
      information is incorporated herein by reference.








**Item
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




During
      the past fiscal year, there have been no related party
      transactions.



















**PART IV**







**Item
      13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
      8-K**




**(a)
      1. Financial Statements:**




The
      financial statements of the Company incorporated by reference in this Report
      are
      listed in the attached Index to the Financial Statements and Supplementary
      Data.




**(a)
      2. Financial Statement Schedules:**




The
      financial statement schedules of the Company filed in this Report are listed
      in
      the attached Index to Financial Statements and Supplementary Data.




**(a)
      3. Exhibits (not included)**




The
      exhibits required to be filed as part of this Report are listed in the attached
      Index to Exhibits.




**(b)
      Current Reports on Form 8-K:**




The
      Company did not file any Form 8-K during the quarter ended June 30, 2006.








































**POWER
      OF ATTORNEY**





The
      Company and each person whose signature appears below hereby appoint Manfred
      F.
      Dyck and Robert Y. Lee as attorneys-in-fact with full power of substitution,


severally,
      to execute in the name and on behalf of the registrant and each such person,
      individually and in each capacity stated below, one or more amendments to the


annual
      report which amendments may make such changes in the report as the
      attorney-in-fact acting deems appropriate and to file any such amendment to
      the
      report with the


Securities
      and Exchange Commission.




**SIGNATURES**





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


undersigned
      thereunto duly authorized.





HYDROMER,
                INC./s/
                Manfred F. Dyck
            President,
                Principal Executive Officer,
            August
                23, 2006Manfred
                F. Dyck
            Chairman
                of the Board of Directors/s/
                Robert Y. Lee
            Chief
                Accounting Officer
            August
                23, 2006Robert
                Y. LeePursuant
                to the requirements of the Securities and Exchange Act of 1934, this
                report has been signed below by the
              following
                persons on behalf of the registrant and in the capacities and on
                the dates
                indicated:/s/
                Manfred F. Dyck
            President,
                Principal Executive Officer,
            August
                23, 2006Manfred
                F. Dyck
            Chairman
                of the Board of Directors/s/
                Robert H. Bea
            Director
            August
                23, 2006Robert
                H. Bea/s/
                Maxwell Borow
            Director
            August
                23, 2006Maxwell
                Borow, MD/s/
                Ursula M. Dyck
            Director
            August
                23, 2006Ursula
                M. Dyck/s/
                Dieter Heinemann
            Director
            August
                10, 2006Dieter
                Heinemann/s/
                Klaus J.H. Meckeler
            Director
            August
                23,2006Klaus
                J.H. Meckeler, MD/s/
                Frederick L. Perl
            Director
            August
                23, 2006Frederick
                L. Perl, MD/s/
                Michael F. Ryan
            Director
            August
                23, 2006Michael
                F. Ryan, PhD























**INDEX
      TO 2005 10-KSB CERTIFICATIONS**











Exhibit
                No.
            Description31.1
            Certification
                of Manfred F. Dyck,
                Chief Executive Officer, pursuant to Securities Exchange Act Rule
                13a-14(a).31.2
            Certification
                of Robert Y.
                Lee, Chief Financial Officer, pursuant to Securities Exchange Act
                Rule
                13a-14(a).32.1
            Certification
                pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002, signed by Manfred F. Dyck, Chief Executive Officer of Hydromer,
                Inc.32.2
            Certification
                pursuant to 18 U.S.C.
                Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
                Act
                of 2002, signed by Robert Y. Lee, Chief Financial Officer of Hydromer,
                Inc.
















































































**Hydromer,
      Inc. & Subsidiary**




**Consolidated
      Financial Statements**




**June
      30, 2006 and 2005**

































































**Report
      of Independent Registered Public Accounting Firm**











To
      the
      Board of Directors and Stockholders of


Hydromer,
      Inc. and Subsidiary





We
      have
      audited the accompanying balance sheets of Hydromer, Inc. and Subsidiary as
      of
      June 30, 2006 and 2005 and the related statements of income, stockholders’


equity
      and cash flows for each of the years in the two year period ended June 30,
      2006.
      These financial statements are the responsibility of the company’s management.


Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and


perform
      the audit to obtain reasonable assurance about whether the financial statements
      are free of material misstatement. An audit includes examining, on a test basis,
      evidence


supporting
      the amounts and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by


management,
      as well as evaluating the overall financial statement presentation. We believe
      that our audits provide a reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Hydromer, Inc. and Subsidiary
      as of
      June 30, 2006 and


2005,
      and
      the results of its operations and its cash flows for each of the two in the
      two-year period ended June 30, 2006 in conformity with accounting principles
      generally


accepted
      in the United States of America.






****




**Rosenberg
      Rich Baker
      Berman & Company**








Rosenberg
      Rich Baker Berman & Company


Rosenberg
        Rich Baker Berman & Company
  Rosenberg
        Rich Baker Berman & Compan


Bridgewater,
      New Jersey


September
      27, 2006

































































**Hydromer,
      Inc. & Subsidiary**


**Index
      to the Consolidated Financial Statements**


**June
      30, 2006 and 2005**














PageFinancial
                StatementsConsolidated
                Balance Sheets
            F-1Consolidated
                Statements of Income
            F-2Consolidated
                Statements of Stockholders’ Equity
            F-2Consolidated
                Statements of Cash Flows
            F-3Notes
                to the Consolidated Financial Statements
            F-4
                to F-8















































**Hydromer,
      Inc. & Subsidiary**


**Consolidated
      Balance Sheets**





June
                30,.
            **2006**
            2005**Assets**Current
                Assets:Cash
                and cash equivalents
            **$**
            **434,865****.**
            $
            1,376,656.Trade
                receivables less allowance for doubtful accounts of $44,479
                and
              $32,753
                as of June 30, 2006 and 2005, respectively
            
            **1,198,089****.**
            
            1,220,258.Inventory
            
            **988,086****.**
            
            1,094,927.Prepaid
                expenses
            
            **118,436****.**
            
            126,762.Deferred
                tax asset
            
            **8,976****.**
            
            8,976.Income
                Tax Refund Receivable
            
            **91,436****.**
            
            38,801.Other
            
            **127,776****.**
            
            14,841.Total
                Current Assets
            
            **2,967,664****.**
            
            3,881,221.Property
                and equipment, net
            
            **3,377,473****.**
            
            3,276,258.Deferred
                tax asset, non-current
            
            **507,426****.**
            
            83,013.Intangible
                Assets, net
            
            **849,262****.**
            
            780,140.Goodwill
            
            **-**
            
            238,172.Other,
                non-current
            
            **114,377****.**
            
            **-**Total
                Assets
            **$**
            **7,816,202****.**
            $
            8,258,804..**Liabilities
                and Stockholders’ Equity**Current
                Liabilities:Accounts
                payable
            **$**
            **635,010****.**
            $
            466,993.Short-term
                borrowings
            
            **656,255****.**
            
            206,663.Accrued
                expenses
            
            **374,043****.**
            
            287,417.Bonus
                payable
            
            **-****..**
            
            77,267.Current
                portion of deferred revenue
            
            **128,941****.**
            
            161,317.Current
                portion of mortgage payable
            
            **202,204****.**
            
            178,029.Income
                tax payable
            
            **1,100****.**
            
            32,328.Total
                Current Liabilities
            
            **1,997,553****.**
            
            1,410,014.Deferred
                tax liability
            
            **271,058****.**
            
            243,864.Long-term
                portion of deferred revenue
            
            **93,176****.**
            
            176,979.Long-term
                portion of mortgage payable
            
            **2,093,437****.**
            
            2,295,292.Total
                Liabilities
            
            **4,455,224****.**
            
            4,126,149.Contingencies
              
              Stockholders’
                Equity
            
            -
            
            -Preferred
                stock - no par value, authorized 1,000,000 shares, no shares
              issued
                and outstanding
            
            -
            
            -Common
                stock - no par value, authorized 15,000,000 shares;
              as
                of June 30, 2006, 4,655,081 shares issued and 4,644,164 sharesoutstanding;
                as of June 30, 2005, 4,634,859 shares issued and 4,623,942
              shares
                outstanding
            
            **3,639,315****.**
            
            3,631,615.Contributed
                capital
            
            **577,750****.**
            
            577,750.Accumulated
                deficit
            
            **(849,947)**
            
            (70,570)Treasury
                stock, 10,917 common shares at cost
            
            **(6,140)**
            
            (6,140)Total
                Stockholders’ Equity
            
            **3,360,978****.**
            
            4,132,655.Total
                Liabilities and Stockholders’ Equity
            **$**
            **7,816,202****.**
            $
            8,258,804.


*See
      notes to the consolidated financial statements.*








**Hydromer,
      Inc. & Subsidiary**


**Consolidated
      Statements of Income**


Year
                Ended June 30,**2006**
            
            2005**Revenues**Sale
                of
                products
            **$**
            **4,752,991****.**
            $
            4,871,283Service
                revenues
            
            **1,240,176****.**
            
            1,329,709Royalties
              and
              Contract Revenues
            
            **1,876,562.**
            ****
            2,300,382**Total
                Revenues**
            
            **7,869,729****.**
            
            8,501,374**Expenses**Cost
                of Sales
            
            **3,526,039****.**
            
            3,228,875Operating
                Expenses
            
            **5,494,366****.**
            
            4,783,188Impairment
                of Goodwill
            
            **238,172****.**
            
            -Other
                (Income) / Expenses, net
            
            **(143,974)**
            
            109,995(Benefit
                from)/Provision for Income Taxes
            
            **(465,497)**
            
            110,065**Total
                Expenses**
            
            **8,649,106****.**
            
            8,232,123**Net
                (Loss) Income**
            **$**
            **(779,377)**
            **$**
            269,251(Loss)
                / Earnings Per Common Share
            **$**
            **(0.17)**
            **$**
            0.06(Loss)
                / Earnings Per Common Share - Assuming Dilution
            **$**
            **(0.17)**
            **$**
            0.06Weighted
                Average Number of Common Shares Outstanding
            
            **4,638,843**
            
            4,614,500Weighted
                Average Number of Common Shares Outstanding - Assuming
                Dilution
            
            **4,638,843**
            
            4,781,500


For the year ended June 30, 2006, common stock equivalents were not included
      in
      computing diluted earnings per share as their effect would be
      anti-dilutive.


*See
      notes to the consolidated financial statements.*





**Hydromer,
      Inc. & Subsidiary**


**Consolidated
      Statements of Stockholders’ Equity**


Common
                Stock
            
            Contributed
            
            Accumulated
            
            Treasury
                StockShares
            
            Amount
            
            Capital
            
            Deficit
            
            Shares
            
            Amount
            
            TotalBalance
                June 30, 2004
            4,608,904
            $
            3,615,615
            $
            577,750
            $
            (339,821)
            
            10,917
            $
            (6,140)
            $
            3,847,404.Exercise
                of Stock Options
              Net
                Income
            25,955
            
            16,000
            
            
            
            269,251.
            
            
            
            
            
            16,000.
              269,251.Balance
                June 30, 2005
            4,634,859
            $
            3,631,615
            $
            577,750
            $
            (70,570)
            
            10,917
            $
            (6,140)
            $
            4,132,655.Exercise
                of Stock Options
            20,222
            
            7,700
            
            
            
            
            
            
            
            
            
            7,700.Net
                Loss
            
            
            
            
            
            
            (779,377)
            
            
            
            
            
            (779,377)**Balance
                June 30, 2006**
            **4,655,081**
            **$**
            **3,639,315**
            **$**
            **577,750**
            **$**
            **(849,947)**
            
            **10,917**
            **$**
            **(6,140)**
            **$**
            **3,360,978****.**


*See
      notes to the consolidated financial statements.*














**Hydromer,
      Inc. & Subsidiary**


**Consolidated
      Statements of Cash Flows**





Year
                Ended June 30,**2006**
            
            2005**Cash
                Flows From Operating Activities:**Net
                (Loss) / Income
            **$**
            **(779,377)**
            $
            269,251.Adjustments
                to reconcile net income to net cash provided by operating
                activitiesDepreciation
                and amortization
            
            **381,395****.******
            
            360,117.Impairment
                of Goodwill
            
            **238,172****.**
            
            -.Deferred
                income taxes
            
            **(397,219)**
            
            102,173.Changes
                in Assets and LiabilitiesTrade
                receivables
            
            **22,169****.**
            
            495,051.Inventory
            
            **106,841****.**
            
            (285,938)Prepaid
                expenses
            
            **8,327****.**
            
            (1,963)Other
                assets
            
            **(234,679)**
            
            24,570.Accounts
                payable and accrued liabilities
            
            **177,374****.**
            
            (133,367)Deferred
                revenues
            
            **(116,179)**
            
            208,296.Income
                taxes payable
            
            **(83,863)**
            
            (95,090)Net
                Cash (Used for) Provided by Operating Activities
            
            **(677,039)**
            
            943,100.**Cash
                Flows From Investing Activities:**Cash
                purchases of property and equipment
            
            **(338,283)**
            
            (560,277)Cash
                payments on Patents and Trademarks
            
            **(213,449)**
            
            (258,387)Cash
                purchases of Short-term investments
            
            **(392,633)**
            
            -Maturity
                of Short-term investments
            
            **400,000****.**
            
            -Net
                Cash Used for Investing Activities
            
            **(544,365)**
            
            (818,664)**Cash
                Flows From Financing Activities:**Net
                borrowings/(payments) against Line of Credit
            
            **449,592****.**
            
            75,653.Proceeds
                from long-term borrowings
            
            ****-.**.**
            
            1,990,000.Repayment
                of long-term borrowings
            
            **(177,679)**
            
            (971,909)Proceeds
                from the issuance of common stock
            
            **7,700****.**
            
            16,000.Net
                Cash Provided by Financing Activities
            
            **279,613****.**
            
            1,109,744.**Net
                (Decrease) Increase in Cash and Cash Equivalents:**
            
            **(941,791)**
            
            1,234,180.Cash
                and Cash Equivalents at Beginning of Period
            
            **1,376,656****.**
            
            142,476.Cash
                and Cash Equivalents at End of Period
            **$**
            **434,865****.**
            $
            1,376,656.








Cash
                paid during the year for:Interest
            **$**
            **172,823****.**
            $
            115,216.Income
                taxes
            **$**
            **32,907****.******
            $
            102,500.





*See
      notes to the consolidated financial statements.*








**Hydromer,
      Inc. & Subsidiary**


**Notes
      to the Consolidated Financial Statements**





**1.
      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Nature
      of Operations**


Hydromer,
      Inc. & Subsidiary (the “Company”) is a bio-polymer research and development
      company based in Branchburg, New Jersey. The Company develops polymer


complexes
      for commercial markets in both the United States and abroad for the medical,
      cosmetics, veterinary sciences and industrial fields. The Company obtains patent


rights
      on
      certain products from which royalty revenues are received. Its wholly owned
      subsidiary, Biosearch Medical Products, Inc., a U.S. based corporation, is
      an
      OEM


manufacturer
      for various medical products companies as well as the manufacturer of its own
      line of endoscopic products sold to hospitals, domestically and
      internationally,


through
      a
      network of dealers. The Company also offers R&D, engineering and contract
      coating services in its array of capabilities.




**Principles
      of Consolidation**


The
      consolidated financial statements include the accounts of Hydromer, Inc. and
      its
      wholly owned subsidiary. All significant intercompany balances and transactions


have
      been
      eliminated.




**Cash
      and Cash Equivalents**


Cash
      and
      cash equivalents consist of short-term investments with original maturities
      of
      three months or less.




**Short-Term
      Investments**


Short-term
      investments consist of investments other than cash and cash equivalents with
      original maturities of greater than three months and less than one year. There
      were


no
      short-term investments as of June 30, 2006 and June 30, 2005.




**Inventories**


Inventories
      are valued at the lower of cost, determined by the first-in, first-out method,
      or market and include appropriate amounts of labor and overhead.




**Depreciation**


The
      cost
      of property and equipment, which includes a reasonable portion of labor costs
      for equipment built in-house, is depreciated on a straight-line method over
      the


estimated
      useful lives of the assets: 5-10 years for machinery and equipment, 3-5 years
      for furniture and office equipment and 40 years for the building. When assets
      are


retired
      or otherwise disposed of, the cost and related accumulated depreciation are
      removed from the accounts, and any resulting gain or loss is reflected in
      income


for
      the period. Repairs and maintenance which do not extend the useful lives of
      the
      related assets are expensed as incurred.




**Patents**


Expenses
      associated with patents are prepaid and amortized over the expected life of
      the
      patent, typically 20 years. Prepaid expenses associated with patents which
      are


not
      approved or abandoned are expensed in the period in which such patents are
      not
      approved or abandoned. Maintenance fees associated with existing patents are


written
      off over 12 months. Amortization expense for the years ended June 30, 2006
      and
      2005 were $144,327 and $151,175, respectively. One new patent was granted during


the
      year
      ended June 30, 2006.




**Goodwill**


Goodwill
      represents the excess of the purchase price of Biosearch Medical Products,
      Inc.
      over the fair market value of their net assets at the date of acquisition and
      through


June
      30,
      2002, was amortized on the straight line method over 40 years. The Company
      adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill*


*and
      Other Intangible Assets* ,
      on July
      1, 2002 in which goodwill is no longer amortized but tested for impairment
      on at
      least an annual basis. The carrying value is reviewed


if
      the
      facts and circumstances, such as significant declines in sales, earnings or
      cash
      flows or material adverse changes in the business climate, suggest that it
      may
      be impaired.


If
      this
      review indicates that goodwill will not be recoverable, the impairment is
      determined by comparing the carrying value of goodwill to fair value. Fair
      value
      can be


determined
      based on quoted market values, discounted cash flows or appraisals. The Company
      uses the present value of expected future cash inflows method.


During
      the year ended June 30, 2006, the Company determined that the carrying amount
      of
      the goodwill exceeded its fair value. A goodwill impairment loss of $238,172


was
      recognized. As of June 30, 2006, the original goodwill balance has been fully
      written off.




**Long-Lived
      Assets**


The
      Company assesses long-lived assets for impairment as required under SFAS No.
      144, *Accounting
      for the Impairment or Disposal of Long-Lived Assets* .
      The
      Company


reviews
      for impairment whenever events or circumstances indicate that the carrying
      amount of these assets may not be recoverable. The Company assesses these assets


for
      impairment based on estimated future cash flows from these assets .




**Revenue
      Recognition**


Revenues
      from product and services sales are recognized at the time of shipment or
      services rendered provided that collection of the resulting receivable is
      probable. Revenues


from
      royalties are recognized upon the sale of certain products by licensees with
      whom the Company has licensing agreements. Contract Revenues, which includes


payments
      from Option, Supply or Support agreements that are typically based on time
      frames, are recognized in the periods to which it pertains. Deferred revenues
      are


recorded
      when agreements call for payment ahead of when the amounts are
      earned.




**Shipping
      and Handling Charges**


The
      Company includes costs of shipping and handling billed to customers in Revenues
      and the related expense of shipping and handling costs in Cost of
      Sales.




**Advertising**


Advertising
      costs are expensed as incurred except for tangible assets, such as printed
      advertising materials, which are expensed as consumed. Advertising expense


was
      $42,671 and $47,267 for the years ended June 30, 2006 and 2005, respectively.




**Research
      and Development**


Research
      and development costs, primarily employee salaries and benefits, are charged
      to
      operations when incurred and are included in operating expenses. The amounts


charged
      to expense for the years ended June 30, 2006 and 2005 were approximately
      $1,000,987 and $1,012,091, respectively.




**Stock-Based
      Compensation**


As
      permitted by SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      the
      Company has elected to follow Accounting Principle Board Opinion No. 25, *Accounting
      for*


*S* *tock
      Issued to Employees,* (“APB
      25”) and related interpretations in accounting for its employee stock option
      plans. Under APB 25, no compensation expense is


recognized
      at the time of option grant when the exercise price of the Company’s employee
      stock options equals the fair market value of the underlying common stock


on
      the
      date of grant. Effective January 1, 2006, the Company is accounting for stock
      options under SFAS No. 123(R) (see footnote 2. “New Accounting
      Pronouncements **”** )




**Income
      Taxes**


Income
      taxes are provided for the tax effects of transactions reported in the financial
      statements and consist of taxes currently due plus deferred taxes related
      primarily to


differences
      between the bases of assets and liabilities for financial and income tax
      reporting. The deferred tax assets and liabilities represent the future tax
      return





F-4


**Hydromer,
      Inc. & Subsidiary**


**Notes
      to the Consolidated Financial Statements**




consequences
      of those differences, which will either be taxable or deductible when the assets
      and liabilities are recovered or settled.


Deferred
      taxes are also recognized for operating losses
      that are available to offset future federal and state income taxes.




**Earnings
      Per Share**


Earnings
      per share, in accordance with the provisions of SFAS No. 128, Earnings Per
      Share, is computed by dividing net income by the weighted average number of
      common


stock
      shares outstanding during the period.




**Use
      of Estimates**


The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect


the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues


and
      expenses during the reporting period. Actual results could differ from those
      estimates.




**Reclassification**


Certain
      amounts previously reported have been reclassified to conform to the 2006
      presentation.







**2.
      NEW ACCOUNTING PRONOUNCEMENTS**




The
      Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      on
      January 1, 2006. SFAS No. 123(R) establishes the standards for transactions
      where an entity exchanges its


equity
      instruments for goods or services. This standard requires an issuer to measure
      the cost of employee services received in exchange for an award of equity
      instruments


based
      on
      the grant-date fair value of the award and eliminated the exception to account
      for such awards using the intrinsic method previously allowable under APB No.
      25.


SFAS
      No.
      123(R) requires all equity compensation to be expensed during the related
      periods. There were no transactions subject to the accounting of SFAS No. 123(R)
      this year.





**3.
      CONCENTRATION OF CREDIT AND BUSINESS RISK**




The
      Company is exposed to additional credit and business risks due to its
      concentration of activity with certain parties. For example, at times throughout
      the year, the Company


may
      maintain certain bank accounts in excess of FDIC insured limits.




In
      addition, the Company provides credit in the normal course of business to
      customers. Ongoing credit evaluations of its customers are performed, and
      allowances for


doubtful
      accounts are based on factors surrounding the credit risk of specific customers,
      historical trends and other information.




For
      the
      year ended June 30, 2006, the Company sold products and services and collected
      Contract Revenues, totaling 32% of its total revenues, to two customers, Cordis


Neurovascular
      Systems and Cook Endoscopy (formerly Wilson Cook Medical, Inc.) who individually
      accounted for 18% and 14%, respectively, of the consolidated revenues.


T here
      were
      no outstanding accounts receivable from these customers at June 30,
      2006.




During
      the fiscal year ended June 30, 2005 Cordis Neurovascular Systems and Cook
      Endoscopy individually accounted for 15% and 14%, respectively, of total
      revenues.




Accounts
      receivable from these customers accounted for 22% of total accounts receivable
      at June 30, 2005.




The
      Company’s patent 4,642,267 expired on May 6, 2005. This patent was the subject
      of four licenses with a total annual royalty income to the Company of
      approximately $2.1


million.
      The Company was able to enter into supply agreements or support fees, with
      varying terms and termination conditions, with all four of the licensees, valued
      at $1.5


million
      annually. Patent no. 4,769,013, the subject of three royalty licenses, expired
      during the fiscal year ended June 30, 2006 and another patent (no. 4,875,287
      with one royalty


license)
      is to expire in November 2006. The total annual royalty income from these two
      patents approximated $0.1 million.





**4.
      INVENTORY**




Inventory
      consists of:


June
                30,**2006**
            
            2005Finished
                goods
            **$**
            **328,777**
            $
            336,078Work
                in process
            
            **211,422**
            
            314,345Raw
                materials
            
            **447,887**
            
            444,504**$**
            **998,086**
            $
            1,094,927





**5.
      OTHER ASSETS**




Included
      in Other assets as of June 30, 2006 is $123,776 and $114,377, current and
      non-current portion, respectively, representing the $250,000 remaining
      receivable from
      the


legal
      settlement arising from the Company’s patent infringement claim settled in
      February 2006. The receivable, $125,000 each due in January 2007 and January
      2008, is discounted
      at 5%.





**6.
      PROPERTY AND EQUIPMENT**




Property
      and equipment consists of the following:


June
                30,**2006**
            
            2005Land
            **$**
            **472,410****..**
            $
            472,410.Building
            
            **2,148,681****..**
            
            2,121,092.Machinery
                and equipment
            
            **3,819,631****..**
            
            3,556,839.Furniture
                and fixtures
            
            **605,558****..**
            
            733,595.**7,046,280****..**
            
            .****6,883,936.Less:
                Accumulated
              depreciation
                and amortization
            
            **(3,668,807****)****.**
            
            (3,607,678)Property
                and Equipment, net
            **$**
            **3,377,473****..**
            $
            3,276,258.




Depreciation
      expense charged to operations was $236,558 and $205,579 for the years ended
      June
      30, 2006 and 2005, respectively.







**7.
      INTANGIBLE ASSETS**




Intangible
      Assets are comprised of the following:


June
                30,**2006**
            
            2005Patents
            **$**
            **1,101,153****.**
            $
            975,940.Trademarks
            
            **72,955****.**
            
            72,412.Less:
                Accumulated amortization
            
            **(324,846)**
            
            (268,212)Intangible
                Assets, net
            **$**
            **849,262****.**
            $
            780,140.




Future
      amortization of the Intangible Assets, as of June 30, 2006, are as
      follows:


Year
                ending June 30,2007
            $
            81,5672008
            
            77,3232009
            
            73,3102010
            
            69,3662011
            
            68,727Thereafter
            
            478,9690$
            849,262





F-5


**Hydromer,
      Inc. & Subsidiary**


**Notes
      to the Consolidated Financial Statements**





**8.
      LONG-TERM DEBT AND CREDIT FACILITY**




The
      Company’s facility is financed by a ten-year mortgage note bearing interest at a
      6.52% fixed rate. The note amortizes with monthly payments and is secured by
      the


real
      estate and improvements and all rents from leases subsequently entered into.
      As
      of June 30, 2006, the book value of the real estate and improvements was
      $2,327,405.


The
      last
      complete appraisal was conducted in 2003 and reflected a market value of
      $3,200,000.




On
      June
      30, 2005, the Company closed on a long-term financing facility of $1,990,000
      in
      the form of a second mortgage on its property. This facility has a ten year
      term
      with


a
      6.38%
      fixed rate. $886,414 was used to pay off a construction loan/continuing loan
      provided by New Millennium Bank with the remainder put in short-term investments
      or


to
      be
      used for working capital and possible acquisitions. The facility was financed
      through Wachovia Bank, NA which also holds a $555,000 first Mortgage on the
      Company's


property.




As
      of
      June 30, 2006, the Company did not meet certain financial ratios required under
      the loan documents. A waiver has been granted by the lender.




The
      Company also has a revolving line of credit agreement with a financial
      institution, which allows borrowings of up to $750,000, secured by all trade
      receivables and inventories.


The
      line
      bore interest, payable monthly at LIBOR plus 3.15% until June 2005 at which
      was
      then reduced to LIBOR plus 2.25%. As of June 30, 2006, the interest rate was
      7.59%.


This
      line
      had a maturity date of July 31, 2006 which was extended until January 31, 2007
      during the year at the same terms. As of June 30, 2006 and 2005, $656,255 and
      $206,663


were
      outstanding on the line of credit respectively.




Long-term
      debt is comprised of the following:


June
                30,**2006**
            
            2005Mortgage
                note
            **$**
            **438,234****.**
            $
            483,321.Second
                Mortgage Loan
            
            **1,857,407****.**
            
            1,990,000.Less:
                Current Maturities
            
            **(202,204)**
            
            (178,029)Long-term
                Debt,
              Net
                of Current Maturities
            **$**
            **2,093,437****.**
            $
            2,295,292.




Total
      maturities of long-term debt are as follows:


Year
                ending June 30,2007
            $
            202,2042008
            
            215,3932009
            
            230,1822010
            
            245,6042011
            
            262,060Thereafter
            
            1,140,198$
            2,295,641





**9.
      FAIR VALUE OF FINANCIAL INSTRUMENTS**




The
      carrying amount of cash and cash equivalents, short-term investments, accounts
      receivable, accounts payable and accrued expenses approximates fair value
      because


of
      the
      short maturity of these instruments. The fair value of the Company’s long-term
      debt approximates its carrying value as it is based on or about the current
      rates


offered
      to the Company for debt of the same remaining maturities with similar collateral
      requirements.














**Limitations**


Fair
      value estimates are made at a specific point in time, based on relevant market
      information about the financial instrument. These estimates are subjective
      in
      nature


and
      involve uncertainties and matters of significant judgment and therefore cannot
      be determined with precision. Changes in assumptions could significantly affect
      the


estimates.




**10.
      INCOME TAXES**


The
      income tax (benefit) provision is comprised of the following:


Federal
            
            State
            
            Total**Year
                Ended June 30, 2006****Current**
            **$**
            **(71,185)**
            **$**
            **2,907****.**
            **$**
            **(68,278)****Deferred**
            
            **(296,253)**
            
            **(100,966)**
            
            **(397,219)****$**
            **(367,438)**
            **$**
            **(98,059)**
            **$**
            **(465,497)**Year
                Ended June 30, 2005Current
            $
            1,513
            $
            5,764.
            $
            7,277Deferred
            
            90,843
            
            11,945.
            
            102,788$
            92,356
            $
            17,709.
            $
            110,065




The Company’s deferred tax asset and liability as presented in the Company’s
      financial statements are comprised of the following temporary
      differences:


June
                30,**2006**
            
            2005Deferred
                Tax AssetNet
                Operating Losses
            **$**
            **345,510****.**
            $
            201,628.Adjustment
                of Goodwill
            
            **196,069****.**
            
            100,800.Research
                & Development Credits
            
            **346,643****.**
            
            9,829.Valuation
                allowance
            
            **(371,820)**
            
            (220,268)Total
                Deferred Tax Assets
            
            **516,402****.**
            
            91,989.Deferred
                Tax LiabilityDepreciation
            
            **(271,058)**
            
            (243,864)Total
                Deferred Tax Liability
            **$**
            **(271,058)**
            $
            (243,864)




Deferred
      taxes are recognized for temporary differences between the bases of assets
      and
      liabilities for financial statement and income tax purposes. The differences


relate
      primarily to depreciable assets (using accelerated depreciation methods for
      income tax purposes). The Company’s adjustment to Goodwill in 2004 and 2006
      created


a
      deferred tax asset, which although has an indefinite life, has been fully
      reserved for as realization of its benefit is unlikely.




The
      Company has net operating loss carry forwards of approximately $144,051 and
      $508,813 for Federal and State tax purposes respectively. These net operating
      loss carry


forwards
      may be used to reduce federal and state taxable income and tax liabilities
      in
      future years and expire in various years through June 30, 2019 and June 30,
      2011
      for


Federal
      and State tax purposes, respectively. In addition, the Company has Research
      and
      Development Tax Credits for State tax purposes of approximately $329,643 which


expires
      in various years through June 30, 2019.




The
      Company’s provision for income taxes differs from applying the statutory U.S.
      federal income tax rate to the income before income taxes. The primary
      differences


result
      from providing for state income taxes, generation of allowable tax credits
      and
      from deducting certain expenses for financial statement purposes but not for
      federal


income
      tax purposes.







F-6


**Hydromer,
      Inc. & Subsidiary**


**Notes
      to the Consolidated Financial Statements**









A reconciliation between taxes computed at the federal statutory rate and the
      consolidated effective tax rate follows:


June
                30,**2006****.**
            
            2005.Federal
                statutory tax rate
            
            **(34.0)**
            **%**
            
            34.0
            %State
                income tax - net of federal
              tax
                benefit
            
            **(4.5)**
            
            
            3.2R
                & D credits
              Adjustment
                to prior year accrual for income tax
            
            **(7.8)****.**
              
              **.****-****.**
            
            
            -
              
              (8.2)Permanent
                and other differences
            
            **8.9****.********.**
            
            
            0.9**(37.4)**
            **%**
            
            29.9
            %






**11.
      STOCK OPTIONS AND AWARDS**




On
      February 22, 2000 the Board of Directors approved an option plan that granted
      each active director 2,000 options for each meeting attended, awarded at the
      annual meeting at the 5-day market price average.




The
      following options were awarded to the Board of Directors under this
      plan:


Issuance
              
              Date
            OptionsIssued
            ExercisePrice
            ExpirationDate
            OptionsExercisedOct
                24, 2000
            62,000
            $0.55
            Oct
                23, 2005
            23,700Nov
                14, 2001
            64,000
            $1.11
            Nov
                13, 2006
            -Nov
                13, 2002
            80,000
            $0.45
            Nov
                13, 2007
            -Nov
                19, 2003
            52,000
            $1.10
            Nov
                19, 2008
            -Nov
                17, 2004
            56,000
            $2.10
            Nov
                17, 2009
            -Nov
                16, 2005
            62,000
            $0.95
            Nov
                16, 2010
            -




There were no other stock option issuances during the 2005 and 2006 fiscal
      years.




A summary of activity under the plan for the years ending June 30, 2006 and
      2005
      is as follows:


Common
                Stock Options OutstandingWeighted
                AverageShares
            
            Exercise
                PriceBalance,
                June 30, 2004
            
            501,524.
            
            $
                0.94Granted
              Exercised
            
            56,000.
              (30,000)
            
            2.10
              0.83Canceled
            
            (5,000)..
            
            0.80Balance,
                June 30, 2005
            
            522,524.
            
            $
                1.08Granted
            
            62,000.
            
            0.95Exercised
            
            (23,700)..
            
            0.55Canceled
            
            (158,824)..
            
            1.18**Balance,
                June 30, 2006**
            
            **402,000****.**
            
            **$
                1.04**





Following is a summary of the status of options outstanding as of June 30,
      2006:


Outstanding
                Options.
            
            Exercisable
                Options.Exercise
              Price
              Range
            
            Number
            
            Weighted
                Average Remaining ContractualLife
            
            Weighted
                Average Exercise
              Price
            
            Number
            
            Weighted
                Average Exercise
              Price$0.45
                - $0.85
            
            100,000
            
            1.2
                years
            
            $0.49
            
            100,000
            
            $0.49$0.86
                - $1.68
            
            246,000
            
            1.9
                years
            
            $1.03
            
            246,000
            
            $1.03$1.69
                - $2.10
            
            56,000
            
            3.4
                years
            
            $2.10
            
            56,000
            
            $2.10402,000
            
            1.9
                years
            
            $1.04
            
            402,000
            
            $1.04








**PRO
      FORMA INFORMATION**




Prior
      to
      January 1, 2006, the Company followed the disclosure only provisions of SFAS
      No.
      123, *Accounting
      for Stock Based Compensation.* Accordingly, no


compensation
      expense has been recognized for stock options issued. Had compensation expense
      for the options which vested in 2006 and 2005 been determined based


on
      the
      fair value at the grant date commensurate with the provisions of SFAS No. 123,
      the Company’s net income and net income per share for 2006 and 2005,
      respectively,


would
      have been reflected as to the pro forma amounts indicated below:







**2006**
            
            2005Net
                (Loss) Income:As
                reported
            **$**
            **(779,377)**
            $
            269,251Pro
                forma
            
            **(809,460)**
            
            209,396Basic
                (Loss) Income per Share:As
                reported
            **$**
            **(0.17)**
            $
            0.06Pro
                forma
            
            **(0.17)**
            
            0.05




The
      fair
      value of each option grant is estimated on the date of grant using the
      Black-Scholes pricing model with the following weighted average assumptions
      for


grants
      in
      2006 and 2005, respectively: dividend yield of 0% and 0%; expected volatility
      of
      115% and 115%; risk-free interest rate of 5.1% and 4.1%; and expected lives
      of


5
      years
      in both years.





**12.
      RETIREMENT PLAN**




The
      Company sponsors a qualified 401(k) plan covering substantially all full time
      employees under which eligible employees can defer a portion of their annual
      compensation.


The
      Company determines annually, the amount of matching contributions, which
      recently has been 25% on 6% of the employees’ salary. The Company’s matching


contribution
      made to the plan during the years ended June 30, 2006 and 2005 were $35,094
      and
      $22,929, respectively.







**13.
      LEASES**




There
      were no material non-cancelable lease terms in excess of one year as of June
      30,
      2006.





**14.
      EARNINGS PER SHARE**




The
      following table sets forth the computation of earnings per share and earnings
      per share - assuming dilution:


**2006**
            
            2005Numerator:Net
                (loss) income
            **$**
            **(779,377)**
            $
            269,251Denominator:Denominator
                for earnings per share
              -
                weighted average shares outstanding
            
            **4,638,843**
            
            4,614,500Effect
                of dilutive securities - stock options
            
            **n/a****.**
            
            167,000Denominator
                for earnings per shareassuming dilution - adjusted weightedaverage shares outstanding
            
            **4,638,843**
            
            4,781,500(Loss)
                Earnings per share
            **$**
            **(0.17)**
            $
            0.06(Loss)
                Earnings per share - assuming dilution
            **$**
            **(0.17)**
            $
            0.06


Common
      stock equivalents of 402,000 and 355,524 for the years ended June 30, 2006
      and
      2005, respectively, were not included in computing diluted earnings per share
      as


their
      effect would be anti-dilutive.





F-7


**Hydromer,
      Inc. & Subsidiary**


**Notes
      to the Consolidated Financial Statements**





**15.
      INDUSTRY SEGMENT INFORMATION**




The
      Company operates two primary business segments: (1) Polymer Research and (2)
      Medical Products.




Products
      included in the polymer research segment are Aquadapt ® ,
      Aquamere ® ,
      Aquatrix ® ,
      Dermaseal ® ,
      Hydromer ® Anti-Fog/Condensation Control Coatings,


Hydromer ® Lubricious Coatings, Sea-Slide ® and
      T-Hexx ® Barrier
      Dips and Sprays. Research and Development services and all of the Company’s
      royalties and


contract revenues
      are reported in this segment.




The
      medical products segment includes an OEM product line of bipolar coagulation
      probes, bilary catheters and stents, jejunal and enteral feeding accessories,
      guidewires,


biofeedback
      devices for fecal and urinary incontinence and other endoscopic accessories.
      Service revenues, including coating services and engineering services, are
      included


in
      this
      segment.




Due
      to
      the multitude of products offered and the product gross margins, the Company
      does not track sales volumes by products.




The
      Company operates globally in its segments with several large customers that
      are
      important to their operating results. One such customer accounted for 26% and
      23%


of
      the
      polymer research segment sales for the 2006 and 2005 fiscal years, respectively.
      For the medical products segment, the top three customers accounted for 48%
      and
      50%


of
      that
      segment’s 2006 and 2005 sales, respectively.




The
      Company evaluates the segments by revenues, total expenses and earnings before
      income taxes. The Company’s assets are not reviewed by business segment.


The
      accounting policies of these segments are described in the summary of
      significant accounting policies.




Corporate
      Overhead, primarily the salaries and fringes of senior management, support
      services (Accounting, Legal, Human Resources and Purchasing) and other


shared
      services (Building maintenance and warehousing), is reflected separately from
      the results of the business segments in the following:


Polymer
                Research*
            
            Medical
                Products
            
            Corporate
                Overhead
            
            Total**Year
                Ended June 30, 2006****Revenue**
            **$**
            **4,315,794****.**
            **$**
            **3,547,574****.**
            
            
            **$**
            **7,863,368****.****Expenses**
            
            **(3,623,388)**
            
            **(3,761,704)**
            **$**
            **(1,484,978)**
            
            **(8,870,070)****Earnings
                (Loss)****before****Income
                Taxes**
            **$**
            **692,406****.**
            **$**
            **(214,130)****.**
            **$**
            **(1,484,978)**
            **$**
            **(1,006,702)****.****.**Year
                Ended June 30, 2005Revenue
            $
            4,878,364.
            $
            3,607,640.
            
            
            $
            8,486,004..Expenses
            
            (3,536,202)
            
            (3,140,312)
            $
            (1,430,174)
            
            (8,106,688)Earnings
                (Loss)beforeIncome
                Taxes
            $
            1,342,162..
            $
            467,328.
            $
            (1,430,174)
            $
            379,316..




* Excludes
      the Fiscal 2006 Impairment of Goodwill of $238,172 as such charge-off is not
      included in the periodic reporting segment evaluations.





Geographic revenues were as follows for the years ended June 30,


**2006**
            2005Domestic
            **82%**
            84%Foreign
            **18%**
            16%





**16.
      CONTINGENCIES**




Royalty
      revenues recorded by the Company’s are based on the sales of licensee products
      as reported by the Company’s licensees which has the risk of being under- or over-reported.
      To minimize such risks, the Company’s management utilizes its knowledge and
      understanding of the licensee’s business, the market and other pertinent factors in
      assessing the validity of reported royalties. In addition, the Company has
      a
      right to audit the amounts reported.




The
      Company has not received any claims by licensees for possible overpayment of
      royalties.




The
      Company has been named as defendant in two product liability actions. Both
      actions are covered within the company's Product Liability Insurance
      policy. Management
      does not


expect
      the outcome to have a material impact to the financial statements





**17.
      SUBSEQUENT EVENTS**




In
      July
      2006, the Company renewed its $750,000 revolving line of credit agreement
      extending the maturity from July 31, 2006 to January 31, 2007.

























F-8


**INDEX
      TO EXHIBITS**


3.a
      Certificate of Incorporation of the Company, as amended to date




3.b
      By-Laws of the Company, as amended to date




10.a
      Minutes of Meeting of the Board of Directors of the Company held on March 5,
      1981 with respect to stock options granted to Manfred F. Dyck (Incorporated
      by


reference
      to Exhibit 10.i to the Registration Statement).




10.b
      Agreement dated August 11, 1981 between Horizon Concepts, Inc., and the Company
      (Incorporated by reference to Exhibit 10.c to the Registration
      Statement).




10.c
      Agreement dated January 27, 1982 between Reliable Pharmaceutical Company, Inc.
      and the Company (Incorporated by reference to Exhibit 10.d to the Registration


Statement).




10.d
      License Agreement dated July 14, 1982 between Biosearch Medical Products Inc.
      and the Company (Incorporated by reference to Exhibit 10.g to the Registration


Statement).




10.e
      Management Services Agreement dated July 14, 1982 between Biosearch Medical
      Products Inc. and the Company (Incorporated by reference to Exhibit 10.h to the


Registration
      Statement).




10.f
      Amendment dated October 7, 1982 to Agreement dated January 27, 1982 between
      Reliable Pharmaceutical Company, Inc. and the Company, together with letter


dated
      October 14, 1982 from Reliable Pharmaceutical Company, Inc. to the Company
      (Incorporated by reference to Exhibit 10.f to the 1983 Annual
      Report).




10.g
      Hydromer Coating agreement dated February 11, 1983 between Pacesetter Systems,
      Inc. and the Company (Incorporated by reference to Exhibit 10.g to the
      1983


Annual
      Report).




10.h
      Lease Agreement dated April 5, 1983 between Salem Realty and the Company
      (Incorporated by reference to Exhibit 10.h to the 1983 Annual
      Report).




10.i
      License Agreement dated April 25, 1983 between CardioSearch Inc. and the Company
      (Incorporated by reference to Exhibit 10.i to the 1983 Annual
      Report).




10.j
      Trademark License Agreement dated April 25, 1983 between CardioSearch Inc.
      and
      the Company (Incorporated by reference to Exhibit 10.j to the 1983 Annual
      Report).




10.k
      Agreement dated August 31, 1983 between Becton, Dickinson & Company and the
      Company (Incorporated by reference to Exhibit 10.l to the 1983 Annual
      Report).




10.l
      Current Report on Form 8-K filed May 30, 1986




10.m
      Hydromer Coating License Agreement dated September 30, 1984 between Axiom
      Medical, Inc. and the Company (Incorporated by reference to Exhibit 10.m to
      the


1984
      Annual Report).




10.n
      1982
      Stock Option Plan of the Company (Incorporated by reference to Exhibit 10.m
      to
      the 1983 Annual Report).




10.o
      Amendment dated June 26, 1984 to Agreement dated August 3, 1983 between Becton,
      Dickinson & Company and the Company (Incorporated by reference to


Exhibit
      10.o to the 1984 Annual Report).




10.p
      License Agreement dated July 31, 1984 between Kendall Company and the Company
      (Incorporated by reference to Exhibit 10.p to the 1984 Annual
      Report).




10.q
      License Agreement dated March 1, 1985 between Van-Tec Inc. and the Company
      and
      Letter of Amendment thereto dated June 13, 1985 (Incorporated by reference


to
      Exhibit 10.o to the 1985 Annual Report).




10.r
      Telex dated June 24, 1985 terminating License Agreement with CardioSearch Inc.
      (Incorporated by reference to Exhibit 10.p to the 1984 Annual
      Report).




10.s
      Amendment dated as of December 31, 1984 to Management Services Agreement dated
      July 14, 1982 between Biosearch Medical Products Inc. and the Company


(Incorporated
      by reference to Exhibit 10.q to the 1985 Annual Report).




10.t
      Lease Renewal Agreement dated April 15, 1985 between Salem Realty and the
      Company (Incorporated by reference to Exhibit 10.r to the 1985 Annual
      Report).




10.u
      Lease Agreement dated December 4, 1984 between Biosearch Medical Products Inc.
      and the Company (Incorporated by reference to Exhibit 10.s to the 1985


Annual
      Report).




10.v
      License Agreement dated April 11, 1986 between Axiom Medical, Inc. and the
      Company (Incorporated by reference to Exhibit 10.i to the 1986 Annual
      Report).




10.w
      License Agreement dated September 13, 1985 between U. S. Viggo and the Company
      (Incorporated by reference to Exhibit 10.c to the 1986 Annual
      Report).




10.x
      License Agreement dated March 27, 1986 between Wilkinson Sword Limited and
      the
      Company (Incorporated by reference to Exhibit 10.f of the 1986 Annual
      Report).










10.y
      Lease Renewal Agreement dated April 15, 1987 between Salem Realty and the
      Company (Incorporated by reference to Exhibit 10.y to the 1987 Annual
      Report).




10.z
      License Agreement dated April 30, 1986 between HPK International and the Company
      (Incorporated by reference to Exhibit 10.j to the 1986 Annual
      Report).




10.aa
      License Agreement dated August 1, 1986 between Film Specialties, Inc. and the
      Company (Incorporated by reference to Exhibit 10.aa to the 1987 Annual
      Report).




10.ab
      Lease Renewal Agreement dated April 15, 1988 between Salem Realty and the
      Company (Incorporated by reference to Exhibit 10.ab to the 1988 Annual
      Report).




10.ac
      License Agreement dated June 30, 1987 between Richards Medical Company and
      the
      Company (Incorporated by reference to Exhibit 10.ac to the 1988 Annual
      Report).




10.ad
      License Agreement dated December 1, 1987 between Mallinckrodt, Inc. and the
      Company (Incorporated by reference to Exhibit 10.ad to the 1988 Annual
      Report).




10.ae
      Option Agreement dated January 28, 1988 between Cordis Corporation and the
      Company (Incorporated by reference to Exhibit 10.ae to the 1988 Annual
      Report).




10.af
      Lease Agreement dated April 15, 1988 between Biosearch Medical Products Inc.
      and
      the Company (Incorporated by reference to Exhibit 10.ag of the 1988 Annual
      Report).




10.ag
      Letters dated June 11, 1987 and September 22, 1987 to U. S. Viggo, Inc.
      modifying License Agreement dated September 13, 1985, to cover only central
      venous


catheters
      (Incorporated by reference to Exhibit 10.ag to the 1988 Annual
      Report).




10.ah
      Lease Renewal Agreement dated April 15, 1989 between Salem Realty and the
      Company (Incorporated by reference to Exhibit 10.ah to the 1989 Annual
      Report).




10.ai
      Amendment dated October 1, 1988 to License Agreement dated September 13, 1985,
      between U. S. Viggo and the Company (Incorporated by reference to Exhibit 10.ai
      to the


1989
      Annual Report).




10.aj
      License Agreement dated October 20, 1988 between Cordis Corp. and the Company
      (Incorporated by reference to Exhibit 10.aj to the 1989 Annual
      Report).




10.ak
      License Agreement dated March 31, 1989 between Cathlab Corp. and the Company
      (Incorporated by reference to Exhibit 10.ak to the 1989 Annual
      Report).




10.al
      Amendment dated December 1, 1988 to License Agreement dated August 1, 1986
      between Film Specialties, Inc. and the Company (Incorporated by reference to


Exhibit
      10.al to the 1989 Annual Report).




10.am
      Finders Agreement dated August 20, 1987 between Phoenix Chemical, Inc. and
      the
      Company (Incorporated by reference to Exhibit 10.am to the 1989 Annual
      Report).




10.an
      License Agreement dated September 10, 1989 between the Stent Division of
      Schneider and the Company (Incorporated by reference to Exhibit 10.an to the
      1990 Annual Report).




10.ao
      License Agreement dated March 30, 1990 between Cosmo Ikko Company and the
      Company (Incorporated by reference to Exhibit 10.ao to the 1990 Annual
      Report).




10.ap
      License Agreement dated April 12, 1990 between Interventional Therapeutics,
      Inc.
      and the Company and amendment dated May 7, 1990 to the Agreement dated April
      12,
      1990 between Interventional Therapeutics, Inc. and the Company (Incorporated
      by
      reference to Exhibit 10.ap to the 1990 Annual Report).




10.aq
      Amended License Agreement dated January 1, 1990 between the Wilkinson Sword
      group of companies and the Company (Incorporated by reference to Exhibit 10.aq
      the 1990 Annual Report).




10.ar
      Lease Agreement dated April 15, 1990 between Salem Realty and the Company
      (Incorporated by reference to Exhibit 10.ar to the 1990 Annual
      Report).




10.as
      Amendment to the Agreement dated July 31, 1984 between Kendall Company and
      the
      Company (Incorporated by reference to Exhibit 10.as to the 1990 Annual
      Report).




10.at
      License Agreement dated January 11, 1991 between Biosearch Medical Products
      Inc.
      and the Company (Incorporated by reference to Exhibit 10.at to the 1991 Annual
      Report).




10.au
      License Agreement dated May 16, 1991 between I E Sensors and the Company
      (Incorporated by reference to Exhibit 10.au to the 1991 Annual
      Report).




10.av
      Lease Renewal Agreement dated April 15, 1991 between Salem Realty and The
      Company (Incorporated by reference to Exhibit 10.av to the 1991 Annual
      Report).




10.aw
      License Agreement dated July 25, 1991 between Johnson & Johnson Orthopaedics
      and the Company (Incorporated by reference to Exhibit 10.aw to the 1992 Annual
      Report).










10.ax
      License Agreement dated August 19, 1991 between Navarre Laboratories Ltd. and
      the Company (Incorporated by reference to Exhibit 10.ax to the 1992 Annual
      Report).




10.ay
      Amended License Agreement dated September 15, 1991 between Boston Scientific
      Corp. and the Company (Incorporated by reference to Exhibit 10.ay to the 1992
      Annual Report).




10.az
      Option/License Agreement dated September 23,1991 between Elan Corp. PLC and
      the
      Company (Incorporated by reference to Exhibit 10.az to the 1992 Annual
      Report).




10.ba
      Lease Agreement dated November 1, 1991 between Morton Street Realty and the
      Company (Incorporated by reference to Exhibit 10.ba to the 1992 Annual
      Report).




10.bb
      License Agreement dated August 17, 1992 between SCIMED Peripheral Interventions,
      division of SCIMED Life Systems, Inc. and the Company. (Incorporated by
      reference to Exhibit 10.bb to the 1993 Annual Report).




10.bc
      License Agreement dated March 9, 1993 between Arrow International, Inc. and
      the
      Company. (Incorporated by reference to Exhibit 10.bc to the 1993 Annual
      Report).




10.bd
      License Agreement dated April 28, 1993 between St. Jude Medical, Inc. and the
      Company. (Incorporated by reference to Exhibit 10.bd to the 1993 Annual
      Report).




10.be
      License Agreement dated November 11, 1993 between Katoh Hatsujyo Kaisha, Ltd.
      and the Company. (Incorporated by reference to Exhibit 10.be to the 1994 Annual
      Report).




10.bf
      Lease Agreement dated June 9, 1995 between Salem Realty and the Company
      (Incorporated by reference to Exhibit 10.bf to the 1995 Annual
      Report).




10.bg
      Amendment dated September 20, 1995 to License Agreement dated April 28, 1993
      between St. Jude Medical, Inc. and the Company. (Incorporated by reference
      to
      Exhibit 10.bg to the 1996 Annual Report).




10.bh
      License Agreement dated April 12, 1990 between Interventional Therapeutics
      and
      the Company was terminated effective December 22, 1995. (Incorporated by
      reference to Exhibit 10.bh to the 1996 Annual Report).




10.bi
      License Agreement dated May 16, 1991 between I E Sensors and the Company was
      terminated effective December 31, 1995. (Incorporated by reference to Exhibit
      10.bi to the 1996 Annual Report).




10.bj
      Consented to the assignment of license agreement dated April 28,1993 between
      St.
      Jude Medical, Inc. and the Company to CR Bard dated January 18, 1996.
      (Incorporated by reference to Exhibit 10.bj to the 1996 Annual
      Report).




10.bk
      License Agreement dated April 30, 1986 between HPK International and the Company
      was terminated effective February 19, 1996. (Incorporated by reference to
      Exhibit 10.bk to the 1996 Annual Report).




10.bl
      License Agreement dated June 6, 1996 between Biosearch Medical Products Inc.
      and
      the Company. (Incorporated by reference to Exhibit 10.bl to the 1996 Annual
      Report).




10.bm
      License Agreement dated August 1, 1996 between Biosearch Medical Products Inc.
      and the Company.




10.bn
      Amended License Agreement dated September 4, 1996 between SCIMED (Boston
      Scientific Corporation) and the Company.




10.bo
      License Agreement dated January 6, 1997 between Sherwood Davis & Geck and
      the Company.




10.bp
      Use
      permit for certain designated area dated May 4, 1997 between Biosearch Medical
      Products Inc. and the Company




10.bq
      Contract of sale between Biosearch Medical Products and the Company for the
      sale
      of 35 Industrial Parkway dated 3/31/98




10.br
      Note and mortgage with PNC Bank dated 6/12/98




10.bs
      3
      year lease agreement with Biosearch Medical Products dated 6/12/98 for 35
      Industrial Parkway




10.bt
      License of technology, supply and stock purchase agreement with C.R.Bard dated
      2/25/99




10.bu
      Trademark and technology license agreement with AST dated 3/9/99




10.bv
      License of two gel patents from Ridge Scientific dated 11/1/98




10.bw
      License and Supply agreement with Gallini SRL dated 6/28/00




10.bx
      Standstill agreement with license option with IMED Pharma Inc. dated
      3/30/00




10.by
      License of technology with Symbiotech Medical Inc. dated 3/28/00




10.bz
      License and supply agreement with TP Orthodontics Inc. dated
      3/30/00




10.ca
      License Agreement dated July 1, 2000 between Becton Dickinson and Company,
      Inc.
      and the Company.










10.cb
      License Agreement dated January 1, 2001 between LHS Limited and LHS Holding
      Limited, English dba KLEENCARE and the Company.




10.cc
      License Agreement dated April 17, 2001 between Tyco
      Healthcare Group LP and the
      Company.




10.cd
      Construction Contract dated April 19, 2001 between REDCO Engineering &
Construction Corp and the Company.




10.ce
      Service Agreement dated April 23, 2001 between Tyco
      Healthcare Group LP and the
      Company.




10.cf
      Loan Agreement dated June 7, 2001 between New Millenium Bank and the Company.




10.cg
      By-Laws Articles of Incorporation.




10.ch
      Loan Agreement dated June 30, 2005 between Wachovia Bank, N.A. and the
      Company.




24.
      Power
      of Attorney (see "Power of Attorney" in the Annual Report on Form
      10-KSB).




31.1
      Certification of Manfred F. Dyck, Chief Executive Officer, pursuant to
      Securities Exchange Act Rule 13a-14(a).


31.2
      Certification of Robert Y. Lee, Chief Financial Officer, pursuant to
      Securities Exchange Act Rule 13a-14(a).




32.1
      Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, signed by Manfred F. Dyck, Chief
      Executive Officer of Hydromer, Inc.




32.2
      Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002, signed by Robert Y. Lee, Chief Financial
      Officer of Hydromer, Inc.
















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