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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, 2003

                                       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 February 20, 2004 was approximately $13.9 million.

         As of February 20, 2004,  41,482,910 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
2004 Annual Meeting of Stockholders  are incorporated by reference into Part III
of this Form 10-KSB.

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<PAGE>

                                INTRODUCTORY NOTE

         Certain  statements in this Report on Form 10-KSB (the "Report")  under
the caption  "Management's  Discussion  and  Analysis  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
intended for use in cardiac surgery.  In October 2003, the Company initiated the
multi-center  pivotal  clinical  trial on REPEL-CV.  In April 2003,  the Company
completed a $725,000 private placement  ("Series C Financing") with a consortium
of European  investors.  The Series C Financing involved the issuance of 604,000
Units at $1.20 per Unit, each  Unit consisting of Series C Convertible Preferred
Stock and two separate  warrants.  In June 2003, the Company  realized  $796,000
from the exercise of the shorter-term warrants included  in the Units, resulting
in the issuance of 6,634,000  shares of the Company's  common stock. The Company
received $193,000 in December 2003 from the sale of certain New Jersey state tax
losses.  These funds are being used to fund the REPEL-CV  clinical trial as well
as other product development activities and operating expenses.

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

CERTAIN HISTORICAL ACTIVITIES

         In March  2003,  the  Company  completed  the  purchase  of the polymer
technology  assets of a private medical  technology  company based in the United
Kingdom,  Phairson  Medical  Limited (and an  affiliated  entity;  collectively,
"Phairson"),  in exchange  for the issuance of  6,895,561  shares of  restricted
Common Stock of the Company.  The assets  comprise a series of United States and
foreign patent  applications  as well as scientific and clinical  documentation.
The Company also assumed  Phairson's  rights and obligations under a development
agreement  with the Swiss Federal  Institute of Technology and the University of
Zurich, as well as with the principal investigator of the technology development
project,  Professor JA Hubbell. Under these agreements,  the Company is required
to pay royalties of no more than 1.1% of net sales of products incorporating the
technology.  If the  Company  fails  to  sublicense  the  technology  or  pursue
development  efforts involving the technology for a period of two years or more,
the  Company  is  obligated  to  negotiate  a return  of the  technology  to the
university.  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 prior financings of the Company, and Richard Franklin,  the
Company's  Chairman,  is a  stockholder  and has served as CEO of  Phairson.  In
connection with the acquisition,  the Company granted an option, exercisable for
seven years,  to purchase up to 100,000 shares of Common Stock at $.09 per share
to Dr.  Gere S.  diZerega,  who  has  served  as a  medical  consultant  to both
companies  and who assisted in  identifying  the  acquisition  opportunity.  Dr.
diZerega had previously served as a director of the Company.

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

     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 Orthopaedics,
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  Sure-Closure  System was invented at the Rambam Medical  Center,  an
affiliate of  Technion-Israel  Institute of Technology in Haifa,  Israel and the
intellectual  property rights  relating  thereto were assigned to the Company in
1992.


                                       2
<PAGE>

     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   gynecologic  surgery,   serious  complications  during
secondary  cardiovascular surgical procedures,  restricted limb motion following
orthopedic  surgery,  and pain following any surgery.  Moreover,  adhesions that
form as a result of surgery can  increase the  complexity,  duration and risk of
subsequent  surgery.  According  to  industry  sources,  in the  United  States,
surgeons perform an estimated  440,000 abdominal  operations  annually to remove
adhesions,  and the  annual  cost in the United  States for the  removal of such
adhesions is estimated at $2.0 billion in inpatient treatment charges.

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

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

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


                                       3
<PAGE>

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

<TABLE>
<CAPTION>
 ----------------------------------------------------------------------------------------------------------------
 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  Pivotal 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 Polymers       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.  In
October 2003, the Company  initiated the  multi-center  randomized,  controlled,
pivotal  clinical  trial  based on an  Investigational  Device  Exemption  (IDE)
granted by the Food and Drug  Administration  (FDA). The objectives of the trial
are to further  demonstrate  the efficacy of REPEL-CV in reducing the extent and
severity of adhesions after open heart surgery in a neonatal patient population.
It is currently  anticipated  that this trial will be completed by mid-2006 and,
assuming  a  favorable  outcome,  will be  submitted  to the FDA as a basis  for
obtaining  approval to  commercialize  REPEL-CV for use in cardiac  surgery.  In
March 2003, the Company  completed a feasibility  clinical trial for REPEL-CV in
open heart surgical procedures. This trial commenced during the first quarter of
2002 and patient enrollment was completed during the third quarter of 2002. This
trial provided initial  information on the effectiveness of REPEL-CV in reducing
the formation of post-operative  adhesions in open heart surgical  procedures as
well as provide  additional safety data. In February 2000, the Company concluded
a multi-center, randomized, controlled U.S. pilot clinical trial for REPEL-CV in
open heart surgical procedures.  In the pilot clinical trial, REPEL-CV was rated
safe and well  tolerated  when  compared  to the  control of  standard  surgical
technique. REPEL-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.

REPEL

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

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


                                       4
<PAGE>


RESOLVE

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

     In  another  approach,  the  Company  has  been  evaluating   bioresorbable
materials which coat tissue surfaces as a means of providing  broad-based versus
site  specific  protection  against  adhesion   formation.   This  approach  has
particular application in gynecological and general abdominal surgery due to the
"bowl shaped" anatomical  configuration of the peritoneal cavity. The liquid gel
material would be poured (open procedures) or injected (laparoscopic procedures)
into the  peritoneal  cavity at the conclusion of the procedure as an instillate
to coat and lubricate the tissue  surfaces  thereby  protecting  the organs from
adhesion formation.

     A number of formulations of these instillate  materials have been evaluated
in a series of pre-clinical studies during which the preferred viscosity, tissue
adherence and resorption time were  determined.  In addition to being determined
as safe and biocompatible,  these materials proved to be efficacious in reducing
the level of adhesion  formation in the abdominal  cavity in these  pre-clinical
studies.

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.

 POLYMER TECHNOLOGY

     The material  capabilities  and  intellectual  property  portfolio  for the
Company's proprietary bioresorbable polymer technology continues to broaden. The
recent  acquisition  of the polymer  technology  assets from  Phairson Ltd. (See
Certain Historical  Events),  provides the Company with a second distinct family
of polymer  materials which have  demonstrated  positive  results in preliminary
pre-clinical adhesion prevention studies. The Company is also evaluating the use
of its  recently  developed  and  patented  reverse  thermal  gel  materials  in
anti-adhesion product and other device applications. The variety and versatility
of these  technologies  provide the Company  opportunities  to both  enhance the
performance  characteristics  of the Company's adhesion  prevention  products as
well as to pursue the  application  of these unique  materials in other  medical
products. The Company has had discussions with medical device and pharmaceutical
companies on the use of these  materials in drug and cell delivery,  implantable
medical device coatings and other bioresorbable polymer product opportunities.

     The  Company's  principal  polymer  technology  was developed at the Hebrew
University  of  Jerusalem.  The Company  entered into an  agreement  with Yissum
Research  Development  Company of the Hebrew University of Jerusalem  ("Yissum")
dated June 14, 1991, as amended (the "Yissum Agreement"),  pursuant to which the
Company  agreed to finance  research  and  development  conducted  at the Hebrew
University  of Jerusalem in the field of  biomedical  polymers.  Pursuant to the
Yissum  Agreement,  Yissum 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 to terminate the Yissum  Agreement  and/or enter into  contracts with
others in order to grant them a license  for the  development,  manufacture  and
marketing of a product and the other rights detailed in the Yissum Agreement if,
among other things,  (i) the Company stops  manufacturing  and/or  marketing the
product  for a period  of more  than 12  months;  or (ii) the  Company  breaches
the Yissum  Agreement,  a receiver or liquidator is appointed for the Company or
attachment is made over a substantial part of the Company's assets, or execution
proceedings  are taken  against the Company and the same is not  remedied or set
aside within the time periods specified in the Yissum  Agreement.  As originally
agreed, the agreement provided an additional right of termination on the part of
Yissum in the event the Company failed to achieve the first  commercial  sale by
December 31, 2001 or net sales or income of at least  $1,000,000 by December 31,
2002.  Subsequently,  the agreement was amended to permit the Company additional
time to achieve  product  commercialization  and minimum net sales.  As amended,
Yissum is prohibited from  terminating the agreement or contracting  with others
regarding the subject matter thereof following failure by the Company to achieve
$1,000,000  in annual net sales or income,  provided  the Company  pays  minimum
annual  royalties to Yissum in the amount of $50,000 for each of calendar  years
2001 through  2005,  and $100,000 for each of calendar  years 2006 through 2007.
Any and all minimum  royalty  payments  made by the  Company to Yissum  shall be
applied against the maximum royalty  obligation  referenced  above.  Because the
Company has not yet  commercialized  any  products,  the  previously  referenced
minimum royalty payments of $50,000 each were made to Yissum for the years ended
December  31, 2001,  December  31, 2002 and  December 31, 2003.  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.

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."


                                       6
<PAGE>

         Devices

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

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

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

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

          Third Party Reimbursement

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

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.


                                       7
<PAGE>

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.

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  seeks to insure that its  products are
manufactured in compliance with regulatory  requirements.  The Company  utilizes
independent testing facilities to evaluate products produced by the manufacturer
for quality assurance purposes.

     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 by the medical community of the Company's  products as an alternative
to other available products.  Such acceptance will be substantially dependent on
educating  the  medical  community  as to the  distinctive  characteristics  and
potential benefits of the Company's technologies and products.

PRODUCT LIABILITY AND INSURANCE

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

HUMAN RESOURCES

     As of February 20,  2004,  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..........         58       President, CEO & CFO
          EliPines, Ph.D...............      58       Vice President and Chief Scientific
                                                      Officer
</TABLE>

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

     Eli Pines,  Ph.D.  has served as the  Company's  Vice  President  and Chief
Scientific  Officer  since March 2003 and prior  thereto  from June 1995 to July
2000. From July 2000 to February 2003, Dr. Pines continued his relationship with
the Company in a  consulting  capacity.  From June 1992 to June 1995,  Dr. Pines
served as vice  president  and chief  technical  officer for  Fibratek,  Inc., a
biopharmaceutical  company  engaged in research,  development  and production of
medical products.  Prior to joining  Fibratek,  Inc., Dr. Pines was employed for
seventeen  years by Johnson & Johnson,  where his last  position was director of
new products  research and development with worldwide  responsibilities  for the
Surgical  Specialty  Division  of  Johnson & Johnson  Medical,  Inc.  Dr.  Pines
received a BS in Chemistry from Brooklyn  College in 1968, a Ph.D. in Biophysics
from  Syracuse  University  in 1972 and  conducted  post  doctoral  research  in
Biochemistry at The Rockefeller University from 1972 to 1974.


                                       8

<PAGE>

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 Medical Center, New York.
</TABLE>


                                       9
<PAGE>

<TABLE>
<CAPTION>
<S>                                         <C>
     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
                                            Medical Center. His research interests hypoplastic left heart syndrome,
                                            Marfan's disease and cryoablation in Fontan revision procedures.
</TABLE>


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, 2003  will not be sufficient
to meet its cash requirements through 2004. Other than the potential proceeds of
up to $2.8 million from the exercise of outstanding warrants scheduled to expire
on  March  21,  2004,  (exercisable  at $.24  per  share),  the  Company  has no
arrangements  to  secure  additional  funds.  Even  if the  warrants  are  fully
exercised,  the Company anticipates seeking additional  financing later in 2004,
subject to market conditions and obtaining  acceptable terms. 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.


                                       10
<PAGE>

     LIMITED OPERATING HISTORY; HISTORY OF LOSSES

         The Company's operations to date, have consisted primarily of research,
development  and  testing  of its  technologies  and  the  commercialization  of
CLINICEL(TM)  and the  Sure-Closure  System.  With the  exception  of the  third
quarter  of  1994,  when the gain on the  sale of the  Sure-Closure  System  was
realized,  and the first quarter of 1999, when other income was recorded related
to the reduction of prior period debt, the Company has incurred  significant net
losses from its inception.  The Company experienced net losses of $1,048,000 and
$1,577,000  for the years ended  December  31, 2002 and 2003,  respectively.  At
December 31, 2003, the Company had an accumulated  deficit of $40,261,000  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 (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, disputes may
arise  as to the  proprietary  rights  to  such  information,  which  may not be
resolved in favor of the Company.


                                       11
<PAGE>

     DEPENDENCE ON REIMBURSEMENT

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

     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
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.


                                       12
<PAGE>

     RISK OF USING HAZARDOUS MATERIALS

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

     DEPENDENCE UPON ATTRACTION AND RETENTION OF KEY PERSONNEL AND CONSULTANTS

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

     RISK OF PRODUCT LIABILITY CLAIMS; INSURANCE

     The Company's  business  exposes it to potential  liability  risks that are
inherent in the testing,  manufacturing and marketing of medical  products.  The
use of the Company's proposed products in clinical trials may expose the Company
to product  liability  claims and possible adverse  publicity.  These risks also
exist with respect to the  Company's  proposed  products,  if any,  that receive
regulatory  approval for  commercial  sale.  The Company  currently  has product
liability  insurance  coverage for the use of its proposed  products in clinical
trials.  However,  there can be no  assurance  that the Company  will be able to
obtain additional  insurance coverage at acceptable costs, if at all, or be able
to  maintain  the  current  level of  insurance.  A product  liability  or other
judgment against the Company in excess of the Company's insurance coverage could
have a material adverse effect upon the Company.

     ANTI-TAKEOVER PROVISIONS

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

     THE SALE OR  AVAILABILITY  FOR SALE OF SUBSTANTIAL  AMOUNTS OF COMMON STOCK
COULD ADVERSELY AFFECT THE STOCK PRICE

     The sale or availability  for sale of substantial  amounts of the Company's
Common Stock,  including  shares  issuable upon  exercise of  outstanding  stock
options and warrants and upon  conversion of outstanding  convertible  preferred
stock in the public  market  could  adversely  affect  the  market  price of the
Company's  Common  Stock.  As of February 20, 2004,  the Company had  41,482,910
shares of Common Stock issued and outstanding and the following shares of Common
Stock were reserved for issuance:

          o 6,634,000  shares upon conversion of outstanding  shares of Series C
     Convertible  Preferred Stock,  which is scheduled to automatically  convert
     into Common Stock as of March 26, 2004;

          o 12,042,000 shares upon exercise of outstanding warrants, exercisable
     at $0.24 per share and expiring on March 21, 2004;


                                       13
<PAGE>

          o 6,634,000 shares upon exercise of outstanding warrants,  exercisable
     at $0.12 per share and expiring on March 26, 2005;

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

          o 9,574,000 shares upon exercise of outstanding  options,  exercisable
     at prices  ranging from $0.023 to $7.88 per share and expiring from May 29,
     2004 to October 3, 2013.

     At February 20, 2004, approximately 20% 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.


ITEM 2.  PROPERTIES

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

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


ITEM 3. LEGAL PROCEEDINGS

         The Company is not a party to any material legal proceedings and is not
aware  of any  such  proceedings  which  may  be  contemplated  by  governmental
authorities.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                       14
<PAGE>

                                     PART II

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

(A)   MARKET INFORMATION

      The  Company's  Common  Stock  traded  on  the  National   Association  of
Securities Dealers Automated  Quotation System ("Nasdaq") Stock Market under the
symbol CHAI from  September  22, 1992 to August 27, 1998.  Effective  August 28,
1998,  the Company's  Common Stock was delisted from Nasdaq  because the Company
failed to satisfy applicable maintenance criteria.  Since delisting from Nasdaq,
the company's  Common Stock has been quoted on the OTC Bulletin  Board. 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, 2002

      First Quarter                                  .44            .16

      Second Quarter                                 .28            .12

      Third Quarter                                  .19            .09

      Fourth Quarter                                 .18            .05

Fiscal Year Ended December 31, 2003

      First Quarter                                  .35            .12

      Second Quarter                                 .70            .22

      Third Quarter                                  .60            .39

      Fourth Quarter                                 .47            .26

Fiscal Year Ended December 31, 2004

     January 1 through February 20, 2004             .45            .28


      On April 1, 2003,  the  Company  completed  a $725,000  private  placement
("Series C  Financing")  with a consortium of European  investors.  The Series C
Financing  involved the issuance of 604,000  Units at $1.20 per Unit.  Each Unit
consists  of one  share of  Series C  Convertible  Preferred  Stock  ("Series  C
Preferred  Stock")  convertible  into ten shares of Common  Stock;  one  warrant
entitling  the  holder to  purchase,  until June 30,  2003,  up to ten shares of
Common Stock at $0.12 per share; and one two-year  warrant  entitling the holder
to purchase up to ten shares of Common Stock at $0.12 per share.  571,600  Units
closed  on March  26,  2003 and the  remainder  on  April  1,  2003.  All of the
shorter-term  warrants were  exercised  prior to their  expiration in June 2003,
resulting in additional  proceeds to the Company of $796,000 and the issuance of
6,634,000   shares  of  Common  Stock.   The  Series  C  Preferred   Stock  will
automatically convert into common shares on the first anniversary of the initial
closing.  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 was 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.


                                       15

<PAGE>

(B) APPROXIMATE NUMBER OF EQUITY SECURITIES HOLDERS

         As of  February  20,  2004 the  number  of  holders  of  record  of the
Company's  Common  Stock  was 230.  The  Company  believes  that the  number  of
beneficial holders of its Common Stock on such date was in excess of 1,500.

(C) DIVIDENDS

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


                                       16

<PAGE>


ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

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
toward the  development  of products  for the  prevention  and/or  reduction  of
post-surgical adhesions.

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

RESULTS OF OPERATIONS

     The Company had revenue of $30,000 for the fiscal year ended  December  31,
2003 that  represented  royalties  on sales of the  Sure-Closure  System.  Total
revenue  for the fiscal year ended  December  31,  2002 was  $34,000,  also from
royalties on sales of the Sure-Closure System.

     The Company  incurred  research  and  development  expenses of $832,000 and
$330,000  for the fiscal years ended  December 31, 2003 and 2002,  respectively.
The  increase  was  primarily   attributable   to  costs   associated  with  the
manufacturing of clinical samples for and the initiation of the REPEL-CV pivotal
clinical trial. It is anticipated  that these expenses will continue to increase
in support of clinical trial and manufacturing development activities.

     General and administrative  expenses totaled $1,216,000 for the fiscal year
ended  December  31, 2003 as compared to $988,000  for the  previous  year.  The
increase was primarily  attributable to higher compensation  expenses associated
with an addition to staff,  an increase in stock-based  compensation  and higher
insurance premiums.

     Interest  income  declined to $3,000 for the fiscal year ended December 31,
2003  from  $5,000  for the  prior  fiscal  year.  The  decrease  was  primarily
attributable to lower interest rates and lower average cash balances.

     Interest expense decreased to $6,000 for the fiscal year ended December 31,
2003  from  $92,000  for the prior  fiscal  year.  The  decrease  was  primarily
attributable  to the  write-off,  in 2002, 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 $15,000 and $100,000
for the fiscal years ended December 31, 2003 and 2002, respectively. These gains
represent  the  effect of the  forgiveness  of  portions  of  outstanding  trade
liabilities upon settlement.

     The Company  realized  other  income from the  reversal of  liabilities  of
$236,000 for the fiscal year ended  December 31, 2003;  there was no  comparable
prior year amount.  During 2003,  the Company  reversed  liabilities of $194,000
relating to customer  credits and a $42,000  customer  advance.  The  underlying
transactions  occurred  during or before  1999,  and there has been little or no
communication  with the parties  regarding these  transactions  since that time.
Accordingly,  the Company believes that any claim for these amounts at this time
would be barred by applicable statutes of limitations, as well as other grounds.
Should the Company be required  to honor  these  claims in the future,  it would
result in a charge to income and adversely affect liquidity.

     The  Company  recorded a benefit for income  taxes of  $193,000  during the
fiscal year ended  December  31, 2003 as compared to $222,000 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  $1,577,000  for the fiscal year ended
December  31, 2003 as compared to a net loss of  $1,048,000  for the prior year.
The  increase  in the  current  period net loss is  attributable  to the factors
described above.


                                       17

<PAGE>

     The Company  reflected  deemed  non-cash  dividends on  preferred  stock of
$324,000 for the fiscal year ended  December 31, 2003 resulting in a net loss to
common  stockholders  of $1,901,000;  in the prior fiscal year,  deemed non-cash
dividends on preferred stock of $419,000 was recorded resulting in a net loss to
common stockholders of $1,467,000.

LIQUIDITY AND CAPITAL RESOURCES

     At December  31, 2003 the Company had cash of $680,000  compared to cash of
$497,000 at  December  31,  2002.  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, 2003 the Company had a working  capital surplus of $28,000;
however,  excluding  a  $250,000  non-cash  liability  for  accrued  stock-based
compensation  that will be  reclassified  to  additional  paid in  capital  upon
vesting  in March  2004,  there  would  have been a working  capital  surplus of
$278,000.

     Net cash used in operating  activities  was  $1,310,000 for the fiscal year
ended  December 31, 2003 as compared to $717,000 for the prior fiscal year.  Net
cash used in operating  activities  for the fiscal year ended  December 31, 2003
was primarily due to a net loss of $1,577,000  reduced by the non-cash effect of
$534,000 in  stock-based  compensation  expense and  increased  by the  non-cash
effect of  $236,000  related to the  reversal of  liabilities.  Net cash used in
operating  activities  in the  prior  year  was  primarily  due to a net loss of
$1,048,000   reduced  by  the  non-cash   effect  of  $449,000  in   stock-based
compensation  expense and increased by the non-cash effect of a $100,000 gain on
settlement of debt.

     Net cash used in investing  activities  for the fiscal year ended  December
31,  2003 was  $4,000  from the  purchase  of  office  equipment;  there  was no
comparable prior year amount.

     Net cash  provided  from  financing  activities  for the fiscal  year ended
December  31, 2003 was  $1,497,000  as compared to $842,000 for the prior fiscal
year.  Net cash provided  from  financing  activities  for the fiscal year ended
December 31, 2003 was  comprised  of $692,000 net proceeds  from the issuance of
Series C Convertible  Preferred Stock and $805,000 proceeds from the exercise of
stock options and warrants.  Net cash  provided from  activities  for the fiscal
year ended  December 31, 2002 was  comprised  of $700,000 net proceeds  from the
issuance of Series B Convertible  Preferred Stock and $142,000 proceeds from the
exercise of stock options and warrants.

     The cash  balance as of  December  31, 2003 is not  sufficient  to meet the
Company's cash requirements  through 2004. Other than the potential  proceeds of
up to $2.8 million from the exercise of outstanding warrants scheduled to expire
on  March  21,  2004  (exercisable  at $.24  per  share),  the  Company  has no
arrangements to secure additional funds.  These warrants are scheduled to expire
on March 21,  2004.  Even if the  warrants  are  fully  exercised,  the  Company
anticipates  seeking  additional  financing  later in 2004,  subject  to  market
conditions and obtaining acceptable terms. The Company will be required to raise
substantial   additional   funds  to  continue  the  clinical   development  and
commercialization of REPEL-CV, as well as its proposed products. There can be no
assurance  that the  warrants will be  exercised  or that such  arrangements  or
financings will be available as needed or on terms acceptable to the Company. We
have received a report from our independent  auditors  containing an explanatory
paragraph  stating  that  certain  conditions  raise doubt  about the  Company's
ability to continue as a going concern.

     At  December  31,  2003 the  Company  had  employment  agreements  with two
executives  which  expire  in  March  2006  and  May  2006.  Pursuant  to  these
agreements,  the  Company's  commitment  regarding  early  termination  benefits
aggregates $309,000 at December 31, 2003.

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-15.


                                       18

<PAGE>

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

      None.

ITEM 8A. 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 the
end of the period  covered by this  annual  report (the  "Evaluation  Date") 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.  In  connection  with the  evaluation
referred to in (a) above, we have  identified no change in our internal  control
of financial reporting that has materially affected,  or is reasonably likely to
materially affect, our internal control over financial reporting.


                                       19

<PAGE>

                                    PART III


ITEM 9.  DIRECTORS,  EXECUTIVE  OFFICERS,  PROMOTERS AND CONTROL  PERSONS OF THE
REGISTRANT; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

         The  information  called for by this item is  incorporated by reference
herein to the definitive  Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 2003 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 2003 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 2003 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 2003 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. (12)

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. (13)

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. (9) (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. (9)
         (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)

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

10.28    Amendment No. 4 dated as of April 24, 2002 to the Agreement between the
         Registrant and Yissum. (13)

10.29    Consulting  Agreement  between  Registrant  and Richard L.  Franklin MD
         dated April 1, 2001. (9) *

10.30    Amendment No. 1 dated May 20, 2003 to the Consulting  Agreement between
         Registrant and Richard L. Franklin MD. (9) *

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. (9) (12)

10.34(a) Amendment No. 1 dated May 14, 2003, to the Employment Agreement between
         Registrant and Robert P. Hickey. (9) *

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    Series C Subscription  Agreement  dated March March 26, 2003 (including
         exhibits and Supplement dated March 21, 2003). (13)

10.38    Agency Agreement between  Registrant and Clubb  BioCapital,  Ltd. dated
         January 9, 2003. (13)

10.39    Employment Agreement between Registrant and Eli Pines Ph.D. dated March
         1, 2003 (including indemnity letter). (9) (13)

10.40    Assignment  and  Amendment  Agreement  dated March 18, 2003,  among the
         Registrant,   Phairson  Medical,   Ltd.,  Swiss  Federal  Institute  of
         Technology and University of Zurich (including  underlying  development
         contract). (13)

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). (13)

10.43    Asset Purchase Agreement between Registrant and Phairson Medical,  Ltd.
         dated March 18, 2003. (13)

10.44    Certain  Information  Regarding  Equity  Compensation  Arrangements Not
         Approved  by  Stockholders  (including  forms of  option agreements for
         directors and officers and signature pages). *


                                       21


<PAGE>


23.1     Consent of Eisner LLP. *

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

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

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

(1)   Incorporated by reference to the  Registrant's  Registration  Statement on
      Form S-1 (File No. 33-94008) declared effective on September 22, 1992.

(2)   Incorporated by reference to Registrant's  Registration  Statement on Form
      S-1 (File No. 333-02588) declared effective on May 3, 1996.

(3)   Incorporated by reference to the Registrant's  report on Form 10-Q for the
      quarter ended September 30, 1992.

(4)   Incorporated by reference to the Registrant's  report on Form 10-K for the
      year ended December 31, 1993.

(5)   Incorporated by reference to the Registrant's  report on Form 8-K filed by
      the Company on August 12, 1994.

(6)   Incorporated by reference to the Registrant's  report on Form 10-K for the
      year ended December 31, 1994.

(7)   Incorporated by reference to the Registrant's  report on Form 10-K for the
      year ended December 31, 1996.

(8)   Incorporated by reference to the Registrant's  report on Form 10-Q for the
      quarter ended June 30, 1997.

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

(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,  2001.

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

      (b) REPORTS ON FORM 8-K

      None

                                       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
                                     President, CEO and CFO
                                     (principal executive, financial and
                                     accounting officer)

Dated:  February 20, 2004


      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/ Richard L. Franklin, M.D.           Chairman of the Board                   February 20, 2004
------------------------------
RICHARD L. FRANKLIN, M.D.


/s/ Robert P. Hickey                    Director,  President, CEO and CFO       February 20, 2004
------------------------------          (principal executive, financial and
ROBERT P. HICKEY                        accounting officer)


/s/ David G. P. Allan                   Director                                February 20, 2004
------------------------------
DAVID G. P. ALLAN


/s/ Edward A. Celano                    Director                                February 20, 2004
------------------------------
EDWARD A. CELANO


/s/ Barry R. Frankel                    Director                                February 20, 2004
------------------------------
BARRY R. FRANKEL


/s/ Walter R. Maupay                    Director                                February 20, 2004
------------------------------
WALTER R. MAUPAY


/s/ Irwin M. Rosenthal                  Director                                February 20, 2004
------------------------------
IRWIN M. ROSENTHAL
</TABLE>


                                       23

<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 Stockholders' Equity (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, 2003 and the related  statements of operations,  changes
in stockholders'  equity (capital  deficit) and cash flows for each of the years
in the two-year period ended December 31, 2003.  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, 2003 and the results of its operations and its cash flows for
each of the years in the two-year  period ended  December 31, 2003 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
minimal  working  capital and  stockholders'  equity at December 31, 2003.  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


New York, New York
February 16, 2004


                                      F-2

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.
                                  BALANCE SHEET
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                       DECEMBER 31
                                                                          2003
                                                                       -----------
<S>                                                                     <C>
                                  ASSETS
Current assets:
    Cash .......................................................        $    680
    Prepaid expenses ...........................................              37
                                                                        --------
               Total current assets ............................             717

Acquired technology, less accumulated amortization .............             293
Furniture and equipment, less accumulated depreciation .........               4
                                                                        --------

                        TOTAL ..................................        $  1,014
                                                                        ========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued expenses.......................        $    439
     Accrued stock-based compensation ..........................             250
                                                                        --------
               Total current liabilities .......................             689

Deferred royalty income ........................................             197
Convertible note payable - long term ...........................             110
                                                                        --------

               Total liabilities ...............................             996
                                                                        --------

Commitments and other matters (Note H)

Stockholders' equity:
     Preferred stock, $.01 par value; shares authorized - 5,000;
       Series C convertible shares issued and outstanding - 663                7
     Common stock, $.001 par value; shares authorized - 100,000;
       issued and outstanding - 41,483 .........................              41
     Additional paid-in capital ................................          40,248
     Unearned stock-based compensation .........................             (17)
     Accumulated deficit .......................................         (40,261)
                                                                        --------
               Total stockholders' equity ......................              18
                                                                        --------
                                    TOTAL ......................        $  1,014
                                                                        ========
</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,
                                                                          -------------------------
                                                                            2002             2003
                                                                          --------         --------
<S>                                                                       <C>              <C>
Revenue:
   Royalty income ................................................        $     34         $     30
                                                                          --------         --------

Operating expenses:
   Research and development expenses .............................             330              832
   General and administrative expenses ...........................             988            1,216
                                                                          --------         --------
          Operating expenses .....................................           1,318            2,048
                                                                          --------         --------

Loss from operations .............................................          (1,284)          (2,018)

Other income/(expense):
Other income .....................................................               1
Interest income ..................................................               5                3
Interest expense .................................................             (92)              (6)
Reversal of liabilities ..........................................                              236
Gain on settlement of debt .......................................             100               15
                                                                          --------         --------

Loss before benefit for income taxes .............................          (1,270)          (1,770)
Benefit for income taxes .........................................             222              193
                                                                          --------         --------

Net loss .........................................................          (1,048)          (1,577)
Beneficial conversion on convertible preferred stock .............            (419)            (324)
                                                                          --------         --------
Net loss attributable to common stockholders .....................        $ (1,467)        $ (1,901)
                                                                          ========         ========

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

Weighted average shares outstanding - basic and diluted ..........          16,124           34,346
</TABLE>

                 See accompanying notes to financial statements.

                                       F-4

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

         STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                          PREFERRED                COMMON             ADDITIONAL       UNEARNED
                                     -------------------     ------------------        PAID-IN        STOCK-BASED     ACCUMULATED
                                     SHARES       AMOUNT     SHARES      AMOUNT        CAPITAL        COMPENSATION      DEFICIT
----------------------------------------------------------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>         <C>           <C>              <C>            <C>
Balance - January 1, 2002 .....                              15,343    $     15       $ 36,280                         $(37,636)
  Series B preferred stock
  financing ...................       1,091     $     11                                 1,064
  Options issued as consider-
  ation  for accrued fees .....                                                             68
  Series B preferred stock
  issued as consideration for
  accrued royalties ...........          21                                                 25
  Options and warrants
  exercised ...................                               1,224           1            141
  Common stock issued in
  settlement of accounts
  payable .....................                                 192           1             74
  Series B units issued in
  settlement of other liability                                                             25
  Stock-based compensation ....                                                            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)
  Conversion of Series B
   preferred stock ............      (1,112)         (11)    11,125          11
  Options and warrants
  exercised ...................                               6,703           6            799
  Common stock issued in asset
  acquisition .................                               6,896           7            337
  Series C preferred stock
  financing ...................         663            7                                   685
  Stock-based compensation ....                                                            287
  Amortization of employee
  stock-based compensation ....                                                                              97
  Net loss for the year .......                                                                                          (1,577)
----------------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 2003 ...         663     $      7     41,483    $     41        $ 40,248        $    (17)       $(40,261)
==================================================================================================================================
</TABLE>

                 See accompanying notes to financial statements.

                                       F-5
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                            STATEMENTS OF CASH FLOWS

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED DECEMBER 31,
                                                                                            ----------------------
                                                                                             2002            2003
                                                                                            -------        -------
<S>                                                                                         <C>            <C>
Cash flows from operating activities:
    Net loss ........................................................................       $(1,048)       $(1,577)
    Adjustments to reconcile net loss to net cash used in operations:
        Deferred royalty income .....................................................           (34)           (30)
        Stock-based compensation ....................................................           449            534
        Amortization of acquired technology .........................................                           51
        Gain on settlement of debt ..................................................          (100)           (15)
        Reversal of liabilities .....................................................                         (236)
        Amortization of discount on convertible promissory notes ....................            92
        Changes in operating assets and liabilities:
            (Increase) in prepaid expenses ..........................................           (20)            (6)
            (Decrease) in accounts payable and accrued expenses .....................           (65)           (13)
            (Decrease) in accrued stock-based compensation &  other liabilities .....            (5)            (4)
                                                                                            -------        -------

                Net cash used in operating activities ...............................          (717)        (1,310)
                                                                                            -------        -------

Cash flows from investing activities:
    Purchase of equipment ...........................................................                           (4)
                                                                                            -------        -------
        Net cash used in investing activities .......................................                           (4)
                                                                                            -------        -------

Cash flows from financing activities:
    Net proceeds from issuance of Series B Convertible Preferred Stock ..............           700
    Net proceeds from issuance of Series C Convertible Preferred Stock ..............                          692
    Proceeds from exercise of stock options and warrants ............................           142            805
                                                                                            -------        -------
       Net cash provided by financing activities ....................................           842          1,497
                                                                                            -------        -------

Net  increase in cash ...............................................................           125            183
Cash at beginning of year ...........................................................           372            497
                                                                                            -------        -------
Cash at end of year .................................................................       $   497        $   680
                                                                                            =======        =======

Supplementary cash flow information:

    Interest paid ...................................................................       $     6        $     6
Non-cash investing and financing activities:
    Options issued as consideration for accrued consulting fees .....................            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
    Common stock and options issued in conjunction with the acquisition of technology                          344
    Conversion of Series B preferred stock into common stock ........................                           11
</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  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
intended for use in cardiac surgery.  In October 2003, the Company initiated the
multi-center  pivotal  clinical  trial on REPEL-CV.  In April 2003,  the Company
completed a $725,000 private placement  ("Series C Financing") with a consortium
of European  investors.  The Series C Financing involved the issuance of 604,000
Units at $1.20 per Unit. In June 2003,  the Company  realized  $796,000 from the
exercise of warrants to purchase 6,634,000 shares of the Company's common stock.
The Company  received  $193,000  in  December  2003 from the sale of certain New
Jersey  state  tax  losses.  These  funds are  being  used to fund the  REPEL-CV
clinical  trial as well as other product  development  activities  and operating
expenses.

     The accompanying financial statements have been prepared on a going concern
basis.  As shown in the  accompanying  financial  statements,  the  Company  has
experienced  recurring  net  losses,  has used its  cash in  operations  and has
minimal  working  capital and  stockholders'  equity at December 31, 2003.  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.  The
Company intends to pursue additional equity financings including the exercise of
outstanding  warrants as well as continued  participation  in the New Jersey Tax
Benefit  Transfer  Program.  There is no  assurance  that  initiatives  to raise
additional capital will be successful or that other financing  arrangements will
be available  or that the Company will achieve or 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:

      Royalty income is based on the quarterly sales of the Sure-Closure  System
and any line extensions or embodiments thereof through June 2004.  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]  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.

  [3] Research and development:

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

  [4] 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  Standards  ("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>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                                       -----------------------
                                                                                         2002             2003
                                                                                       -------        -------
<S>                                                                                    <C>            <C>
        Reported net loss attributable to common stockholders                          $(1,467)       $(1,901)
        Stock-based employee compensation expense
            included in reported net loss                                                  277            107
        Stock-based employee compensation determined under
            the fair value based method                                                   (304)          (161)
                                                                                       -------        -------

        Pro forma net loss attributable to common stockholders                         $(1,494)       $(1,955)
                                                                                       =======        =======

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

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


                                      Year Ended December 31,
                                      -----------------------
                                        2002       2003
                                        ----       ----
        Dividend yield                    0%         0%

        Expected volatility             104%       103%


        Risk free interest rate         3.8%       2.2%
        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] 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 for the years ended December 2002 and
2003 excludes the effect from the potential exercise or conversion of securities
which would result in the issuance of incremental shares of common stock because
the effect would be anti-dilutive.

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


                                                     DECEMBER 31,
                                             ---------------------------
                                                2002             2003
                                             ----------       ----------
        Convertible promissory notes            110,000          110,000
        Convertible preferred stock          11,125,000        6,634,000
        Options                               9,360,000        9,574,000
        Warrants                             12,042,000       19,270,000
                                             ----------       ----------
                                             32,637,000       35,588,000
                                             ==========       ==========


(NOTE C) - FURNITURE AND EQUIPMENT:


     Furniture and equipment consists of the following at December 31:

                                                                  ESTIMATED
                                                       2003      USEFUL LIFE
                                                     -------     -----------
                 Office equipment                    $ 4,000       5 years
                                                     -------
                                                       4,000

                 Less accumulated depreciation             0
                                                     -------
                                                     $ 4,000
                                                     =======


(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.


(NOTE E) - STOCKHOLDERS' EQUITY:


  [1] Common stock:

     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.

       In  March  2003,  the  Company  completed  the  purchase  of the  polymer
technology  assets of a private medical  technology  company based in the United
Kingdom,  Phairson  Medical  Limited (and an  affiliated  entity;  collectively,
"Phairson"),  in exchange  for the issuance of  6,896,000  shares of  restricted
common stock of the Company. The assets comprise a series of


                                       F-9

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - STOCKHOLDERS' EQUITY:  (CONTINUED)

 [1] Common stock: (continued)

United States and foreign patent applications as well as scientific and clinical
documentation.  The Company also assumed Phairson's rights and obligations under
a development  agreement with the Swiss Federal  Institute of Technology and the
University  of  Zurich,  as well  as  with  the  principal  investigator  of the
technology  development project,  Professor JA Hubbell.  Under these agreements,
the Company is required  to pay  royalties  of no more than 1.1% of net sales of
products  incorporating  the technology.  If the Company fails to sublicense the
technology or pursue  development  efforts involving the technology for a period
of two years or more,  the  Company is  obligated  to  negotiate a return of the
technology to the university. In connection with this transaction,  $344,000 was
recorded as acquired technology which is being amortized over the estimated life
of 5 years. 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.  Certain
stockholders of Phairson have participated in previous financings of the Company
and Richard Franklin, the Company's Chairman, is a stockholder in and has served
as CEO of Phairson.


     In March  2003,  the  Company  issued  11,125,000  shares of  common  stock
pursuant to the automatic conversion of 1,112,000 shares of Series B convertible
preferred stock which were issued in March 2002.

     During June 2003,  6,634,000 shares were issued as a result of the exercise
of warrants issued during the Series C private  placement.  During 2003,  69,000
shares of common stock were issued as a result of the exercise of stock  options
by a former Director.

  [2] Preferred stock:

      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. The remainder of the shorter term warrants expired. 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  and  $105,000  were  charged to the net loss
attributable  to common  stockholders  for the years ended December 31, 2002 and
2003, respectively.

      On April 1, 2003,  the  Company  completed  a $725,000  private  placement
("Series C  Financing")  with a consortium of European  investors.  The Series C
Financing  involved the issuance of 604,000  Units at $1.20 per Unit plus 59,400
broker

                                      F-10

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - STOCKHOLDERS' EQUITY:  (CONTINUED)

 [2] Preferred stock: (continued)

Units.  Each Unit consists of one share of Series C Convertible  Preferred Stock
("Series C Preferred  Stock")  convertible  into ten shares of Common Stock; one
warrant entitling the holder to purchase,  until June 30, 2003, up to ten shares
of Common  Stock at $0.12 per share;  and one  two-year  warrant  entitling  the
holder to  purchase  up to ten shares of Common  Stock at $0.12 per  share.  The
Series C Preferred  Stock will  automatically  convert into common shares on the
first  anniversary  of the  initial  closing.  The broker also  received  59,400
four-year  warrants  each  entitling  the holder to  purchase up to 10 shares of
Common Stock at $0.12 per share.

            The Company  allocated  the proceeds  between the Series C Preferred
Stock ($293,000) and the detachable  warrants based on the relative fair values.
The  Company is  reflecting  a deemed  dividend  for the  beneficial  conversion
feature of the  Series C  Preferred  Stock,  which was  limited to the  proceeds
allocated  to the Series C Preferred  Stock,  over the one-year  period  through
automatic  conversion.  Accordingly,  $219,000  was  charged  to  the  net  loss
attributable to common stockholders for the year ended December 31, 2003.

  [3]  Warrants:

     As of December 31, 2003, there were warrants  outstanding to purchase up to
12,042,000 shares of the Company's common stock at $0.24 per share and 7,228,000
shares of the Company's common stock at $0.12 per share.

  [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,  2003,  there were no options  outstanding  pursuant to the
1992 Plan,  options to purchase  679,000 shares of common stock were outstanding
pursuant  to the 2000 Plan and options to  purchase  6,267,000  shares of common
stock were outstanding  pursuant to the 2001 Plan are outstanding.  In addition,
options to purchase 2,628,000 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, 2003,  there were  5,319,000  options  available  for grant
under these plans.  Operating expenses include the following charges relating to
stock options:


                                               Year Ended December 31,
                                             ---------------------------
                                               2002               2003
                                             --------           --------
        Employees                            $277,000           $107,000
        Consulting fees                       172,000            427,000
                                             --------           --------
                                             $449,000           $534,000
                                             ========           ========


                                       F-11

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE E) - STOCKHOLDERS' EQUITY:  (CONTINUED)

 [4]  Options:  (continued)


     A summary of the status of the  Company's  stock options as of December 31,
2002 and 2003,  and changes  during the years ended on those dates is  presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              2002                            2003

                                                        WEIGHTED-AVERAGE                WEIGHTED-AVERAGE
                                                SHARES   EXERCISE PRICE    SHARES        EXERCISE PRICE
                                                ------   --------------    ------        --------------
<S>                                             <C>          <C>          <C>          <C>
        Outstanding at beginning of year        3,841        $   1.17     9,360        $   0.76
        Granted                                 5,718            0.13       350            0.28
        Exercised                                 (74)           0.07       (69)           0.15
        Forfeited                                (125)           2.00       (67)           3.10
        Outstanding at end of year              9,360            0.53     9,574            0.50
        Options exercisable at year-end         5,544            0.76     7,581            0.58

        Weighted-average grant date fair
        value of options granted during the
        year                                                     0.30                      0.26
</TABLE>


     Included in the preceding  table are 4,068,000 and 350,000  options granted
to non-employees and non-employee directors in 2002 and 2003, respectively.  The
weighted-average  grant  date fair  value of such  options  was $0.30 and $0.26,
respectively.

     Options to purchase 5,200,000 shares of common stock,  including  2,200,000
to officers and 3,000,000 to a director,  pursuant to the 2001 Plan were granted
at the closing of the Series B Offering in March 2002.  The options  vest in one
third  increments  as of the grant date and the first and  second  anniversaries
thereof and will expire no later than seven  years from the vesting  dates.  The
exercise price for the options is $0.12 per share.  At the closing of the Series
B  Offering,  the market  price of the  Company's  common  stock was $0.38.  The
Company recorded $534,000 of compensation  expense attributable to these options
in 2003.



     The  following  table  summarizes  information  about fixed  stock  options
outstanding at December 31, 2003 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                        Options Outstanding                                     Options Exercisable
                        ------------------------------------------------------      ------------------------------------
         Range                          Weighted-Average
    Weighed Average      Number             Remaining         Weighted-Average        Number
    Exercise Prices    Outstanding       Contractual Life      Exercise Price       Exercisable         Exercise Price
    ---------------    -----------       ----------------      --------------       -----------         --------------
<S>                    <S>              <C>                   <C>                   <C>                 <C>
       $0.02 - 0.82      7,642               6 years                $0.15              5,758                $0.16
       1.00 -  2.00      1,759               3 years                 1.69              1,650                 1.64
       4.00 -  4.75        162               2 years                 4.02                162                 4.02
       7.00 -  7.88         11                1 year                 7.57                 11                 7.57
                         -----                                      -----              -----                -----
                         9,574               4 years                $0.50              7,581                $0.58
</TABLE>


(NOTE F) - INCOME TAXES:


     At December  31, 2003,  the Company has  approximately  $37,116,000  of net
operating  loss  carryforwards  to offset  future  federal  taxable  income  and
approximately  $672,000 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 2023.  Past and
future issuances of the Company's



                                       F-12

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE F) - INCOME TAXES:  (CONTINUED)

stock may subject  the  Company to  limitations  on the  utilization  of its net
operating loss and research and development tax credit carryforwards.

     The  Company  has   participated  in  the  Tax  Benefit   Transfer  Program
administered by the State of New Jersey under which $2,830,000 and $2,459,000 in
eligible loss carryforwards,  covering the remainder of tax year 1997, were sold
to PSE&G in exchange for cash payments of approximately $222,000 and $193,000 in
2002 and 2003, respectively. The Company anticipates similar transactions during
2003 and  beyond,  contingent  upon  approvals  from  the  State  Department  of
Taxation. At December 31, 2003, the Company has net operating loss carryforwards
for New Jersey  State  income tax purposes of  approximately  $12,616,000  which
expire through 2009.

     The deferred tax asset,  which amounted to $14,548,000 at December 31, 2003
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  increased  by $121,000 in 2002 and  increased by
$527,000 in 2003.


     The income  tax  benefit  of  $222,000  and  $193,000  for the years  ended
December  31,  2002 and 2003  reflect  the  Company's  participation  in the Tax
Benefit Transfer Program described above.

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

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                      --------------------------------
                                                                          2002                2003
                                                                      ------------        ------------
<S>                                                                   <C>                 <C>
               Income tax benefit at the federal statutory rate       $   (432,000)       $   (602,000)
               State and local income taxes, net of effect on
               federal taxes                                               (76,000)           (106,000)
               Increase in valuation allowance                             121,000             527,000
               Sale of state net operating loss carryforwards             (222,000)           (193,000)
               Reduction in deferred tax asset from transfer of
               state net operating loss carryforwards                      255,000             221,000
               Other                                                       132,000             (40,000)
                                                                      ------------        ------------
                                                                      $   (222,000)       $   (193,000)
                                                                      ============        ============

        The deferred tax asset at December 31 is as follows:

                                                                          2002                2003
                                                                      ------------        ------------
               Net operating loss carryforward                        $ 13,139,000        $ 13,376,000
               Research and development credit carryforward                641,000             672,000
               Other                                                       241,000             500,000
                                                                      ------------        ------------
                                                                        14,021,000          14,548,000

               Valuation allowance                                     (14,021,000)        (14,548,000)
                                                                      ------------        ------------
                                                                      $          0        $          0
                                                                      ============        ============
</TABLE>


                                       F-13

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(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.

 [2] Dimotech agreement:


     During July 1995, the Company entered into an agreement with Dimotech Ltd.,
pursuant to which the Company  financed  and  Dimotech  conducted  research  and
development with regard to the scar management  program.  In connection with the
agreement,  Dimotech assigned to the Company its worldwide rights to the patents
and  know-how  to  develop,  manufacture  and market  products  relating to this
technology.  In 2000,  this  agreement  was  terminated  and all rights  therein
reverted  back to  Dimotech.  In 2001,  the Company  reached a  settlement  with
Dimotech  with respect to past due royalties  and accrued  interest  aggregating
$125,000. Pursuant to the settlement, the Company paid $52,000, issued a $40,000
note  payable  (convertible  into common  stock at $1.00 per share) and recorded
$25,000 as accrued expenses, which was converted into 21,000 Series B Units upon
the  closing  of the  Series B  Offering  in 2002.  Dimotech  forgave  $8,000 in
connection with the settlement.

(NOTE H) - COMMITMENTS AND OTHER MATTERS:

  [1]  Lease:

     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,  2003,  the Company has  employment  agreements  with two
executives  which  expire  in  March  2006  and  May  2006.  Pursuant  to  these
agreements,  the  Company's  commitment  regarding  early  termination  benefits
aggregates $309,000 at December 31, 2003.

  [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.


                                       F-14

<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


(NOTE H) - COMMITMENTS AND OTHER MATTERS:  (CONTINUED)


 [4] Reversal of liabilities:

       During 2003, the Company  reversed  liabilities  of $194,000  relating to
customer credits and a $42,000  customer  advance.  The underlying  transactions
occurred  during or before 1999,  and there has been little or no  communication
with the parties regarding these transactions since that time. Accordingly,  the
Company  believes  that any claim for these amounts at this time would be barred
by applicable  statutes of  limitations,  as well as other  grounds.  Should the
Company be required to honor these  claims in the future,  it would  result in a
charge to income and adversely affect liquidity.

 [5]  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.
("MedChem")  substantially all of its assets related to the Sure-Closure System,
a disposable wound closure device,  including  rights,  agreements and licenses.
The terms of the agreement  provide that the Company is entitled to royalties of
10% of the net sales (as defined in the  agreement),  through June 30, 2004,  of
the  Sure-Closure  System  and any line  extensions  or future  embodiments.  In
connection  with this  transaction,  $644,000 was  recorded as deferred  royalty
income and through  December  31, 2003 has been reduced by $447,000 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.


(NOTE J) - RELATED PARTY:

     In each of 2002 and 2003, the Company paid $120,000 in business  management
consulting fees to Richard Franklin, the Chairman of its Board of Directors.


     See NOTE E [1] with respect to Company's transaction with Phairson Ltd.


(NOTE K) - GAIN ON SETTLEMENT OF DEBT:

     For the years ended  December  31, 2002 and 2003, a gain on  settlement  of
debt of $100,000 and $15,000,  respectively,  are attributable to the cumulative
forgiveness of portions of certain  outstanding trade obligations settled during
the year.


                                      F-15

<PAGE>

                                 EXHIBIT INDEX

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

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

10.44    Certain  Information  Regarding  Equity  Compensation  Arrangements Not
         Approved  by  Stockholders  (including  forms of option  agreements for
         directors and officers and signature pages).

23.1     Consent of Eisner LLP.

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

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