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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

(Mark One)
|X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934
      For the fiscal year ended December 31, 2001
                                       OR
|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
      For the transition period __________ to __________

                         COMMISSION FILE NUMBER: 0-20580

                           LIFE MEDICAL SCIENCES, INC.
             (Exact name of registrant as specified in its charter)

               Delaware                                          14-1745197
    (State or other jurisdiction of                           (I.R.S. Employer
     incorporation or organization)                          Identification No.)

P.O. Box 219, Little Silver, New Jersey                            07739
(Address of principal executive offices)                         (Zip Code)

                                 (732) 728-1769
              (Registrant's telephone number, including area code)

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

                                      NONE
                              (Title of each class)

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK--PAR VALUE $.001 PER SHARE
                                      UNITS
                           REDEEMABLE CLASS A WARRANTS
                           REDEEMABLE CLASS B WARRANTS
                                (Title of class)

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

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

      The aggregate market value of the common equity held by non-affiliates of
the registrant as of March 8, 2002 was approximately $4.5 million.

      As of March 8, 2002, 15,535,650 shares of Common Stock, $.001 par value,
of the registrant were issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

      Portions of the registrant's definitive proxy statement to be filed
pursuant to Regulation 14A in connection with solicitation of proxies for its
2002 Annual Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.

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<PAGE>

                                INTRODUCTORY NOTE

      Life Medical Sciences, Inc., a Delaware corporation (the "Company"), is a
biomaterials company engaged in the development and commercialization of
innovative and cost-effective medical devices for therapeutic applications.

      Certain statements in this Report on Form 10-K (the "Report") under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995, including,
without limitation, statements regarding future cash requirements and the
ability of the company to raise capital. Such forward-looking statements involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: delays in product development; problems or delays
with clinical trials; failure to receive or delays in receiving regulatory
approval; lack of enforceability of patents and proprietary rights; lack of
reimbursement; general economic and business conditions; industry capacity;
industry trends; demographic changes; competition; material costs and
availability; the loss of any significant customers; changes in business
strategy or development plans; quality of management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and other factors referenced in this Report. When used
in the Report, statements that are not statements of material facts may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "anticipates", "plans", "intends", "expects" and similar expressions are
intended to identify such forward-looking statements which speak only as of the
date hereof. The Company undertakes no obligation to publicly release the
results of any revisions to these forward-looking statements that may be made to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.


                                       1
<PAGE>

                                     PART I

Item 1. Business

General

      Life Medical Sciences, Inc. (the "Company") is a biomaterials company
engaged in the development and commercialization of innovative and
cost-effective medical products for therapeutic applications. Products under
development, all of which are based on the Company's proprietary, bioresorbable
polymer technology, are medical devices designed to prevent or reduce the
formation of adhesions (scar tissue) following a broad range of surgical
procedures. With the receipt of approximately $1 million in December 2000,
through a combination of equity financing and the sale of state tax losses, the
Company was able to reinitiate development activities related to its
REPEL-CV(TM) adhesion barrier film that had previously been postponed due to
limited financial resources. During 2001, the Company received advances totaling
$440,000 in the form of convertible debt from investors in a larger preferred
stock/warrant offering which was completed in March 2002 for an aggregate of
$1.2 million (including the conversion of the convertible debt), $300,000 of
which is being held in escrow pending the increase in the Company's authorized
Common Stock. The Company raised an additional $294,000 in December 2001 from
the sale of certain New Jersey state tax losses. The proceeds of these
financings are intended to fund the REPEL-CV clinical trial as well as other
product development activities and operating expenses. In April 2001, the Board
of Directors approved a proposed purchase of the polymer technology assets of a
third party in exchange for the issuance of 6,900,000 shares of restricted
Common Stock of the Company. Execution of the transaction was made contingent
upon the completion of the $1.2 million preferred stock/warrant offering and the
increase in the Company's authorized Common Stock as previously referenced. The
Company has not entered into a written agreement concerning this transaction and
cannot assure that the transaction will occur on the terms approved or at all.

      The Company's bioresorbable polymer technology is based on a proprietary
group of polymers. The Company believes that these polymers display desirable
properties which enable them to be tailored to a wide variety of applications.
These properties include bioresorbability, flexibility and strength. Unlike many
other polymer systems that may cause untoward tissue responses, polymers derived
from the Company's proprietary polymer technology are highly biocompatible. In
addition to products for the prevention or reduction of post-operative
adhesions, the Company believes that potential medical applications for its
polymer technology include resorbable sutures, stents, coatings for implantable
devices and drug delivery systems.

Certain Historical Activities

      In April 1998, the Company launched its CLINICEL silicone-based device for
diminishing unsightly scars and associated discomfort. CLINICEL was marketed
through a direct to consumer marketing campaign in the United States and
internationally through a series of independent distributors. However, in order
to focus resources on the bioresorbable polymer product opportunities, the
Company discontinued the manufacture and sale of CLINICEL products effective
February 29, 2000 and the intellectual property rights associated with CLINICEL
reverted to the Dimotech Ltd., a subsidiary of Technion Research and Development
Foundation Ltd.

      The Company previously developed and marketed the Sure-Closure System(TM),
a disposable wound closure device. The Company, in July 1994, sold the
Sure-Closure System to MedChem Products, Inc. ("MedChem") which was subsequently
acquired by C.R. Bard, Inc. ("C.R. Bard"). In October 1997, Zimmer, Inc., a
subsidiary of Bristol - Myers Squibb ("Zimmer"), acquired the Sure - Closure
System from C.R. Bard. The Company receives a 10% royalty on all net sales of
the Sure-Closure System products through June 30, 2004.

      The Company is a Delaware corporation which was organized in August 1990
under the name of BioMedical Polymers International, Ltd. The Company changed
its name to Life Medical Sciences, Inc. in June 1992.

Post-Operative Adhesions

      Adhesions are fibrous structures that connect tissues or organ surfaces
that are not normally joined. They are an undesirable side effect of the body's
normal healing process following damage to tissue. Adhesions can cause
significant complications such as bowel obstruction following abdominal surgery,
infertility following gynecological surgery, serious complications during
secondary cardiovascular surgical procedures, restricted limb motion following
orthopedic surgery, and pain following any surgery. Moreover, adhesions that
form as a result of surgery can increase the complexity, duration and risk of
subsequent


                                       2
<PAGE>

surgery. According to industry sources, in the United States, surgeons perform
an estimated 440,000 abdominal operations annually to remove adhesions, and the
annual cost in the United States for the removal of such adhesions is
approximately $1.2 billion in inpatient treatment charges.

      According to industry data, adhesions occur in approximately 93% of
abdominal surgeries, between 55% and 100% of gynecologic operations and in
virtually every open-heart procedure. Adhesion formation after open-heart
surgical procedures is a well-documented, significant complication at the point
of performing a secondary procedure. Secondary procedures (re-do's) account for
15-20% of the approximately 500,000 open-heart surgeries performed annually in
the United States. Extensive adhesions form between the surface of the heart
(epicardium) and the inner surface of the sternum after virtually every
open-heart surgical procedure. These adhesions make opening the sternum and
accessing the heart a time consuming and dangerous process in the secondary
procedure. There are no FDA approved products currently available to the
cardiovascular surgeon to address post-operative adhesion formation.

      Since it is not possible to predict which patients will develop adhesion
related complications, the Company believes that most surgeries will benefit
from routine use of its adhesion prevention products. The Company believes that
current products for the prevention or reduction of adhesions are limited by
various shortcomings including: (i) undesirable handling characteristics in the
surgical environment, (ii) diminished efficacy in the presence of blood, (iii)
inability to be used in laproscopic procedures, and (iv) failure to be absorbed.
The Company believes that its products under development may not suffer from
some if not all of these shortcomings and as a result may become the preferred
method of treatment for the prevention or reduction of adhesions. In addition,
some resorbable polymers may form particles or breakdown products as they
degrade which could lead to untoward biological effects or may actually cause
adhesions. The Company believes that its products will provide an additional
clinical benefit in that they have been shown to uniformly dissolve without
forming particles or breakdown products, which could lead to untoward biological
effects.

      Set forth below is a chart summarizing the Company's products and their
stage of development, followed by a more detailed description of each product.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------
Adhesion Prevention Products Under Development
----------------------------------------------------------------------------------------------------------------
                       Potential                                                                 Est. Annual
Product                Therapeutic Application                  Status                        Market Potential
----------------------------------------------------------------------------------------------------------------
<S>                    <C>                                      <C>                           <C>
REPEL-CV               Preventing or reducing post-operative    IDE approval for a            $250 Million
Barrier Film           surgical adhesions in  open heart        feasibility clinical trial
                       surgical procedures.
----------------------------------------------------------------------------------------------------------------
REPEL(TM)              Preventing or reducing  post-operative   IDE  approval for a pivotal   $100 Million
Barrier Film           surgical adhesions in gynecological      clinical trial in
                       and general surgical procedures.         gynecological procedures.
----------------------------------------------------------------------------------------------------------------
RESOLVE(TM)            Preventing or reducing post-operative    Preclinical development       $400 Million
Viscous Solution       surgical adhesions in gynecological
                       and general abdominal surgery.
----------------------------------------------------------------------------------------------------------------
RELIEVE(TM)            Preventing or reducing post-operative    Preclinical development       $300 Million
Viscous Solution       surgical adhesions in orthopedic and
                       spinal surgery.
----------------------------------------------------------------------------------------------------------------
</TABLE>

REPEL-CV

      REPEL-CV is a bioresorbable adhesion barrier film designed to be placed
over the surface of the heart at the conclusion of the surgical procedure.
REPEL-CV was evaluated in a series of pre-clinical studies which were conducted
at the University of Southern California and at New York Presbyterian Medical
Center. Throughout these studies, REPEL-CV was rated as safe and well-tolerated
as well as virtually preventing the formation of adhesions to the surface of the
heart.


                                       3
<PAGE>

      In December 2001, the Company received FDA approval to conduct a
feasibility clinical trial for REPEL-CV in open heart surgical procedures. It is
anticipated that this trial will commence during the first quarter of 2002 and
take approximately one year to complete. This trial is designed to provide
initial information on the effectiveness of REPEL-CV in reducing the formation
of post-operative adhesions in open heart surgical procedures as well as provide
additional safety data. In February 2000, the Company concluded a multi-center,
randomized, controlled U.S. pilot clinical trial for REPEL-CV in open heart
surgical procedures. In the pilot clinical trial, REPEL-CV was rated safe and
well tolerated when compared to the control of standard surgical technique.

REPEL

      REPEL adhesion barrier film is the first in the series of bioresorbable
adhesion prevention products from the Company's patented platform technology.
REPEL was tested in a series of pre-clinical studies at the University of
Southern California in which its efficacy was evaluated in controlled, blinded,
randomized studies. These studies demonstrated that REPEL either completely
eliminated or substantially reduced the formation of adhesions in the peritoneal
cavity in such industry standard models as de novo adhesion formation, adhesion
reformation and adhesion formation in the presence of blood. Throughout these
studies, REPEL was assessed as safe and biocompatible and resorbed without
complication. In conjunction with the Investigational Device Exemption (IDE)
submission to the FDA, REPEL was rated safe in an extensive series of
non-clinical toxicologic and hematologic studies.

      During 1997, a pilot clinical trial was conducted on REPEL in
gynecological surgery, at several sites in the United States. The trial was
designed to test the safety and efficacy of REPEL when applied to the anterior
and posterior surfaces of the uterus during myomectomies by laparotomy. REPEL
was rated safe and well tolerated as well as being greater than twice as
effective in reducing adhesion formation compared to the control of standard
surgical technique. The most striking result of the trial was the reduction in
the extent of adhesion formation on the posterior surface of the uterus, where
adhesions are more extensive, clinically relevant and difficult to address. On
the posterior surface, the median extent of adhesions in the REPEL patients was
less than 25 percent, whereas the control patients' median extent was greater
than 75 percent. Based on these results, FDA has granted approval to initiate
the pivotal clinical trial.

RESOLVE

      Coating tissue surfaces as a means of providing broad-based versus site
specific protection against adhesion formation is the objective of the RESOLVE
viscous gel development program. This approach has particular application in
gynecological and general abdominal surgery due to the "bowl shaped" anatomical
configuration of the peritoneal cavity. RESOLVE would be poured (open
procedures) or injected (laparoscopic procedures) into the peritoneal cavity at
the conclusion of the procedure as an instillate to coat and lubricate the
tissue surfaces thereby protecting the organs from adhesion formation.

      The formulation of RESOLVE was specified through a series of pre-clinical
studies during which the preferred viscosity, tissue adherence and resorption
time were determined. In addition to being determined as safe and biocompatible,
RESOLVE proved to be efficacious in reducing the level of adhesion formation in
the abdominal cavity during a series of pre-clinical studies. In one
pre-clinical study, approximately forty-five (45) percent of the tissue surfaces
in the RESOLVE treated group were free of adhesions, compared to less than ten
(10) percent in the control group.

RELIEVE

      Gels of higher viscosities may also be beneficial in addressing adhesion
formation in articulating joints subsequent to orthopedic surgical procedures
and involving the spinal canal after spinal surgery. The RELIEVE category of
viscous gel products have been under development through pre-clinical studies.
Candidate materials have been evaluated in a surrogate hand tendon model and in
a feasibility study in spinal surgery.

DEVELOPMENT OPPORTUNITIES

      The material capabilities and intellectual property portfolio for the
Company's proprietary bioresorbable polymer technology continues to broaden.
This provides opportunities to both enhance the performance characteristics of
the Company's adhesion prevention products as well as to pursue the application
of these unique materials in other medical


                                       4
<PAGE>

products. The Company has had discussions with medical device and pharmaceutical
companies on the use of these materials in drug and cell delivery, implantable
medical device coatings and other bioresorbable polymer product opportunities.

Collaborative Agreements

   Polymer Technology

      The Company's polymer technology was developed at the Hebrew University of
Jerusalem. The Company entered into an agreement with Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum") dated June
14, 1991, as amended in February 1994, as of January 1996 and as of October 1996
(the "Yissum Agreement"), pursuant to which the Company agreed to finance
research and development conducted at the Hebrew University of Jerusalem in the
field of biomedical polymers. Pursuant to the Yissum Agreement, Yissum has
assigned to the Company its worldwide rights to patents, patent applications and
know-how to develop, manufacture and market products relating to this
technology. Under the terms of the Yissum Agreement, all rights in the research
or products developed are owned solely by the Company, except as set forth
below. The Company is permitted to grant licenses of its polymer technology upon
certain terms and conditions. The Company has agreed to favorably consider
manufacturing in Israel products resulting from its polymer technology and to
explore opportunities to do so.

      In consideration for the assignment of the patents and the patent
applications, the granting of the licensing rights and the know-how, the
research that Yissum agreed to procure pursuant to the Yissum Agreement and
Yissum's performance of its obligations thereunder, the Company paid Yissum a
fixed fee of $750,000 and is obligated to pay a royalty of five percent of all
net sales of the Company's products under the Yissum Agreement up to a maximum
amount of $5,500,000 in royalties during the term of the Yissum Agreement.

      The Yissum Agreement continues until the earlier of the last date upon
which the patents covering the products governed by the Yissum Agreement expire
or the end of a period of 15 years from the date of the first commercial sale of
products under the assigned technology. Yissum has the right in its sole
discretion, subject to certain exceptions set forth below, to terminate the
Yissum Agreement and/or enter into contracts with others in order to grant them
a license for the development, manufacture and marketing of a product and the
other rights detailed in the Yissum Agreement if, among other things, (i) the
Company does not advise Yissum of the completion of development and
manufacturing work necessary to lead to the development of a product by December
31, 2001; (ii) the Company does not advise Yissum of the first commercial sale
by December 31, 2001; (iii) the Company does not reach total net sales of
products or achieve income of $1,000,000 by December 31, 2002; (iv) the Company
stops manufacturing and/or marketing the product for a period of more than 12
months; or (v) the Company breaches the Yissum Agreement, a receiver or
liquidator is appointed for the Company or the Company passes a resolution for
voluntary winding up, or a winding up application is made against the Company,
an attachment is made over a substantial part of the Company's assets, or
execution proceedings are taken against the Company, and the same is not
remedied or set aside within the time periods specified in the Yissum Agreement.
Notwithstanding the foregoing: (i) in the event that the Company does not advise
Yissum of the first commercial sale by December 31, 2001, Yissum shall not
terminate the Yissum Agreement during the year ended December 31, 2002 so long
as the Company pays to Yissum a minimum royalty payment of $50,000; (ii) in the
event that the Company does not (a) advise Yissum of the first commercial sale
by December 31, 2002 or (b) reach total net sales of products or achieve income
of $1,000,000 by December 31, 2002, Yissum shall not terminate the Yissum
Agreement during the year ended December 31, 2003 so long as the Company pays to
Yissum a minimum royalty payment of $50,000; and (iii) in the event that the
Company does not reach total net sales of products or achieve income of
$1,000,000 by December 31, 2003, Yissum shall not terminate the Yissum Agreement
during the year ended December 31, 2004 so long as the Company pays to Yissum a
minimum royalty payment of $50,000. In that the Company did not commercialize a
product by December 31, 2001, the previously referenced minimum royalty payment
of $50,000 was made to Yissum in January 2002. The Company has agreed to
indemnify Yissum under certain circumstances. Upon the termination of the Yissum
Agreement for any reason, the patents and patent applications licensed by Yissum
to the Company will revert in full to Yissum.

   Clinicel(TM)

      The CLINICEL product line was developed at The Bruce Rappaport Faculty of
Medicine at Technion-Israel Institute of Technology in Haifa, Israel (the
"Rappaport Faculty"). In July 1995, the Company entered into an agreement with
Dimotech Ltd., a subsidiary of Technion R&D Foundation Ltd., (the "Dimotech
Agreement") pursuant to which the Company agreed to finance the research and
development conducted by Dimotech with regard to CLINICEL. Pursuant to the
Dimotech Agreement,


                                       5
<PAGE>

Dimotech had assigned to the Company the worldwide rights to its patent
applications, any patents which may issue and know-how to develop, manufacture
and market products relating to CLINICEL. Under the terms of the Dimotech
Agreement, all rights in the research or products developed were owned solely by
the Company. On February 29, 2000, the Dimotech Agreement was terminated and all
rights therein which accrued to the Company reverted to Dimotech and the license
granted to the Company expired.

   Sure-Closure System(TM)

      The Sure-Closure System was invented at the Rambam Medical Center, an
affiliate of Technion-Israel Institute of Technology in Haifa, Israel. The
Company entered into an agreement with Technion dated June 28, 1992 (the
"Skin-Stretching Agreement"), pursuant to which Technion has assigned to the
Company its worldwide rights to its patents, patent applications and know-how to
develop, manufacture and market products relating to the Sure-Closure System
technology, and Technion assigned the Skin-Stretching Agreement to Dimotech. On
July 29, 1994, the Company completed the sale of its Sure-Closure System to
MedChem. The assets sold included substantially all of the Company's assets,
properties, claims, rights and interests related to the Sure-Closure System,
other than accounts receivable. The transaction provided for (i) the payment to
the Company of $4 million; (ii) the assumption of certain liabilities, in an
amount of approximately $644,000 which was recorded as deferred royalty income
and will continue to be reduced by a 10% royalty on net sales of all current and
future Sure-Closure System products to be paid to the Company through June 30,
2004. In July 1994, in connection with the sale of the Sure-Closure System,
Technion and Dimotech agreed to the assignment of all rights and duties under
the Skin Stretching Agreement, to MedChem. In October 1997 the Sure-Closure
System was acquired by the Zimmer Inc. subsidiary of Bristol-Myers Squibb.

Government Regulation

   FDA and Other Regulations

      The Company's research and development activities and the production and
marketing of the Company's products are subject to regulation for safety,
efficacy and compliance with a wide range of regulatory requirements by numerous
governmental authorities in the United States and other countries. In the United
States, drugs, biologic products and medical devices are subject to rigorous FDA
review. The Federal Food, Drug, and Cosmetic Act, the Public Health Service Act
and other federal statutes and regulations govern or influence the research,
testing, manufacture, safety, labeling, storage, record keeping, approval,
distribution, reporting, advertising and promotion of such products.
Noncompliance with applicable requirements can result in fines, recall,
injunction or seizure of products, refusal to permit products to be imported
into the United States, refusal of the government to approve or clear product
approval applications or to allow the Company to enter into government supply
contracts, withdrawal of previously approved applications and criminal
prosecution. The FDA may also assess civil penalties for violations of the Food,
Drug, and Cosmetic Act relating to medical devices.

      In order to obtain FDA approval of a new drug, a biologic or device,
companies must submit proof of safety and efficacy. In most cases such proof
entails extensive clinical and preclinical laboratory tests. The testing and
preparation of necessary applications and processing of those applications by
the FDA is expensive and may take several years to complete. There is no
assurance that the FDA will act favorably or in a timely manner in reviewing
submitted applications, and the Company may encounter significant difficulties
or costs in its efforts to obtain FDA approvals which could delay or preclude
the Company from marketing any product it may develop. The FDA may also require
postmarketing testing and surveillance of approved products, or place other
conditions on the approvals. These requirements could cause it to be more
difficult or expensive to sell the products, and could therefore restrict the
commercial applications of such products. Product approvals may be withdrawn if
compliance with regulatory standards is not maintained or if problems occur
following initial marketing. For patented products or technologies, delays
imposed by the governmental approval process may materially reduce the period
during which the Company will have the exclusive right to exploit such
technologies. See "Risk Factors - Risks Associated with Uncertainties of
Clinical Trials."

   Devices

      The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and record keeping regulations, GMPs, 510(k) pre-market
notification, and are subject to other general controls. Class II devices may be
subject to additional regulatory controls, including performance standards and
other special controls, such as guidelines and postmarket surveillance. Class
III devices, which are typically invasive or life-sustaining products, or new
products never before marketed, require clinical testing to assure safety and


                                       6
<PAGE>

effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices.
Products utilizing the Company's polymer technology are likely to be classified
as Class III devices, requiring a PreMarket Approval ("PMA") application review
process prior to commercial distribution in the United States.

      A PMA application must be supported by extensive data, including
preclinical and human clinical trial data, as well as extensive literature, to
prove the safety and efficacy of the device. Upon receipt, the FDA conducts a
preliminary review of the PMA application. If sufficiently complete, the
submission is declared fileable by the FDA. By law, the FDA has 180 days to
review a PMA application once it is filed, although PMA application reviews more
often occur over a significantly protracted time period, and generally take
approximately two years or more from the date of filing to complete. A number of
devices for which FDA marketing clearance has been sought have never been
cleared for marketing.

      If human clinical trials of a proposed device are required and the device
presents a "significant risk," the manufacturer or distributor of the device
will have to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal testing. If the IDE application is approved,
human clinical trials may begin at a specified number of investigational sites
with the number of patients approved by the FDA.

      Sales of devices, new drugs and biologic products outside the United
States are subject to foreign regulatory requirements that vary widely from
country to country. Whether or not FDA approval has been obtained, approval of a
device, new drug or biologic product by a comparable regulatory authority of a
foreign country must generally be obtained prior to the initiation of marketing
in those countries. The time required to obtain such approval may be longer or
shorter than that required for FDA approval.

   Third Party Reimbursement

      Successful commercialization of the Company's proposed products may depend
in part on the availability of adequate reimbursement from third-party health
care payers such as Medicare, Medicaid, and private insurance plans.
Reimbursement matters include both coverage issues and payment issues. Questions
of coverage raise the issue of whether a product will be paid for at all and
under what circumstances. Questions of payment relate to the amount or level of
payment. Reimbursement policies vary among payers and may depend on the setting
in which a product is used.

      There are numerous governmental third-party payers. Medicare is a
federally funded health insurance for persons who are age 65 or older, who have
end stage renal disease, or who otherwise qualify by virtue of a disability.
Medicare is the largest single health insurance program in the United States.
Medicaid is a joint federal-state program to provide health services to the
indigent. The Department of Veterans Affairs provides a variety of medical
services to veterans both directly and through arrangements with private health
care providers. The Civilian Health and Medical Program for the Uniformed
Services pays for care and services furnished to dependents of members of the
armed forces. There are also numerous private health insurance plans, including
private nonprofit insurers (e.g., Blue Cross and Blue Shield plans), commercial
insurers, and various types of managed care organizations.

Patents and Proprietary Rights

      In connection with the polymer technology, the Company currently holds
five issued United States patents, one Australian patent, one Canadian patent
and one Israeli patent relating to methods and compositions for reducing or
eliminating post-surgical adhesion formation as well as bioresorbable polymeric
compounds and polyurethane polymeric compounds. The first US patent claims novel
bioresorbable polymeric compounds of specified chemical structure. Also claimed
are medical articles, including sutures and prosthetic devices, made from these
materials as well as methods for making these materials. The second US patent
claims novel polyurethane polymeric compounds of specified chemical structure.
Also claimed are medical articles, including sutures and wound and burn
dressings. The third and fourth US patents claim novel bioresorbable polymer
compounds of specified chemical structure and their use in post-operative
adhesion prevention. The fifth US patent claims novel bioresorbable polymeric
compositions based on AB polyester diblocks and triblocks. The five US patents
will remain in effect until June 2, 2008, May 3, 2010, July 11, 2016, July 11,
2017 and April 3, 2018, respectively, provided that all requisite maintenance
fees are paid to the US Patent and Trademark Office. The Company also has
numerous patent applications pertaining to various novel bioresorbable polymeric
compounds and, in certain instances, their use in post-operative adhesion
prevention on file with the US and international patent agencies.

Competition


                                       7
<PAGE>

      The Company's adhesion prevention products are expected to compete with
various currently marketed products such as Interceed(TM), a product of Johnson
& Johnson, Seprafilm(TM), a product of Genzyme Biosurgery, Intergel(TM), a
product of LifeCore Biomedical, Inc., Adcon-L(TM), a product of Gliatech, Inc.
and Goretex(TM), a product of WL Gore. Several other companies including Anika
Therapeutics, Inc., Alliance Pharmaceuticals, Corp., Confluent Surgical Inc. and
Fziomed, Inc. either are or may be pursuing the development of products for the
prevention of adhesions. The anti-adhesion market is characterized by a limited
number of products currently on the market with limited (as a percent of total
surgical procedures using such products) penetration. The Company's products are
in the developmental stage in a market where clinical efficacy and, to a lesser
extent, strength of existing product lines are the principal bases of
competition.

Manufacturing

      The Company intends to rely primarily on one primary manufacturer to
produce its proposed products for testing and commercial purposes. The
manufacturer procures, tests and inspects all raw materials used in the
production of the Company's proposed products. The manufacturer relies on
various sources, approved by the Company, for its raw materials and components.
The Company believes that alternative sources for these raw materials and
components are available. The Company's products will be manufactured in a
facility in compliance with regulatory requirements. The Company has engaged a
third party to inspect the product formulated by the manufacturer for quality
assurance purposes.

      As of the date of this report, the Company and its primary manufacturer
have completed various manufacturing pilot batches and scale-up studies at its
primary contract manufacturing site. The Company's manufacturing equipment,
which was used by the manufacturer in the production process, was pledged as
collateral against amounts owed to this manufacturer during 1998. On April 12,
1999, the Company transferred the title to this equipment to the contract
manufacturer in exchange for the forgiveness of certain liabilities owed. The
Company has recently reinitiated the production of REPEL-CV products for use in
clinical trials at this manufacturer and intends to continue this manufacturing
development and optimize, validate and utilize the process, equipment and
manufacturer to produce further clinical and commercial sale products at this
site.

Marketing and Sales

      With regard to the commercialization of the proposed products from its
polymer technology, the Company may either establish an organization for the
marketing and sale of these proposed products or enter into corporate alliances
for the distribution of certain products in the United States. The Company
intends to seek joint venture, licensing or collaborative arrangements for the
marketing and sale of these proposed products elsewhere in the world.

      Products utilizing the Company's technologies are expected to be targeted
to various segments in the medical community, including physicians, surgeons,
and other care providers. The Company's future growth and profitability will
depend, in large part, on the success of its personnel and others in fostering
acceptance of the Company's products as an alternative to other available
products, among the medical community. Such acceptance will be substantially
dependent on educating the medical community as to the distinctive
characteristics and potential benefits of the Company's technologies and
products.

Product Liability and Insurance

      The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
Company has obtained product liability insurance for its clinical trials
providing coverage in an aggregate amount of $5,000,000.

Human Resources

      As of March, 2002, the Company employed one full time employee. Research
and development activities are conducted through arrangements with various
consultants and companies in Europe, Israel and the United States. Subject to
availability of sufficient financing, the Company intends to increase its number
of full time employees as it expands its clinical trials and product development
activities and begins to market its products.

Executive Officers of the Company

      The Company's executive officer is as follows:


                                       8
<PAGE>

                   Name                Age       Positions with the Company
      -------------------------------  ---     ------------------------------
      Robert P. Hickey...............  56      Chairman, President, CEO & CFO

      Robert P. Hickey has served as Chairman since May 1999, President and
Chief Executive Officer since May 1996, Chief Financial Officer since March 2000
and as a Director since August 1996. From May 1994 until joining the Company,
Mr. Hickey was founder and president of Roberts Healthcare Resources, Inc., a
company engaged in project consulting to Fortune 500 and leading edge companies
in the healthcare industry. From 1975 to 1994, Mr. Hickey served in various
positions at Johnson & Johnson. From 1992 to 1994, Mr. Hickey was Vice
President, Marketing and Director of Ethicon, Inc., a unit of Johnson & Johnson.

Consultants and Advisors

      The Company utilizes various consultants and advisors for research,
development and testing of its technologies and products. The Company
periodically confers with such consultants and advisors as necessary to discuss
research, development and testing strategies and specific details of certain
projects. Certain of the listed consultants and advisors have entered into
agreements specifying the terms and scope of their individual advisory
relationship with the Company. The Company does not believe that termination of
any individual consulting or advisory agreement would materially affect its
business. None of the consultants or advisors are employed by the Company and,
therefore, may have commitments to, or consulting or advisory contracts with,
other entities which may compete with their obligations to the Company. The
Company's consultants and advisors are as follows:

Daniel Cohn, Ph.D.            Dr. Daniel Cohn is Professor of Biomaterials
                              Science and Head of the Biomedical Polymers
                              Research Group, Casali Institute of Applied
                              Chemistry, Hebrew University, Jerusalem, Israel.
                              Dr. Cohn's main areas of research are biomedical
                              resorbable polymers, surface tailoring of
                              polymeric biomaterials, biomedical composites and
                              the development of polymeric scaffolds for tissue
                              engineering. Dr. Cohn developed the Company's
                              polymer technology.

Michael P. Diamond, M.D.      Dr. Michael P. Diamond, since 1994, has served as
                              Professor of Obstetrics and Gynecology at Wayne
                              State University in Detroit, Michigan, and
                              Director of the Division of Reproductive
                              Endocrinology and Infertility. Dr. Diamond is a
                              Board-certified Obstetrician/Gynecologist with a
                              subspecialization in Reproductive Endocrinology
                              and Infertility. He has long-standing involvement
                              in animal and clinical trials assessing
                              postoperative adhesion development.

Gere S. diZerega, M.D.        Dr. Gere S. diZerega is Professor, Department of
                              Obstetrics and Gynecology at Women's' Hospital,
                              University of Southern California Medical Center.
                              Dr. diZerega's area of research include
                              post-operative adhesions, peritoneal healing and
                              post-surgical wound repair.

Steven R. Gundry, M. D.       Dr. Steven R. Gundry is Director of the
                              International Heart Institute at the Dessert
                              Regional Medical Center, Palm Springs, CA and
                              Professor, Departments of Surgery and Pediatrics
                              at Loma Linda University School of Medicine. Dr.
                              Gundry is a Board certified cardiothoracic surgeon
                              with research interests in myocardial protection,
                              minimally invasive surgery, robotics and
                              cardiovascular surgery.

Mehmet C. Oz, M.D.            Dr. Mehmet C. Oz is Irving Assistant Professor of
                              Surgery at Columbia University College of
                              Physicians and Surgeons, New York and Director of
                              The Assist Device Program and attending surgeon of
                              the Division of Cardiothoracic Surgery at New
                              York-Presbyterian Medical Center, New York.


                                       9
<PAGE>

Eli Pines, Ph.D.              Eli Pines, Ph.D. previously served as a Vice
                              President and the Chief Scientific Officer of the
                              Company from June 1995 to July 2000.. From June
                              1992 to June 1995 Dr. Pines served as vice
                              president and chief technical officer for
                              Fibratek, Inc., a biopharmaceutical company
                              engaged in research, development and production of
                              medical products. Prior to joining Fibratek, Inc.,
                              Dr. Pines was employed for seventeen years by
                              Johnson & Johnson, where his last position was
                              director of new products research and development
                              with worldwide responsibilities for the Surgical
                              Specialty Division of Johnson & Johnson Medical,
                              Inc. Dr. Pines received a BS in Chemistry from
                              Brooklyn College in 1968, a Ph.D. in Biophysics
                              from Syracuse University in 1972 and conducted
                              post doctoral research in Biochemistry at The
                              Rockefeller University from 1972 to 1974.

Eric A. Rose, M.D.            Eric A. Rose is Chairman, Department of Surgery at
                              College of Physicians & Surgeons of Columbia
                              University, New York, Surgeon-in-Chief of
                              Columbia-Presbyterian Medical Center, New York and
                              Director, Cardio-Thoracic Services at St.
                              Michael's Medical Center, Newark, New Jersey.

Risk Factors

Risk that Technologies or Proposed Products Will Never Be Successfully Developed

      The Company's polymer technology and proposed products are still under
development and are subject to the risks of failure inherent in the development
of new technologies and products based on new technologies. The Company's
polymer technology and proposed products will require significant further
research, development and testing, including extensive clinical testing and
regulatory approval, prior to commercial use. Unsuccessful results from clinical
trials of the Company's proposed products or adverse findings with respect to
these products could adversely affect some or all of the Company's proposed
products. No assurance can be given that such proposed products will prove to be
safe, efficacious and non-toxic, receive requisite regulatory approvals,
demonstrate substantial therapeutic benefit, be commercialized on a timely
basis, experience no design or manufacturing problems, be manufactured on a
large scale, be economical to market, be accepted by the marketplace, or
generate sufficient revenues to support future research and development
programs. In addition, no assurance can be given that proprietary rights of
third parties will not preclude the Company from marketing its proposed products
or that third parties will not market superior or equivalent products.

Risks Associated With Uncertainties of Clinical Trials

      The Company is required to obtain approval from the FDA prior to marketing
its proposed therapeutic products in the United States and the approval of
foreign regulatory authorities to commercialize its proposed products in other
countries. To obtain such approvals, the Company is required to prove the safety
and efficacy of its proposed products through extensive preclinical studies and
clinical trials. The Company is in various stages of such testing. The
completion of any of the Company's clinical trials is dependent upon many
factors including the rate of patient enrollment and the heterogeneity of the
patients and indications to be treated. Delays in patient enrollment, as well as
the heterogeneity of patients and indications to be treated, may result in
increased trial costs and delays in FDA submissions, which could have a material
adverse effect on the Company.

      A number of companies in the biotechnology and pharmaceutical industries
have suffered significant setbacks in clinical trials, even after showing
promising results in earlier studies or trials. Although the Company has
obtained favorable results to date in preclinical studies and clinical trials of
certain of its proposed products, such results may not be predictive of results
that will ultimately be obtained in or throughout such preclinical studies and
clinical trials. There can be no assurance that the Company will not encounter
problems in its clinical trials that will cause the Company to delay or suspend
its clinical trials, that the clinical trials of its proposed products will be
completed at all, that such testing will ultimately demonstrate the safety or
efficacy of such proposed products or that any proposed products will receive
regulatory approval on a timely basis, if at all. If any such problems occur, it
could have a material adverse affect on the Company.

      Capital Needs; Uncertainty of Additional Funding; Going Concern Emphasis
in Auditors Report: Loss on Sale or Merger

      The Company's available cash as of December 31, 2001, will not be
sufficient to meet its cash requirements through


                                       10
<PAGE>

2002; however, the addition of the proceeds from the Series B Offering described
herein should provide sufficient cash to fund operations through 2002. As a
result of the Company's limited capital resources, the Company's auditors have
indicated in their report that there is substantial doubt about the Company's
ability to continue as a going concern. The Company will be required to raise
substantial additional funds to fund existing operations, continue to conduct
necessary research and development, preclinical studies and clinical trials, to
commercialize its proposed products, and to fund the growth that is expected to
occur if any of its proposed products are approved for marketing. The Company is
seeking such additional funding through collaborative arrangements with
strategic partners, licensing arrangements for certain of its proposed products,
and additional public or private financings, including equity financings. Any
additional equity financings may be dilutive to stockholders. There can be no
assurance that such arrangements or financings will be available as needed or on
terms acceptable to the Company. Insufficient funds may require the Company to
delay, scale back or eliminate some or all of its research and development
programs, or require it to license to third parties certain products or
technologies that the Company would otherwise seek to commercialize itself. If
the Company is not able to raise additional funds as needed to continue its
research and development programs, it may become necessary for the Company to
attempt to be merged or sold in whole or in part with or to another entity.
There can be no assurance that such a sale or merger would be available, but if
it were, the proceeds to the Company or its stockholders from such a sale or
merger could be substantially less than the amount invested by stockholders in
the Company, resulting in significant losses to the stockholders on their
investment in the Company's securities.

Limited Operating History; History of Losses

      The Company has a limited history of operations that, to date, has
consisted primarily of research, development and testing of its technologies and
the commercialization of CLINICEL(TM) and the Sure-Closure System. With the
exception of the third quarter of 1994, when the gain on the sale of the
Sure-Closure System was realized, and the first quarter of 1999, when other
income was recorded related to the reduction of prior period debt, the Company
has incurred significant net losses from its inception. The Company experienced
net losses of $955,000, $520,000 and $676,000 for the years ended December 31,
1999, 2000 and 2001, respectively. At December 31, 2001, the Company had an
accumulated deficit of $37,584,000 which has increased since that date. Although
recent capital constraints have reduced spending levels, the Company continues
to expend financial and other resources on (i) research, development and testing
of its polymer technology and proposed products utilizing this technology and
(ii) general and administrative expenses. The Company expects to incur
additional losses as its research, development and preclinical studies and
clinical trials continue to expand. The Company's ability to achieve a
profitable level of operations is dependent on successfully completing the
development of its proposed products, obtaining required regulatory approvals,
and manufacturing and selling its proposed products. Accordingly, the extent of
future losses and the time required to achieve profitability, if ever, is
uncertain. There can be no assurance that the Company will achieve or sustain a
profitable level of operations.

No Assurance of Regulatory Approvals; Potential Delays

      The Company's proposed products will be subject to regulation by the FDA
and comparable agencies in foreign countries. The regulatory approval process
often takes a number of years and requires the expenditure of substantial funds.
In the United States, the FDA enforces, where applicable, development, testing,
labeling, manufacturing, registration, notification, clearance or approval,
marketing, distribution, recordkeeping and reporting requirements for new drugs,
medical devices, biologics and cosmetics. In addition, there can be no assurance
that government regulations applicable to the Company's products or the
interpretation of those regulations will not change and thereby prevent the
Company from marketing some or all of its products temporarily or permanently.
There can be no assurance that any proposed products that may be developed by
the Company will be able to satisfy the current requirements and regulations of
the FDA or comparable foreign agencies. There can be no assurance that clinical
testing will provide evidence of safety and efficacy in humans or that
regulatory approvals will be granted for any of the Company's proposed products.

      Manufacturers of medical devices are required to obtain FDA approval of
their manufacturing facilities and processes, to adhere to applicable standards
for manufacturing practices and to engage in extensive recordkeeping and
reporting. Failures to obtain or delays in obtaining regulatory approvals would
adversely affect the manufacturing and marketing of the Company's products, the
Company's financial position and the Company's revenues or royalties. When and
if approvals are granted, the Company, the approved device, the manufacture of
such device and the facilities in which such device is manufactured are subject
to ongoing regulatory review. Subsequent discovery of previously unknown
problems may result in restriction on a product's use or withdrawal of the
product from the market. Adverse government regulation that might arise from
future legislative or administrative action, particularly as it relates to
healthcare reform and product pricing, cannot be predicted.


                                       11
<PAGE>

Patents and Proprietary Rights; No Assurance of Enforceability or Significant
Competitive Advantage

      The Company's success will depend heavily on its ability to obtain and
retain patent protection for its polymer technology and other products, to
preserve its trade secrets and to operate without infringing the proprietary
rights of third parties. The Company owns five United States patents, one
Australian patent, one Canadian patent and one Israeli patent relating to its
polymer technology. In addition, the Company has filed for patents in a number
of countries and intends to file additional patent applications in other
countries. There can be no assurance that the claims in the pending patent
applications will issue as patents, that any issued patents will provide the
Company with significant competitive advantages, that challenges will not be
instituted against the validity or enforceability of any patent owned by the
Company, or, if instituted, that such challenges will not be successful. The
cost of litigation to uphold the validity and prevent infringement of a patent
can be substantial. Furthermore, there can be no assurance that others will not
independently develop similar or superior technologies, duplicate the Company's
technologies or design around the patented aspects of the Company's
technologies. The Company could incur substantial costs in proceedings before
the United States Patent and Trademark Office, including interference
proceedings. The proceedings could also result in adverse decisions as to the
patentability of the Company's licensed or assigned inventions. Further, there
can be no assurance that the Company will not infringe upon prior or future
patents owned by others, that the Company will not need to acquire licenses
under patents belonging to others for technology potentially useful or necessary
to the Company, or that such licenses will be available to the Company, if at
all, on terms acceptable to the Company. Moreover, there can be no assurance
that any patent issued to or licensed by the Company will not be infringed by
others. Lastly, there can be no assurance that third parties will not bring
suits against the Company for patent infringement or for declaratory judgment to
have the patents owned or licensed by the Company declared invalid.

      The Company seeks to protect its trade secrets and proprietary know-how,
in part, through confidentiality agreements with its employees, consultants,
advisors, collaborators and others. There can be no assurance that these
agreements will not be violated by the other parties, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. To the
extent that consultants, key employees, third parties involved in the Company's
projects or others independently develop technological information, disputes may
arise as to the proprietary rights to such information, which may not be
resolved in favor of the Company.

Dependence on Reimbursement

      Successful commercialization of the Company's proposed products may depend
in part on the availability of adequate reimbursement from third-party health
care payors such as Medicare, Medicaid and private insurance plans.
Reimbursement matters include both coverage issues and payment issues. Questions
of coverage raise the issue of whether a product will be paid for at all and
under what circumstances. Questions of payment relate to the amount or level of
payment. Reimbursement policies vary among payors and may depend on the setting
in which a product is used.

      Significant uncertainty exists as to the reimbursement status of newly
approved health care products. There can be no assurance that adequate
third-party reimbursement will be available for the Company to establish and
maintain price levels sufficient for realization of an appropriate return on its
investment in developing new therapies. Government and other third-party payors
are increasingly attempting to contain health care costs by limiting both
coverage and payment levels for new therapeutic products approved for marketing
by the FDA and by refusing, in some cases, to provide any coverage for uses of
approved products for disease indications for which the FDA has not granted
marketing approval. If adequate coverage and payment levels are not provided by
government and third-party payors for the Company's proposed products, the
market acceptance of these products would be adversely affected. Failure of the
Company's proposed products to be adequately reimbursed by third-party payors
could have a material adverse effect on the Company.

Uncertain Market Acceptance of Proposed Products

      The Company's future growth and profitability will depend, in large part,
on the acceptance by the medical community of the Company's proposed products.
This acceptance will be substantially dependent on educating the medical
community as to the full capabilities, distinctive characteristics, perceived
benefits and clinical efficacy of the Company's proposed products. There can be
no assurance that the Company's efforts or those of others will be successful or
that any of the Company's proposed products will receive the necessary market
acceptance. Failure of the Company's proposed products to gain market acceptance
would have a material adverse effect on the Company.

Risk of Not Obtaining Additional Manufacturing Facilities and Experienced
Manufacturing Personnel and/or Establishing Contract Manufacturing Arrangements
with Others


                                       12
<PAGE>

      The Company believes it currently has contracted for sufficient
manufacturing capabilities to allow for production of its proposed products in
quantities sufficient to support its anticipated commercial needs and clinical
programs. To be successful, however, the Company must be capable of
manufacturing or contracting for the manufacture of its products in commercial
quantities, in compliance with regulatory requirements and at acceptable costs.
The Company may manufacture certain products directly at such time, if ever,
that such products are successfully developed. The Company has no experience
with the direct manufacture of these proposed products. The manufacture of these
proposed products is complex and difficult, and will require the Company to
attract and retain experienced manufacturing personnel and to obtain the use of
a manufacturing facility in compliance with FDA and other regulatory
requirements. There can be no assurance that experienced personnel can be
attracted to or retained by the Company, or that the Company will be able to
obtain the financing necessary to manufacture these products directly.

Risk of Termination of, or Loss of Rights to, Technologies Under Agreements with
Others

      The Company has acquired the rights to its technologies pursuant to
agreements with research institutions. Such agreements contain provisions
requiring the Company, among other things, to develop, commercialize and/or
market products, to achieve minimum sales and/or income levels within certain
periods of time, to meet minimum funding requirements and to make royalty
payments in order to maintain the patents and other rights granted thereunder.
In addition, the patents and proprietary rights revert to the grantor on certain
dates and/or upon the occurrence of certain conditions. In light of the
Company's current capital resource constraints, there can be no assurance that
said conditions will not occur. In the event that certain patents and
proprietary rights were to revert to the grantor, it would have a material
adverse affect on the Company.

Competition and Technological Obsolescence

      The Company is engaged in rapidly evolving and highly competitive fields.
Competition from biotechnology companies, medical device manufacturers,
pharmaceutical and chemical companies and other competitors is intense. Many of
these companies have substantially greater capital resources, research and
development staffs, facilities and experience in obtaining regulatory approvals
than the Company as well as substantially more experience than the Company in
the manufacturing, marketing and sale of products. Academic institutions,
hospitals, governmental agencies and other public and private research
organizations are also conducting research and seeking patent protection and may
develop competing products or technologies on their own or through joint
ventures. The Company believes that its competitive position will be based on
its ability to create and maintain scientifically advanced technology and
proprietary products, obtain required government approvals on a timely basis,
develop and manufacture its proposed products on a cost-effective basis and
successfully market its products. There can be no assurance that the Company's
current or proposed products under development will be able to compete
successfully with existing products or products under development by other
companies, universities and other institutions.

Risk of Using Hazardous Materials

      Medical and biopharmaceutical research and development involves the
controlled use of hazardous materials. The Company is subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of such materials and certain waste products. Although the Company
believes that all of its current contractors comply and future contractors will
comply with safety procedures for handling and disposing of such materials under
the standards prescribed by federal, state and local regulations, the risk of
accidental contamination or injury from those materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages that result and any such liability could exceed the resources of
the Company.

Dependence Upon Attraction and Retention of Key Personnel and Consultants

      The Company is dependent upon a limited number of key management,
scientific and technical personnel and consultants. In addition, the Company's
future success will depend in part upon its ability to attract and retain highly
qualified personnel. The Company competes for such personnel with other
companies, academic institutions, government entities and other organizations.
There can be no assurance that the Company will be successful in hiring or
retaining qualified personnel. Loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect on the Company.
In addition, the Company relies upon consultants and advisors to assist the
Company in formulating its research and development strategies, testing and
manufacturing and marketing-related issues. All of the Company's consultants and
advisors are employed outside the Company and may have commitments or consulting
or advisory contracts with other entities.

Risk of Product Liability Claims; Insurance

      The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and


                                       13
<PAGE>

marketing of medical products. The use of the Company's proposed products in
clinical trials may expose the Company to product liability claims and possible
adverse publicity. These risks also exist with respect to the Company's proposed
products, if any, that receive regulatory approval for commercial sales. The
Company currently has product liability insurance coverage for the use of its
proposed products in clinical trials. However, there can be no assurance that
the Company will be able to obtain additional insurance coverage at acceptable
costs, if at all, or be able to maintain the current level of insurance.
Further, there can be no assurance that a product liability claim would not
materially adversely affect the Company. A product liability or other judgment
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company.

Risk Inherent in International Sales and Operations

      The Company intends to sell its proposed products outside of the United
States, as well as domestically. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted by
the imposition of governmental controls, regulation of medical devices and other
medical products, export license requirements, political instability, trade
restrictions, changes in tariffs, exchange rate fluctuations and difficulties in
managing international operations.

Anti-Takeover Provisions

      The Company's Restated Certificate of Incorporation, as amended (the
"Restated Certificate of Incorporation") authorizes the issuance of a maximum of
5,000,000 shares of preferred stock ("Preferred Stock") on terms that may be
fixed by the Company's Board of Directors without further stockholder action.
The terms of any series of Preferred Stock could adversely affect the rights of
holders of the Common Stock. The issuance of Preferred Stock could make the
possible takeover of the Company more difficult or otherwise dilute the rights
of holders of the Common Stock and the market price of the Common Stock. In
addition, the Company is subject to Delaware General Corporation Law provisions
that may have the effect of discouraging persons from pursuing a non-negotiated
takeover of the Company and preventing certain changes of control.

Future Sales of the Company Securities Could Lower the Stock Price and Impair
the Ability to Raise Funds

      The market price of the Company's securities could drop due to sales of a
large number of the Company's securities or the perception that such sales could
occur. Such sales also might make it more difficult to sell additional
securities in the future at a price deemed appropriate by the Company. Of the
Company's 15,535,650 shares of Common Stock outstanding as of March 8, 2002,
8,354,542 shares are "restricted shares," as defined in Rule 144 of the
Securities Act, and under certain circumstances may be sold without registration
pursuant to Rule 144. Additional shares of Common Stock are issuable upon
exercise or conversion of outstanding derivative securities as follows:
11,125,000 shares upon conversion of outstanding shares of Series B Preferred
Stock, which shares will automatically convert into Common Stock in March 2003;
11,125,000 shares upon exercise of outstanding warrants, exercisable at $0.12
per share and expiring on June 30, 2002 (or later under certain circumstances);
12,042,000 shares upon exercise of outstanding warrants, exercisable at $0.24
per share and expiring in March 2004 (or later under certain circumstances);
200,000 shares upon exercise of outstanding warrants, exercisable at $7.95 per
share and expiring in May 2002; and approximately 9,109,000 shares issuable upon
exercise of outstanding options issued under and outside the Company's plans,
exercisable at prices ranging from $0.023 to $7.00 and expiring from May 2003 to
January 2009.

      Holders of the Series B Preferred Stock and warrants referred to above are
entitled to certain registration rights for the underlying shares. Registration
of such shares, or even the perception that such registration that such
registration might occur, could also adversely affect the price of the Company's
Common Stock.

Possible Volatility of Stock Price

      The market price of the Company's Common Stock has been and is likely to
continue to be highly volatile. Factors such as fluctuations in the Company's
operating results, and/or ability to obtain capital, shortfalls in revenue or
earnings from levels expected by securities analysts, outcomes of clinical
trials and regulatory submissions, announcements of technological innovations or
new products by the Company or its competitors, governmental regulations,
developments with respect to patents or proprietary rights, litigation, public
concern as to the safety of products developed by the Company or others and
general market conditions may have a significant adverse effect on the market
price of the Common Stock and the Warrants.


                                       14
<PAGE>

Item 2. Properties

      The Company's offices are currently located in an aggregate of
approximately 500 square feet in Oceanport New Jersey. The space is provided by
the Company's Chairman on a month-to-month basis and there is no lease expense
associated with this space. Any staff expansion will necessitate the Company
securing leased commercial space.

      The Company's research and development activities and clinical studies are
currently conducted at various hospitals and universities in the United States
and certain European countries. The Company believes that these facilities are
adequate for its current research and development needs. The Company will be
required to add additional sites in connection with its expanded development and
testing activities. Currently the Company utilizes contract manufacturing
organizations to produce its proposed products for research and development
activities, clinical studies and for commercial sale.

Item 3. Legal Proceedings

      The Company is not a party to any material legal proceedings and is not
aware of any such proceedings which may be contemplated by governmental
authorities. The Company has, however, experienced cash shortages recently and
has been subject to litigation and may continue to be subject to litigation in
connection with actions by third parties for amounts claimed to be owed. In July
2001, a judgment was rendered against the Company and in favor of R.R. Donnelley
& Sons Company in the amount of $24,724 related to the non-payment of trade
invoices. To the best of the Company's knowledge, this judgment is pending final
resolution by the court.

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

      None.


                                       15
<PAGE>

                                     PART II

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

(a)   Market Information

      The Company's Common Stock, Class A Warrants, and Class B Warrants have
traded separately on the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") Stock Market under the symbols CHAI, CHAIW, and
CHAIZ, respectively, from September 22, 1992 to August 27, 1998. Effective
August 28, 1998, the Company's securities were delisted from the Nasdaq because
the Company failed to satisfy applicable maintenance criteria. Since delisting
from Nasdaq, the company's Common Stock, Class A Warrants, and Class B Warrants
have been quoted on the OTC Bulletin Board. On March 21, 2002, the Class A and
Class B Warrants expired. The following sets forth the quarterly high and low
sales price for the periods presented. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>

                                                     Common Stock
                                                      Sales Price
                                                   ----------------
                                                    High       Low
                                                    ----       ---
         <S>                                       <C>        <C>
         Fiscal Year Ended December 31, 2000
            First Quarter                          $1 5/8     $5/16
            Second Quarter                          23/32      7/32
            Third Quarter                            9/32      3/32
            Fourth Quarter                           5/32      3/64

         Fiscal Year Ended December 31, 2001
            First Quarter                           33/64       1/8
            Second Quarter                           3/10       1/9
            Third Quarter                             1/3       1/9
            Fourth Quarter                            1/4      1/10

         Fiscal Year Ended December 31, 2002
            January 1 through February 28, 2002    44/100       1/8
</TABLE>

      In March 2002, the Company completed an offering (the "Series B Offering")
of 1,000,000 units at a price of $1.20 per unit, each unit consisting of one
share of Series B Convertible Preferred Stock, one warrant, exercisable until
June 30, 2002 (or later under certain circumstances), to purchase 10 shares of
Common Stock at $0.12 per share, and one warrant, exercisable for two years from
the issuance date (or later under certain circumstances), to purchase 10 shares
of Common Stock at $0.24 per share. Each share of Series B Preferred is
automatically convertible on the first anniversary of the date of issuance into
10 shares of Common Stock (subject to antidilution adjustment), resulting in an
effective price of $0.12 per share of Common Stock. The Company received gross
proceeds of $1.2 million, which amount included the conversion of an aggregate
of $440,000 in convertible debt into the offering. Of the proceeds of the
offering, $300,000 was held in escrow and must be returned to the investors in
the event the Company fails to implement an increase to its authorized Common
Stock to 100,000,000 shares by one year from issuance of the Series B Offering.
An additional 91,667 units and warrnats to purchase 916,667 shares of Common
Stock were issued as commissions in connection with the Series B Offering. The
Series B Offering was made in reliance upon the provisions of Regulation S under
the Securities Act of 1933. Each investor represented that such investor is not
a US Person and the offering is believed to have been made in an Offshore
Transaction, as such terms are used within the meaning of Regulation S.


                                       16
<PAGE>

      As previously reported in our Form 10-Q for the quarter ended June 30,
2002, in July 2002 the Company settled approximately $125,000 in royalty
payments and accrued interest claimed to be owing to Dimotech in exchange for
cash payments aggregating $52,237, the issuance to Dimotech of a five-year 6.5%
convertible debenture in the principal amount of $40,000 (convertible at the
holder's option into 40,000 shares of Common Stock or a number of shares of any
senior security which would be convertible into 40,000 shares of Common Stock)
and $25,000 worth of securities of the same type as were to be issued in the
then contemplated preferred stock financing. The cash payments have been made
and the convertible note has been issued. At the time of the closing of the
Series B Offering, the Company issued 20,833 Units to Dimotech in final
satisfaction of its obligations to issue securities under the settlement.

      As part of a settlement of $317,000 in trade payables to a vendor, the
Company issued 192,308 shares of Common Stock (valued at $0.39 per share, or
$75,000 in the aggregate) and a five-year debenture in the principal amount of
$70,000 bearing interest at 5% per year, convertible at the option of the holder
into Common Stock at $1.00 per share. Of the balance of the debt, $75,000 was
paid in cash and the remaining $97,000 was written off. The Company relied upon
the exemption provided by Section 4(2) of the Securities Act of 1933 for this
transaction as well as the settlement with Dimotech.

(b)   Approximate Number of Equity Securities Holders

      As of March 8, 2001 the number of holders of record of the Company's
Common Stock was 195. The Company believes that the number of beneficial holders
of its Common Stock on such date was in excess of 2,300.

(c)   Dividends

      The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of any
cash dividends.

Item 6. Selected Financial Data

      The selected financial data presented below (in thousands, except per
share data), for the years ended December 31, 1997, 1998, 1999, 2000 and 2001
have been derived from audited financial statements of the Company. The
financial statements of the Company at December 31, 2000 and 2001 and for the
years ended December 31, 1999, 2000 and 2001, together with the notes thereto
and the related report of Richard A. Eisner & Company, LLP, independent
auditors, are included elsewhere in this Form 10-K. The selected financial data
set forth below should be read in conjunction with the Financial Statements of
the Company and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.

<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                                                 -----------------------
                                                                    1997       1998       1999       2000       2001
                                                                    ----       ----       ----       ----       ----
<S>                                                               <C>        <C>        <C>        <C>        <C>
Statement of Operations Data: 2001

Revenues:
   Product Sales                                                             $ 1,715    $ 1,201    $    58
   Royalty Income                                                 $    64         55         48         43    $    35
                                                                  -------    -------    -------    -------    -------
   Total Revenue                                                       64      1,770      1,249        101         35
Cost of Sales                                                          --        820        556          4         --
                                                                  -------    -------    -------    -------    -------
Gross Margin                                                           64        950        693         97         35
Operating Expenses:
   Research and development                                         6,721      3,584        788        316        473
   Sales and marketing                                                         3,142        437         20
   General and administrative                                       2,012      1,982      1,684        759        637
                                                                  -------    -------    -------    -------    -------
      Operating expenses                                            8,283      8,708      2,909      1,095      1,110
                                                                  -------    -------    -------    -------    -------
(Loss) from operations                                             (8,219)    (7,758)    (2,216)      (998)    (1,075)
Other income                                                                                                        3
Interest income                                                       557        161         16         11         15
Interest expense                                                       (4)        (5)        (4)        (1)        (1)
Amortization of debt discount                                                                                     (47)
Gain on settlement of debt                                             --         --         --         --         91
                                                                  -------    -------    -------    -------    -------
Net (loss) before benefit for income tax and extraordinary gain    (7,666)    (7,602)    (1,772)      (988)    (1,022)
Benefit for income taxes                                                                    817        468        294
                                                                  -------    -------    -------    -------    -------
Loss before extraordinary gain                                     (7,666)    (7,602)    (1,387)      (520)      (728)
Extraordinary gain from extinguishment of liability                    --         --        432         --         --
                                                                  -------    -------    -------    -------    -------
Net (loss)                                                        $(7,666)   $(7,602)   $  (955)   $  (520)   $  (728)
                                                                  =======    =======    =======    =======    =======
Net (loss) per share                                              $ (0.97)   $ (0.96)   $ (0.11)   $ (0.05)   $ (0.06)
                                                                  =======    =======    =======    =======    =======
Weighted average shares
   Outstanding                                                      7,919      7,923      8,715     10,155     13,069
</TABLE>


                                       17
<PAGE>

<TABLE>
<CAPTION>
                                                          December 31,
                                                          ------------
                                      1997        1998        1999        2000        2001
                                      ----        ----        ----        ----        ----
<S>                                 <C>         <C>         <C>         <C>         <C>
Balance Sheet Data:
Cash                                $  7,569    $    485    $    724    $    844    $    372
   Working capital (deficiency)        5,975      (1,006)       (698)       (513)     (1,042)
Total Assets                           7,786       1,034         798         966         449
Total Liabilities                      1,621       2,312       1,789       1,765       1,790
Accumulated deficit                  (27,831)    (35,433)    (36,388)    (36,908)    (37,636)
Stockholders' equity (deficiency)      6,165      (1,278)       (991)       (799)     (1,341)
</TABLE>


                                       18
<PAGE>

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

Financial Overview

      Since its inception, the Company has been engaged primarily in research
and development of its technologies and proposed products, and the
commercialization of CLINICEL and the Sure-Closure System. In early 2000, in
conjunction with the discontinuation of the CLINICEL product line, the Company
refocused its strategy solely toward the development of products for the
prevention and/or reduction of post-surgical adhesions.

Results of Operations

            2001 vs. 2000

      The Company had revenue of $35,000 for the fiscal year ended December 31,
2001 which represented royalties on sales of the Sure-Closure System. Total
revenue for the fiscal year ended December 31, 2000 was $101,000, comprised of
$58,000 in CLINICEL sales and $43,000 in royalties on sales of the Sure-Closure
System. The absence of CLINICEL sales in 2001 was due to the discontinuation of
sale of CLINICEL products in February 2000.

      The was no cost of goods sold for the fiscal year ended December 31, 2001
as compared to cost of goods sold for the fiscal year ended December 31, 2000 of
$4,000.

      The were no sales and marketing expenses in the fiscal year ended December
31, 2001 compared to $20,000 for the comparable period in 2000.

      The Company incurred research and development expenses of $473,000 and
$316,000 for the fiscal years ended December 31, 2001 and 2000, respectively.
The increase was primarily attributable to the reinitiation of expenditures
associated with the REPEL-CV product development program.

      General and administrative expenses totaled $637,000 for the fiscal year
ended December 31, 2001 as compared to $759,000 for the previous fiscal year.
The reduction was related to termination of most remaining staff members in July
2000.

      Interest income increased to $15,000 for the fiscal year ended December
31, 2001 from $11,000 for the fiscal year ended December 31, 2000.

      Interest expense increased to $9,000 for the fiscal year ended December
31, 2001 from $1,000 for the prior fiscal year. The increase is attributable to
imputed interest associated with non-interest bearing convertible promissory
notes executed during 2001.

      The Company recorded $47,000 as amortization of debt discount for the
fiscal year ended December 31, 2001; there was no comparable amount for the
prior fiscal year. This amount reflected the amortization of the fair value of
warrants issued in conjunction with convertible promissory notes issued during
2001.

      The Company realized a gain on settlement of debt of $91,000 for the
fiscal year ended December 31, 2001. This represented the cumulative effect of
the forgiveness of portions of outstanding trade liabilities upon settlement.


                                       19
<PAGE>

Results of Operations (Continued)

            2001 vs. 2000 (Continued)

The Company recorded a benefit for income taxes of $294,000 during the fiscal
year ended December 31, 2001; compared to $468,000 in the prior year. These
amounts were attributable to the receipt of funds associated with the sale of
certain accumulated New Jersey State tax operating losses; the reduction
compared to the prior year was largely the result of more companies
participating in the program.

      The Company recorded a net loss of $728,000 for the fiscal year ended
December 31, 2001 as compared to a net loss of $520,000 for the prior year. The
increase in the current period net loss is attributable to the reasons described
above.

            1999 vs. 2000

      The Company had revenue of $101,000 for the fiscal year ended December 31,
2000 of which $58,000 was attributed to the sale of CLINICEL products and
$43,000 represented royalties on sales of the Sure-Closure System. Total revenue
for the fiscal year ended December 31, 1999 was $1,249,000, comprised of
$1,201,000 in CLINICEL sales and $48,000 in royalties on sales of the
Sure-Closure System. The decline in CLINICEL sales was due to the
discontinuation of sale of CLINICEL products in February 2000.

      Cost of goods sold for the fiscal year ended December 31, 2000 was $4,000
as compared to $556,000 for the prior year. The reduction is attributable to the
reduced level of CLINICEL sales and the write-off of certain inventories in the
prior year.

      Sales and marketing expenses declined to $20,000 in the fiscal year ended
December 31, 2000 from $437,000 for the comparable period in 1999. The reduction
reflected the elimination of consumer and professional advertising associated
with the discontinuation of the sale of CLINICEL products.

      The Company incurred research and development expenses of $316,000 and
$788,000 for the fiscal years ended December 31, 2000 and 1999, respectively.
The reduction was primarily attributable to the scale back of expenditures on
several bioresorbable polymer-based product development programs.

      General and administrative expenses totaled $759,000 for the fiscal year
ended December 31, 2000 as compared to $1,684,000 for the previous fiscal year.
The reduction was related to termination of most remaining staff members in July
2000.

      Interest income declined to $11,000 for the fiscal year ended December 31,
2000 from $16,000 for the fiscal year ended December 31, 1999.

      Interest expense was $1,000 and $4,000 for the fiscal years ended December
31, 2000 and 1999, respectively.

      The Company recorded a benefit for income taxes of $468,000 during the
fiscal year ended December 31, 2000; compared to $817,000 in the prior year.
These amounts were attributable to the receipt of funds associated with the sale
of certain accumulated New Jersey State tax operating losses; the reduction
compared to the prior year was largely the result of lower overall funding
allocated by the State to the program.

      The Company recorded an extraordinary item of $432,000 during the fiscal
year ended December 31, 1999. This extraordinary item was attributable to a gain
on the extinguishment of amounts owed to suppliers by the transfer of title to
equipment that had previously been charged to research and development expenses.


                                       20
<PAGE>

Results of Operations (Continued)

            2000 vs. 1999 (Continued)

The Company recorded a net loss of $520,000 for the fiscal year ended December
31, 2000 as compared to a net loss of $955,000 for the prior year. The decrease
in the current period net loss is attributable to the reasons described above.

Liquidity and Capital Resources

      At December 31, 2001, the Company had cash of $372,000 compared to cash of
$844,000 at December 31, 2000. The primary use of these funds is to fund the
Company's research and development related to anti-adhesion products and general
and administrative expenses associated with these activities. In December 2001,
the company received a payment of $294,000 in exchange for the transfer of
certain New Jersey State tax benefits; $468,000 was received under this program
in the prior year.

      At December 31, 2001, the Company had a working capital deficit of
$1,042,000. The current cash balance as of December 31, 2001 will not be
sufficient to meet the Company's cash requirements through 2002; however, the
addition of the funds from the Series B Offering described herein should provide
sufficient cash to fund operations through 2002. During the second half of 2001,
the Company received advances totaling $440,000 in the form of non-interest
bearing convertible debt from investors in the Series B Offering which was
completed in March 2002 for an aggregate of $1.2 million (including the
conversion of the convertible debt). Of the proceeds, $300,000 is being held in
escrow pending implementation of an increase in the Company's authorized Common
Stock. (See Item 5.) In addition to losing the $300,000 held in escrow, should
the Company fail to implement the authorized Common Stock increase and thereby
have insufficient shares to issue upon the proper exercise of warrants issued in
the Series B Offering, holders of such warrants shall have the right to force
the Company to purchase their warrants at a price based on their then market
value. The Company raised an additional $294,000 in December 2001 from the sale
of certain New Jersey state tax losses. The Company will be required to raise
substantial additional funds to continue the clinical development and
commercialization of its proposed products. There can be no assurance that such
arrangements or financings will be available as needed or on terms acceptable to
the Company

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

      The Company does not invest in derivative financial instruments.

Item 8. Financial Statements and Supplementary Data

      The Index to Financial Statements appears on page F-1, the Report of
Independent Auditors appears on page F-2, and the Financial Statements and Notes
to Financial Statements appear on pages F-3 to F-15.

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

      None.


                                       21
<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Registrant.

      The information called for by this item is incorporated by reference
herein to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 2001 fiscal year. Certain
information with regard to the executive officer of the Company is contained in
Item 1 hereof and is incorporated by reference in this Part III.

Item 11. Executive Compensation.

      The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A within 120 days after the close of the 2001 fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

      The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A within 120 days after the close of the 2001 fiscal year.

Item 13. Certain Relationships and Related Transactions.

      The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A within120 days after the close of the 2001 fiscal year.

                                     PART IV

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

(a)     1.      Financial Statements.

                An Index to Financial Statements appears on page F-1.

        2.      Schedules.

                None

        3.      Exhibits.

        3.1     Restated Certificate of Incorporation of Registrant, filed
                December 26, 1991, as amended. (1)

        3.1(a)  Amendment to Restated Certificate of Incorporation, dated August
                21, 1992. (1)

        3.1(b)  Certificate of Designations, Rights and Preferences of Series A
                Convertible Preferred Stock. (11)

        3.1(c)  Amendment to Restated Certificate of Incorporation, dated
                December 14, 2000. *

        3.1(d)  Certificate of Designations, Rights and Preferences of Series B
                Convertible Preferred Stock (see forms attached in Exhibit
                10.32)*

        3.2     By-Laws of Registrant. (1)

        3.2(a)  Amendment No. 1 to the By-Laws of Registrant. (11)

        10      The 2000 Stock Option. Plan (10)

        10.1    Amended and Restated 1992 Stock Option Plan of Registrant. (8)
                (9)

        10.2    Form of Non-Qualified Option Agreement granted outside of a Plan
                to certain Directors and Officers (10)


                                       22
<PAGE>

        10.3    Agreement, dated June 14, 1991, between Registrant and Yissum
                Research Development Company of the Hebrew University of
                Jerusalem ("Yissum"). (1)

        10.4    Form of Indemnification Agreement entered into between
                Registrant and certain officers and directors of Registrant. (2)

        10.8    Assignment of certain rights relating to the polymer technology
                to Registrant by Yissum. (3)

        10.9    Form of Non-Qualified Stock Option Agreement. (4) (9)

        10.10   Form of Incentive Stock Option Agreement. (4) (9)

        10.11   Asset Purchase Agreement between Registrant and MedChem
                Products, Inc. dated as of July 29, 1994. (5)

        10.14   Warrant Agreement among Registrant, D. H. Blair Investment
                Banking Corp. and American Stock Transfer & Trust Company
                including forms of Class A and Class B Warrants. (6)

        10.15   Warrant Agreement between Registrant and American Stock Transfer
                and Trust Company. (6)

        10.16   Agreement, dated as of February 1994, between Registrant and
                Yissum. (6)

        10.19   Amendment No. 2 dated as of January 1, 1996 to the Agreement
                between the Registrant and Yissum. (2)

        10.23   Warrant Agreement between Registrant and Wedbush Morgan
                Securities. (7)

        10.24   Underwriting Agreement between Registrant and Wedbush Morgan
                Securities. (7)

        10.27   Amendment No. 3 dated as of October 1, 1996 to the Agreement
                between the Registrant and Yissum. (2)

        10.29   Series A Preferred Stock Purchase Agreement dated December 15,
                2000. (11)

        10.30   Investor Rights Agreement dated December 15, 2000. (11)

        10.31   2001 Non-Qualified Stock Option Plan and Stock Option
                Agreement.*

        10.32   Series B Subscription Agreement dated March 21, 2002. *

        10.33   Agency Agreement between Registrant and Clubb BioCapital, Ltd.
                dated March 21, 2002. *

        10.34   Employment Agreement between Registrant and Robert P. Hickey
                dated May 21, 2001. *

        10.35   Convertible Promissory Note between Registrant and Dimotech,
                Ltd. dated August 6, 2001. *

        10.36   Convertible Promissory Note between Registrant and Polymer
                Technology Group, Inc. dated February 22, 2002. *

        23.1    Consent of Richard A. Eisner & Company, LLP. *

        *       Filed herewith.
        -----------------------


                                       23
<PAGE>

(1)   Incorporated by reference to the Registrant's Registration Statement on
      Form S-1 (File No. 33-94008) declared effective on September 22, 1992.
(2)   Incorporated by reference to Registrant's Registration Statement on Form
      S-1 (File No. 333-02588) declared effective on May 3, 1996.
(3)   Incorporated by reference to the Registrant's report on Form 10-Q for the
      quarter ended September 30, 1992.
(4)   Incorporated by reference to the Registrant's report on Form 10-K for the
      year ended December 31, 1993.
(5)   Incorporated by reference to the Registrant's report on Form 8-K filed by
      the Company on August 12, 1994.
(6)   Incorporated by reference to the Registrant's report on Form 10-K for the
      year ended December 31, 1994.
(7)   Incorporated by reference to the Registrant's report on Form 10-K for the
      year ended December 31, 1996.
(8)   Incorporated by reference to the Registrant's report on Form 10-Q for the
      quarter ended June 30, 1997.
(9)   Includes compensatory plan and or arrangements required to be filed
      pursuant to item 14 (c) of Form 10-K.
(10)  Incorporated by reference to the Registrant's S-8 filed in January 2000.
(11)  Incorporated by reference to the Registrant's 8-K filed in January 2001.

      (b)   Reports on Form 8-K

            None

      (c)   See (a) 3.


                                       24
<PAGE>

                                   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.


                                       Life Medical Sciences, Inc.
                                       (Registrant)

                                       By:   /s/ Robert P. Hickey
                                           ------------------------
                                           Robert P. Hickey
                                             Chairman, President, CEO and CFO
                                             (principal executive, financial and
                                             accounting officer)

Dated: March 21, 2002

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
         Signatures                              Title                                   Date
         ----------                              -----                                   ----
<S>                                <C>                                              <C>
/s/ Robert P. Hickey               Director, Chairman of the Board,                 March 21, 2002
------------------------------       President, CEO and CFO
Robert P. Hickey                     (principal executive, financial and
                                     accounting officer)


/s/ Edward A. Celano               Director                                         March 21, 2002
------------------------------
Edward A. Celano


/s/ Richard L. Franklin, M.D.      Director                                         March 21, 2002
------------------------------
Richard L. Franklin, M.D.


/s/ Walter R. Maupay               Director                                         March 21, 2002
------------------------------
Walter R. Maupay


/s/ Irwin M. Rosenthal             Director                                         March 21, 2002
------------------------------
Irwin M. Rosenthal
</TABLE>


                                       25
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                                                                     Page Number
                                                                     -----------
Independent Auditors' Report .....................................       F-2
Balance Sheets ...................................................       F-3
Statements of Operations .........................................       F-4
Statements of Changes In Capital Deficit .........................       F-5
Statements of Cash Flows .........................................       F-6
Notes to Financial Statements ....................................       F-7


                                       F-1
<PAGE>

                          Independent Auditors' Report


Board of Directors and Stockholders
Life Medical Sciences, Inc.
Little Silver, New Jersey

      We have audited the accompanying balance sheets of Life Medical Sciences,
Inc. as of December 31, 2000 and 2001 and the related statements of operations,
changes in capital deficit and cash flows for each of the years in the
three-year period ended December 31, 2001. 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 auditing standards generally
accepted in the United States of America. 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 enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences, Inc.
as of December 31, 2000 and 2001 and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America.

      The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from
operations, and has both a working capital and capital deficit at December 31,
2001. As a result, the Company has limited capital resources for its continuing
operations, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also discussed
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.


                                          Richard A. Eisner & Company, LLP

New York, New York
February 28, 2002

With respect to NOTE M
March 21, 2002


                                      F-2
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                                 BALANCE SHEETS

                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                 December 31
                                                                            --------------------
                                                                              2000        2001
                                                                              ----        ----
<S>                                                                         <C>         <C>
                                     ASSETS

Current assets:
    Cash ................................................................   $    844    $    372
    Deferred financing costs ............................................                     64
    Prepaid expenses ....................................................        110          11
                                                                            --------    --------
            Total current assets ........................................        954         447
Furniture and equipment, less accumulated depreciation ..................         12           2
                                                                            --------    --------

                                   TOTAL ................................   $    966    $    449
                                                                            ========    ========

                    LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
    Capital lease obligation ............................................   $     16
    Accounts payable ....................................................      1,120    $    901
    Accrued expenses ....................................................        162         164
    Other liabilities ...................................................        169          76
    Convertible promissory notes, net of discount .......................                    348
                                                                            --------    --------
            Total current liabilities ...................................      1,467       1,489

Capital lease obligation, less current portion ..........................          2
Deferred royalty income .................................................        296         261
Note payable-long term ..................................................                     40
                                                                            --------    --------
            Total liabilities ...........................................   $  1,765    $  1,790
                                                                            --------    --------

Commitments and other matters (Note H)

Capital deficit:
    Preferred stock, $.01 par value: shares authorized - 5,000;
      Series A convertible shares issued and outstanding -500 and none ..          5
    Common stock, $.001 par value; shares authorized - 43,750;
      issued and outstanding -10,343 and 15,343 .........................         10          15
    Additional paid-in capital ..........................................     36,094      36,280
    Accumulated deficit .................................................    (36,908)    (37,636)
                                                                            --------    --------
            Total capital deficit .......................................       (799)     (1,341)
                                                                            --------    --------
                                   TOTAL ................................   $    966    $    449
                                                                            ========    ========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-3
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                            STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                               -----------------------------
                                                                 1999       2000       2001
                                                               -------    -------    -------
<S>                                                            <C>        <C>        <C>
Revenues:
  Product sales ............................................   $ 1,201    $    58
  Royalty income ...........................................        48         43    $    35
                                                               -------    -------    -------
                                                                 1,249        101         35

Cost of goods sold .........................................       556          4
                                                               -------    -------    -------

Gross profit ...............................................       693         97         35
                                                               -------    -------    -------

Operating expenses:
  Research and development expenses ........................       788        316        473
  Sales and marketing ......................................       437         20
  General and administrative expenses ......................     1,684        759        637
                                                               -------    -------    -------
    Operating expenses .....................................     2,909      1,095      1,110
                                                               -------    -------    -------

Loss from operations .......................................    (2,216)      (998)    (1,075)

Other income/(expense):
Other income ...............................................                               3
Interest income ............................................        16         11         15
Interest expense ...........................................        (4)        (1)        (9)
Amortization of debt discount ..............................                             (47)
Gain on settlement of debt .................................                              91
                                                               -------    -------    -------

Loss before benefit for income tax and extraordinary gain ..    (2,204)      (988)    (1,022)
Benefit for income taxes ...................................       817        468        294
                                                               -------    -------    -------

Loss before extraordinary gain .............................    (1,387)      (520)      (728)
Extraordinary gain from extinguishment of liability ........       432         --         --
                                                               -------    -------    -------

Net loss ...................................................   $  (955)   $  (520)   $  (728)
                                                               =======    =======    =======

Net loss per common share-basic & diluted:
  Loss before extraordinary gain                               $ (0.16)   $ (0.05)   $ (0.06)
  Extraordinary gain                                              0.05         --         --
                                                               -------    -------    -------
  Net loss per common share                                    $ (0.11)   $ (0.05)   $ (0.06)
                                                               =======    =======    =======

Weighted average shares outstanding - basic & diluted            8,715     10,155     13,069
</TABLE>

                 See accompanying notes to financial statements.


                                      F-4
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                    STATEMENTS OF CHANGES IN CAPITAL DEFICIT
                                 (In thousands)

<TABLE>
<CAPTION>
                                           Preferred               Common          Additional
                                     --------------------    -------------------     Paid In    Accumulated
                                      Shares      Amount      Shares     Amount      Capital      Deficit
                                     --------    --------    --------   --------   ----------   -----------
<S>                                      <C>     <C>           <C>      <C>         <C>          <C>
Balance -January 1, 1999 .........                              7,923   $      8      34,147     $(35,433)
  Common stock issued ............                              1,505          2         748
  Fair value of options issued
  for compensation ...............                                                       472
  Issuance of common stock
  in payment of previously
  established liabilities ........                                 42                     20
  Net (loss) for the year ........                                                                   (955)
                                     --------    --------    --------   --------    --------     --------

Balance - December 31, 1999 ......                              9,470         10      35,387      (36,388)
  Stock options exercised ........                                873                    116
  Fair value of options issued
  for compensation ...............                                                       156
  Preferred stock issued .........        500    $      5                                435
  Net (loss) for the year ........                                                                   (520)
                                     --------    --------    --------   --------    --------     --------

Balance--December 31, 2000 .......        500           5      10,343         10      36,094      (36,908)
  Conversion of preferred stock
  into common stock ..............       (500)         (5)      5,000          5
  Fair value of options issued
  for compensation ...............                                                        47
  Warrants issued with
  Convertible promissory notes ...                                                       139
  Net (loss) for the year ........                                                                   (728)
                                     --------    --------    --------   --------    --------     --------
Balance--December 31, 2001 .......         --          --      15,343   $     15    $ 36,280     $(37,636)
                                     ========    ========    ========   ========    ========     ========
</TABLE>

                 See accompanying notes to financial statements


                                      F-5
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                            STATEMENTS OF CASH FLOWS
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                                               -----------------------
                                                                                1999     2000     2001
                                                                               -----    -----    -----
<S>                                                                            <C>      <C>      <C>
Cash flows from operating activities:
    Net (loss) .............................................................   $(955)   $(520)   $(728)
    Adjustments to reconcile net (loss) to net cash (used in) operations:
        Deferred royalty income ............................................     (47)     (43)     (35)
        Fair value of common stock and options issued as compensation ......     472      156        8
        Depreciation .......................................................      30       24        5
        Loss on sale of equipment ..........................................               14
        Gain on settlement of debt .........................................                       (91)
        Amortization of debt discount ......................................                        47
        Changes in operating assets and liabilities:
            Decrease in accounts receivable ................................     120
            Decrease in inventory ..........................................     264
            (Increase) decrease in prepaid expenses ........................      14      (91)      99
            (Increase) in deferred financing costs .........................                       (39)
            Decrease in deposits ...........................................      47
            Increase (decrease) in accounts payable and accrued expenses ...    (522)     103     (119)
            Increase (decrease) in other liabilities .......................      54      (84)     (52)
                                                                               -----    -----    -----
                Net cash used in operating activities ......................    (523)    (441)    (905)
                                                                               -----    -----    -----

Cash flows from investing activities:
    Purchase of equipment ..................................................                        (1)
    Proceeds from sale of equipment ........................................                5       --
                                                                                        -----    -----
        Net cash provided by investing activities ..........................                5       (1)
                                                                                        -----    -----

Cash flows from financing activities:
    Proceeds from private placement ........................................     770
    Proceeds from exercise of stock options ................................              116
    Proceeds from the issuance of preferred stock ..........................              440
    Proceeds from issuance of notes payable ................................                       440
    Payment on capital lease obligation ....................................      (8)      --       (6)
                                                                               -----    -----    -----
        Net cash provided by (used in) financing activities ................     762      556      434
                                                                               -----    -----    -----

Net (decrease) increase in cash ............................................     239      120     (472)
Cash at beginning of year ..................................................     485      724      844
                                                                               -----    -----    -----
Cash at end of year ........................................................   $ 724    $ 844    $ 372
                                                                               =====    =====    =====

Supplementary cash flow information:
    Interest paid
Non-cash investing and financing activities:                                   $   4    $   1    $   1
    Reduction of capital lease and accrued interest in exchange for
    equipment with a cost basis of $6                                                               16
    Conversion of preferred stock to common stock                                                    5
    Legal fees accrued in connection with financing                                                 25
    Conversion of other liability to note payable                                                   40
    Debt discount recorded for fair value of warrants issued with
    convertible promissory notes                                                                   139
    Options issued as consideration for accrued consulting fees                                     39
</TABLE>

                 See accompanying notes to financial statements.


                                      F-6
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE A) -- The Company and Basis of Presentation:

      Life Medical Sciences, Inc. (the "Company") is a biomaterials company
engaged in the development and commercialization of innovative and
cost-effective medical products for therapeutic applications. Products under
development, all of which are based on the Company's proprietary, bioresorbable
polymer technology, are medical devices designed to prevent or reduce the
formation of adhesions (scar tissue) following a broad range of surgical
procedures. With the receipt of approximately $1 million in December 2000,
through a combination of equity financing and the sale of state tax losses, the
Company was able to reinitiate development activities related to its
REPEL-CV(TM) adhesion barrier film that had previously been postponed due to
limited financial resources. During 2001, the Company received advances totaling
$440,000 in the form of non-interest bearing convertible debt from investors in
a larger preferred stock/warrant offering which was completed in March 2002 for
an aggregate of $1.2 million (including the conversion of the convertible debt).
In April 2001, the Board of Directors approved the proposed purchase of all
polymer technology assets from a third party in exchange for the issuance of
approximately 6,900,000 shares of restricted Common Stock. The closing of this
transaction made contingent upon the closing of the Series B Offering and on
shareholder approval of an increase in the Company's authorized Common Stock.
The Company raised an additional $294,000 in December 2001 from the sale of
certain New Jersey state tax losses. The proceeds of these financings are
intended to fund the REPEL-CV clinical trial as well as other product
development and operating expenses.

      The accompanying financial statements have been prepared on a going
concern basis. As shown in the accompanying financial statements, the Company
has incurred recurring losses and used cash in operations and has both a working
capital and capital deficit at December 31, 2001. As a result, the Company has
limited capital resources for its continuing operations, which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company's continuation as a going concern is dependent upon obtaining
sufficient financing to fund its operations and ultimately to achieve
profitability, which in turn is dependent on successfully completing the
development of its proposed products, obtaining required regulatory approvals
and manufacturing and selling its proposed products. There is no assurance that
initiatives to raise additional capital will be successful or that other
financing arrangements will be available or that the Company will achieve or
sustain a profitable level of operations. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.

(NOTE B) -- Summary of Significant Accounting Policies:

      [1] Revenue Recognition:

      Product revenue is recognized when product is shipped to customers.
Royalty income is based on the quarterly sales of the Sure-Closure System and
any line extensions or embodiments thereof. Royalties are calculated and
credited to the Company within forty-five days after the last day of each
quarter. The Company recognizes such income when the amounts earned become fixed
and determinable. Royalties earned by the Company are applied to the outstanding
deferred royalty income balance.

      [2] Advertising:

      Advertising costs are charged to expense as they are incurred. Total
expenditures in 1999 and 2000 were $196,000 and $20,000, respectively; there
were no comparable expenditures in 2001.

      [3] Depreciation:

      Furniture and equipment are recorded at cost and are depreciated using the
straight-line method based upon an estimated useful life of 5-7 years.


                                      F-7
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE B) -- Summary of Significant Accounting Policies: (continued)

      [4] Research and development:

      Substantially all research and development activities are conducted
through arrangements with specialized academic and industrial organizations (see
Note G). Research and development costs are charged to expense as incurred.

      [5] Patent costs:

      Costs incurred in connection with acquiring patent rights and the
protection of proprietary technologies are charged to expense as incurred.

      [6] Use of estimates:

      The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

      [7] Stock based compensation:

      The Company follows the intrinsic value based method in accounting for
stock-based employee compensation under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation".
The Company follows the fair value method in accounting for stock based
compensation to non-employees.

      [8] Earnings(Loss) per share:

      Basic earnings (loss) per share is computed by dividing the income or loss
by the weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share includes the effect, if dilutive, from
the potential exercise or conversion of securities which would result in the
issuance of incremental shares of common stock. Securities and the related
number of common shares not included in the diluted computation that would
potentially dilute basic earnings per share, if any in the future, are as
follows:

                                            Dilutive potential Common Shares
                                             for the year ended December 31,
                                            --------------------------------
                                             1999         2000         2001
                                             ----         ----         ----

            Convertible promissory notes                             3,707,000
            Convertible preferred stock                 5,000,000
            Options                        4,465,000    3,701,000    3,841,000
            Warrants                       4,968,000    4,968,000    8,635,000
                                           ---------   ----------   ----------

                                           9,433,000   13,669,000   16,183,000
                                           =========   ==========   ==========


                                      F-8
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE C) -- Furniture and Equipment:

      Furniture and equipment consists of the following at December 31:

                                                                  Estimated
                                           2000        2001      useful life
                                         -------     -------     -----------

            Furniture and fixtures       $11,000     $10,000     5 - 7 years
            Office equipment              48,000       8,000       5 years
                                         -------     -------

            Less accumulated              59,000      18,000
            depreciation                  47,000      16,000
                                         -------     -------

                                         $12,000     $ 2,000
                                         =======     =======

(NOTE D) -- Convertible Promissory Notes:

      In September 2001 and November 2001, the Company executed $440,000 in six
month, non-interest bearing Convertible Promissory Notes. In connection
therewith, the Company issued warrants to purchase up to 3,667,000 shares of
Common Stock at an exercise price of $0.12 per share which expire on June 30,
2002. Upon the closing of the Series B Offering, the notes, together with the
warrants were converted into 367,000 Units (See Note M). The estimated fair
value of the warrants of $139,000 was recorded as debt discount of which $47,000
was amortized through December 31, 2001.

(NOTE E) -- Capital Deficit:

      [1] Common stock:

      In June 1999, the Company completed a private placement in which 1,505,003
shares of Common Stock were sold to "accredited investors" as defined in Rule
501 of Regulation D in consideration for cash proceeds of $750,000. In June
2001, the Company issued 5,000,000 shares of Common Stock pursuant to the
automatic conversion of 500,000 shares of Series A Convertible Preferred Stock
which were issued in December 2000.

      [2] Preferred stock:

      In December 2000, the Company completed a private placement in which
500,000 shares of Series A convertible preferred stock were sold to "accredited
investors" as defined in Rule 501 of Regulation D in consideration for cash
proceeds of $500,000. Pursuant to the terms, each share of Series A preferred
stock was converted into 10 shares of the Company's Common Stock during 2001.

      [3] Warrants:

      The following table summarizes outstanding warrants and Common Shares
underlying such warrants at December 31, 2001:

<TABLE>
<CAPTION>
                                                                      Exercise
                                                         Warrants       Price         Shares
                                                         --------       -----         ------
<S>                                                     <C>             <C>         <C>
Outstanding Class A warrants                            1,650,000       $8.40       1,768,000
Class B warrants underlying Class A warrants            1,650,000       12.60       1,768,000
Outstanding Class B warrants                            1,150,000       12.60       1,232,000
Warrants issued with convertible promissory notes       3,667,000         .12       3,667,000
Underwriter warrants                                      200,000        7.95         200,000
                                                                                    ---------
                                                                                    8,635,000
                                                                                    =========
</TABLE>


                                      F-9
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE E) -- Capital Deficit: (Continued)

      [3] Warrants: (Continued)

      In 1992, the Company consummated its initial public offering of 1,150,000
units, each unit consisting of one share of common stock and two warrants. The
warrants included in each unit consist of a redeemable Class A Warrant and a
redeemable Class B Warrant. Each Class A Warrant entitles the holder to
purchase, at an exercise price of $8.40, subject to adjustment, 1.071474 shares
of Common Stock and one Class B Warrant. Each Class B Warrant entitles the
holder to purchase, at an exercise price of $12.60, subject to adjustment,
1.071474 shares of Common Stock. The warrants are redeemable by the Company for
$.05 per warrant on 30 days written notice under certain circumstances.

      In 1993, the Company consummated a public offering of 500,000 units; each
unit consisting of two shares of common stock and one Class A Warrant.

      At December 31, 2001 there were 1,650,000 Class A Warrants and 1,150,000
Class B Warrants outstanding. The warrants'expiration date has been extended to
March 21, 2002.

      The Company sold to the underwriter of its public offering in May 1996,
for nominal consideration, a warrant to purchase 200,000 shares of Common Stock.
The warrant has an exercise price of $7.95 per share and expires in May 2002.

      [4] Options:

      The Company may issue options to purchase up to an aggregate of 1,408,000
shares of Common Stock pursuant to its 1992 Stock Option Plan, as amended (the
"1992 Plan"), 1,000,000 shares of Common Stock pursuant to its 2000
Non-Qualified Stock Option Plan (the "2000 Plan") and 10,000,000 shares of
Common Stock pursuant to its 2001 Non-Qualified Stock Option Plan (the "2001
Plan"). Options to purchase shares may be granted under the 1992 Plan to persons
who, in the case of incentive stock options, are employees of the Company; or,
in the case of SARs and nonstatutory stock options, are officers and key
employees of the Company, or agents, medical and scientific advisors, directors
of or consultants to the Company, whether or not otherwise employed by the
Company. Under the 2000 Plan and the 2001 Plan only non-qualified stock options
may be granted to employees and directors of the Company or agents, medical and
scientific advisors, or consultants to the Company. In the case of the 1992
Plan, the 2000 Plan and the 2001 Plan, the exercise price is determined by the
Compensation Committee of the Board of Directors at the time of the granting of
an option, but in the case of an incentive stock option, the exercise price
shall not be less than the fair market value of the stock on the date of grant.
Options and SARs vest over a period not greater than five years, and expire no
later than ten years from the date of grant.

      At December 31, 2001, options to purchase 150,000 shares of Common Stock
pursuant to the 1992 Plan, 782,000 shares of Common Stock pursuant to the 2000
Plan and 239,000 shares of Common Stock pursuant to the 2001 Plan are
outstanding. In addition, options to purchase 2,670,000 shares of Common Stock
are outstanding pursuant to other agreements. These options vest over various
periods and expire no later than ten years from the date of vesting. At December
31, 2001, there were 11,141,000 options available for grant under these plans.

      Operating expenses include the following charges relating to stock
options:

                                                Year ended December 31,
                                                -----------------------
                                              1999        2000       2001
                                              ----        ----       ----

      Directors fees                        $ 26,000    $ 17,000
      Options in lieu of salaries            296,000
      Consulting fees                        150,000     139,000    $8,000
                                            --------    --------    ------

                                            $472,000    $156,000    $8,000
                                            ========    ========    ======


                                      F-10
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE E) -- Capital Deficit: (Continued)

      [4] Options: (Continued)

      In addition, 39,000 options were granted in consideration for $39,000 of
consulting fees previously charged to research and development expense.

      Had compensation cost for the Company's stock option grants to employees
been determined based on the fair value at the grant dates for awards consistent
with the method of SFAS No. 123, the Company's net loss and loss per share would
have been increased to the pro forma amounts indicated below (in thousands,
except per share data).

<TABLE>
<CAPTION>
                                                          1999                   2000                   2001
                                                          ----                   ----                   ----
<S>                       <C>                           <C>                     <C>                    <C>
Net loss                  As reported                   $(955)                  $(520)                 $(728)
                          Pro forma                     $(1,297)                $(666)                 $(746)
Net loss per share-
basic & diluted           As reported                   $(0.11)                 $(0.05)                $(0.06)
                          Pro forma                     $(0.15)                 $(0.07)                $(0.06)
</TABLE>

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

                                              Year ended December 31,
                                              -----------------------
                                         1999          2000          2001
                                         ----          ----          ----
      Dividend growth                        0%            0%            0%
      Expected volatility                   82%           88%           99%
      Risk free interest rate          5.5-6.3%      4.5-5.9%      4.1-4.4%
      Expected life                   2.5 years     2.5 years     2.5 years

      A summary of the status of the Company's stock options as of December 31,
1999, 2000 and 2001, and changes during the years ended on those dates is
presented below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                       1999                           2000                           2001
                            ----------------------------   ----------------------------   ----------------------------
                                        Weighted-Average               Weighted-Average               Weighted-Average
                            Shares       Exercise Price    Shares       Exercise Price    Shares       Exercise Price
                            ------       --------------    ------       --------------    ------       --------------
<S>                          <C>             <C>            <C>             <C>            <C>             <C>
Outstanding at
beginning of year            2,928           $2.13          4,465           $1.31          3,701           $1.24

Granted                      1,889            0.50            782            0.35            239            0.21

Exercised                       --              --           (873)           0.13             --              --

Forfeited                     (352)           3.78           (672)           2.09            (99)           1.63

Outstanding at end
of year                      4,465            1.31          3,701            1.24          3,841            1.17

Options exercisable
at year-end                  4,042            1.24          3,464            1.19          3,566            1.10

Weighted-average
grant date fair
value of options
granted during the
year                                          0.33                           0.32                           0.12
</TABLE>


                                      F-11
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE E) -- Capital Deficit: (Continued)

      [4] Options: (Continued)

      Included in the preceding table are 558,000, 306,000 and 89,000 options
granted to non-employees in 1999, 2000 and 2001, respectively. The weighted
average grant date fair values of such options was $0.27, $0.45 and $0.13,
respectively.

      The following table summarizes information about fixed stock options
outstanding at December 31, 2001 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                Options Outstanding                        Options Exercisable
                   ------------------------------------------------   ----------------------------

                                 Weighted-Average
     Range            Number        Remaining      Weighted-Average     Number     Weighed Average
Exercise Prices    Outstanding   Contractual Life   Exercise Price    Exercisable  Exercise Price
---------------    -----------   ----------------   --------------    -----------  --------------
<S>                    <C>           <C>                <C>              <C>           <C>
 $0.02 - 0.82          1,716         5 years            $0.20            1,716         $0.20
  1.00 - 2.00          1,921         4 years             1.69            1,646          1.64
  4.00 - 4.75            189         3 years             4.02              189          4.02
  7.00 - 7.88             15         3 years             7.65               15          7.65
                       -----         -------            -----            -----         -----
                       3,841         4 years            $1.17            3,566          1.10
</TABLE>

(NOTE F)-- Income Taxes:

      At December 31, 2001, the Company has approximately $34,682,000 of net
operating loss carryforwards to offset future federal taxable income and
approximately $610,000 of research and development tax credit carryforwards
available to offset future federal income tax, subject to limitations for
alternative minimum tax. The net operating loss and research and development
credit carryforwards expire in various years from 2005 through 2021. Certain
other limitations may apply, including the amount that may be used annually.
Future issuances of the Company's stock, may subject the Company to additional
limitations.

      At December 31, 2001, after giving effect to the sales described in the
following sentence, the Company has net operating loss carryforwards for New
Jersey State income tax purposes of approximately $13,665,000 which expire
through 2008. The Company has participated in the Tax Benefit Transfer Program
administered by the State of New Jersey under which $11,002,000, $6,257,000 and
$3,758,000 in eligible loss carryforwards, covering the tax years 1992 through
1996 and a portion of 1997, were sold to PSE&G in exchange for cash payments of
approximately $817,000, $468,000 and $294,000, in 1999, 2000 and 2001,
respectively. These cash payments are shown as income tax benefits in the
accompanying statements of operations. The Company anticipates similar
transactions during 2002 and beyond, contingent upon approvals from the State
Department of Taxation.

      Deferred tax benefits, which amounted to $13,938,000 and $13,900,000 at
December 31, 2000 and 2001 are principally attributable to net operating loss
carryforwards and have been offset by a valuation allowance against the entire
benefit due to management's uncertainty regarding the future profitability of
the Company. The valuation allowance has been decreased by $573,000, $359,000
and $38,000 in 1999, 2000 and 2001, respectively.

      The income tax benefit of $817,000, $468,000 and $294,000 for the years
ended December 31, 1999, 2000 and 2001 reflect the Company's participation in
the Tax Benefit Transfer Program described above.


                                      F-12
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE F) -- Income Taxes: (Continued)

      The difference between income taxes at the statutory federal income tax
rate and income taxes reported in the statements of operations are attributable
to the following:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                               ---------------------------------------------
                                                                   1999            2000            2001
                                                               ------------    ------------    ------------
<S>                                                            <C>             <C>             <C>
Income tax benefit at the federal statutory rate               $   (325,000)   $   (177,000)   $   (248,000)
State and local income taxes, net of effect on federal taxes        (57,000)        (31,000)        (44,000)
Decrease in valuation allowance                                    (573,000)       (359,000)        (38,000)
Sale of state net operating loss carryforwards                     (817,000)       (468,000)       (294,000)
Reduction in deferred tax asset from transfer of state net
operating loss carryforwards                                        990,000         563,000         338,000
Other                                                               (35,000)          4,000          (8,000)
                                                               ------------    ------------    ------------

                                                               $   (817,000)   $   (468,000)   $   (294,000)
                                                               ============    ============    ============
</TABLE>

      The deferred tax asset at December 31 is as follows:

<TABLE>
<CAPTION>
                                                                   2000            2001
                                                               ------------    ------------
<S>                                                            <C>             <C>
Net operating loss carryforward                                $ 13,186,000    $ 13,022,000
Research and development credit carryforward                        583,000         610,000
Accrued expenses                                                    141,000         240,000
Other                                                                28,000          28,000
                                                               ------------    ------------

                                                                 13,938,000      13,900,000
Valuation allowance                                             (13,938,000)    (13,900,000)
                                                               ------------    ------------

                                                               $          0    $          0
                                                               ============    ============
</TABLE>

(NOTE G) -- Research and License Agreements:

      [1] Yissum agreement:

      During June 1991, the Company entered into a research and license
agreement with Yissum Research and Development Company of the Hebrew University
of Jerusalem ("Yissum"), which was amended in February 1994, as of January 1996
and as of October 1996, pursuant to which the Company finances and Yissum
conducts research and development at the Hebrew University of Jerusalem in the
field of biomedical polymers. In connection with the agreement, Yissum assigned
to the Company its worldwide rights to patents, patent applications and know-how
to develop, manufacture and market products relating to this technology.


                                      F-13
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE G) -- Research and License Agreements: (Continued)

      [1] Yissum agreement: (Continued)

      Pursuant to the agreement, the Company is obligated to pay a royalty of
five percent of all net sales of the Company's products derived under the
agreement. The maximum amount of royalties to be paid during the term of the
agreement is $5,500,000. The agreement continues until the earlier of the last
date upon which the patents expire, or at the end of fifteen years from the date
of the first commercial sale pursuant to the assignment. Yissum has the right in
its sole discretion to terminate the agreement if, among other things the
Company does not attain certain milestones by specified dates. The January 1996
amendment gives the Company options for three one-year extensions, through 2004,
of the periods in which certain milestones must be attained, each for a payment
of $50,000. Upon termination of the agreement for any reason, the patents,
patent applications and know-how assigned by Yissum to the Company in June 1991
will revert in full to Yissum.

      [2] Dimotech agreement:

      During July 1995, the Company entered into an agreement with Dimotech
Ltd., pursuant to which the Company financed and Dimotech conducted research and
development with regard to the scar management program. In connection with the
agreement, Dimotech has assigned to the Company its worldwide rights to the
patents and know-how to develop, manufacture and market products relating to
this technology.

      Pursuant to the agreement, the Company is obligated to pay a royalty of
five percent of all net sales of the Company's products derived under this
agreement including CLINICEL. The agreement continues until the earlier of the
last date upon which the patents expire, or at the end of fifteen years from the
date of the first commercial sale pursuant to the assignment. Dimotech has the
right in its sole discretion to terminate the agreement under certain
circumstances. Upon termination of the agreement for any reason, the patents,
license and know-how assigned by Dimotech to the Company will revert in full to
Dimotech.

      In November 1999, the Company was declared to be in breach of this
agreement by Dimotech due to non-payment of royalties. Effective February 29,
2000, the Company discontinued the manufacture and sale of CLINICEL and the
patent rights reverted to Dimotech. In addition, at December 31, 1999, the
Company wrote off to cost of sales the $186,000 carrying value of the Clincel
products in inventory at such date. The company no longer sells the CLINICEL
products. In August 2001, the Company settled a lawsuit filed in Israel against
the Company and its principal executive officers by Dimotech, Ltd. for the
non-payment of royalties and accrued interest in the amount of $125,000.
Pursuant to the settlement, the Company paid $52,000, issued a $40,000 note
payable (convertible into Common Stock at $1.00 per share) and, at December 31,
2001, reflected $25,000 as accrued expenses which was converted, upon the
closing of the Series B Offering, into 21,000 Series B Units. Dimotech forgave
$8,000 in connection with the settlement.

(NOTE H) -- Commitments and Other Matters:

      [1] Lease:

      The Company vacated its corporate offices in 2000 and accrued the
remaining obligation on the lease, which expired in October 2001. Rent expense
was $88,000 and $90,000 in 1999 and 2000, respectively. The Company's activities
are being conducted at the premises of the Company's Chief Executive Officer on
a rent-free basis.

      [2] Employment agreement:


                                      F-14
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

      The Company has an employment agreement with one executive which expires
in May 2002. Pursuant to this agreement, the Company's commitment regarding
early termination benefits aggregates $90,000 at December 31, 2001.

(NOTE H) -- Commitments and Other Matters: (Continued)

      [3] Supplier Concentration

      The Company intends to rely primarily on one primary manufacturer to
produce its proposed products for testing and commercial purposes. The Company
believes that alternative sources for these raw materials and components are
available.

(NOTE I) -- Sure-Closure System Sale:

      In July 1994, the Company sold or assigned to MedChem Products, Inc.
substantially all of its assets related to the Sure-Closure System, a disposable
wound closure device, including rights, agreements and licenses. The terms of
the agreement provide that the Company is entitled to royalties of 10% of the
net sales (as defined in the agreement), through June 30, 2004, of the
Sure-Closure System and any line extensions or future embodiments. In connection
with this transaction, $644,000 was recorded as deferred royalty income and
through December 31, 2001 has been reduced by $383,000 of royalties earned after
October 1, 1995. A number of the Company's agreements with Technion and
Dimotech, related to the Sure-Closure System, were assigned to MedChem in
connection with the sale. In connection with one such agreement, the Company may
be liable for a two percent royalty on sales of the Sure-Closure System in the
event that MedChem does not pay these royalties.

(NOTE J) -- Related Party:

      The Company incurred expenses of approximately $67,000, $108,000 and
$94,000 in the years ended December 31, 1999, 2000 and 2001 respectively, for
legal services rendered by a firm at which a director of the Company was one of
the partners until May 2001. Accounts payable includes $93,000 and $48,000 at
December 31, 2000 and 2001, respectively, due to such firm.

      In 2001, the Company paid $90,000 in consulting fees to a member of its
Board of Directors.

(NOTE K) -- Extraordinary Gain and Gain on Settlement of Debt:

      For the year ended December 31, 1999 the extraordinary gain of $432,000 is
attributable to the gain on extinguishment of amounts owed to a supplier by the
transfer of title to equipment that had previously been charged to research and
development expenses. For the year ended December 31, 2001, the gain on
settlement of debt of $91,000 is attributable to the cumulative forgiveness of
portions of certain outstanding trade obligations settled during the year.

(NOTE L) -- Quarterly Results (Unaudited):

                                              Quarter Ended
                            ---------------------------------------------------
                             March 31     June 30    September 30   December 31
                            ----------   ----------  ------------   -----------
2001
Revenues                    $   8,000    $   9,000    $   9,000      $  9,000
Net income (loss)            (328,000)    (322,000)    (109,000)       31,000
Income (loss) per share -
basic and diluted (a)           (0.03)       (0.04)       (0.01)         0.00

2000
Revenues                    $  19,000    $  62,000    $   9,000      $ 11,000
Net income (loss)            (305,000)    (290,000)    (141,000)      216,000
Income (loss) per share -
basic and diluted (a)           (0.03)       (0.03)       (0.01)         0.02


                                      F-15
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

(NOTE L) -- Quarterly Results (Unaudited): (Continued)

      (a)   Per common share amounts for the quarters and full year have been
            calculated separately. Accordingly, quarterly amounts do not
            necessarily add to the annual amount because of differences in the
            weighted average common shares outstanding during each period due to
            the effect of the Company's issuing shares of its common stock
            during the year.

(NOTE M) -- Subsequent Events:

      [1] Series B Convertible Preferred Stock financing:

      In March 2002, the Company closed a $1.2 million private placement
("Series B Offering") with a consortium of European investors. The Series B
Offering involved the issuance of one million Units at $1.20 per Unit. Each Unit
consists of one share of Series B Preferred Stock convertible into ten shares of
Common Stock; one warrant entitling the holder to purchase, until June 30, 2002,
up to ten shares of Common Stock at $0.12 per share; and one two-year warrant
entitling the holder to purchase ten shares of Common Stock at $0.24 per share.
The Series B Preferred stockholders are entitled to vote with the common
stockholders on an as converted basis, and the Preferred Stock automatically
converts into Common Stock on March 21, 2003. The Company received gross
proceeds of $760,000 (subject to the escrow referred to below) and effected the
conversion of $440,000 in advances received by the Company during the second
half of 2001 in the form of non-interest bearing convertible promissory notes.
The notes and 3,667,000 warrants issued therewith were cancelled upon conversion
into 367,000 Units.

      The Company does not presently have sufficient number of shares of
authorized Common Stock available for issuance upon conversion of the Preferred
Stock and the exercise of the warrants comprising the Units. Accordingly, the
Company intends to seek stockholder approval at its 2002 Annual Meeting of a
proposal to increase the authorized Common Stock to 100,000,000 shares from
43,750,000 shares. Pending implementation of this increase, $300,000 of the
proceeds of the Series B Offering is being held in escrow and is to be released
to the investors if the increase is not implemented within one year from
closing. Warrant holders could also require the Company to redeem their warrants
based on the then market price of the Common Stock if sufficient shares are not
available for issuance upon exercise. Investors were granted certain
registration rights for the securities purchased. A placement fee consisting of
91,667 Units and a four-year warrant to purchase an additional 91,667 shares of
Common Stock at $0.24 per share was paid to an agent in connection with the
private placement.

      Options to purchase 5,200,000 shares of Common Stock, including 1,500,000
to an officer and 3,000,000 to a director, pursuant to the 2001 plan were
granted in conjunction with the closing of the Series B Offering. The options
vest in one third increments as of the grant date and the first and second
anniversaries thereof and will expire no later than seven years from the vesting
dates. The exercise price for the options is $0.12 per share which is equivalent
to the conversion price of the Series B Preferred Stock in the Series B
Offering.

      Pursuant to the settlement with Dimotech, Ltd., the Company agreed to
issue 21,000 Units under the terms of the Series B Offering as consideration for
$25,000 of accrued royalties.

      [2] Other:

      In February 2002, the Company reached a settlement with Polymer Technology
Group, Inc. ("PTG"). The terms of the settlement require the Company to pay
$75,000 with five days of the closing of the Series B Offering or by March 31,
2002, whichever occurs sooner, issue 192,000 shares of Common Stock, and issue a
five-year 5% Convertible Note in the principal


                                      F-16
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                  NOTES TO FINANCIAL STATEMENTS -- (Continued)

amount of $70,000 which is convertible into Common Stock at $1.00 per share. In
exchange, PTG forgives $97,000 of the total $317,000 claimed to be owed by the
Company as of the settlement date which was included in accounts payable at
December 31, 2001.


                                      F-17