<PAGE>

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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, 2002

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934
     For the transition period             to


                         COMMISSION FILE NUMBER: 0-20580
                           LIFE MEDICAL SCIENCES, INC.
             (Exact name of registrant as specified in its charter)

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


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

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

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

                                      NONE
                                      ----
                              (Title of each class)

           Securities registered pursuant to Section 12(g) of the Act:
                     COMMON STOCK--PAR VALUE $.001 PER SHARE

                                (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.  [  ]

     The aggregate market value of the common equity held by  non-affiliates  of
the registrant as of March 27, 2003 was approximately $12.1 million.

     As of March 27, 2003,  34,804,877 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
2003 Annual Meeting of Stockholders  are incorporated by reference into Part III
of this Form 10-KSB.

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                                INTRODUCTORY NOTE


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

     Life Medical  Sciences,  Inc.  (the  "Company") is a  biomaterials  company
engaged  in  the   development   and   commercialization   of   innovative   and
cost-effective  medical  products for therapeutic  applications.  Products under
development,  all of which  are  based on the  Company's  licensed  proprietary,
bioresorbable  polymer  technology,  are medical devices  designed to prevent or
reduce the  formation  of  adhesions  (scar  tissue)  following a broad range of
surgical  procedures.  The Company's product  development  efforts are currently
focused on its lead product,  REPEL-CV(TM), a bioresorbable adhesion barrier. In
February 2002, the Company initiated the feasibility clinical trial on REPEL-CV.
Patient  enrollment  in this  trial  was  completed  in  September  2002 that is
expected to allow for the  completion of the trial and submission of the results
to the FDA  during  the  second  quarter of 2003.  In March  2002,  the  Company
completed a preferred  stock/warrant offering resulting in aggregate proceeds of
$1.2 million.  The Company  raised an additional  $222,000 in December 2002 from
the  sale of  certain  New  Jersey  state  tax  losses.  The  proceeds  of these
financings,  together  with funds raised in a subsequent  financing  referred to
under "Recent  Developments"  below, are intended 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.

Recent Developments

     Phairson Acquisition
     --------------------

     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.
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 pursue  development  efforts  involving the
technology for an extended period of time, the Company is obligated to negotiate
a return  of the  technology  to the  university.  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 enhances 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 the Series C Financing as
well as prior financings of the Company, and Richard Franklin, a director of the
Company, is a stockholder and serves 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.

     Series C Preferred Financing
     ----------------------------

     During the first quarter of 2003, the Company commenced a private placement
of up to 604,000 units (including a 10%  over-allotment  option),  consisting of
convertible preferred stock and warrants,  for an aggregate offering price of up
to $725,000, or $1.20 per unit (the "Series C Financing"). As of March 27, 2003,
571,600 units were sold  equivalent to gross proceeds of $686,000.  See Part II.
Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters.


                                       2
<PAGE>

     Hiring of Chief Scientific Officer
     ----------------------------------

     Effective  March 1, 2003,  the Company hired Dr. Eli Pines to serve as Vice
President of Research and Chief  Scientific  Officer.  Dr. Pines had  previously
served  in that  capacity  for  five  years  until  July  2000,  after  which he
maintained a consulting  relationship with the Company. The Company entered into
a employment  agreement  with Dr. Pines,  pursuant to which Dr. Pines  currently
receives  an  annual  base  salary  of  $180,000   subject  to  adjustments  for
cost-of-living  increases and other  increases as  determined by the Board.  The
term of Dr.  Pines'  employment  agreement is for a period of three years and is
automatically  renewed on an annual basis  absent  three  months  prior  written
notice.   The  Company  also  extended  the   provisions  of  Dr.  Pines'  prior
indemnification agreement to cover the present employment as well.

Certain Historical Activities

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

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

     The Company is a Delaware  corporation  which was  organized in August 1990
under the name of BioMedical  Polymers  International,  Ltd. The Company changed
its name to Life Medical Sciences, Inc. in June 1992. In April 2002, the Company
increased  the number of  authorized  shares of Common Stock from  43,750,000 to
100,000,000.

Post-Operative Adhesions

     Adhesions are fibrous  structures  that connect  tissues or organ  surfaces
that are not normally joined.  They are an undesirable side effect of the body's
normal  healing  process  following  damage  to  tissue.   Adhesions  can  cause
significant complications such as bowel obstruction following abdominal surgery,
infertility  following  gynecological  surgery,   serious  complications  during
secondary  cardiovascular surgical procedures,  restricted limb motion following
orthopedic  surgery,  and pain following any surgery.  Moreover,  adhesions that
form as a result of surgery can  increase the  complexity,  duration and risk of
subsequent  surgery.  According  to  industry  sources,  in the  United  States,
surgeons perform an estimated  440,000 abdominal  operations  annually to remove
adhesions,  and the  annual  cost in the United  States for the  removal of such
adhesions is approximately $1.2 billion in inpatient treatment charges.

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

     Since it is not possible to predict which  patients  will develop  adhesion
related  complications,  the Company  believes that most  surgeries will benefit
from routine use of its adhesion prevention products.  The Company believes that
current  products for the  prevention  or reduction of adhesions  are limited by
various shortcomings including:  (i) undesirable handling characteristics in the
surgical  environment,  (ii) diminished efficacy in the presence of blood, (iii)
inability to be used in laproscopic procedures, and (iv) failure to be absorbed.
The Company  believes that its products  under  development  may not suffer from
some if not all of these  shortcomings  and as a result may become the preferred
method of treatment for the  prevention or reduction of adhesions.  In addition,


                                       3
<PAGE>


some  resorbable  polymers  may form  particles  or  breakdown  products as they
degrade which could lead to untoward  biological  effects or may actually  cause
adhesions.  The Company  believes  that its products  will provide an additional
clinical  benefit in that they have been  shown to  uniformly  dissolve  without
forming particles or breakdown products, which could lead to untoward biological
effects.

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

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

* 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.
REPEL-CV was evaluated in a series of pre-clinical  studies which were conducted
at the University of Southern  California and at New York  Presbyterian  Medical
Center.  Throughout these studies, REPEL-CV was rated as safe and well-tolerated
as well as virtually preventing the formation of adhesions to the surface of the
heart.

     In  December  2001,  the  Company   received  FDA  approval  to  conduct  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 is designed to provide
initial  information on the  effectiveness of REPEL-CV in reducing the formation
of post-operative adhesions in open heart surgical procedures as well as provide
additional  safety  data.  It is  anticipated  that the trial will be  completed
during  the second  quarter of 2003 at which time the  results of this trial are
expected  to be  submitted  to the FDA as a basis for gaining  approval  for the
initiation of a  multi-center  pivotal  clinical  trial.  In February  2000, the
Company  concluded a  multi-center,  randomized,  controlled U.S. pilot clinical
trial for  REPEL-CV in open heart  surgical  procedures.  In the pilot  clinical
trial,  REPEL-CV was rated safe and well  tolerated when compared to the control
of standard surgical technique.

REPEL

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


                                       4
<PAGE>


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

RESOLVE

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

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

RELIEVE

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

DEVELOPMENT OPPORTUNITIES

     The material  capabilities  and  intellectual  property  portfolio  for the
Company's  proprietary  bioresorbable  polymer technology  continues to broaden.
This provides  opportunities to both enhance the performance  characteristics of
the Company's adhesion  prevention products as well as to pursue the application
of these  unique  materials  in other  medical  products.  The  Company  has had
discussions with medical device and pharmaceutical companies on the use of these
materials in drug and cell delivery,  implantable  medical  device  coatings and
other bioresorbable polymer product opportunities.

Collaborative Agreements

   Polymer Technology

     The Company's polymer  technology was developed at the Hebrew University of
Jerusalem.   The  Company   entered  into  an  agreement  with  Yissum  Research
Development Company of the Hebrew University of Jerusalem  ("Yissum") dated June
14, 1991,  as amended in February  1994,  as of January 1996, as of October 1996
and as of April 2002.  (the "Yissum  Agreement"),  pursuant to which the Company
agreed to finance research and development conducted at the Hebrew University of
Jerusalem in the field of biomedical polymers. Pursuant to the Yissum Agreement,
Yissum has  assigned  to the  Company its  worldwide  rights to patents,  patent
applications and know-how to develop,  manufacture and market products  relating
to this technology.  Under the terms of the Yissum Agreement,  all rights in the
research or products  developed  are owned solely by the Company,  except as set
forth  below.  The  Company  is  permitted  to  grant  licenses  of its  polymer
technology  upon  certain  terms  and  conditions.  The  Company  has  agreed to
favorably  consider  manufacturing in Israel products resulting from its polymer
technology and to explore opportunities to do so.



                                       5
<PAGE>

     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,  subject to certain  exceptions  set forth below,  to terminate  the
Yissum  Agreement and/or enter into contracts with others in order to grant them
a license for the  development,  manufacture  and marketing of a product and the
other rights  detailed in the Yissum  Agreement if, among other things,  (i) the
Company does not advise Yissum of the first commercial sale by December 31, 2001
or reach total net sales of products or achieve income of $1,000,000 by December
31, 2002; (ii) the Company stops manufacturing  and/or marketing the product for
a period of more  than 12  months;  or (iii) the  Company  breaches  the  Yissum
Agreement,  a receiver or liquidator is appointed for the Company or the Company
passes a resolution  for voluntary  winding up, or a winding up  application  is
made against the Company,  an attachment is made over a substantial  part of the
Company's  assets, or execution  proceedings are taken against the Company,  and
the same is not remedied or set aside  within the time periods  specified in the
Yissum  Agreement.  Notwithstanding  the  foregoing:  (i) in the event  that the
Company  does not advise  Yissum of the first  commercial  sale by December  31,
2001,  Yissum shall not  terminate  the Yissum  Agreement  during the year ended
December  31,  2002 so long as the  Company  pays to  Yissum a  minimum  royalty
payment  of  $50,000;  (ii) in the event  that the  Company  does not (a) advise
Yissum of the first  commercial sale by December 31, 2002 or (b) reach total net
sales of products or achieve  income of $1,000,000 by December 31, 2002,  Yissum
shall not terminate the Yissum Agreement during the year ended December 31, 2003
so long as the  Company  pays to Yissum a minimum  royalty  payment of  $50,000;
(iii) in the event that the  Company  does not reach total net sales of products
or achieve income of $1,000,000 by December 31, 2003, Yissum shall not terminate
the Yissum  Agreement  during the year ended  December  31,  2004 so long as the
Company pays to Yissum a minimum royalty  payment of $50,000;  (iv) in the event
that the Company does not reach total net sales of products or achieve income of
$1,000,000 by December 31, 2004, Yissum shall not terminate the Yissum Agreement
during the year ended  December 31, 2005 so long as the Company pays to Yissum a
minimum  annual  royalty  payment of $50,000;  (v) in the event that the Company
does not reach total net sales of products or achieve  income of  $1,000,000  by
December 31, 2005,  Yissum shall not terminate the Yissum  Agreement  during the
year ended  December  31, 2006 so long as the  Company  pays to Yissum a minimum
annual  royalty  payment of $100,000 and (vi) in the event that the Company does
not  reach  total net sales of  products  or  achieve  income of  $1,000,000  by
December 31, 2006,  Yissum shall not terminate the Yissum  Agreement  during the
year ended  December  31, 2007 so long as the  Company  pays to Yissum a minimum
annual royalty payment of $100,000. 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 and December 31, 2002. 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.

     Clinicel(TM)

     The CLINICEL  product line was developed at The Bruce Rappaport  Faculty of
Medicine  at  Technion-Israel  Institute  of  Technology  in Haifa,  Israel (the
"Rappaport  Faculty").  In July 1995, the Company entered into an agreement with
Dimotech  Ltd., a subsidiary of Technion R&D  Foundation  Ltd.,  (the  "Dimotech
Agreement")  pursuant to which the Company  agreed to finance the  research  and
development  conducted  by  Dimotech  with regard to  CLINICEL.  Pursuant to the
Dimotech Agreement, Dimotech had assigned to the Company the worldwide rights to
its patent  applications,  any patents  which may issue and know-how to develop,
manufacture  and market  products  relating to CLINICEL.  Under the terms of the
Dimotech Agreement,  all rights in the research or products developed were owned
solely by the  Company.  On  February  29,  2000,  the  Dimotech  Agreement  was
terminated  and all rights  therein  which  accrued to the  Company  reverted to
Dimotech.

   Sure-Closure System(TM)

     The  Sure-Closure  System was  invented at the Rambam  Medical  Center,  an
affiliate of  Technion-Israel  Institute of  Technology  in Haifa,  Israel.  The
Company  entered  into an  agreement  with  Technion  dated  June 28,  1992 (the
"Skin-Stretching Agreement"), pursuant to which Technion assigned to the Company
its  worldwide  rights to its  patents,  patent  applications  and  know-how  to
develop,  manufacture and market products  relating to the  Sure-Closure  System
technology,  and Technion assigned


                                       6
<PAGE>

the  Skin-Stretching  Agreement  to  Dimotech.  On July 29,  1994,  the  Company
completed  the sale of its  Sure-Closure  System to  MedChem.  The  assets  sold
included substantially all of the Company's assets,  properties,  claims, rights
and  interests  related  to  the  Sure-Closure   System,   other  than  accounts
receivable.  The  transaction  provided for (i) the payment to the Company of $4
million;   (ii)  the  assumption  of  certain  liabilities,   in  an  amount  of
approximately  $644,000  which was recorded as deferred  royalty income and will
continue  to be reduced by a 10%  royalty on net sales of all current and future
Sure-Closure System products to be paid to the Company through June 30, 2004. In
July 1994, in connection with the sale of the Sure-Closure System,  Technion and
Dimotech  agreed to the  assignment  of all  rights  and  duties  under the Skin
Stretching  Agreement,  to MedChem.  In October 1997 the Sure-Closure System was
acquired by the Zimmer Inc., a subsidiary of Bristol-Myers Squibb.

Government Regulation

   FDA and Other Regulations

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

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

   Devices

     The FDA categorizes devices into three regulatory  classifications  subject
to varying degrees of regulatory  control.  In general,  Class I devices require
compliance with labeling and record keeping regulations, GMPs, 510(k) pre-market
notification, and are subject to other general controls. Class II devices may be
subject to additional  regulatory controls,  including performance standards and
other special controls,  such as guidelines and postmarket  surveillance.  Class
III devices,  which are typically invasive or life-sustaining  products,  or new
products never before  marketed,  require  clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require  clinical  testing of Class I and Class II devices.
Products  utilizing the Company's polymer technology are likely to be classified
as Class III devices,  requiring a PreMarket Approval ("PMA") application review
process prior to commercial distribution in the United States.

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



                                       7
<PAGE>

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

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

   Third Party Reimbursement

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

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

Patents and Proprietary Rights

     In connection with the polymer technology,  the Company currently holds six
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 US patent claims novel  bioresorbable  polymeric  compositions based on AB
polyester  diblocks and  triblocks.  The sixth US patent claims novel  polymeric
compositions  with  reverse  thermal  gel  properties.  The six US  patents  are
scheduled to expire on various  dates from 2008 through  2020.  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 InterceedTM,  a product of Johnson &
Johnson,  SeprafilmTM, a product of Genzyme Biosurgery,  Intergel(TM), a product
of LifeCore Biomedical, Inc. and marketed by Johnson & Johnson, and GoretexTM, a
product of WL Gore. Several other companies including Angiotech Pharmaceuticals,
Inc., Anika  Therapeutics,  Inc.,  Alliance  Pharmaceuticals,  Corp.,  Confluent
Surgical Inc. and Fziomed, Inc. either are or may be pursuing the development of
products  for  the  prevention  of  adhesions.   The  anti-adhesion   market  is
characterized  by a limited  number of  products  currently  on the market  with
limited  (as a  percent  of  total  surgical  procedures  using  such  products)
penetration.  The Company's products are in the developmental  stage in a market
where clinical  efficacy and, to a lesser extent,  strength of existing  product
lines are the principal bases of competition.

                                       8
<PAGE>

Manufacturing

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

     As of the date of this  report,  the Company  and its primary  manufacturer
have completed various  manufacturing  pilot batches and scale-up studies at its
primary contract  manufacturing  site. The Company has recently  reinitiated the
production of REPEL-CV  products for use in clinical trials at this manufacturer
and intends to continue this  manufacturing  development and optimize,  validate
and utilize the process,  equipment and manufacturer to produce further clinical
and commercial sale products at this site.

Marketing and Sales

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

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

Product Liability and Insurance

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

Human Resources

     As of March,  2003, the Company employed two 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:

<TABLE>
<CAPTION>
                    Name               Age          Positions with the Company
                    ----               ---          --------------------------
<S>                                     <C>  <C>
       Robert P. Hickey...............  57   Chairman, President, CEO & CFO
       Eli Pines, Ph.D................  57   Vice President and Chief Scientific Officer
</TABLE>


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

     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


                                       9
<PAGE>

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

     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:

<TABLE>
<CAPTION>
<S>                                         <C>
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  Assistant  Professor  of  Surgery,  Division of
                                             Pediatric  Cardiothoracic  Surgery,  Children's  Hospital at The Ohio State
                                             University Medical Center. His research interests include  hypoplastic left
                                             heart  syndrome,  Marfan's  disease  and  cryoablation  in Fontan  revision
                                             procedures.
</TABLE>


                                       10
<PAGE>


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.

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 Company's cash balance as of December 31, 2002,  will not be sufficient
to meet its  cash  requirements  through  2003;  however,  the  addition  of the
proceeds from the Series C Financing should provide  sufficient cash to fund the
current  level of  operations  through  2003.  Should the  Company  receive  FDA
approval to initiate the pivotal  clinical  trial on REPEL-CV,  additional  cash
will be  required to fund this  program.  As a result of the  Company's  limited
capital  resources,  the Company's  auditors have indicated in their report that
there is  substantial  doubt about the Company's  ability to continue as a going
concern.  The Company will be required to raise substantial  additional funds to
fund  existing   operations,   continue  to  conduct   necessary   research  and
development,  preclinical  studies and clinical  trials,  to  commercialize  its
proposed  products,  and to fund the growth  that is expected to occur if any of
its proposed  products are approved for  marketing.  The Company would seek such
additional funding through  collaborative  arrangements with strategic partners,
licensing  arrangements  for certain of its proposed  products,  and  additional
public or private financings, including equity financings. Any additional equity
financings may be dilutive to stockholders.  There can be no assurance that such
arrangements or financings will be available as needed or on terms acceptable to
the Company.  Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and development programs, or require it to
license to third parties certain products or technologies that the Company would
otherwise seek to commercialize itself.

Limited Operating History; History of Losses

     The  Company  has a  limited  history  of  operations  that,  to date,  has
consisted primarily of research, development and testing of its technologies and
the  commercialization  of CLINICEL(TM)  and the Sure-Closure  System.  With the
exception  of the  third  quarter  of  1994,  when  the  gain on the sale of the
Sure-Closure  System was  realized,  and the first  quarter of 1999,  when


                                       11
<PAGE>

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 $520,000,  $728,000 and $1,048,000 for the years ended
December 31, 2000, 2001and 2002, respectively. At December 31, 2002, the Company
had an accumulated  deficit of $38,684,000  which has increased since that date.
The Company  continues to expend  financial and other resources on (i) research,
development  and  testing  of  its  polymer  technology  and  proposed  products
utilizing this  technology  and (ii) general and  administrative  expenses.  The
Company  expects to incur  additional  losses as its research,  development  and
preclinical  studies  and  clinical  trials  continue to expand.  The  Company's
ability to achieve a profitable level of operations is dependent on successfully
completing  the  development  of  its  proposed  products,   obtaining  required
regulatory  approvals,  and  manufacturing  and selling its  proposed  products.
Accordingly,  the  extent of future  losses  and the time  required  to  achieve
profitability, if ever, is uncertain. There can be no assurance that the Company
will achieve or sustain a profitable level of operations.

No Assurance of Regulatory Approvals; Potential Delays

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

     Manufacturers  of medical  devices are  required to obtain FDA  approval of
their manufacturing  facilities and processes, to adhere to applicable standards
for  manufacturing  practices  and to  engage  in  extensive  recordkeeping  and
reporting.  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.

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 six  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,


                                       12
<PAGE>

disputes may arise as to the proprietary  rights to such information,  which may
not be resolved in favor of the Company.

Dependence on Reimbursement

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

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

Uncertain Market Acceptance of Proposed Products

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

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


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

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

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

Competition and Technological Obsolescence

     The Company is engaged in rapidly evolving and highly  competitive  fields.
Competition  from  biotechnology   companies,   medical  device   manufacturers,
pharmaceutical and chemical companies and other competitors is intense.  Many of
these  companies have  substantially  greater  capital  resources,  research and
development staffs,  facilities and experience in obtaining regulatory approvals
than the Company as well as  substantially  more  experience than the Company in
the  manufacturing,  marketing  and  sale of  products.  Academic  institutions,
hospitals,   governmental   agencies  and  other  public  and  private  research

                                       13
<PAGE>

organizations are also conducting research and seeking patent protection and may
develop  competing  products  or  technologies  on their  own or  through  joint
ventures.  The Company  believes that its competitive  position will be based on
its  ability to create  and  maintain  scientifically  advanced  technology  and
proprietary  products,  obtain required government  approvals on a timely basis,
develop and  manufacture  its proposed  products on a  cost-effective  basis and
successfully  market its products.  There can be no assurance that the Company's
current  or  proposed  products  under  development  will  be  able  to  compete
successfully  with  existing  products or products  under  development  by other
companies, universities and other institutions.

Risk of Using Hazardous Materials

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

Dependence Upon Attraction and Retention of Key Personnel and Consultants

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

Risk of Product Liability Claims; Insurance

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

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 March 14, 2003, the Company had 34,804,877  shares
of Common Stock issued and outstanding and the following  shares of Common Stock
were reserved for issuance:

     o    6,287,600  shares upon  conversion of  outstanding  shares of Series C
          Convertible  Preferred  Stock,  which is  scheduled  to  automatically
          convert as of March 26, 2004;



                                       14
<PAGE>

     o    12,041,670 shares upon exercise of outstanding  warrants,  exercisable
          at $0.24 per share and expiring on March 21, 2004;

     o    6,287,600 shares upon exercise of outstanding warrants, exercisable at
          $0.12 per share and expiring on June 30, 2003;

     o    6,287,600 shares upon exercise of outstanding warrants, exercisable at
          $0.12 per share and expiring on March 26, 2005;

     o    571,600 shares upon exercise of outstanding  warrants,  exercisable at
          $0.12 per share and expiring on March 26, 2007;

     o    9,435,493 shares upon exercise of outstanding options,  exercisable at
          prices  ranging from $0.023 to $7.88 per share and  expiring  from May
          29, 2003 to March 21, 2011.

     Approximately 49% of the currently  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  "restrictive  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 and the Warrants.

Item 2.  Properties

     The   Company's   offices  are   currently   located  in  an  aggregate  of
approximately 500 square feet in Oceanport New Jersey.  The space is provided by
the Company's  Chairman on a month-to-month  basis and there is no lease expense
associated  with this space.  Any staff  expansion 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.  The Company will be
required to add additional sites in connection with any expanded development and
testing  activities.  Currently  the  Company  utilizes  contract  manufacturing
organizations  to produce its proposed  products  for  research and  development
activities, clinical studies and for commercial sale.

Item 3. Legal Proceedings

     The Company is not a party to any  material  legal  proceedings  and is not
aware  of any  such  proceedings  which  may  be  contemplated  by  governmental
authorities.  The Company has, however,  experienced cash shortages recently and
has been subject to  litigation  and may continue to be subject to litigation in
connection with actions by third parties for amounts claimed to be owed.

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 has  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. On March
21, 2002, the Company's  previously publicly traded Class A and Class B Warrants
expired.  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, 2001
       First Quarter                                .52          .13

       Second Quarter                               .30          .11

       Third Quarter                                .33          .11

       Fourth Quarter                               .25          .10

Fiscal Year Ended December 31, 2002
     First Quarter                                  .44          .16

      Second Quarter                                .28          .12

      Third Quarter                                 .19          .09

       Fourth Quarter                               .18          .05

Fiscal Year Ended December 31, 2003

     January 1 through March 14, 2003               .12          .24



     In March  2003,  the  Company  issued  and sold in the  Series C  Financing
571,600  units at a price of $1.20 per unit  resulting in gross cash proceeds of
$686,000.  Each unit  consisted of one share of Series C  Convertible  Preferred
Stock,  one  warrant,  exercisable  until June 30, 2003 to purchase 10 shares of
Common Stock at $0.12 per share, and one warrant, exercisable for two years from
the issuance date to purchase 10 shares of Common Stock at $0.12 per share. Each
share  of  Series  C  Preferred  is  automatically   convertible  on  the  first
anniversary  of the date of issuance into 10 shares of Common Stock  (subject to
antidilution adjustment),  resulting in an effective price of $0.12 per share of
Common Stock. A placement fee in units equal to 10% of the units it placed and a
four-year  warrant to purchase an additional number of shares of Common Stock at
$0.12  per share equal to the number of units it placed will be paid to an agent
in  connection  with  the  Series  C  Financing.  Pursuant to an investor rights
agreement,  holders  of  Units are entitled to piggyback and demand registration
rights  with  respect  to  the  shares of Common Stock underlying the securities
comprising  the  units. The offering was made in reliance upon the provisions of
Section  4  (2)  under  the  Securities  Act of 1933. The offering was made to a
limited number of investors, each of who made investment representations and are
believed  to  be  sophisticated  investors.


                                       16
<PAGE>

(b)  Approximate Number of Equity Securities Holders


     As of March 27,  2003 the  number  of  holders  of record of the  Company's
Common Stock was 201. The Company believes that the number of beneficial holders
of its Common Stock on such date was approximately 1,700.

(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.

(d)  Securities Authorized For Issuance Under Equity Compensation Plans



<TABLE>
<CAPTION>
                                     Number of securities to be   Weighted average exercise
                                      issued upon exercise of        price of outstanding      Number of securities
                                   outstanding options, warrants           options,          remaining available for
              Plan Category                  and rights              warrants and rights         future issuance
       ----------------------------------------------------------------------------------------------------------------
                                                (a)                           (b)                      (c)
                                  -------------------------------------------------------------------------------------
<S>                                              <C>                                                <C>
       Equity compensation plans
       approved by security
       holders                                   0                           N/A                    1,407,500

       Equity compensation plans
       not
       approved by security
       holders                               9,435,494                      $0.53                   4,109,528
                                  -------------------------------------------------------------------------------------
       Total                                 9,435,494                      $0.53                   5,517,028
                                  =====================================================================================
</TABLE>

     683,472  fully vested  options have been issued  pursuant to the  Company's
2000  Non-Qualified  Stock Option Plan at exercise prices ranging from $0.023 to
$1.4375 per share and with  termination  dates ranging from December 27, 2006 to
October 12, 2007.

     6,207,000   options  have  been  issued  pursuant  to  the  Company's  2001
Non-Qualified  Stock Option Plan at exercise  prices ranging from $0.12 to $0.27
per  share and with  termination  dates  ranging  from June 6, 2008 to March 21,
2011. Of the total options issued, 2,590,334 are vested, 1,733,333 vest on March
21, 2003 and 1,733,333 vest on March 21, 2004.

     2,545,021   fully  vested  options  have  been  issued  pursuant  to  other
agreements at exercise  prices ranging from $0.05 to $7.00 and with  termination
dates ranging from May 29, 2003 to March 9, 2007.


                                       17
<PAGE>
Item 6.  Management's Discussion And Analysis of Plan of Operations

Financial Overview

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

Results of Operations

     The Company had revenue of $34,000 for the fiscal year ended  December  31,
2002 that  represented  royalties  on sales of the  Sure-Closure  System.  Total
revenue  for the fiscal year ended  December  31,  2001 was  $35,000,  also from
royalties on sales of the Sure-Closure System.

     The Company  incurred  research  and  development  expenses of $330,000 and
$473,000  for the fiscal years ended  December 31, 2002 and 2001,  respectively.
The  decrease  was  primarily  attributable  to the costs  incurred  during 2001
associated with the initiation of the REPEL-CV clinical trial.

     General and  administrative  expenses  totaled $988,000 for the fiscal year
ended  December  31, 2002 as compared to $637,000  for the  previous  year.  The
increase was primarily attributable to a $358,000 of stock based compensation.

     Interest  income  declined to $5,000 for the fiscal year ended December 31,
2002  from  $15,000  for the prior  fiscal  year.  The  decrease  was  primarily
attributable to lower interest rates and lower average cash balances.

     Interest expense and amortization of debt discount increased to $92,000 for
the  fiscal year ended December 31, 2002 from $56,000 for the prior fiscal year.
The  increase  was  primarily  attributable  to  the  write-off of the remaining
balance of the debt discount upon the conversion of convertible promissory notes
in  the  aggregate principal amount of $440,000 into units comprised of Series B
Convertible  Preferred  Stock  and  warrants.

     The Company  realized  gains on  settlement of debt of $100,000 and $91,000
for the fiscal years ended December 31, 2002 and 2001, respectively. These gains
represented the cumulative  effect of the forgiveness of portions of outstanding
trade liabilities upon settlement.

     The  Company  recorded a benefit for income  taxes of  $222,000  during the
fiscal year ended  December  31, 2002 as compared to $294,000 in the prior year.
These amounts were attributable to the receipt of funds associated with the sale
of certain  accumulated  New Jersey State tax  operating  losses.  The reduction
compared  to  the  prior  year  was  primarily  the  result  of  more  companies
participating in the program.

     The  Company  reported a net loss of  $1,048,000  for the fiscal year ended
December 31, 2002 as compared to a net loss of $728,000 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 issued
in March 2002 of $419,000 for the fiscal year ended  December 31, 2002 resulting
in a net loss to common  stockholders  of  $1,467,000;  there was no  comparable
figure in the prior year.


                                       18
<PAGE>


Liquidity and Capital Resources

     At December 31, 2002, the Company had cash of $497,000  compared to cash of
$372,000 at  December  31,  2001.  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,  2002,  the  Company  had a working  capital  deficit  of
$293,000.  The cash balance as of December 31, 2002 is not be sufficient to meet
the Company's cash requirements  through 2003. In March 2003, the Company raised
$686,000 in cash through the Series C Financing. (See Item 5.) With the proceeds
from the Series C Financing,  the Company expects to be able to fund the current
level of operations  through the remainder of 2003.  Additional  funding will be
required if the Company  receives  regulatory  approval to initiate the REPEL-CV
pivotal trial, which is currently projected for the third calendar quarter.  The
Company will be required to raise  substantial  additional funds to continue the
clinical development and  commercialization of its proposed products.  There can
be no assurance that such arrangements or financings will be available as needed
or on terms acceptable to the Company

Item 7.  Financial Statements.

     The Index to  Financial  Statements  appears on page F-1,  the  Independent
Auditors' Report appears on page F-2, and the Financial  Statements and Notes to
Financial Statements appear on pages F-3 to F-18.


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

     None.


                                       19
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons of the
Registrant; Compliance with Section 1 (6a) 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 within 120 days after the close of the 2002 fiscal year.  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 within 120 days after the close of the 2002 fiscal year.

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 within 120 days after the close of the 2002 fiscal year.

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 within120 days after the close of the 2002 fiscal year.

Item 13. Exhibits and Reports on Form 8-K.

          Exhibits.

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

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

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

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

3.1(d)    Certificate  of  Designations,  Rights  and  Preferences  of  Series B
          Convertible Preferred Stock (See form attached in Exhibit 10.32) (12)

3.1(e)    Certificate  of  Designations,  Rights  and  Preferences  of  Series C
          Convertible Preferred Stock. (See form attached in Exhibit 10.38)*

3.2       By-Laws of Registrant. (1)

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

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

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

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

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



                                       20
<PAGE>


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

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

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

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

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

10.16     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)

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

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


10.31     2001 Non-Qualified Stock Option Plan and Stock Option Agreement. (12)


10.32     Series B Subscription Agreement dated March 21, 2002. (12)


10.33     Agency Agreement between  Registrant and Clubb BioCapital,  Ltd. dated
          March 21, 2002. (12)

10.34     Employment Agreement between Registrant and Robert P. Hickey dated May
          21, 2001. (12) **

10.35     Convertible  Promissory  Note between  Registrant  and Dimotech,  Ltd.
          dated August 6, 2001. (12)

10.36     Convertible  Promissory Note between Registrant and Polymer Technology
          Group, Inc. dated February 22, 2002. (12)

10.37     Amendment  No. 4 dated as of April 24, 2002 to the  Agreement  between
          the Registrant and Yissum. *

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

10.39     Agency Agreement between  Registrant and Clubb BioCapital,  Ltd. dated
          January 9, 2003. *

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

10.41     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). *

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). *

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

23.1      Consent of Eisner LLP (formerly Richard A. Eisner & Co., LLP). *

99.1      Certification of Principal  Executive Officer and Principal  Financial
          Officer pursuant to 18 U.S.C. 1350.*

**        Indicates a management contract or compensatory plan or arrangement.

*         Filed herewith.


                                       21
<PAGE>



(1)  Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-1 (File No. 33-94008) declared effective on September 22, 1992.
(2)  Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-1 (File No. 333-02588) declared effective on May 3, 1996.
(3)  Incorporated by reference to the  Registrant's  report on Form 10-Q for the
     quarter ended September 30, 1992.
(4)  Incorporated by reference to the  Registrant's  report on Form 10-K for the
     year ended December 31, 1993.
(5)  Incorporated by reference to the  Registrant's  report on Form 8-K filed by
     the Company on August 12, 1994.
(6)  Incorporated by reference to the  Registrant's  report on Form 10-K for the
     year ended December 31, 1994.
(7)  Incorporated by reference to the  Registrant's  report on Form 10-K for the
     year ended December 31, 1996.
(8)  Incorporated by reference to the  Registrant's  report on Form 10-Q for the
     quarter ended June 30, 1997.
(9)  Includes  compensatory  plan  and  or  arrangements  required  to be  filed
     pursuant to item 14 (c) of Form 10-K.
(10) Incorporated by reference to the Registrant's S-8 filed in January 2000.
(11) Incorporated by reference to the Registrant's 8-K filed in January 2001.
(12) Incorporated by reference to the  Registrant's  report on Form 10-K for the
     year ended December 31, 2002.

     (b)   Reports on Form 8-K

           None

Item 14. Controls and Procedures

     (a) 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-14(c) and 15-d-14(c)) as of a
date (the  "Evaluation  Date")  within 90 days  before the  filing  date of this
annual  report,  has concluded  that as of the  Evaluation  Date, our disclosure
controls and  procedures  were  adequate  and  designed to ensure that  material
information  relating to us and  required to be disclosed in the reports we file
or submit to the Securities and Exchange Commission would be made known to him.

     (b) Changes in internal controls.  There were no significant changes in our
internal   controls  or,  to  our   knowledge,   in  other  factors  that  could
significantly  affect our disclosure  controls and procedures  subsequent to the
Evaluation Date.



                                       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.


                              Life Medical Sciences, Inc.
                              (Registrant)

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





Dated:  March 27, 2003

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

<TABLE>
<CAPTION>
              Signatures                          Title                                      Date
              ----------                          -----                                      ----

<S>                                     <C>                                             <C>
/s/ Robert P. Hickey                    Director, Chairman of the Board,                March 27, 2003
-----------------------------            President, CEO and CFO
Robert P. Hickey                         (principal executive, financial and
                                          accounting officer)

/s/ Edward A. Celano                    Director                                        March 27, 2003
-----------------------------
Edward A. Celano

/s/Richard L. Franklin, M.D.            Director                                        March 27, 2003
-----------------------------
Richard L. Franklin, M.D.

/s/ Walter R. Maupay                    Director                                        March 27, 2003
------------------------------
Walter R. Maupay

/s/ Irwin M. Rosenthal                  Director                                        March 27, 2003
------------------------------
Irwin M. Rosenthal
</TABLE>



                                       23
<PAGE>

                                  CERTIFICATION

      I, Robert P. Hickey, certify that:

1. I have reviewed this annual report on Form 10-KSB of Life Medical Sciences,
Inc.;
      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
      4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

            a) designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

            b) evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

            c) presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on our
      evaluation as of the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

            a) all significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's ability to
      record, process, summarize and report financial data and have identified
      for the registrant's auditors any material weaknesses in internal
      controls; and

            b) any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      controls; and

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Dated: March 27, 2003                     By: /s/ Robert P. Hickey
                                              ---------------------------------
                                              Robert P. Hickey
                                              Chief Executive Officer
                                              and Chief Financial Officer



                                       24


<PAGE>


                          INDEX TO FINANCIAL STATEMENTS


                                                                    Page  Number
                                                                    ----  ------

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




                                      F-1
<PAGE>

                          Independent Auditors' Report


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

     We have audited the  accompanying  balance sheet of Life Medical  Sciences,
Inc. as of December 31, 2002 and the related  statements of operations,  changes
in capital  deficit and cash flows for each of the years in the two-year  period
ended December 31, 2002. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

     In our opinion, the financial  statements  enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences,  Inc.
as of December 31, 2002 and the results of its operations and its cash flows for
each of the years in the two-year  period ended  December 31, 2002 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 experienced recurring net losses, and has
a negative  working capital position and a capital deficit at December 31, 2002.
As a result, substantial doubt exists about the Company's 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 (formerly Richard A. Eisner & Co., LLP)



New York, New York
March 14, 2003

With respect to NOTE L
March 27, 2003





                                      F-2
<PAGE>


                           LIFE MEDICAL SCIENCES, INC.

                                  BALANCE SHEET

                      (In thousands, except per share data)


<TABLE>
<CAPTION>
                                                                           December 31
                                                                              2002
                                                                            --------
                                 ASSETS
Current assets:
<S>                                                                         <C>
    Cash ................................................................   $    497
    Prepaid expenses ....................................................         17
                                                                            --------
               Total current assets .....................................        514
                                                                            --------


Furniture and equipment, less accumulated depreciation ..................         --
                                                                            --------


TOTAL ...................................................................   $    514
                                                                            ========

                     LIABILITIES AND CAPITAL DEFICIT

Current liabilities:
    Accounts payable ....................................................   $    584
    Accrued expenses ....................................................         77
    Other liabilities ...................................................        146
                                                                            --------
               Total current liabilities ................................        807

Deferred royalty income .................................................        227
Convertible note payable - long term ....................................        110
                                                                            --------
               Total liabilities ........................................      1,144
                                                                            --------

Commitments and other matters (Note H)

Capital deficit:
     Preferred stock, $.01 par value; shares authorized - 5,000;
       Series B convertible shares issued and outstanding - 1,113 .......         11
     Common stock, $.001 par value; shares authorized - 100,000;
       issued and outstanding - 16,759 ..................................         17
     Additional paid-in capital .........................................     38,140
     Unearned stock-based compensation ..................................       (114)
     Accumulated deficit ................................................    (38,684)
                                                                            --------
               Total capital deficit ....................................       (630)
                                                                            --------
                                    TOTAL ...............................   $    514
                                                                            ========
</TABLE>

                See accompanying notes to financial statements.



                                      F-3
<PAGE>




                           LIFE MEDICAL SCIENCES, INC.

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


<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                     --------------------
                                                                       2001        2002
                                                                     --------    --------
Revenue:
<S>                                                                  <C>         <C>
   Royalty income ................................................   $     35    $     34
                                                                     --------    --------

Operating expenses:
   Research and development expenses .............................        473         330
   Sales and marketing
   General and administrative expenses ...........................        637         988
                                                                     --------    --------
          Operating expenses .....................................      1,110       1,318
                                                                     --------    --------

Loss from operations .............................................     (1,075)     (1,284)

Other income/(expense):
Other income .....................................................          3           1
Interest income ..................................................         15           5
Interest expense .................................................         (9)         --
Amortization of debt discount   ..................................        (47)        (92)
Gain on settlement of debt .......................................         91         100
                                                                     --------    --------

Loss before benefit for income taxes .............................     (1,022)     (1,270)
Benefit for income taxes .........................................        294         222
                                                                     --------    --------

Net loss .........................................................       (728)     (1,048)
Beneficial conversion on convertible preferred stock .............         --        (419)
                                                                     --------    --------

Net loss attributable to common stockholders .....................   $   (728)   $ (1,467)
                                                                     ========    ========

Net loss attributable to common stockholders per share - basic and
   diluted .......................................................   $  (0.06)   $  (0.09)
                                                                     ========    ========

Weighted average shares outstanding - basic and diluted ..........     13,069      16,124
</TABLE>


                See accompanying notes to financial statements.

                                      F-4

<PAGE>




                                            LIFE MEDICAL SCIENCES, INC.

                                     STATEMENTS OF CHANGES IN CAPITAL DEFICIT
                                                  (In thousands)


<TABLE>
<CAPTION>
                                                                                                Additional  Unearned
                                                        Preferred                Common          Paid-In  Stock-Based   Accumulated
                                                    Shares     Amount       Shares    Amount     Capital  Compensation      Deficit
                                                    ------     ------       ------    ------     -------  ------------      -------
<S>                                                  <C>    <C>           <C>      <C>         <C>                        <C>
Balance - January 1, 2001 ........................    500    $      5      10,343   $     10    $ 36,094                  $(36,908)
  Conversion of preferred
  stock ..........................................   (500)         (5)      5,000          5
  Fair value of options issued
  for compensation ...............................                                                    47
  Warrants issued with
  convertible promissory notes ...................                                                   139
  Net loss for the year ..........................                                                                            (728)
                                                     -----    --------      ------   --------    --------   --------       --------

Balance - December 31, 2001 ......................                         15,343          15      36,280                  (37,636)
  Series B preferred stock
  financing ......................................                                                  1,064
  Options issued as consider-
  ation  for accrued fees ........................  1,091          11                                  68
  Series B preferred stock
  issued as consideration for
  accrued royalties ..............................     21                                              25
  Options and warrants
  exercised ......................................                                                    141
  Common stock issued in
  settlement of accounts
  payable ........................................                          1,224           1          74
  Series B units issued in
  settlement of other liability ..................                                                     25
  Stock-based compensation .......................                            192           1         463   $   (261)
  Amortization of employee
  stock-based compensation .......................                                                               147
  Net loss for the year ..........................                                                                          (1,048)
                                                     -----    --------      ------   --------    --------   --------       --------

Balance - December 31, 2002 ......................   1,112    $     11      16,759   $     17    $ 38,140   $   (114)     $(38,684)
                                                     =====    ========      ======   ========    ========   ========       ========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-5
<PAGE>



                           LIFE MEDICAL SCIENCES, INC.

<TABLE>
<CAPTION>
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)


                                                                          Year Ended December 31,
                                                                            ------------------
                                                                             2001       2002
                                                                            -------    -------
Cash flows from operating activities:
<S>                                                                         <C>        <C>
    Net loss ............................................................   $  (728)   $(1,048)
    Adjustments to reconcile net loss to net cash used in operations:
        Deferred royalty income .........................................       (35)       (34)
        Stock-based compensation ........................................         8        449
        Depreciation ....................................................         5
        Gain on settlement of debt ......................................       (91)      (100)
        Amortization of debt discount ...................................        47
        Amortization of discount on convertible promissory notes ........                   92
        Changes in operating assets and liabilities:
            (Increase) decrease in prepaid expenses .....................        99         (6)
            (Increase) in deferred financing costs ......................       (39)
            Increase (decrease) in accounts payable and accrued expenses       (119)       (65)
            Increase (decrease) in other liabilities ....................       (52)        (5)
                                                                            -------    -------
                Net cash used in operating activities ...................      (905)      (717)
                                                                            -------    -------
Cash flows from investing activities:
    Purchase of equipment ...............................................        (1)
                                                                            -------
        Net cash used in investing activities ...........................        (1)
                                                                            -------
Cash flows from financing activities:
    Net proceeds from issuance of Series B Convertible Preferred Stock ..                  700
    Proceeds from exercise of stock options and warrants ................                  142
    Proceeds from issuance of notes payable .............................       440
    Payment on capital lease obligation .................................        (6)
                                                                            -------    -------
       Net cash provided by financing activities ........................       434        842
                                                                            -------    -------
Net (decrease) increase in cash .........................................      (472)       125
Cash at beginning of year ...............................................       844        372
                                                                            -------    -------
Cash at end of year .....................................................   $   372    $   497
                                                                            =======    =======

Supplementary cash flow information:
    Interest paid .......................................................   $     9    $     6
Non-cash investing and financing activities:
    Reduction of capital lease and accrued interest in exchange for
    equipment with a cost basis of $6 ...................................        16
    Conversion of preferred stock to common stock .......................         5
    Legal fees accrued in connection with financing .....................        25
    Conversion of other liability to note payable .......................        40
    Debt discount recorded for fair value of warrants issued with
    convertible promissory notes ........................................       139
    Options issued as consideration for accrued consulting fees .........        39         68
    Common stock issued in satisfaction of accounts payable .............                   75
    Conversion of accounts payable to notes payable .....................                   70
    Series B Units issued in satisfaction of other liability ............                   25
    Series B Units issued in satisfaction of convertible promissory notes                  440
</TABLE>

                 See accompanying notes to financial statements.


                                      F-6
<PAGE>


                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

     Life Medical  Sciences,  Inc.  (the  "Company") is a  biomaterials  company
engaged  in  the   development   and   commercialization   of   innovative   and
cost-effective  medical  products for therapeutic  applications.  Products under
development,  all of which  are  based  on the  Company's  license  proprietary,
bioresorbable  polymer  technology,  are medical devices  designed to prevent or
reduce the  formation  of  adhesions  (scar  tissue)  following a broad range of
surgical  procedures.  The Company's product  development  efforts are currently
focused on its lead product,  REPEL-CV(TM), a bioresorbable adhesion barrier. In
February 2002, the Company initiated the feasibility clinical trial on REPEL-CV.
In  March  2002,  the  Company  completed  a  preferred  stock/warrant  offering
resulting in aggregate  proceeds of $1.2 million.  The Company received $222,000
in  December  2002 from the sale of certain New Jersey  state tax losses.  These
funds,  together with a subsequent  financing referred to below, are intended 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
experienced recurring net losses, has used its cash in operations and has both a
working  capital and capital  deficit at December  31,  2002.  As a result,  the
Company has limited  resources  available for its  continuing  operations.  As a
result,  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 achieve
profitability,  which  in turn  is  dependent  on  successfully  completing  the
development of its proposed products,  obtaining required  regulatory  approvals
and manufacturing and selling its proposed products.  There is no assurance that
initiatives  to  raise  additional  capital  will be  successful  or that  other
financing  arrangements  will be  available  or that the Company will achieve or
sustain a  profitable  level of  operations.  The  financial  statements  do not
include  any  adjustments  that might be  necessary  if the Company is unable to
continue as a going concern.


(NOTE B) - Summary of Significant Accounting Policies:

  [1]  Revenue Recognition:

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

  [2]  Advertising:

     Advertising  costs are charged to expense as they are incurred.  There were
no expenditures in 2001 or 2002.

  [3]  Depreciation:

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

  [4]  Research and development:

     Substantially  all research and development  activities are outsourced (see
Note G). Research and development costs are charged to expense as incurred.

  [5]  Patent costs:

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



                                      F-7
<PAGE>


                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

  [6]  Use of estimates:

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions that affect the reported amounts of
assets and  liabilities  and disclosure of contingent  assets and liabilities at
the date of the  financial  statements  and the reported  amounts of revenue and
expenses  during the reporting  period.  Actual  results could differ from those
estimates.

  [7]  Stock-based compensation:

     The Company  follows the  intrinsic  value based method in  accounting  for
stock-based employee  compensation under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. The
Company has adopted the  disclosure-only  provisions  of  Statement of Financial
Accounting  Standard  ("SFAS")  No.  123  and  SFAS  No.  148,  "Accounting  for
Stock-Based  Compensation--Transition  and  Disclosure,"  which was  released in
December 2002 as an amendment of SFAS No. 123.

     The following  table  illustrates the effect on net loss and loss per share
if the fair value  based  method had been  applied to all awards (in  thousands,
except per share data):

<TABLE>
<CAPTION>
                                                                                   2001       2002
                                                                                  -------    -------
                                                                                Year Ended December 31,
                                                                                -----------------------
<S>                                                                               <C>        <C>
     Reported net loss attributable to common stockholders                        $  (728)   $(1,467)
     Stock-based employee compensation expense
         included in reported net loss                                                  0        277
     Stock-based employee compensation determined under
         the fair value based method                                                  (18)      (304)
                                                                                  -------    -------
     Pro forma net loss attributable to common stockholders                       $  (746)   $(1,494)
                                                                                  =======    =======

     Loss per common share attributable to common stockholders (basic and
         diluted):
             As reported                                                          $ (0.06)   $ (0.09)
                                                                                  =======    =======
             Pro forma                                                            $ (0.06)   $ (0.09)
                                                                                  =======    =======
</TABLE>



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

                                     Year ended December 31,
                                     -----------------------
                                      2001            2002
                                      ----            ----
     Dividend yield                        0%              0%
     Expected volatility                  99%            104%
     Risk free interest rate         4.1-4.4%      3.56-4.14%
     Expected life                  2.5 years       2.5 years




                                      F-8
<PAGE>


                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

  [8]  Recently Issued Accounting Pronouncements

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition  and  Disclosure"  as an  amendment  to SFAS No. 123 to
provide alternative methods of transition for an entity that voluntarily changes
to the fair value method of accounting for stock-based employee compensation. It
also  amends the  disclosure  provisions  of SFAS No.  123 to require  prominent
disclosure  about the  effects  on  reported  net income  (loss) of an  entity's
accounting  policy decisions with respect to stock-based  employee  compensation
and amends APB  Opinion  No. 28 to require  disclosure  about  those  effects in
interim  financial  information.  The  disclosure  provisions  are effective for
fiscal years ending after December 15, 2002, and for interim  periods  beginning
after  December  15, 2002.  The Company  follows the  intrinsic  value method of
accounting for stock-based employee compensation,  but will continue to evaluate
the benefits of a voluntary change to the fair value based method.

  [9] Earnings (loss) per share:

     Basic earnings  (loss) per share is computed by dividing the income or loss
by the weighted average number of shares of common stock outstanding during each
period. Diluted earnings (loss) per share includes the effect, if dilutive, from
the potential  exercise or  conversion  of securities  which would result in the
issuance of incremental shares of common stock.

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

                                          December 31,
                                        2001         2002
                                    ----------   ----------

     Convertible promissory notes    3,707,000      110,000
     Convertible preferred stock                 11,125,000
     Options                         3,841,000    9,360,000
     Warrants                        8,635,000   12,042,000
                                    ----------   ----------

                                    16,183,000   32,637,000
                                    ==========   ==========


(NOTE C) - Furniture and Equipment:

     Furniture and equipment consists of the following at December 31:

                                                Estimated
                                      2002     useful life
                                     -------   -----------

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

                                      18,000
     Less accumulated depreciation    18,000
                                     -------
                                     $     0


(NOTE D) - Convertible Promissory Notes:

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


                                      F-9
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS



(NOTE D) - Convertible Promissory Notes:  (continued)

     In 2001, the Company executed $440,000 in six month,  non-interest  bearing
convertible  promissory  notes.  In  connection  therewith,  the Company  issued
warrants to purchase up to 3,667,000 shares of common stock at an exercise price
of $0.12 per share with an expiration  date of June 30, 2002. The estimated fair
value of the warrants of $139,000 was recorded as debt discount of which $47,000
was amortized through December 31, 2001. The balance of $92,000 was amortized in
2002 and upon the closing of the Series B Offering, the notes, together with the
warrants were converted into 367,000 Units (see Note E).


(NOTE E) - Capital Deficit:

  [1]  Common stock:

     In June 2001, the Company issued  5,000,000 shares of common stock pursuant
to the automatic conversion of 500,000 shares of Series A convertible  preferred
stock which were issued in December  2000. In February  2002,  192,000 shares of
common stock were issued in settlement of certain trade payables.  In July 2002,
1,142,000  shares of common  stock were  issued as a result of the  exercise  of
warrants  issued  during the Series B private  placement.  During  2002,  82,000
shares of common stock were issued as a result of the exercise of stock  options
by a former Director.

  [2]  Preferred stock:

     In December  2000,  the  Company  completed  a private  placement  in which
500,000  shares  of  Series A  convertible  preferred  stock  were sold for cash
proceeds of  $500,000.  Pursuant to the terms,  each share of Series A preferred
stock was converted into 10 shares of the Company's common stock during 2001.

     In March 2002, the Company closed a $1.2 million private placement ("Series
B Offering").  The Series B Offering  involved the issuance of one million Units
at $1.20 per Unit.  Each Unit consists of one share of Series B preferred  stock
convertible into ten shares of common stock; one warrant entitling the holder to
purchase,  until June 30,  2002,  up to ten shares of common  stock at $0.12 per
share; and one two-year  warrant  entitling the holder to purchase ten shares of
common stock at $0.24 per share. The Company subsequently  modified the terms of
the warrants expiring on June 30, 2002, wherein, if a warrantholder exercised at
least 50% of a warrant by June 30, 2002, the  expiration  date for the remainder
of that  warrant  would be extended to December  31,  2002. A total of 1,141,666
shares  equal to  $137,000  were  exercised  under  the  revised  terms  with an
equivalent  number that were extended  until December 31, 2002. The remainder of
the shorter term  warrants  expired as of June 30, 2002.  The Series B preferred
stockholders  are  entitled  to  vote  with  the  common  stockholders  on an as
converted  basis,  and the preferred stock converted  automatically  into common
stock on March 21, 2003.  The Company  received  gross  proceeds of $760,000 and
effected  the  conversion  of  $440,000  in  non-interest   bearing  convertible
promissory  notes.  The notes  and  3,667,000  warrants  issued  therewith  were
cancelled upon  conversion  into 367,000 Units.  Investors were granted  certain
registration rights for the securities purchased.  A placement fee consisting of
91,667 Units and a two-year warrant to purchase an additional  916,667 shares of
common  stock at $0.24  per share  was paid to an agent in  connection  with the
private placement.

     The Company  allocated  the proceeds  between the Series B Preferred  Stock
($524,000)  and the detachable  warrants based on the relative fair values.  The
Company  computed the  beneficial  conversion  feature of the Series B Preferred
Stock,  which was limited to the  proceeds  allocated  to the Series B Preferred
Stock and which is being  amortized over the one-year  period through  automatic
conversion.  Accordingly  $419,000 was charged to the net loss  attributable  to
common stockholders for the year ended December 31, 2002.

  [3]  Warrants:

     As of December 31, 2002, there were warrants  outstanding to purchase up to
12,042,000 shares of the Company's common stock at $0.24 per share.

     In March 2002,  1,650,000  Class A Warrants and 1,150,000  Class B Warrants
expired.  These warrants were issued in connection  with  financings in previous
years.



                                      F-10
<PAGE>


                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - Capital Deficit:  (continued)

  [4]  Options:

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

     At December 31,  2002,  there were no options  outstanding  pursuant to the
1992 Plan,  options to purchase  708,000 shares of common stock were outstanding
pursuant  to the 2000 Plan and options to  purchase  6,107,000  shares of common
stock were outstanding  pursuant to the 2001 Plan are outstanding.  In addition,
options to purchase 2,545,000 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,  2002,  there were
5,592,000  options  available  for grant under these plans.  Operating  expenses
include the following charges relating to stock options:

                     Year ended December 31,
                     -----------------------
                         2001       2002
                       --------   --------

     Employees                    $277,000
     Directors fees
     Consulting fees   $  8,000    172,000
                       --------   --------

                       $  8,000   $449,000
                       ========   ========

     A summary of the status of the  Company's  stock options as of December 31,
2001 and 2002,  and changes  during the years ended on those dates is  presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                    2001                            2002
                                            ---------------------------       ----------------------------
                                                        Weighted-Average                  Weighted-Average
                                            Shares       Exercise Price       Shares        Exercise Price
                                            ------       --------------       ------        --------------
<S>                                         <C>            <C>                 <C>            <C>
     Outstanding at beginning of year       3,701          $   1.24            3,841          $   1.17
     Granted                                  239              0.21            5,718              0.13
     Exercised                                 --                -               (74)             0.07
     Forfeited                                (99)             1.63             (125)             2.00
     Outstanding at end of year             3,841              1.17            9,360              0.53
     Options exercisable at year-end        3,566              1.10            5,544              0.76

     Weighted-average grant date fair
     value of options granted during the
     year                                                      0.12                               0.30
</TABLE>


                                      F-11
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - Capital Deficit:  (continued)

  [4]  Options:  (continued)

     Included in the preceding table are 89,000 and 4,068,000 options granted to
non-employees  in 2001 and 2002,  respectively.  The weighted average grant date
fair value of such options was $0.13 and $0.30, respectively.

     Options to purchase 5,200,000 shares of common stock,  including  1,500,000
to an  officer  and  3,000,000  to a  director,  pursuant  to the 2001 plan were
granted at the closing of the Series B Offering.  The options  vest in one third
increments as of the grant date and the first and second  anniversaries  thereof
and will expire no later than seven years from the vesting  dates.  The exercise
price for the  options  is $0.12  per  share.  At the  closing  of the  Series B
Offering,  the market price of the Company's common stock was $0.38. The Company
recorded $449,000 of compensation expense attributable to these options in 2002.

     The  following  table  summarizes  information  about fixed  stock  options
outstanding at December 31, 2002 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                         Options Outstanding                                 Options Exercisable
                                         -------------------                                 -------------------
                                          Weighted-Average
                                                 Remaining       Weighed Average
              Range           Number           Contractual              Exercise            Number      Weighted-Average
     Exercise Prices      Outstanding                 Life                 Price        Exercisable        Exercise Price
     ---------------      -----------                 ----                 -----        -----------        --------------
<S>                             <C>                 <C>                     <C>               <C>                   <C>
       $0.02 -  0.82            7,360               6 years                 $0.15             3,694                 $0.17
        1.00 -  2.00            1,796               3 years                  1.69             1,646                  1.64
        4.00 -  4.75              189               2 years                  4.02               189                  4.02
        7.00 -  7.88               15               2 years                  7.65                15                  7.65
                                -----               -------                 -----             -----                 -----
                                9,360               4 years                 $0.53             5,544                 $0.76

</TABLE>


(NOTE F) - Income Taxes:

     At December  31, 2002,  the Company has  approximately  $35,547,000  of net
operating  loss  carryforwards  to offset  future  federal  taxable  income  and
approximately  $641,000 of research  and  development  tax credit  carryforwards
available  to offset  future  federal  income tax,  subject to  limitations  for
alternative  minimum tax. The net  operating  loss and research and  development
credit  carryforwards  expire in various years from 2005 through  2022.  Certain
other  limitations  may apply,  including the amount that may be used  annually.
Future  issuances of the  Company's  stock may subject the Company to additional
limitations.

     At December 31, 2002,  after  giving  effect to the sales  described in the
following  sentence,  the Company has net operating loss  carryforwards  for New
Jersey  State  income tax  purposes of  approximately  $11,700,000  which expire
through 2009. The Company has  participated in the Tax Benefit  Transfer Program
administered by the State of New Jersey under which  $3,758,000 and 2,830,000 in
eligible loss carryforwards,  covering the tax years 1996 and a portion of 1997,
were sold to PSE&G in exchange for cash payments of  approximately  $294,000 and
$222,000  in 2001  and  2002,  respectively.  The  Company  anticipates  similar
transactions  during 2003 and beyond,  contingent  upon approvals from the State
Department of Taxation.

     The deferred tax asset,  which amounted to $14,021,000 at December 31, 2002
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 $38,000 in 2001 and  increased  by
$121,000 in 2002.

     The income  tax  benefit  of  $294,000  and  $222,000  for the years  ended
December  31,  2001 and 2002  reflect  the  Company's  participation  in the Tax
Benefit Transfer Program described above.



                                      F-12
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - Income Taxes:  (continued)

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

<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                               ----------------------------
                                                                   2001            2002
                                                               ------------    ------------
<S>                                                            <C>             <C>
            Income tax benefit at the federal statutory rate   $   (248,000)   $   (432,000)
            State and local income taxes, net of effect on
            federal taxes                                           (44,000)        (76,000)
            Stock-based compensation                                                180,000
            (Decrease) increase in valuation allowance              (38,000)        121,000
            Sale of state net operating loss carryforwards         (294,000)       (222,000)
            Reduction in deferred tax asset from transfer of
            state net operating loss carryforwards                  338,000         255,000
            Other                                                    (8,000)        (48,000)
                                                               ------------    ------------

                                                               $   (294,000)   $   (222,000)
                                                               ============    ============

     The deferred tax asset at December 31 is as follows:

                                                                   2001            2002
                                                               ------------    ------------
            Net operating loss carryforward                    $ 13,022,000    $ 13,139,000
            Research and development credit carryforward            610,000         641,000
            Accrued expenses                                        240,000         202,000
            Other                                                    28,000          39,000
                                                               ------------    ------------

                                                                 13,900,000      14,021,000
            Valuation allowance                                 (13,900,000)    (14,021,000)
                                                               ------------    ------------

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

(NOTE G) - Research and License Agreements:

  [1]  Yissum agreement:

     During June 1991, the Company entered into a research and license agreement
(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,  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.

                                      F-13
<PAGE>

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

  [2]  Dimotech agreement:

     During July 1995, the Company entered into an agreement with Dimotech Ltd.,
pursuant to which the Company  financed  and  Dimotech  conducted  research  and
development with regard to the scar management  program.  In connection with the
agreement,  Dimotech  has  assigned to the Company its  worldwide  rights to the
patents and know-how to develop,  manufacture  and market  products  relating to
this  technology.  Pursuant to the agreement,  the Company is obligated to pay a
royalty of five percent of all net sales of the Company's products derived under
this agreement  including  CLINICEL.  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.  Dimotech  forgave
$8,000 in connection with the settlement.


(NOTE H) - Commitments and Other Matters:

  [1]  Lease:

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

  [2]  Employment agreement:

     At December  31, 2002,  the Company has an  employment  agreement  with one
executive which expires in May 2003.  Pursuant to this agreement,  the Company's
commitment  regarding early termination benefits aggregates $105,000 at December
31, 2002.

  [3]  Supplier concentration:

     The Company intends to rely primarily on one primary manufacturer,  Polymer
Technology Group, Inc. ("PTG"), to produce its proposed products for testing and
commercial purposes. The Company believes that alternative sources for these raw
materials and components are available.

  [4]  Other:

     In February 2002, a settlement was reached with PTG, the Company's  primary
supplier,  with  respect  to past due  accounts  payable  aggregating  $317,000.
Pursuant to the  settlement  the Company paid $75,000,  issued 192,000 shares of
common stock and issued a $70,000 note payable (convertible into common stock at
$1.00 per share). PTG forgave $97,000 in connection with the settlement.


(NOTE I) - Sure-Closure System Sale:

     In July 1994,  the  Company  sold or  assigned  to MedChem  Products,  Inc.
substantially all of its assets related to the Sure-Closure System, a disposable
wound closure device,  including rights,  agreements and licenses.  The terms of
the  agreement  provide  that the Company is entitled to royalties of 10% of the
net  sales  (as  defined  in the  agreement),  through  June  30,  2004,  of the
Sure-Closure System and any line extensions or future embodiments. In connection
with this  transaction,  $644,000  was recorded as deferred  royalty  income and
through  December 31, 2002 has been reduced by $417,000 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. In
connection with one such agreement,  the Company may be liable for a two percent
royalty on sales of the  Sure-Closure  System in the event that MedChem does not
pay these royalties.


                                      F-14
<PAGE>

(NOTE J) - Related Party:

     The Company incurred  expenses of  approximately  $94,000 in the year ended
December 31, 2001 for legal services  rendered by a firm at which a director and
stockholder  of the Company  was one of the  partners  until May 2001.  Accounts
payable includes $52,000 at December 31, 2002, due to such firm.

     In 2002, the Company paid $120,000 in business  management  consulting fees
to Richard Franklin, a member of its Board of Directors (see Note L[2]).


(NOTE K) - Gain on Settlement of Debt:

     For the years ended  December  31, 2001 and 2002, a gain on  settlement  of
debt of $91,000 and $100,000,  respectively,  are attributable to the cumulative
forgiveness of portions of certain  outstanding trade obligations settled during
the year.


(NOTE L) - Subsequent Events:

     [1] Series C convertible preferred stock financing:

     During the first quarter of 2003, the Company commenced a private placement
of up to 604,000 units (including a 10%  over-allotment  option),  consisting of
convertible preferred stock and warrants,  for an aggregate offering price of up
to $725,000, or $1.20 per unit (the "Series C Financing"). As of March 27, 2003,
571,600 units were sold equal to gross proceeds of $686,000.  Each Unit consists
of one share of 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 ten shares of common stock at $0.12 per share.
The  Series C  preferred  stockholders  are  entitled  to vote  with the  common
stockholders on an as converted  basis,  and the preferred  stock  automatically
converts  into  common  stock in March  2004.  Investors  were  granted  certain
registration rights for the securities purchased. A placement fee in units equal
to 10% of the units it placed and a  four-year  warrant to  purchase a number of
shares of Common Stock at $0.12 per share equal to the number of units it placed
will be paid to an agent in connection with the Series C Financing.

     The Company will allocate the proceeds between the Series C Preferred Stock
and  the  detachable  warrants  based on their relative fair values. The Company
will  compute the beneficial conversion feature on the Series C Preferred Stock,
which  will be limited to the proceeds allocated to the Series C Preferred Stock
and  which  will  be  amortized  over  the  one-year  period  through  automatic
conversion.

  [2]  Phairson acquisition:

     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.
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 pursue  development  efforts  involving the
technology for an extended period of time, the Company is obligated to negotiate
a return of the technology to the university.  Certain  stockholders of Phairson
have  participated in the Series C Financing as well as prior  financings of the
Company,  and Richard Franklin,  a director of the Company, is a stockholder and
serves 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.


                                      F-15
<PAGE>


(NOTE M) - Adjustment:

The Company recorded $449,000 of stock-based compensation during 2002, a portion
of which  was  attributable  to  previous  2002  quarters.  The  effect  of such
retroactive adjustment is summarized as follows (in thousands,  except per share
data):

<TABLE>
<CAPTION>
                                                                   Three-Month Periods Ended
                             ------------------------------------------------------------------------------------------------------
                                     March 31, 2002                          June 30, 2002                    September 30, 2002
                             -----------------------------          -----------------------------         -------------------------
                           As Originally                          As Originally                        As Originally
                             Reported          As Restated          Reported          As Restated         Reported      As Restated
                             --------          -----------          --------          -----------         --------      -----------
<S>                          <C>                <C>                 <C>                <C>                <C>             <C>
Accrued expenses             $      76          $      85           $      74          $     120          $      74       $    142
                             =========          =========           =========          =========          =========       ========

Additional paid-in capital   $  37,545          $  38,008           $  37,672          $  38,135          $  37,675       $ 38,138
                             =========          =========           =========          =========          =========       ========

Unearned stock-based
compensation                 $      --          $     259           $      --          $     210          $      --       $    161
                             =========          =========           =========          =========          =========       ========

Net loss                     $    (217)         $    (430)          $    (187)         $    (273)         $    (177)      $   (248)
                             =========          =========           =========          =========          =========       ========

Net loss attributable to
common stockholders          $    (231)         $    (444)          $    (322)         $    (408)         $    (312)      $   (383)
                             =========          =========           =========          =========          =========       ========

Net loss per share
attributable to common
stockholders - basic and
diluted                      $   (0.01)         $   (0.03)          $   (0.03)         $   (0.04)         $   (0.02)      $  (0.02)
                             =========          =========           =========          =========          =========       ========
</TABLE>



The Company issued stock options to certain individuals which grants were
previously accounted for as costs of the Series B Offering. In the
circumstances, these options have vesting requirements and the Company has
changed its accounting treatment to record stock-based compensation.


                                      F-16


<PAGE>