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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

(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, 2005

                                       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
                                 SYNTHEMED, 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

                                (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-KSB or any  amendment to
this Form 10-KSB. [X]

      The aggregate market value of the common equity held by  non-affiliates of
the registrant as of February 10, 2006 was approximately $47.2 million.

      As of February  10, 2006,  66,596,447  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
2006 Annual Meeting of Stockholders  are incorporated by reference into Part III
of this Form 10-KSB.

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<PAGE>

                                INTRODUCTORY NOTE

      Certain  statements in this Report on Form 10-KSB (the "Report") under the
caption  "Management's  Discussion  and  Analysis  or  Plan 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  historical  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

      SyntheMed,   Inc.  (the  "Company")  is  a  biomaterials  company  engaged
primarily in the development and  commercialization  of  anti-adhesion  and drug
delivery  products.  Products under  development,  all of which are based on the
Company's licensed proprietary,  bioresorbable polymer technology, are primarily
medical  devices  designed to prevent or reduce the formation of adhesions (scar
tissue)  following a broad range of surgical  procedures.  The Company's product
development efforts are currently focused on its lead product,  REPEL-CV(TM),  a
bioresorbable  adhesion barrier intended for use in cardiac surgery.  In October
2003, the Company  initiated a US-based  multi-center  pivotal clinical trial on
REPEL-CV which is currently anticipated to be completed in mid-2006.  Assuming a
favorable outcome, the Company anticipates  submitting the results of this trial
to the FDA as a basis  for  obtaining  approval  to market  REPEL-CV  for use in
cardiac surgery.  In January 2005, the Company  announced that a planned interim
analysis of patient  data from the  REPEL-CV  trial was  completed by a Data and
Safety  Monitoring  Board  ("DSMB")  comprised  of  medical  and  biostatistical
specialists  who are not  participating  in the  trial.  Based on data from over
forty patients,  the DSMB recommended that the trial proceed as planned and that
no  modifications  to the trial  protocol  were  indicated.  In March 2005,  the
Company  announced the initiation of a multi-center  clinical study for REPEL-CV
involving  several cardiac surgery  centers in Europe.  The Company  anticipates
receiving,  in  mid-2006,  the CE Mark  approval to market  REPEL-CV  for use in
cardiac surgery within the European Union and other international markets.

      In March 2005, the Company received $796,000 from the exercise of warrants
to purchase  6,634,000  shares of the Company's  common stock. In December 2005,
the Company  received  $254,000  from the sale of certain  New Jersey  state tax
losses.  These funds are being used to fund the REPEL-CV  clinical trial as well
as other product development activities and operating expenses.

      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  March,  2003,  the  Company  completed  the  purchase  of the  polymer
technology  assets of a private medical  technology  company based in the United
Kingdom,  Phairson  Medical  Limited (and an  affiliated  entity;  collectively,
"Phairson"),  in exchange  for the issuance of  6,895,561  shares of  restricted
Common Stock of the Company.  The assets  comprise a series of United States and
foreign patent applications as well as scientific and clinical documentation and
provide the Company a second platform technology for future product development.
The Company also assumed  Phairson's  rights and obligations under a development
agreement  with the Swiss Federal  Institute of Technology and the University of
Zurich, as well as with the principal investigator of the technology development
project,  Professor JA Hubbell. Under these agreements,  the Company is required
to pay royalties of no more than 1.1% of net sales of products incorporating the
technology.  If the  Company  fails  to  sublicense  the  technology  or  pursue
development  efforts involving the technology for a period of two years or more,
the  Company  is  obligated  to  negotiate  a return  of the  technology  to the
university.  Management  believes that its development  efforts to date have met
the  requirements  of  the  agreement.   Materials  derived  from  this  polymer
technology  have  shown  positive  results  in  initial  preclinical  studies on
post-operative  adhesion  formation  models  and  in a  toxicology  study.  This
acquisition further enhanced the Company's  broad-based,  proprietary technology
platform from which post-operative  adhesion prevention products may be derived.
Certain  stockholders of Phairson have  participated in prior  financings of the
Company,  and Richard  Franklin,  Company's  Chairman,  is a stockholder and has
served as CEO of  Phairson.  In  connection  with the  acquisition,  the Company
granted an option, exercisable for seven years, to purchase up to 100,000 shares
of Common Stock at $.09 per share to Dr. Gere S.  diZerega,  who has served as a
medical  consultant  to both  companies  and who  assisted  in  identifying  the
acquisition opportunity. Dr. diZerega had previously served as a director of the
Company.

      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.


                                       2
<PAGE>

      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 Orthopaedics
acquired the Sure - Closure System from C.R.  Bard.  The Company  received a 10%
royalty on all net sales of the  Sure-Closure  System products  through June 30,
2004. In September 2004, the Company recorded  royalty income of $174,000.  This
income was  associated  with the write off of the remaining  balance of deferred
royalty  income  upon the  expiration  of the royalty  period of the  underlying
agreement. The Sure-Closure System was invented at the Rambam Medical Center, an
affiliate of  Technion-Israel  Institute of Technology in Haifa,  Israel and the
intellectual  property rights  relating  thereto were assigned to the Company in
1992.

      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 and to SyntheMed,  Inc. in
May 2005. In April 2002, the Company  increased the number of authorized  shares
of Common Stock from 43,750,000 to  100,000,000.  In November 2005, the Board of
Directors  approved  the  increase in the  authorized  shares of Common Stock to
150,000,000 shares subject to stockholder  approval at the Company's 2006 annual
meeting.

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   gynecologic  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 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
estimated at $2.0 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.

      In the United  States,  there are  approximately  1.9 million  gynecologic
surgical  procedures  performed  annually  which  have  proven  to be  prone  to
post-operative adhesion formation.  Among these procedures are approximately 1.0
million  infertility  procedures which, in many instances,  are performed due to
the  complications  caused by adhesions which have compromised the functionality
of  the  reproductive  organs.  In  the  absence  of  an  efficacious  means  of
intervention,  the  formation  of  adhesions  becomes  a  virtually  unavoidable
byproduct of the trauma caused to internal  tissue  surfaces during the surgical
procedure.   Numerous   clinical  studies   substantiate  the  observation  that
performing such procedures laparoscopically (less-invasively) rather than in the
traditional  open manner,  in fact,  may lead to the formation of more extensive
and problematic adhesions.

      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 in gynecologic and
general surgery 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.


                                       3
<PAGE>

      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>
                                        Products Under Development

                                 Potential                                                      Est. Annual
Product                   Therapeutic Application                      Status                Market Potential*
----------------   -------------------------------------   -------------------------------   -----------------
<S>                <C>                                     <C>                               <C>
REPEL-CV           Preventing or reducing post-operative   Pivotal clinical trial            $250 Million
Barrier Film       surgical adhesions in open heart        European clinical study
                   surgical procedures.

REPEL-AFIB         Intraoperative prevention of            Preclinical development           $1 Billion
Drug Delivery      surgically-induced atrial
                   fibrillation.

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.
                                                           Project on hold.

RESOLVE(TM)        Preventing or reducing post-operative   Preclinical development           $400 Million
Viscous Polymers   surgical adhesions in gynecological
                   and general abdominal surgery.

RELIEVE(TM)        Preventing or reducing post-operative   Preclinical development on hold   $300 Million
Viscous Solution   surgical adhesions in orthopedic and
                   spinal surgery.
</TABLE>

* Based on industry estimates.

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.  In
October 2003, the Company  initiated the  multi-center  randomized,  controlled,
pivotal  clinical  trial  based on an  Investigational  Device  Exemption  (IDE)
granted by the Food and Drug  Administration  (FDA). The objectives of the trial
are to further  demonstrate  the efficacy of REPEL-CV in reducing the extent and
severity of adhesions after open heart surgery in a neonatal patient population.
It is currently  anticipated  that this trial will be completed in mid-2006 and,
assuming  a  favorable  outcome,  will be  submitted  to the FDA as a basis  for
obtaining  approval to  commercialize  REPEL-CV for use in cardiac  surgery.  In
January 2005, the Company  announced that a planned interim  analysis of patient
data from the REPEL-CV  trial was  completed by a DSMB  comprised of medical and
biostatistical specialists who are not participating in the trial. Based on data
from over forty patients, the DSMB recommended that the trial proceed as planned
and that no modifications  to the trial protocol were indicated.  In March 2005,
the Company  announced  the  initiation  of a  multi-center  clinical  study for
REPEL-CV  involving  several leading cardiac surgery centers in Europe. In March
2003,  the Company  completed a feasibility  clinical trial for REPEL-CV in open
heart surgical procedures. This trial commenced during the first quarter of 2002
and patient  enrollment  was completed  during the third  quarter of 2002.  This
trial provided initial  information on the effectiveness of REPEL-CV in reducing
the formation of post-operative  adhesions in open heart surgical  procedures as
well as  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-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  and was shown to virtually prevent the formation of adhesions to
the surface of the heart.

REPEL-AFIB


                                       4
<PAGE>

      Approximately one third of patients  undergoing open heart surgery develop
atrial  fibrillation  (irregular  heart beat),  resulting from the trauma of the
surgical  procedure.  Patients typically  encounter this complication during the
first or second day of the post-operative recovery period which often results in
the  patients  being  returned to the coronary  intensive  care  setting.  These
patients are currently  treated with  systemic drug delivery  after the onset of
the complication  which requires  increased patient monitoring and often results
in a delayed discharge from the hospital,  significantly  increasing the overall
cost of care.  Similar to drug eluding  stents used in  angioplasty  procedures,
REPEL-AFIB  comprises a site-specific drug delivery vehicle, in this case in the
form of a bioresorbable  film similar to REPEL-CV,  which is impregnated with an
anti-arrythmic  drug which is  designed to be placed on the surface of the heart
during the open heart surgical  procedure.  The objective is to deliver the drug
to the heart tissue as the film resorbs  thereby  preventing the onset of atrial
fibrillation. If successful, the use of REPEL-AFIB could reduce the patient risk
associated  with atrial  fibrillation  and eliminate the costs  associated  with
systemic  drug  delivery  and  increased  patient  monitoring.  The  Company has
evaluated  prototype  films in  preclinical  screening  studies  and  intends to
conduct further product development.

REPEL

      REPEL adhesion  barrier film was 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 an  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.  Initiation of this trial has been deferred due to
the Company's limited financial  resources and emphasis on the REPEL-CV clinical
development program.

RESOLVE

      The Company plans to address the market  opportunity  associated  with the
incidence  of  post-operative  adhesion  formation  in  gynecologic  and general
abdominal  surgery  through  the  pursuit of two  distinct  product  development
programs.  In each instance,  the objective is to provide surgeons with products
that are effective in reducing the extent and severity of adhesions and are easy
to use in both open and less-invasive surgical procedures.  In one approach, the
Company is exploiting its proprietary  bioresorbable reverse thermal gel polymer
technology.  The novelty of this  technology  is, in part,  associated  with its
ability to rapidly transition from a liquid at room temperature to a viscous gel
when  exposed to the  temperature  of  internal  tissue  surfaces.  The  Company
continues  to  evaluate   prototype   materials  based  on  this  technology  in
preclinical surgical models.

      In  another  approach,  the  Company  has  been  evaluating  bioresorbable
materials that coat tissue surfaces as a means of providing  broad-based  versus
site  specific  protection  against  adhesion   formation.   This  approach  has
particular application in gynecological and general abdominal surgery due to the
"bowl shaped" anatomical  configuration of the peritoneal cavity. The liquid gel
material 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.

      A number of formulations of these instillate materials have been evaluated
in a series of preclinical studies during which the preferred viscosity,  tissue
adherence and resorption time were  determined.  In addition to being determined
as safe and biocompatible,  these materials proved to be efficacious in reducing
the level of adhesion  formation in the abdominal  cavity in these  pre-clinical
studies. Further development work has been deferred due to the Company's limited
financial resources and emphasis on the REPEL-CV clinical development program.


                                       5
<PAGE>

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.  Further  development  work has been
deferred due to the Company's  limited  financial  resources and emphasis on the
REPEL-CV clinical development program.

Polymer Technology

      The material  capabilities  and  intellectual  property  portfolio for the
Company's proprietary bioresorbable polymer technology continues to broaden. The
acquisition  of the polymer  technology  assets from  Phairson Ltd. (See Certain
Historical Events) provides the Company with a second distinct family of polymer
materials which have demonstrated  positive results in preliminary  pre-clinical
adhesion  prevention  studies.  The  Company is also  evaluating  the use of its
recently  developed and patented  reverse thermal gel materials in anti-adhesion
product and other  device  applications.  The variety and  versatility  of these
technologies  provide the Company  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 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.

      The Company's  principal  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 (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  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 later 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 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 stops  manufacturing  and/or  marketing the
product  for a period  of more  than 12  months;  or (ii) the  Company  breaches
theYissum  Agreement,  a receiver or  liquidator is appointed for the Company or
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.  As originally
agreed, the agreement provided an additional right of termination on the part of
Yissum in the event the Company failed to achieve the first  commercial  sale by
December 31, 2001 or net sales or income of at least  $1,000,000 by December 31,
2002.  Subsequently,  the agreement was amended to permit the Company additional
time to achieve product  commercialization and minimum net sales. As amended, so
long as the Company fails to achieve  $1,000,000 in net sales or income,  Yissum
is  prohibited  from  terminating  the  agreement  or  contracting  with  others
regarding the subject matter  thereof,  provided the Company pays minimum annual
royalties  to Yissum in the amount of $50,000  for each of  calendar  years 2001
through 2005, and $100,000 for each of calendar years 2006 through 2007. Any and
all minimum  royalty  payments  made by the  Company to Yissum  shall be applied
against the maximum royalty obligation referenced above. Because the Company has
not yet commercialized any products,  the previously  referenced minimum royalty
payments of $50,000  each were made to Yissum for the years ended  December  31,
2001,  December 31, 2002,  December 31, 2003, December 31, 2004 and December 31,
2005.  The Company has agreed to indemnify  Yissum under certain  circumstances.
Upon the  termination  by Yissum of the Yissum  Agreement  for any  reason,  the
patents and patent applications licensed by Yissum to the Company will revert in
full to Yissum.


                                       6
<PAGE>

Government Regulation

      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.  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."

      Food and Drug Administration ("FDA")

      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.

      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
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 currently under development  utilizing the Company's polymer technology
are  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.


                                       7
<PAGE>

      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  relate to 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.

      Internationally,  reimbursement issues vary by country which can influence
the pace at which hospitals are willing to respond to the surgeons'  request for
new  products,  particularly  those that add to the total  cost of the  surgical
procedure   rather  than   substituting  for  an  existing   product.   In  some
international  markets, the use of new products may be delayed until the product
is included  in a  government  tender  under  which the  hospital  can apply for
reimbursement. The submission and approval of tender applications may only occur
on a semi-annual or annual basis depending on the country.

Patents and Proprietary Rights

      In connection with the polymer  technology under license from Yissum,  the
Company  currently holds eight United States patents,  one Australian patent and
one  Canadian  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 and seventh US patents claim novel bioresorbable
polymeric  compositions based on AB polyester diblocks and triblocks.  The sixth
and eighth US patent claims novel  polymeric  compositions  with reverse thermal
gel properties. These patents are scheduled to expire on various dates from 2008
through 2022. In connection with the polymer technology  acquired from Phairson,
the Company  currently  holds two United  States  patents.  The first US patents
claims the  treatment  of trauma with a  composition  comprising  a  polyanionic
polymer  and  the  second   claims  a  composition   comprising   hydrolytically
susceptible   polyanionic   polymer.   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

      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,  Adhibit(TM),  a product of
Angiotech Pharmaceuticals,  Inc., CardioWrap(TM), a product of Mast Surgical and
Goretex(TM),  a product of WL Gore.  Several other  companies  including ML Labs
Ltd., Anika  Therapeutics,  Inc.,  Alliance  Pharmaceuticals,  Corp.,  Confluent
Surgical Inc., LifeCore Biomedical, Inc., Mast Surgical 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 does not currently  intend to undertake the manufacture of its
products.  Polymer Technology Group, Inc. ("PTG") has been the Company's primary
supplier  and is in a position to produce the  Company's  proposed  products for
testing and commercial  purposes.  However,  the Company is developing alternate
sources  of  supply  for  its  current  product.  The  contract  manufacturer(s)
procures,  tests and inspects all raw  materials  used in the  production of the
Company's  proposed  products.  The contract  manufacturer(s)  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 seeks to ensure that its products are manufactured in
compliance  with  regulatory  requirements.  The  Company  utilizes  independent
testing facilities to evaluate products produced by the manufacturer for quality
assurance purposes.


                                       8
<PAGE>

      The Company and PTG have completed various manufacturing pilot batches and
scale-up studies at PTG's primary  manufacturing site. The Company is engaged in
a  manufacturing  development  program to  optimize,  validate  and scale up the
manufacturing  process  at several  alternate  contract  vendors to support  the
commercial sale of REPEL-CV.

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  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 by the medical community of the Company's  products as an alternative
to other available products.  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 $10,000,000. The Company intends to
obtain similar  insurance  covering  marketed products in advance of the product
launch.

Human Resources

      As of February  2006,  the  Company  employed  three full time  employees.
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 officers are as follows:

           Name          Age   Positions with the Company
      ----------------   ---   --------------------------
      Robert P. Hickey    60   President, CEO & CFO
      Eli Pines, Ph.D     60   Vice President and
                               Chief Scientific Officer


      Robert P. Hickey has served  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.

      Eli Pines,  Ph.D.  has served as the  Company's  Vice  President and Chief
Scientific  Officer  since March 2003 and prior  thereto  from June 1995 to July
2000. From July 2000 to February 2003, Dr. Pines continued his relationship with
the Company in a  consulting  capacity.  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.

Consultants and Advisors


                                       9
<PAGE>

      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   areas  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.


      Eric A. Rose, M.D.         Dr.  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.

      Samuel Weinstein, M.D.     Dr.  Samuel  Weinstein is  Director,  Pediatric
                                 Cardiothoracic   Surgery   at  The   Children's
                                 Hospital  of  Montifiore  Medical  Center,  New
                                 York.    His   research    interests    include
                                 hypoplastic   left  eart   syndrome,   Marfan's
                                 disease  and  cryoablation  in Fontan  revision
                                 procedures.

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. 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.


                                       10
<PAGE>

      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

      The cash  balance as of December  31, 2005 is not  sufficient  to meet the
Company's  cash  requirements  through 2006.  The Company is seeking  additional
financing and will be required to raise substantial additional funds in both the
short and long term to continue the pre-clinical and clinical development 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.
Any additional equity  financings may be dilutive to stockholders.  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. 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.

      Limited Operating History; History of Losses

      The Company's  operations to date,  have 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 $1,841,000 and
$2,148,000  for the years ended  December  31, 2004 and 2005,  respectively.  At
December 31, 2005, the Company had an accumulated  deficit of  $44,250,000.  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  or generate  positive cash
flows from 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.


                                       11
<PAGE>

      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.  Failure 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,  if any. 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.

      When the European Union ("EU") was founded, one of the stated goals was to
create a single  European  market by removing  trade barriers that existed among
the EU Member  States.  CE marking is a  mandatory  certification  system  which
indicates  that a  particular  product  complies  with all  applicable  European
product  safety,  health  and  environmental  requirements.  Having a product CE
marked  demonstrates  that a manufacturer  is in compliance  with  applicable EU
directives.  The CE marking  system  promotes free trade to and within Europe by
providing a single set of safety and  environmental  requirements a product must
meet.  Products  complying  with CE marking are now  accepted and presumed to be
safe in 28 European countries.

      The Medical Devices Directives,  which are applicable to REPEL-CV, set out
essential  requirements  to ensure that a medical device will not compromise the
health and safety of the patient,  user or any other person,  and that any risks
associated  with the  device  are  still  compatible  with  patient  health  and
protection. Devices that conform to these requirements are entitled to apply the
CE  marking,  which then  allows the  product to be freely  placed on the market
within the EU. The conformity to the  applicable  set of essential  requirements
must be proved by following a testing and/or  certification  procedure conducted
by  organizations  officially  recognized  in the EU as  having  the  expertise,
experience and quality systems to competently assess the technical requirements.
The Company is currently under contract with such an organization that is in the
process of certifying that the Company's  systems and procedures comply with all
the applicable  European stands and regulations so REPEL-CV can have the CE mark
applied. The Company anticipates receiving the CE mark for REPEL-CV in mid-2006.

      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 ten  United  States  patents,  one
Australian patent and one Canadian 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  relate to 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.


                                       12
<PAGE>

      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.

      Internationally,  reimbursement issues vary by country which can influence
the pace at which hospitals are willing to respond to the surgeons'  request for
new  products,  particularly  those that add to the total  cost of the  surgical
procedure   rather  than   substituting  for  an  existing   product.   In  some
international  markets, the use of new products may be delayed until the product
is included  in a  government  tender  under  which the  hospital  can apply for
reimbursement. The submission and approval of tender applications may only occur
on a semi-annual or annual basis depending on the country.

      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.

      Reliance on Contract Manufacturers; Lack of Manufacturing Experience

      The Company currently has no manufacturing  facilities and, therefore,  is
required to rely on others for clinical and commercial production.  In addition,
some raw materials  necessary for the commercial  manufacturing of the Company's
products are produced to distinct  specifications and may only be available from
a limited number of suppliers.  The Company intends to use a series of suppliers
in the production of REPEL-CV.  Any delays or failures of the  manufacturing  or
packaging  process at any of these suppliers  could cause inventory  problems or
product shortages.

      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  and  past  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.


                                       13
<PAGE>

      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 and its contract manufacturer
are 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 that could conflict with their service
to the Company.

      Risk of Product Liability Claims; Insufficient Insurance

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

      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.

      The Sale or Availability  for Sale of Substantial  Amounts of Common Stock
Could Adversely Affect the Stock Price

      The sale or availability for sale of substantial  amounts of the Company's
Common Stock,  including  shares  issuable upon  exercise of  outstanding  stock
options and warrants and upon  conversion of outstanding  convertible  preferred
stock in the public  market  could  adversely  affect  the  market  price of the
Company's  Common  Stock.  As of February 10, 2006,  the Company had  66,596,447
shares of Common Stock issued and outstanding and the following shares of Common
Stock were reserved for issuance:

            o 594,000 shares upon exercise of outstanding warrants,  exercisable
      at $0.12 per share and expiring on March 26, 2007;


                                       14
<PAGE>

            o  110,000  shares  upon  conversion  of  promissory  notes  with  a
      conversion  price of $1.00  per  share  expiring  on  August  1,  2006 and
      February 1, 2007.

            o  12,081,000   shares  upon   exercise  of   outstanding   options,
      exercisable  at prices ranging from $0.023 to $4.75 per share and expiring
      from March 5, 2006 to April 22, 2014.

      Approximately  62% of the  outstanding  shares of Common Stock, as well as
substantially  all of the shares issuable upon exercise of outstanding  options,
are freely  tradable  without  restriction  unless held by an  affiliate  of the
Company as that term is defined under the Securities Act.

      The remaining  shares described above are deemed  "restricted  securities"
and may not be sold in the absence of  registration  or in accordance  with Rule
144 under the Securities Act or another exemption.

      Possible Volatility of Stock Price and Illiquid Trading

      The market price of the  Company's  Common Stock has been and is likely to
continue  to be highly  volatile.  Trading  in the  Company's  Common  Stock has
experienced  low volume and limited  liquidity.  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.

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 President on a month-to-month  basis and there is no lease expense
associated  with this space.  Any staff  expansion may  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.  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.

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  traded  on  the  National   Association  of
Securities Dealers Automated  Quotation System ("Nasdaq") Stock Market under the
symbol CHAI from  September  22, 1992 to August 27, 1998.  Effective  August 28,
1998,  the Company's  Common Stock was delisted from Nasdaq  because the Company
failed to satisfy applicable maintenance criteria.  Since delisting from Nasdaq,
the Company's Common Stock has been quoted on the OTC Bulletin Board.  Effective
May 2005,  the  Company's  Common Stock has traded  under the symbol  SYMD.  The
following  sets forth the quarterly  high and low bid price for the Common Stock
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.

                                            Common Stock
                                            Bid Price ($)
                                            -------------
                                            High      Low
                                            ----      ---

Fiscal Year Ended December 31, 2004
      First Quarter                         .44       .31

      Second Quarter                        .53       .33

      Third Quarter                         .51       .34

      Fourth Quarter                        .60       .28

Fiscal Year Ended December 31, 2005
      First Quarter                         .44       .31

      Second Quarter                        .43       .34

      Third Quarter                         .42       .31

      Fourth Quarter                        .45       .34

Fiscal Year Ended December 31, 2006

      January 1 through February 10, 2006   .90       .40



(b) Approximate Number of Equity Securities Holders

      As of February 10, 2006,  the number of holders of record of the Company's
Common Stock was 238. The Company believes that the number of beneficial holders
of its Common Stock on such date was in excess of 1,500.

(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.


                                       16
<PAGE>

Item 6. Management's Discussion and Analysis or Plan of Operations

Overview

      SyntheMed,   Inc.  (the  "Company")  is  a  biomaterials  company  engaged
primarily in the development and  commercialization  of  anti-adhesion  and drug
delivery  products.  Products under  development,  all of which are based on the
Company's licensed proprietary,  bioresorbable polymer technology, are primarily
medical  devices  designed to prevent or reduce the formation of adhesions (scar
tissue)  following a broad range of surgical  procedures.  The Company's product
development efforts are currently focused on its lead product,  REPEL-CV(TM),  a
bioresorbable  adhesion barrier intended for use in cardiac surgery.  In October
2003, the Company  initiated a US-based  multi-center  pivotal clinical trial on
REPEL-CV which is currently anticipated to be completed in mid-2006.  Assuming a
favorable outcome, the Company anticipates  submitting the results of this trial
to the FDA as a basis  for  obtaining  approval  to market  REPEL-CV  for use in
cardiac surgery.  In January 2005, the Company  announced that a planned interim
analysis of patient  data from the  REPEL-CV  trial was  completed by a Data and
Safety  Monitoring  Board  ("DSMB")  comprised  of  medical  and  biostatistical
specialists  who are not  participating  in the  trial.  Based on data from over
forty patients,  the DSMB recommended that the trial proceed as planned and that
no  modifications  to the trial  protocol  were  indicated.  In March 2005,  the
Company  announced the initiation of a multi-center  clinical study for REPEL-CV
involving  several cardiac surgery  centers in Europe.  The Company  anticipates
receiving,  in  mid-2006,  the CE Mark  approval to market  REPEL-CV  for use in
cardiac surgery within the European Union and other international markets.

      The following discussion and analysis of the Company`s financial condition
and  results of  operations  should be read in  conjunction  with its  financial
statements and notes thereto appearing elsewhere herein.

Results of Operations

      The Company had no revenue for the fiscal year ended  December  31,  2005;
for the fiscal year ended  December 31, 2004, the Company had revenue of $23,000
that represented royalties on sales of the Sure-Closure System.  Pursuant to the
terms of the  underlying  agreement,  the  Company's  right to  receive  royalty
payments  associated with Sure Closure System product sales expired with respect
to sales occurring after June 30, 2004.

      The Company incurred  research and development  expenses of $1,524,000 and
$1,382,000 for the fiscal years ended December 31, 2005 and 2004,  respectively.
The increase was  primarily  attributable  to higher costs  associated  with the
REPEL-CV  European clinical study and product liability expense partially offset
by lower US pivotal clinical trial and manufacturing development expenses. It is
anticipated that research and development  expenses will continue to increase as
the Company expands its product development activities.

      General and  administrative  expenses totaled $937,000 for the fiscal year
ended  December 31, 2005 as compared to $1,019,000  for the previous  year.  The
decrease was primarily  attributable to lower stock-based  compensation  expense
partially offset by higher minimum royalty and legal expenses.

      Interest  income  increased to $28,000 for the fiscal year ended  December
31, 2005 from  $13,000 for the prior fiscal  year.  The  increase was  primarily
attributable to higher interest rates.

      The Company  recognized  royalty  income of  $174,000  for the fiscal year
ended December 31, 2004.  This income was  associated  with the write off of the
remaining  balance of deferred  royalty income  associated with the Sure Closure
System upon the June 30, 2004 expiration of the royalty period.

      Interest expense of $6,000 for the fiscal year ended December 31, 2005 was
equal to the amount reported in the prior year.


                                       17
<PAGE>

      The Company  realized  other  income from the reversal of  liabilities  of
$37,000 and $61,000 for the fiscal  years ended  December  31, 2005 and December
31, 2004, respectively. The reversal of liabilities during 2005 and 2004 related
to trade transactions which where due and payable on or before December 31, 1999
and December 31, 1998, respectively.  The reversals were made due to the passage
of time and the Company's  belief that the underlying  claims would be barred by
applicable  statutes of limitation if recovery actions were asserted at the time
of the respective reversals.

      The Company  recorded an income tax benefit of $254,000  during the fiscal
year ended  December  31, 2005 as compared to $295,000 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 decrease compared
to prior year is primarily attributed to an increase in companies  participating
in the program.

      The Company  reported a net loss of  $2,148,000  for the fiscal year ended
December  31, 2005 as compared to a net loss of  $1,841,000  for the prior year.
The  increase  in the  current  period net loss is  attributable  to the factors
described above.

      The Company  reflected  deemed  non-cash  dividends on preferred  stock of
$74,000 for the fiscal year ended  December  31,  2004  resulting  in a net loss
attributable to common  stockholders  of $1,915,000.  With the conversion of the
Series C Convertible  Preferred Stock into common stock in March 2004,  there is
no further recognition of a deemed non-cash dividend.

Liquidity and Capital Resources

      At December 31, 2005 the Company had cash and cash equivalents of $735,000
compared to cash and cash  equivalents  of $1,861,000 at December 31, 2004.  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.

      At December 31, 2005 the Company had a working capital deficit of $57,000.

      Net cash used in operating  activities  was $1,922,000 for the fiscal year
ended December 31, 2005 as compared to $1,504,000 for the prior fiscal year. Net
cash used in operating  activities  for the fiscal year ended December 31, 2005,
was primarily due to a net loss of $2,148,000 reduced by increases of $86,000 in
accounts  payable and $123,000 in accrued  expenses.  Net cash used in operating
activities  for the prior  year was  primarily  due to a net loss of  $1,841,000
reduced by the non-cash effect of $219,000 in stock-based  compensation  expense
and a $289,000 increase in accrued expenses and increased by the non-cash effect
of $197,000 of royalty income.

      Net cash used in  investing  activities  was  $145,000 for the fiscal year
ended  December 31, 2004 for the purchase of production  equipment and leasehold
improvements; there were no similar transactions during 2005.

      Net cash  provided  from  financing  activities  for the fiscal year ended
December 31, 2005 was $796,000 as compared to $2,830,000 for the prior year. Net
cash provided from  financing  activities  for the year ended  December 31, 2005
represented  the proceeds from the exercise of warrants.  Net cash provided from
financing  activities  for the year ended  December  31,  2004  represented  the
proceeds from the exercise of stock options and warrants.

      The balance of cash and cash  equivalents  as of December  31, 2005 is not
sufficient to meet the Company's cash requirements through 2006. In August 2005,
the Company entered into an agency agreement with an investment  banker to raise
up to $5 million  through the issuance of up to 12,500,000  shares of its common
stock at $0.40 per share.  As of February  28,  2006,  the Company has  received
approximately  $3.2  million  that is  held in  escrow  pending  closing  of the
transaction  (NOTE L).  Insufficient  funds have  required the Company to delay,
scale back or eliminate  some or all of its research and  development  programs.
This shortage of funds may also require it to license to third  parties  certain
products or technologies  that the Company would otherwise seek to commercialize
itself.  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.


                                       18
<PAGE>

      At December  31, 2005 the Company  had  employment  agreements  with three
executives that expire in March 2006, May 2006 and September 2006, respectively.
Pursuant  to  these  agreements,   the  Company's   commitment  regarding  early
termination benefits aggregates $402,000 at December 31, 2005.

Item 7. Financial Statements.

      The Index to Financial  Statements  appears on page F-1, the Report of the
Independent  Registered  Public  Accounting  Firm  appears on page F-2,  and the
Financial  Statements and Notes to Financial  Statements  appear on pages F-3 to
F-16.

Item  8.  Changes  in and  Disagreements  With  Accountants  on  Accounting  and
Financial Disclosure.

      None.

Item 8A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

      The chief executive officer who is also the chief financial officer, after
evaluating  the  effectiveness  of  the  Company's   "disclosure   controls  and
procedures"  (as defined in the Securities  Exchange Act of 1934 Rules 13a-15(e)
and 15d-15(e); collectively,  "Disclosure Controls") as of the end of the period
covered by this annual report (the  "Evaluation  Date") has concluded that as of
the  Evaluation  Date,  our  Disclosure   Controls  were  effective  to  provide
reasonable  assurance that  information  required to be disclosed in our reports
filed or  submitted  under  the  Securities  Exchange  Act of 1934 is  recorded,
processed, summarized and reported within the time periods specified by the SEC,
and that  material  information  relating to our  company  and any  consolidated
subsidiaries is made known to management,  including the chief executive officer
and chief financial  officer,  particularly  during the period when our periodic
reports  are  being  prepared  to  allow  timely  decisions  regarding  required
disclosure.

      In connection with the evaluation referred to in the foregoing  paragraph,
we have identified no change in our internal control of financial reporting that
occurred  during  the  quarter  ended  December  31,  2005  that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.

Inherent Limitations on Effectiveness of Controls

      The Company's management,  including the chief executive officer and chief
financial officer,  who are the same person, does not expect that our Disclosure
Controls or our internal control over financial reporting will prevent or detect
all error and all  fraud.  A control  system,  no matter how well  designed  and
operated, can provide only reasonable, not absolute,  assurance that the control
system's objectives will be met. The design of a control system must reflect the
fact that there are resource  constraints,  and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that  misstatements  due to error or fraud  will not  occur or that all  control
issues and instances of fraud,  if any,  within the company have been  detected.
These   inherent   limitations   include  the   realities   that   judgments  in
decision-making  can be faulty and that  breakdowns  can occur because of simple
error or mistake.  Controls can also be  circumvented  by the individual acts of
some persons,  by collusion of two or more people, or by management  override of
the  controls.  The design of any system of controls is based in part on certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving  its stated goals under all  potential
future  conditions.  Projections of any evaluation of controls  effectiveness to
future periods are subject to risks.  Over time,  controls may become inadequate
because of changes in  conditions or  deterioration  in the degree of compliance
with policies or procedures.


                                       19
<PAGE>

                                    PART III

Item 9.  Directors,  Executive  Officers,  Promoters and Control  Persons of the
Registrant; Compliance with Section 16(a) of the Exchange Act.

      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 for the 2006 annual meeting of stockholders.  Certain information
with regard to the  executive  officers of the  Company is  contained  in Item 1
hereof and is incorporated by reference in this Part III.

Item 10. 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 for the 2006 annual meeting of stockholders.

Item 11.  Security  Ownership of Certain  Beneficial  Owners and  Management and
Related Stockholder Matters.

      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 for the 2006 annual meeting of stockholders.

Item 12. 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 for the 2006 annual meeting of stockholders.

Item 13. 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)     Intentionally omitted.

3.1(c)     Amendment to Restated Certificate of Incorporation, dated December
           14, 2000. (9)

3.1(d)     Amendment to Restated Certificate of Incorporation, dated April 22,
           2005*

3.2        By-Laws of Registrant. (1)

3.2(a)     Amendment No. 1 to the By-Laws of Registrant. (10)

10         The Registrant's 2000 Stock Option Plan. (8) (9)

10.2       Form of Non-Qualified Option Agreement granted outside of a Plan. (8)
           (9)

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)


                                       20
<PAGE>

10.9       Form of Non-Qualified Stock Option Agreement. (4) (8)

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

10.16      Amendment No. 1 dated as of February 1994 to the Agreement 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)

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

10.28      Amendment No. 4 dated as of April 24, 2002 to the Agreement between
           the Registrant and Yissum. (12)

10.29      Consulting Agreement between Registrant and Richard L. Franklin MD
           dated April 1, 2001. (8) (13)

10.30      Amendment No. 1 dated May 20, 2003 to the Consulting Agreement
           between Registrant and Richard L. Franklin MD. (8) (13)

10.31      2001 Non-Qualified Stock Option Plan and Stock Option Agreement. (11)

10.32      Series B Subscription Agreement dated March 21, 2002. (11)

10.33      Intentionally omitted.

10.34      Employment Agreement between Registrant and Robert P. Hickey dated
           May 21, 2001. (8) (11)

10.34(a)   Amendment No. 1 dated May 14, 2003, to the Employment Agreement
           between Registrant and Robert P. Hickey. (8) (13)

10.35      Convertible Promissory Note between Registrant and Dimotech, Ltd.
           dated August 6, 2001. (11)

10.36      Convertible Promissory Note between Registrant and Polymer Technology
           Group, Inc. dated February 22, 2002. (11)

10.37      Series C Subscription Agreement dated March March 26, 2003 (including
           exhibits and Supplement dated March 21, 2003). (12)

10.38      Intentionally omitted.

10.39      Employment Agreement between Registrant and Eli Pines Ph.D. dated
           March 1, 2003 (including indemnity letter). (8) (12)

10.40      Assignment and Amendment Agreement dated March 18, 2003, among the
           Registrant, Phairson Medical, Ltd., Swiss Federal Institute of
           Technology and University of Zurich (including underlying development
           contract). (12)

10.42      Contract effective as of December 1, 1998, between Phairson Medical,
           Ltd. and Professor J. A. Hubbell, as amended (including letter
           agreement dated January 14, 2003, assigning same to Registrant). (12)

10.43      Asset Purchase Agreement between Registrant and Phairson Medical,
           Ltd. dated March 18, 2003. (12)

10.44      Certain Information Regarding Equity Compensation Arrangements Not
           Approved by Stockholders. (13)

10.45      Option agreements dated April 23, 2004 and May 24, 2004 in favor of
           Robert P. Hickey. (14)

10.46      Option agreements dated April 23, 2004 and May 24, 2004 in favor of
           Eli Pines PhD. (14)


                                       21
<PAGE>

10.47      Option agreement dated April 22, 2005 in favor of Robert P. Hickey.*

10.48      Option agreement dated April 22, 2005 in favor of Eli Pines PhD.*

23.1       Consent of Eisner LLP. *

31.1       Certification of Principal Executive Officer and Principal Financial
           Officer Pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant
           to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1       Certification of Principal Executive Officer and Principal Financial
           Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
           906 of the Sarbanes-Oxley Act of 2002. *

* Filed herewith.

(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)   Indicates a management contract or compensatory plan or arrangement.

(9)   Incorporated by reference to the Registrant's S-8 filed in January 2000.

(10)  Incorporated by reference to the Registrant's 8-K filed in January 2001.

(11)  Incorporated by reference to the Registrant's report on Form 10-K for the
      year ended December 31, 2001.

(12)  Incorporated by reference to the Registrant's report on Form 10-KSB for
      the year ended December 31, 2002.

(13)  Incorporated by reference to the Registrant's report on Form 10-KSB for
      the year ended December 31, 2003.

(14)  Previously filed.

Item 14. Principal Accountant Fees and Services.

      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 for the 2006 annual meeting of stockholders.


                                       22
<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.


                                            SyntheMed, Inc.
                                            (Registrant)

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


Dated: February 28, 2006

      In accordance  with the Exchange Act, this report has been signed below by
the following  persons on behalf of the  registrant and in the capacities and on
the dates indicated.

        Signatures                      Title                         Date
        ----------                      -----                         ----

/s/ Richard L. Franklin, M.D.   Chairman of the Board          February 28, 2006
-----------------------------
Richard L. Franklin, M.D.

/s/ Robert P. Hickey            Director, President, CEO and   February 28, 2006
-----------------------------   CFO (principal executive,
Robert P. Hickey                financial and accounting
                                officer)

/s/ David G. P. Allan           Director                       February 28, 2006
-----------------------------
David G. P. Allan

/s/ Edward A. Celano            Director                       February 28, 2006
-----------------------------
Edward A. Celano

/s/ Barry R. Frankel            Director                       February 28, 2006
-----------------------------
Barry R. Frankel

/s/ Walter R. Maupay            Director                       February 28, 2006
-----------------------------
Walter R. Maupay


                                       23
<PAGE>



                          INDEX TO FINANCIAL STATEMENTS


                                                                           Page
                                                                          Number

Report of Independent Registered Public Accounting Firm....................  F-2
Balance Sheet..............................................................  F-3
Statements of Operations...................................................  F-4
Statements of Changes in Stockholders' Equity..............................  F-5
Statements of Cash Flows...................................................  F-6
Notes to Financial Statements..............................................  F-7











                                       F-1
<PAGE>

             Report of Independent Registered Public Accounting Firm


Board of Directors and Stockholders
SyntheMed, Inc.


      We have audited the  accompanying  balance sheet of  SyntheMed,  Inc. (the
"Company")  as of December 31, 2005 and the related  statements  of  operations,
changes  in  stockholders'  equity  and cash  flows for each of the years in the
two-year  period ended  December 31, 2005.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

      We conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements  enumerated above present fairly,
in all  material  respects,  the  financial  position of  SyntheMed,  Inc. as of
December 31, 2005, and the results of its operations and its cash flows for each
of the years in the two-year  period ended December 31, 2005, 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 no revenues, has experienced recurring net
losses and has  negative  working  capital and minimal  stockholders'  equity at
December 31, 2005, which raise  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.



Eisner LLP



New York, New York
January 31, 2006, Date of which is
  February 28, 2006 except as to NOTE L

                                      F-2
<PAGE>


                                 SYNTHEMED, INC.

                                  BALANCE SHEET

                      (In thousands, except per share data)


                                                                    December 31,
                                                                        2005
                                                                    ------------
                                     ASSETS

Current assets:
  Cash and cash equivalents......................................    $     735
  Prepaid expenses...............................................           94
                                                                     ---------
         Total current assets....................................          829

Acquired technology, less accumulated amortization...............          157
Machinery and equipment, less accumulated depreciation...........          104
                                                                     ---------
                    TOTAL........................................    $   1,090
                                                                     =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable...............................................    $     359
  Accrued expenses...............................................          487
  Convertible note payable, current portion......................           40
                                                                     ---------
         Total current liabilities...............................          886

Convertible note payable, net of current portion.................           70
                                                                     ---------
         Total liabilities.......................................          956
                                                                     ---------

Commitments and other matters (Notes H and I)

Stockholders' equity:
  Preferred stock, $.01 par value; shares authorized - 5,000;
    issued and outstanding - none
  Common stock, $.001 par value; shares authorized - 100,000;
    issued and outstanding - 66,596..............................           66
  Additional paid-in capital.....................................       44,318
  Accumulated deficit............................................      (44,250)
                                                                     ---------
         Total stockholders' equity                                        134
                                                                     ---------
                    TOTAL........................................    $   1,090
                                                                     =========

                 See accompanying notes to financial statements.

                                       F-3
<PAGE>

                                 SYNTHEMED, INC.

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


                                                       Year Ended December 31,
                                                     ---------------------------
                                                        2004             2005
                                                     ----------       ----------
Revenue:
   Royalty income..................................  $       23
                                                     ----------

Operating expenses:
   Research and development .......................       1,382      $    1,524
   General and administrative .....................       1,019             937
                                                   ------------      ----------
          Operating expenses                              2,401           2,461
                                                   ------------      ----------

Loss from operations...............................      (2,378)         (2,461)

Other income/(expense):
Interest income....................................          13              28
Royalty income.....................................         174
Interest expense...................................          (6)             (6)
Reversal of liabilities............................          61              37
                                                   ------------      ----------


Loss before income tax benefit.....................      (2,136)         (2,402)
Income tax benefit.................................         295             254
                                                   ------------      ----------

Net loss...........................................      (1,841)         (2,148)
Deemed dividend in connection with beneficial
  conversion feature of convertible preferred
  stock............................................         (74)
                                                   ------------      ----------

Net loss attributable to common stockholders.......     $(1,915)        $(2,148)
                                                   ============      ==========

Net loss attributable to common stockholders per
  share - basic and diluted........................   $(0.03)          $(0.03)
                                                      =======          =======

Weighted average shares outstanding - basic
  and diluted......................................   55,798           65,070


                 See accompanying notes to financial statements.

                                       F-4
<PAGE>

                                 SYNTHEMED, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (In thousands)

<TABLE>
<CAPTION>

                                       Preferred            Common         Additional    Unearned
                                   -----------------   -----------------    Paid-in     Stock-Based     Accumulated
                                    Shares   Amount     Shares   Amount     Capital     Compensation      Deficit        Totals
                                   -------- --------   -------- --------   ----------   -------------   -----------     ---------
<S>                                    <C>        <C>    <C>    <C>        <C>          <C>             <C>             <C>
 Balance - January 1, 2004              663       $7     41,483 $     41   $   40,248   $        (17)   $  (40,261)     $     11
    Conversion of Series C
    preferred stock.............       -663       -7      6,634        7
    Options and warrants
    exercised...................                         11,845       12        2,818                                      2,830
    Stock-based compensation....                                                  452                                        452
    Amortization of employee
    stock-based compensation....                                                                  17                          17
    Net loss for the year                                                                                   (1,841)       (1,841)
                                   -------------------------------------   ----------   -------------   -----------     ---------

 Balance December 31, 2004......                         59,962       60       43,518                      (42,102)        1,476
    Exercise of Series C
    warrants....................                          6,634        6          790                                        796
    Options issued to
    consultants.................                                                   10                                         10
    Net loss for the year.......                                                                            (2,148)       (2,148)
                                   -------- --------   -------- --------   ----------   -------------   -----------     ---------



 Balance December 31, 2005......                         66,596 $     66   $   44,318                   $  (44,250)     $    134
                                   ======== ========   ======== ========   ==========   =============   ===========     =========
</TABLE>

                 See accompanying notes to financial statements.

                                       F-5
<PAGE>

                                 SYNTHEMED, INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                                Year Ended December 31,
                                                                                              ---------------------------
                                                                                                 2004             2005
                                                                                              ----------       ----------
<S>                                                                                           <C>              <C>
Cash flows from operating activities:
    Net loss..........................................................................        $   (1,841)      $   (2,148)
    Adjustments to reconcile net loss to net cash used in operating activities:
        Depreciation..................................................................                15               30
        Stock-based compensation......................................................               219               10
        Amortization of acquired technology...........................................                68               68
        Royalty income................................................................              (197)
        Reversal of liabilities.......................................................               (61)             (37)
        Changes in operating assets and liabilities:
           (Increase) in prepaid expenses.............................................                (3)             (54)
           Increase in accounts payable...............................................                 7               86
           Increase in accrued expenses...............................................               289              123
                                                                                              ----------       ----------
                Net cash used in operating activities.................................            (1,504)          (1,922)
                                                                                              ----------       ----------
Cash flows from investing activities:
    Purchase of equipment.............................................................              (145)
                                                                                              ----------
        Net cash used in investing activities.........................................              (145)
                                                                                              ----------
Cash flows from financing activities:
    Proceeds from exercise of options and warrants....................................             2,830              796
                                                                                              ----------       ----------

        Net cash provided by financing activities.....................................             2,830              796
                                                                                              ----------       ----------

Net  increase/(decrease) in cash......................................................             1,181           (1,126)
Cash and cash equivalents at beginning of year........................................               680            1,861
                                                                                              ----------       ----------
Cash and cash equivalents at end of year..............................................        $    1,861       $      735
                                                                                              ==========       ==========

Supplementary cash flow information:
    Interest paid                                                                             $        6       $        6
Non-cash investing and financing activities:
    Conversion of Series C preferred stock into common stock                                           7
</TABLE>

                 See accompanying notes to financial statements.

                                       F-6
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

      SyntheMed,   Inc.  (the  "Company")  is  a  biomaterials  company  engaged
primarily in the development and  commercialization  of  anti-adhesion  and drug
delivery  products.  In May 2005, the Company changed its name from Life Medical
Sciences, Inc. to SyntheMed,  Inc. Since early 2000, products under development,
all of which  are based on the  Company's  licensed  proprietary,  bioresorbable
polymer technology,  are primarily medical devices designed to prevent or reduce
the  formation of adhesions  (scar  tissue)  following a broad range of surgical
procedures.  The Company's product  development efforts are currently focused on
its lead product,  REPEL-CV(TM),  a bioresorbable  adhesion barrier intended for
use in cardiac surgery.  In October 2003, the Company initiated the multi-center
pivotal clinical trial on REPEL-CV.  In January 2005, the Company announced that
a planned interim analysis of patient data from the REPEL-CV trial was completed
by a Data  and  Safety  Monitoring  Board  ("DSMB")  comprised  of  medical  and
biostatistical specialists who are not participating in the trial. Based on data
from over forty patients, the DSMB recommended that the trial proceed as planned
and that no modifications  to the trial protocol were indicated.  In March 2005,
the Company  announced  the  initiation  of a  multi-center  clinical  study for
REPEL-CV involving several cardiac surgery centers in Europe.

      In May 2004, the Company announced the initiation of a product development
program  intended to provide cardiac surgeons with the first ever localized drug
delivery  product  intended  to prevent the onset of atrial  fibrillation  after
open-heart  surgery.  The Company is also conducting  preclinical  studies on an
anti-adhesion  product for use in gynecologic surgery.  This product development
program is based on the Company's proprietary, bioresorbable reverse thermal gel
("RTG") technology.

      In March 2005, the Company received $796,000 upon the exercise of warrants
to purchase  6,634,000  shares of the Company's  common stock. In December 2005,
the Company  received  $254,000  from the sale of certain  New Jersey  state tax
losses.  These funds are being used to fund the REPEL-CV  clinical trial as well
as other product development activities 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 no revenues,  has  experienced  recurring net losses,  has negative  working
capital and has minimal  stockholders' equity at December 31, 2005. As a result,
the Company has limited  resources  available for its continuing  operations and
substantial  doubt  exists  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 generate
cash flows from  operations,  which is dependent on successfully  completing the
development of its proposed products,  obtaining required  regulatory  approvals
and  manufacturing  and selling its proposed  products.  The Company  intends to
pursue additional  equity  financings as well as continued  participation in the
New Jersey Tax Benefit Transfer Program.  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 generate
positive cash flows from 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:

      Royalty income has been based on the quarterly  sales of the  Sure-Closure
System  and any line  extensions  or  embodiments  thereof  through  June  2004.
Royalties were  calculated and credited to the Company  within  forty-five  days
after the last day of each quarter.  The Company recognized such income when the
amounts earned became fixed and  determinable.  Royalties  earned by the Company
were applied to the outstanding  deferred royalty income balance. As provided in
the original  agreement,  the royalty period on sales of the Sure-Closure System
expired in June 2004. (see Note J).

[2]   Cash and cash equivalents:

      The Company  considers all highly  liquid  investments  purchased  with an
original maturity of three months or less to be cash equivalents.


                                      F-7
<PAGE>

                                SYNTHEMED, INC.

                         NOTES TO FINANCIAL STATEMENTS


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

[3]   Depreciation and Amortization:

      Machinery and equipment are recorded at cost and are depreciated using the
straight-line method based upon an estimated useful life of 3-5 years.  Acquired
technology  is amortized on a straight  line basis over its  estimated  economic
life of 5 years.

[4]   Research and development:

      Substantially all research and development  activities are outsourced (see
Note H). Research and development costs representing principally clinical trials
and manufacturing development 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,  such as expected cash flows used
to  determine  recoverability  of  intangible  assets,  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 of  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  Standards  ("SFAS")  No. 123 and SFAS No. 148. The  following  table
illustrates the effect on net loss and net loss per share attributable to common
stockholders  if the fair value based method of SFAS No. 123 had been applied to
all awards (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,
                                                                                      ---------------------------
                                                                                         2004             2005
                                                                                      ----------       ----------
<S>                                                                                   <C>              <C>
Reported net loss attributable to common stockholders                                 $  (1,915)       $  (2,148)

Stock-based employee compensation expense
    included in reported net loss                                                            79

Stock-based employee compensation determined under
    the fair value based method                                                            (557)            (442)
                                                                                      ----------       ----------

Pro forma net loss attributable to common stockholders                                $  (2,393)       $  (2,590)
                                                                                      ==========       ==========

Loss per common share attributable to common stockholders
    (basic and diluted):
        As reported                                                                   $   (0.03)       $   (0.03)
                                                                                      ==========       ==========
        Pro forma                                                                     $   (0.04)       $   (0.04)
                                                                                      ==========       ==========
</TABLE>

                                      F-8
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

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


                                                  Year Ended December 31,
                                                  -----------------------
                                                   2004            2005
                                                   ----            ----
          Dividend yield                             0%              0%
          Expected volatility                      103%             98%
          Risk free interest rate                  2.2%            3.8%
          Expected life                          2.5 years       2.5 years


[8]   Earnings (loss) per share:

      Basic earnings  (loss) per share  attributable  to common  stockholders is
computed by dividing the net income or loss attributable to common  stockholders
by the weighted average number of shares of common stock outstanding during each
period.  Diluted earnings (loss) per share  attributable to common  stockholders
for the years  ended  December  31,  2004 and 2005  excludes  the  effect of the
potential  exercise  or  conversion  of  securities  which  would  result in the
issuance of  incremental  shares of common  stock  because  the effect  would be
anti-dilutive.

      Securities and the related  potential number of common shares not included
in the diluted computation, are as follows:

                                                       December 31,
                                               --------------------------
                                                 2004            2005
                                                 ----            ----

          Convertible promissory notes          110,000         110,000
          Options                            11,179,000      12,081,000
          Warrants                            7,228,000         594,000
                                             ----------      ----------
                                             18,517,000      12,875,000
                                             ==========      ==========

[9]   Impairment of Intangible Assets

      Intangible assets are reviewed for impairment annually and whenever events
or changes in circumstances indicate that the related carrying amount may not be
recoverable over the remaining  useful life. The Company has considered  whether
there has been  impairment  in the  carrying  value of the  acquired  technology
described  in Note C.  Based on the best  information  available  to  management
including estimated future cash flows the Company believes the carrying value of
the asset is recoverable.

[10]  Reclassifications

      Certain  reclassifications  have  been made to the  prior  year  financial
statements to conform to the current year presentation.

[11]  Recently issued accounting pronouncements:

      In December  2004,  the FASB issued FASB  Statement No. 123 (Revised 2004)
"Share-Based  Payment:  an  Amendment of FASB  Statements  No. 123 and 95" ("FAS
123R").  FAS 123R is effective for public  entities that file as small  business
issuers as of the first  interim or annual  reporting  period that begins  after
December 15, 2005.  Therefore,  the Company will adopt it as of January 1, 2006.
FAS  123R  sets  accounting  requirements  for  "share-based"   compensation  to
employees,   requires  companies  to  recognize  in  the  income  statement  the
grant-date  fair  value of stock  options  and other  equity-based  compensation
issued to  employees  and  disallows  the use of the  intrinsic  value method of
accounting for stock compensation. Accordingly, the adoption of SFAS 123R's fair
value  method  could  have a  significant  impact on the  Company's  results  of
operations,  although it will have no impact on the Company's  overall financial
position.  The impact of adoption of SFAS 123R cannot be  predicted at this time
because it will depend on levels of share-based payments granted in the future.

                                      F-9
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

      In May 2005, the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections--a replacement of APB Opinion No. 20 and FASB Statement No. 3 ("SFAS
154"). This Statement replaces APB Opinion No. 20, Accounting Changes,  and FASB
Statement No. 3, Reporting  Accounting Changes in Interim Financial  Statements,
and changes the requirements for the accounting for and reporting of a change in
accounting  principle.  SFAS 154  requires  retrospective  application  to prior
periods  financial  statements  of a voluntary  change in  accounting  principle
unless it is impractical to determine period specific changes. This statement is
effective  for fiscal  periods  beginning  after  December  15,  2005 and is not
expected to have a  significant  impact on the Company's  financial  statements.
(NOTE C) - Acquired Technology:

      In March 2003,  the Company  purchased  assets which  comprise a series of
United States and foreign patent applications as well as scientific and clinical
documentation.  In  connection  with  this  transaction,  the  Company  ascribed
$344,000 of value to this  technology.  For each of the years ended December 31,
2004 and 2005, the Company recorded  amortization of $68,000,  respectively.  At
December 31, 2005, accumulated amortization totaled $187,000.

(NOTE D) - Machinery and Equipment:

     Machinery and equipment consists of the following at December 31:

                                                                    Estimated
                                                        2005       useful life
                                                    -----------   -------------
          Machinery and equipment                   $   145,000      5 years
          Office equipment                                4,000      3 years
                                                    -----------
                                                        149,000
          Less accumulated depreciation                  45,000
                                                    -----------
                                                    $   104,000
                                                    ===========

(NOTE E) - Convertible Promissory Notes:

      In February  2002,  the Company  issued a $70,000 5 year,  5%  convertible
promissory  note  maturing  February  1, 2007 to PTG (see Note I [3]),  which is
convertible  into common  shares at a  conversion  price of $1.00 per share.  In
August 2001, the Company issued a $40,000 5 year,  6.5%  convertible  promissory
note  maturing  August  1, 2006 to  Dimotech,  Ltd.  (See  Note H [2])  which is
convertible into common shares at a conversion price of $1.00 per share.

(NOTE F) - Stockholders' Equity:

[1]   Common stock:

      In  March  2003,  the  Company  completed  the  purchase  of  the  polymer
technology  assets of a private medical  technology  company based in the United
Kingdom,  Phairson  Medical  Limited (and an  affiliated  entity;  collectively,
"Phairson"),  in exchange  for the issuance of  6,896,000  shares of  restricted
common stock of the Company.  The assets  comprise a series of United States and
foreign patent  applications  as well as scientific and clinical  documentation.
The Company also assumed  Phairson's  rights and obligations under a development
agreement  with the Swiss Federal  Institute of Technology and the University of
Zurich, as well as with the principal investigator of the technology development
project,  Professor JA Hubbell. Under these agreements,  the Company is required
to pay royalties of no more than 1.1% of net sales of products incorporating the
technology.  If the  Company  fails  to  sublicense  the  technology  or  pursue
development  efforts involving the technology for a period of two years or more,
the  Company  is  obligated  to  negotiate  a return  of the  technology  to the
university.  Management  believes  that  its  development  efforts  have met the
requirements of the agreement. In connection with this transaction, $344,000 was
recorded as acquired technology which is being amortized over the estimated life
of 5 years. (Note C) In connection with the acquisition,  the Company granted an
option,  exercisable for seven years, to purchase up to 100,000 shares of Common
Stock at $.09 per share to Dr.  Gere S.  diZerega,  who has  served as a medical
consultant to both

                                      F-10
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Stockholders' Equity:  (continued)

[1]   Common Stock: (continued)

companies  and who assisted in  identifying  the  acquisition  opportunity.  Dr.
diZerega  had  previously   served  as  a  director  of  the  Company.   Certain
stockholders of Phairson have participated in previous financings of the Company
and Richard Franklin, the Company's Chairman, is a stockholder in and has served
as CEO of Phairson.

      In March  2003,  the  Company  issued  11,125,000  shares of common  stock
pursuant to the automatic conversion of 1,112,000 shares of Series B convertible
preferred  stock  which  were  issued in March  2002.  Also,  during  June 2003,
6,634,000  shares  were issued as a result of the  exercise  of warrants  issued
during the Series C private  placement.  During  2003,  69,000  shares of common
stock  were  issued as a result of the  exercise  of stock  options  by a former
Director.

      In March  2004,  the  Company  issued  6,634,000  shares of  common  stock
pursuant to the automatic  conversion of 663,000  shares of Series C convertible
preferred stock that were issued in March 2003. In March 2004, 11,833,000 shares
were issued as a result of the exercise of warrants  issued  during the Series B
private  placement.  In June 2004,  12,000 shares were issued as a result of the
exercise of stock options by a former Director.

      In March 2005,  the Company issued  6,634,000  shares of common stock as a
result of the exercise of warrants issued during the Series C private placement.

      In November 2005, the Company's  Board of Directors  approved the increase
in the number of  authorized  shares  from 105  million to 155  million  shares,
consisting of (i) one hundred and fifty million  (150,000,000)  shares of Common
Stock,  par value  $.001  per  share  ("Common  Stock"),  and (ii) five  million
(5,000,000)  shares of  Preferred  Stock,  par value $.01 per share  ("Preferred
Stock"), subject to stockholder approval at the Company's 2006 annual meeting.

[2]   Preferred stock:

      On April 1, 2003,  the  Company  completed  a $725,000  private  placement
("Series C  Financing")  with a consortium of European  investors.  The Series C
Financing  involved the issuance of 604,000  Units at $1.20 per Unit plus 59,400
broker Units. Each Unit consists of one share of Series C Convertible  Preferred
Stock ("Series C Preferred Stock")  convertible into ten shares of Common Stock;
one warrant  entitling  the holder to purchase,  until June 30, 2003,  up to ten
shares of Common Stock at $0.12 per share;  and one two-year  warrant  entitling
the holder to purchase up to ten shares of Common Stock at $0.12 per share.  The
Series C Preferred Stock automatically converted into common shares on the first
anniversary of the initial  closing.  The broker also received 59,400  four-year
warrants  each  entitling the holder to purchase up to 10 shares of Common Stock
at $0.12 per share.

      The Company  allocated the proceeds  between the Series C Preferred  Stock
($293,000) and the  detachable  warrants based on the relative fair values using
the following  assumptions:  dividend yield of 0%;  expected  volatility of 99 -
104%;  risk free interest  rate of 5%; and expected life of 2.5 years.  Prior to
the conversion of the Preferred Stock,  the Company  reflected a deemed dividend
for the beneficial conversion feature of the Series C Preferred Stock, which was
limited to the  proceeds  allocated  to the Series C Preferred  Stock,  over the
one-year period through automatic conversion.  Accordingly, $219,000 and $74,000
was charged to the net loss  attributable  to common  stockholders  for the year
ended December 31, 2003 and 2004, respectively.

[3]   Warrants:

      As of December 31, 2005, there were warrants outstanding to purchase up to
594,000 shares of the Company's  common stock at $0.12 per share which expire on
March 26, 2007.

[4]   Options:

      The Company may issue  options to purchase up to an aggregate of 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").  Only  non-qualified  stock
options to purchase shares may be granted under the

                                      F-11
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Stockholders' Equity:  (continued)

[4]   Options:  (continued)

2000 Plan and the 2001 Plan to employees and directors of the Company or agents,
medical and scientific  advisors,  or consultants to the Company. In the case of
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. Options vest over a period not greater than five years, and expire no
later than ten years from the date of grant.

      At December 31, 2005,  options to purchase  777,000 shares of common stock
were  outstanding  pursuant to the 2000 Plan and  options to purchase  9,727,000
shares of common stock were outstanding  pursuant to the 2001 Plan. In addition,
options to purchase 1,577,000 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, 2005, there were 341,000 options available for grant under
these plans.  Operating expenses include the following charges relating to stock
options:

                                            Year Ended December 31,
                                           --------------------------
                                             2004             2005
                                           ---------        ---------
   Employees/Director                      $  79,000        $      --
   Consulting fees                           140,000           10,000
                                           ---------        ---------
                                           $ 219,000        $  10,000
                                           =========        =========

      On April 23, 2004, the  compensation  committee  modified  certain options
previously  granted to a former  director.  The Company  extended the expiration
date of 125,000  options granted under the 2001 Plan from one year after date of
separation  to October 12, 2007.  The Company  extended the  expiration  date of
100,000  options  granted  outside  of the  plan  from  90  days  after  date of
separation  to October 12, 2007.  In connection  with these  modifications,  the
Company  recorded a fair value  charge of  $62,000.  In  addition,  the  Company
granted  50,000  options with an exercise price equal to the market price on the
date of the grant to the former director which vested  immediately and expire on
April 23, 2011.

      A summary of the status of the Company's  stock options as of December 31,
2004 and 2005,  and changes  during the years ended on those dates is  presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                      2004                            2005
                                           ---------------------------      -------------------------
                                                      Weighted-Average                Weighted-Average
                                           Shares      Exercise Price       Shares    Exercise Price
                                           ------     ----------------      ------    ----------------
<S>                                         <C>             <C>             <C>            <C>
   Outstanding at beginning of year         9,574           $0.50           11,179         $0.40
   Granted                                  2,035            0.50            1,535          0.36
   Exercised                                  (12)           0.20               --
   Forfeited/Expired                         (418)           2.22             (633)         2.14
   Outstanding at end of year              11,179            0.43           12,081          0.34
   Options exercisable at year-end         10,119            0.40           10,868          0.30

   Weighted-average grant date fair
   value of options granted during the
   year                                                      0.31                           0.30
</TABLE>

      Included in the preceding table are 485,000 and 605,000 options granted to
non-employee  directors  in 2004 and 2005,  respectively.  The  weighted-average
grant date fair value of such  options was $0.43 and $0.36,  respectively.  Also
included in the preceding table are 100,000 options granted to  non-employees in
2005. The weighted average grant date fair value of such options was $0.36 and a
stock-based compensation charge of $10,000 was recorded.

                                      F-12
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Stockholders' Equity:  (continued)

[4]   Options:  (continued)

      Options to purchase 5,200,000 shares of common stock,  including 2,200,000
to officers and 3,000,000 to a director,  pursuant to the 2001 Plan were granted
at the closing of the Series B  convertible  preferred  stock  issuance in March
2002.  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.
At the  closing of the Series B  Offering,  the  market  price of the  Company's
common stock was $0.38.  The Company recorded  $157,000 of compensation  expense
attributable to these options in 2004.

      The following table summarizes  information for stock options  outstanding
at December 31, 2005 (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 - 0.12           5,878               6 years                $0.12              5,878             $0.12
  0.14 - 0.81           5,321               6 years                 0.38              4,218              0.36
  1.00 - 2.00             826               1 year                  1.23                716              1.12
  4.00 - 4.75              56               1 year                  4.03                 56              4.03
                       ------               -------                -----             ------             -----
                       12,081               4 years                $0.33             10,868             $0.30
</TABLE>

      In November 2005, the Company's Board of Directors approved the 2006 stock
option plan,  authorizing the issuance of up to an aggregate of 5,000,000 shares
of Common  Stock.  The 2006 stock option plan  provides for the issuance of both
non-qualified  and incentive stock options.  This plan is subject to stockholder
approval at the Company's 2006 annual meeting.

(NOTE G) - Income Taxes:

      At December 31, 2005,  the Company has  approximately  $41,000,000  of net
operating  loss  carryforwards  to offset  future  federal  taxable  income  and
approximately  $790,000 of research  and  development  tax credit  carryforwards
available  to offset  future  federal  income tax,  subject to  limitations  for
alternative minimum tax. The ability of the Company to utilize its net operating
losses and research and development tax credit carryforwards in future years may
be limited in  accordance  with the  provisions  of Section 382 of the  Internal
Revenue Code.

The  net operating  loss  and  research and  development  credit  carryforwarwds
expire as follows:

                                                                Research
                                                            and Development
       Year                    Net Operating Loss              Tax Credit
       ----                    ------------------              ----------
       2006                    $         803,000
       2007                            1,519,000            $       69,000
       2008                            4,044,000                    31,000
       2009                            3,376,000                    11,000
   2010 - 2025                        31,258,000                   679,000
                               -----------------            --------------
                               $      41,000,000            $      790,000
                               =================            ==============

                                      F-13
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE G) - Income Taxes: (continued)

      The  Company  has   participated  in  the  Tax  Benefit  Transfer  Program
administered by the State of New Jersey under which $3,677,000 and $3,175,000 in
eligible  loss  carryforwards,  covering  the tax year  1998,  were sold to PSEG
Services Corporation in exchange for cash payments of approximately $295,000 and
$254,000  in 2004  and  2005,  respectively.  The  Company  anticipates  similar
transactions  during 2006 and beyond,  contingent  upon approvals from the State
Department of Taxation. At December 31, 2005, the Company has net operating loss
carryforwards  for  New  Jersey  State  income  tax  purposes  of  approximately
$9,691,000 which expire through 2012.

      The deferred federal tax asset,  which amounted to $15,868,000 at December
31, 2005 has 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 $48,000 in 2004 and increased by
$1,368,000 in 2005.

      The income tax  benefit  of  $295,000  and  $254,000  for the years  ended
December  31,  2004 and 2005  reflect  the  Company's  participation  in the Tax
Benefit Transfer Program described above.

      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,
                                                         ---------------------------------
                                                              2004              2005
                                                         --------------    ---------------
<S>                                                      <C>               <C>
   Income tax benefit at the federal statutory rate      $   (726,000)     $   (816,000)
   State and local income taxes, net of effect on
   federal taxes                                             (128,000)         (144,000)
   Increase in valuation allowance                            817,000         1,368,000
   Sale of state net operating loss carryforwards            (295,000)         (254,000)
   Reduction in deferred tax asset from transfer of
   state net operating loss carryforwards                     331,000           286,000
   NJ Net Operating Loss                                                       (644,000)
   Benefit of research and development credit                                   (57,000)
   Other                                                     (294,000)            7,000
                                                         ------------      ------------
                                                         $   (295,000)     $   (254,000)
                                                         ============      ============
</TABLE>

The deferred tax asset at December 31 consists of the following:

<TABLE>
<CAPTION>
                                                              2004             2005
                                                         --------------    ------------
<S>                                                      <C>               <C>
   Net operating loss carryforward                       $   13,231,000    $ 14,519,000
   Research and development credit carryforward                 733,000         790,000
   Other                                                        536,000         560,000
                                                         --------------    ------------
                                                             14,500,000      15,868,000
   Valuation allowance                                      (14,500,000)    (15,868,000)
                                                         --------------    ------------
                                                         $            0    $          0
                                                         ==============    ============
</TABLE>

(NOTE H) - Research and License Agreements:

[1]   Yissum agreement:

      During  June  1991,  the  Company  entered  into a  research  and  license
agreement (the "Agreement") with Yissum Research and Development  Company of the
Hebrew University of Jerusalem  ("Yissum"),  which was amended in February 1994,
as of January 1996,  as of October 1996 and as of April 2002,  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,

                                      F-14
<PAGE>

(NOTE H) - Research and License Agreements:  (continued)

[1]   Yissum agreement: (continued)

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.

      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 later 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,  and the 2002 amendment  gives the Company  similar  options through
2007 for an annual  payment,  in 2005,  of  $50,000  and,  in 2006 and 2007,  of
$100,000.  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. In addition,  in the event of a material breach of the
Agreement by the Company,  all patents and patent applications  derived from the
research shall revert 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 assigned to the Company its worldwide rights to the patents
and  know-how  to  develop,  manufacture  and market  products  relating to this
technology.  In 2000,  this  agreement  was  terminated  and all rights  therein
reverted  back to  Dimotech.  In 2001,  the Company  reached a  settlement  with
Dimotech  with respect to past due royalties  and accrued  interest  aggregating
$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 recorded
$25,000 as accrued expenses, which was converted into 21,000 Series B Units upon
the closing of the Series B Offering in 2002 (Note E).  Dimotech  forgave $8,000
in connection with the settlement.

(NOTE I) - Commitments and Other Matters:

[1]   Employment agreement:

      At December 31, 2005,  the Company has  employment  agreements  with three
executives which expire in March 2006, May 2006 and September 2006.  Pursuant to
these agreements,  the Company's commitment regarding early termination benefits
aggregates $402,000 at December 31, 2005.

[2]   Supplier concentration:

      Polymer  Technology  Group,  Inc.  ("PTG") has been the Company's  primary
supplier and is in a position to produce its  proposed  products for testing and
commercial  purposes.  However,  the Company is developing  alternate sources of
supply for its current  product under  development.  For the year ended December
31, 2005 and 2004, the Company paid $5,000 and $132,000, respectively, to PTG in
connection with such services.

[3]   Reversal of liabilities:

      During 2005 and 2004,  the  Company  reversed  liabilities  of $37,000 and
$61,000,  respectively,  primarily  relating to trade  transactions  with former
vendors.  The underlying  transactions  occurred during or before 1999 and 1998,
respectively,  and there has been  little or no  communication  with the parties
regarding these transactions since that time. Accordingly,  the Company believes
that any claim  for these  amounts  at this time  would be barred by  applicable
statutes of limitations.


                                      F-15
<PAGE>

                                 SYNTHEMED, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE J) - Sure-Closure System Sale:

      In July 1994,  the  Company  sold or assigned  to MedChem  Products,  Inc.
("MedChem")  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, 2003 had been reduced by $470,000 of royalties
earned. 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.  Upon  expiration of the royalty period on June 30, 2004,  pursuant to the
agreement,  the $174,000  remaining  balance of the deferred  royalty income was
recorded in income. (See NOTE B [1])

(NOTE K) - Related Parties:

      In 2004, the Company paid $75,000 in business  management  consulting fees
to Richard L. Franklin, MD, the Chairman of the Board of Directors. No such fees
were paid in 2005.

      See NOTE F [1] with respect to Company's transaction with Phairson Ltd., a
company in which Dr. Franklin is a stockholder and former CEO.

      The Company's  limited  activities are being  conducted at the premises of
the Company's Chief Executive Officer on a rent-free basis.

(NOTE L) - Subsequent Event:

      In August  2005,  the Company  entered  into an agency  agreement  with an
investment  banker  to raise up to $5  million  through  the  issuance  of up to
12,500,000  shares of its common  stock at $0.40 per share.  As of February  28,
2006, the Company has received approximately $3.2 million that is held in escrow
pending closing of the transaction.



                                      F-16