SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-K


(Mark
One)


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


For
the fiscal year ended December 31, 2009


or


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


For
the transition period
from                              to


Commission
file number:  0-20580





SYNTHEMED, INC.


(Exact
name of registrant as specified in its charter)


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





200
      Middlesex Essex Turnpike, Suite 210
              08830Iselin,
      New Jersey
              (Zip
      Code)(Address
      of principal executive offices)





(732)
404-1117


(Registrant’s telephone number,
including area code)





Securities
registered under Section 12(b) of the Exchange Act:


NONE


Securities
registered under Section 12(g) of the Exchange Act:





COMMON
STOCK—PAR VALUE $.001 PER SHARE


(Title
of class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes   ̈    No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x




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 whether the registrant has submitted electronically and posted on
its corporate web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).     Yes   ̈    No   ̈




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




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
(as defined in Rule 12b-2 of
the Exchange Act). Check one:





Large
      accelerated filer   ̈
                Accelerated
      Filer   ̈
                Non-accelerated
      filer   ̈
                Smaller
      reporting company  x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).    Yes   ̈    No  x




The
aggregate market value of the registrant’s voting and non-voting common equity
held by non-affiliates of the registrant was approximately $14,000,000 
based on the last reported sale price of the registrant’s common stock as of
June 30, 2009.




At
February 28, 2010, 109,041,190 shares of registrant’s Common Stock were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrant's proxy statement for the
2010 Annual Meeting of Stockholders are incorporated by reference in
Part III of this Form 10-K to the extent described
herein.













SyntheMed,
Inc.


Table of
Contents





Part I
                            Item 1
                            Business
                            2Item 1A
                            Risk
      Factors
                            12Item 1B
                            Unresolved
      Staff Comments
                            19Item 2
                            Properties
                            19Item
      3
                            Legal
      Proceedings
                            19Item
      4
                            [Removed
      and Reserved]
                            19Part II
                            Item 5
                            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                            20Item 6
                            Selected
      Financial Data
                            20Item
      7
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            21Item 7A
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            25Item 8
                            Financial
      Statements and Supplementary Data
                            25Item
      9
                            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                            25Item 9A(T)
                            Controls
      and Procedures
                            25Item 9B
                            Other
      Information
                            26Part III
                            Item
      10
                            Directors,
      Executive Officers and Corporate Governance
                            26Item 11
                            Executive
      Compensation
                            26Item
      12
                            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                            26Item
      13
                            Certain
      Relationships and Related Transactions, and Director
      Independence
                            26Item
      14
                            Principal
      Accountant Fees and Services
                            27Part IV
                            Item 15
                            Exhibits,
      Financial Statement Schedules
                            27Signatures
                            30


1





PART
I


Item
1.   Business.





General





We are a
biomaterials company engaged in the development and commercialization of
innovative and cost-effective medical devices for therapeutic
applications.  Our products and product candidates, all of which are
based on our proprietary, bioresorbable polymer technology, are primarily
surgical implants designed to prevent or reduce the formation of adhesions (scar
tissue) following a broad range of surgical procedures.  Our lead
product, REPEL-CV® Bioresorbable Adhesion Barrier (“REPEL-CV”), is a
bioresorbable film designed to be placed over the surface of the heart at the
conclusion of cardiac surgery to reduce the formation of post-operative
adhesions.




We have
been selling REPEL-CV domestically since obtaining US Food and Drug
Administration (“FDA”) clearance in March 2009 and internationally since
obtaining CE Mark approval in August 2006.  In the United States and
some foreign countries, our marketing approval is limited to the pediatric
market, while the CE Mark approval, which covers the European Union and other
countries, as well as other foreign approvals subsequently obtained, apply
broadly to both the adult and pediatric market segments.  In 2009, we
generated $360,000 in product sales from REPEL-CV, compared to $181,000 in the
prior year.




Following
FDA approval for the pediatric indication, we focused on clarifying the
additional clinical data that the FDA would require as a basis for expanding US
regulatory approval to include the adult indication.  In August 2009,
we reached an understanding with the FDA regarding these data requirements and
the scope of the related clinical studies.  Clearance to commence
these clinical studies is subject to submission to and approval by the FDA of an
Investigational Device Exemption (“IDE”) application.  We do not have
sufficient cash resources, either on hand or anticipated from operations, to
fund these clinical studies.  As a result, we are exploring strategic
and other transactions to fund such studies in a way that would maximize value
for our shareholders.




We
believe that there are a number of opportunities to leverage our polymer film
technology used in REPEL-CV in other anatomic sites where the presence of a
temporary barrier at the surgical site may provide clinical benefit at the point
of a subsequent surgery through the reduction of post-operative adhesions. We
are currently focusing on the following two opportunities:




·
            In
      November 2008, we received 510(k) clearance from the FDA to market
      SinusShieldTM, a bioresorbable film intended to reduce adhesions and act as
      a space-occupying stent in nasal and sinus surgical procedures.
      SinusShield was developed utilizing the same polymer film used in
      REPEL-CV. We are continuing to explore a marketing/distribution
      relationship with prospective companies who focus on the ear, nose and
      throat (“ENT”) surgical market.




·
            We
      have submitted an application with the European Union regulatory authority
      for the expansion of the CE Mark indication for our polymer film to
      include use as an anti-adhesion material in gynecologic surgical
      procedures.




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. Based on secondary market research, surgeons in the United States
perform an estimated 500,000 abdominal operations annually to remove
adhesions.  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.


2





Adhesion
formation after open-heart surgical procedures is a significant complication at
the point of performing a secondary procedure.  We estimate that
secondary procedures (re-do’s) account for 15-20% of the approximately 425,000
open-heart surgeries performed annually in the United
States.  Extensive adhesions form between the surface of the heart
(epicardium) and the inner surface of the sternum after virtually every
open-heart surgical procedure.  These adhesions make opening the
sternum and accessing the heart a time consuming and dangerous process in the
secondary procedure.  There are no FDA approved products currently
available to the cardiovascular surgeon to address post-operative adhesion
formation.





Since it
is not possible to predict which patients will develop adhesion related
complications, we believe that most surgeries will benefit from routine use of
our adhesion prevention products.  We believe that current products
for the prevention or reduction of adhesions in gynecologic and general surgery
are limited by various shortcomings including: (i) undesirable handling
characteristics in the surgical environment, (ii) diminished efficacy in the
presence of blood, (iii) inability to be used in laproscopic procedures, and
(iv) failure to be absorbed. We believe that our 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.





Products and Proposed
Products





REPEL-CV®
Adhesion Barrier





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 to reduce the formation
of post-operative adhesions (scar tissue).  The significant trauma,
bleeding and fluid accumulation in the pericardial cavity during an open heart
surgical procedure invariably results in the formation of dense, vascularized
adhesions which cause the heart to become attached to the inner surface of the
sternum as well as to other vascular structures and organs adjacent to the
heart.  These adhesions evolve over time from the initial bridging of
fibrin in the form of clots which form from the residual blood present upon the
completion of the reconstructive surgical procedure on the heart.  By
placing REPEL-CV over the heart, the bridging of the fibrin is blocked and thus
the severity of these adhesions is reduced.  The use of REPEL-CV may
benefit any patient who could be considered a candidate for subsequent open
heart surgery.  We estimate that approximately 15-20% of the total
open heart surgical procedures performed in the United States involve patients
who have had prior open heart surgery and this percentage is expected to
increase as the population ages and life expectancy continues to
increase.  The presence of adhesions at the point of reoperation
represents a significant complication which increases the risk to the patient
and the cost of the procedure.  REPEL-CV is the first product approved
by the FDA to address this surgical complication.





Pivotal
Trial





In
September 2006, we reported positive efficacy results from the multi-center,
randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients who
underwent staged, open-heart surgical procedures.  The results of the
pivotal trial demonstrated that the primary clinical endpoint, based on the
level of reduction in the mean extent of adhesions between the REPEL-CV treated
patients and the control patients, was achieved.  The pivotal trial
was conducted at 15 pediatric cardiac surgery centers throughout the United
States, and enrolled 144 neonatal patients who had undergone staged, open-heart
surgical procedures. In this trial, surgeons used a four point grading system to
determine the extent and severity of adhesions in the patients.  Over
70% of the REPEL-CV treated patients were completely free of
clinically-significant adhesions, the most severe grade of adhesions measured,
as compared to less than 30% in the control patients, with a p value <
0.0001.  In the primary clinical endpoint assessment, the mean extent
of clinically-significant adhesions in the control patients was 2.5 times
greater than in the REPEL-CV patients, with a p value =
0.0005.  The results of this trial were summarized in an article
published in the August 2008 edition of The Annals of Thoracic
Surgery.





European
Clinical Study





In June
2006, we announced the successful completion of a multi-center clinical study
for REPEL-CV involving several leading cardiac surgery centers in
Europe.  At the point of the second surgical procedure, 13 of the 15
patients in the study were free of clinically-significant adhesions representing
a significant improvement over the typical experience among patients who have
undergone secondary open heart procedures. The results of this study were
summarized in an article published in the March 2007 edition of the Expert Review of Medical
Devices.


3





Previous
Studies





In March
2003, we completed a feasibility clinical trial for REPEL-CV in open heart
surgical procedures.  This trial commenced during the first quarter of
2002 and patient enrollment was completed during the third quarter of
2002.  This trial provided initial information on the effectiveness of
REPEL-CV in reducing the formation of post-operative adhesions in open heart
surgical procedures as well as additional safety data. In February 2000, we
concluded a multi-center, randomized, controlled U.S. pilot clinical trial for
REPEL-CV in open heart surgical procedures. In the pilot clinical trial,
REPEL-CV was rated safe and well tolerated when compared to the control of
standard surgical technique.  REPEL-CV was evaluated in a series of
pre-clinical studies which were conducted at the University of Southern
California and at New York Presbyterian Medical Center.  Throughout
these studies, REPEL-CV was rated as safe and well-tolerated and was shown to
virtually prevent the formation of adhesions to the surface of the
heart.





Regulatory





In March
2009, the FDA approved REPEL-CV for use in reducing the severity of
post-operative adhesions in pediatric patients who are likely to require
reoperation via sternotomy.  The approval was consistent with the
earlier recommendation in September 2007 of the FDA’s Circulatory System Devices
Advisory Panel, which also recommended the development of additional clinical
data as a basis for expanding the indicated use to include adult patients. As
stipulated in the PMA approval, we are required to conduct a post-approval
safety study in pediatric patients.





In July
2009, a separate Advisory Panel met to provide general guidance to the FDA on
the clinical requirements for anti-adhesion products in cardiac surgery as well
as, during a closed session, to comment on clinical study protocols we submitted
in support of the adult indication. In August 2009, we reached an understanding
with the FDA regarding the additional clinical data requirements for the adult
indication.  Clearance to commence these clinical studies is subject
to submission to and approval by the FDA of an IDE application.  We do
not have sufficient cash resources, either on hand or anticipated from
operations, to fund these clinical studies.  As a result, we are
exploring strategic and other transactions to fund such studies in a way that
would maximize value for our shareholders.





In August
2006, we received CE Mark approval for use of REPEL-CV to reduce the incidence,
severity and extent of post-operative adhesion formation in both adult and
pediatric patients undergoing cardiac surgery.





In July
2008, we received Health Canada’s approval to market REPEL-CV for use in
pediatric patients who undergo open heart surgery.





In 2009,
we received approvals from the regulatory authorities in Australia, Brazil,
India, Russia and Saudi Arabia for the use of REPEL-CV in all patients
undergoing cardiac surgery.  Similar applications are pending with the
regulatory authorities in Costa Rica, Columbia, South Korea, Taiwan and
Uruguay.





Other
Film-Based Product Opportunities





We are
also assessing opportunities to leverage our polymer film technology used in
REPEL-CV in other anatomic sites where the presence of a temporary barrier at
the surgical site may provide clinical benefit at the point of a subsequent
surgery and/or help to avoid post-operative complications.  For
example, in November 2008 we received 510(k) clearance from the FDA to market
SinusShieldTM, a bioresorbable film intended to reduce adhesions and act as a
space occupying stent in nasal and sinus surgical procedures. There are
approximately two million surgical procedures performed in the United States
each year involving the sinuses.  Invariably, as a result of the
trauma and bleeding which occurs during these procedures, the sinus passages
become blocked resulting in the need for a subsequent surgical procedure to
clear the blockage.  Surgeons will often use silicone and other
non-resorbable tubes to maintain clear openings of the sinus passages during the
post-operative healing period; however, these tubes must be removed which
unavoidably causes additional trauma and bleeding.  We have received
Institutional Review Board approval at a major clinical center to initiate a
clinical study to evaluate the use of SinusShield in coil form to perform the
same post-operative task as the silicone tubing but without the need to
subsequently remove the material.  The initiation of this study is
contingent upon the availability of additional financial
resources.


4





We are
assessing the potential application of our polymer film in the pelvic cavity
where the formation of post-operative adhesions following gynecologic surgery
causes various clinical complications including infertility, chronic pain and
small bowel obstruction. Various compositions of our polymer film technology
have previously been successfully evaluated in preclinical and clinical
gynecologic adhesion models.  We have successfully completed a similar
preclinical study with the current generation film and have submitted
application with the European Union regulatory authority for the expansion of
the CE Mark indication for our polymer film to include use in gynecologic
surgical procedures.





Another
potential application is in spine surgery where the trauma and bleeding during
the surgical procedure can result in the spinal nerves becoming tethered to the
adjacent structures through the formation of post-operative adhesions resulting
in chronic pain and restricted mobility.  We have conducted
preclinical studies in which our polymer film reduced the extent and severity of
peridural adhesions.   Further pursuit of this opportunity has
been suspended due to lack of financial resources.





RESOLVE





We have
evaluated bioresorbable materials that coat tissue surfaces as a means of
providing broad-based versus site specific protection against adhesion
formation.  The objective was to provide surgeons with products that
are effective in reducing the extent and severity of adhesions and are easy to
use in both open and less-invasive surgical procedures.  This approach
has particular application in gynecological and general abdominal surgery due to
the “bowl shaped” anatomical configuration of the peritoneal cavity. The viscous
solutions would be used as an instillate that is poured (open procedures) or
injected (laparoscopic procedures) into the peritoneal cavity at the conclusion
of the procedure to coat and lubricate the tissue surfaces thereby protecting
the organs from adhesion formation.  The viscous solutions would
continue to recoat the traumatized tissue surfaces as the patient is ambulated
during the immediate post-operative recovery phase.





In
preclinical studies, a number of formulations of these instillate materials had
been evaluated.   In addition to being determined as safe and
biocompatible, these materials appeared to be efficacious in reducing the level
of adhesion formation in the abdominal cavity in these preclinical
studies.  This development program has been stopped due to lack of
sufficient financial resources.





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 has been under development through preclinical
studies.  Candidate materials have been evaluated in a surrogate hand
tendon model and in a feasibility study in spinal surgery.  Our focus
has been to exploit our proprietary bioresorbable reverse thermal gel polymer
technology in the development of viscous gels for these
indications.  The novelty of this technology is, in part, associated
with its ability to rapidly transition from a liquid at room temperature to a
viscous gel when exposed to the higher temperature of internal tissue
surfaces.  This development program has been stopped due to lack of
sufficient financial resources.





Our
Polymer Technology




Our
bioresorbable polymer technology is based on a proprietary group of polymers. We
believe 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 our
proprietary polymer technology are highly biocompatible.  In addition
to products for the prevention or reduction of post-operative adhesions, we
believe that potential medical applications for our polymer technology include
resorbable sutures, stents, coatings for implantable devices and drug delivery
systems.





We
incurred expenses of $1,387,000 in 2009 and $1,609,000 in 2008 on
company-sponsored research and development activities. Our research and
development activities are currently conducted through arrangements with various
consultants, companies and institutions in the United States, Europe and
Israel.





Yissum Agreement




Our
principal polymer technology was developed at the Hebrew University of
Jerusalem. We 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 we agreed to finance research and
development conducted at the Hebrew University of Jerusalem in the field of
biomedical polymers. Pursuant to the Yissum Agreement, Yissum assigned to us the
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 us, except as set forth below. We are permitted to grant sublicenses
to our polymer technology upon certain terms and conditions.


5





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, we paid Yissum a fixed fee of $750,000 and are
obligated to pay a royalty of five percent of all net sales of our products
under the Yissum Agreement up to a maximum amount of $5,500,000 in royalties
during the term of the Yissum Agreement. We continue to fund and conduct
research programs through Yissum under 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) we stop manufacturing and/or marketing the product for a period of
more than 12 months; or (ii) we breach the Yissum Agreement, a receiver or
liquidator is appointed for us or attachment is made over a substantial part of
our assets, or execution proceedings are taken against us 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 we 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.  The agreement has subsequently been
amended on several occasions to permit us additional time to achieve minimum net
sales or income targets in exchange for payment of minimum
royalties.  Accordingly, we have paid Yissum an aggregate of $850,000
in minimum royalties to preserve our rights under the Yissum Agreement for
performance years 2001 through 2009.  A modification to the 2009
minimum royalty payment was agreed whereby we paid $50,000 of the $200,000
obligation in January 2010 with the balance, along with accumulated interest and
a potential transaction-related premium, due upon the completion of a strategic
transaction. Our rights under the Yissum Agreement are preserved through the end
of 2011 either through the payment of the 5% royalty on net sales or an annual
minimum royalty of $250,000 for performance year 2010..  Any and all
minimum royalty payments made by us to Yissum shall be applied against the
maximum royalty obligation referenced above.  We have agreed to
indemnify Yissum under certain circumstances. Upon the termination by Yissum of
the Yissum Agreement for any reason, the patents and patent applications
assigned by Yissum to us will revert in full to Yissum.





Phairson
Technology





In March
2003, we 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 our Common Stock.  The assets comprise
a series of United States and foreign patent applications as well as scientific
and clinical documentation that provide us a second platform technology for
future product development.  We 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, we are required to pay royalties of
no more than 1.1% of net sales of products incorporating the
technology.  If we fail to sublicense the technology or pursue
development efforts involving the technology for a period of two years or more,
we are obligated to negotiate a return of the technology to the
university.  Management believes that our development efforts to date
have met the requirements of the agreement.  This acquisition further
enhanced our broad-based, proprietary technology platform from which
post-operative adhesion prevention products may be derived.  In
connection with the acquisition, we 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 our Company and is currently serving in a
consulting capacity as our Medical Director.





Government
Regulation





Our
research and development activities and the production and marketing of our
products are subject to regulation for safety, efficacy and compliance with a
wide range of regulatory requirements by numerous governmental authorities in
the United States and other countries.  These requirements could cause
it to be more difficult or expensive to sell the products, and could therefore
restrict the commercial applications of such products. Product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing. For patented products or
technologies, delays imposed by the governmental approval process may materially
reduce the period during which we will have the exclusive right to exploit such
technologies.


6





US
Food and Drug Administration





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 FDA may also require
post-marketing testing and surveillance of approved products, or place other
conditions on the approvals.





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 post-market 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.
REPEL-CV and other products currently under development, with the exception of
SinusShield, as anti-adhesion products utilizing our polymer technology are
classified as Class III devices, requiring a PreMarket Approval (“PMA”)
application review process prior to commercial distribution in the United
States.  In surgical applications where the use of our materials does
not involve surgical implantation, such as the use of SinusShield in ENT
surgery, we have been able to obtain FDA clearance to market through the 510(k)
pre-market notification process.





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. A number of devices for which FDA
marketing clearance has been sought have never been cleared for
marketing.




A 510(k)
clearance will be granted if the submitted information establishes that the
proposed device is “substantially equivalent” to a legally marketed Class I or
II medical device, or to a Class III medical device for which the FDA has not
required a PMA. The FDA may determine that a proposed device is not
substantially equivalent to a legally marketed device, or that additional
information or data are needed before a substantial equivalence determination
can be made. A request for additional data may require that clinical studies be
performed to establish the device’s “substantial equivalence.”




Commercial
distribution of a device for which a 510(k) notification is required can begin
only after the FDA issues a letter finding the device to be “substantially
equivalent” to a predicate device. The FDA must make a determination with
respect to a 510(k) submission within 90 days of its receipt. The FDA may, and
often does, extend this time frame by requesting additional data or
information.




A “not
substantially equivalent” determination, or a request for additional
information, could delay or prevent the market introduction of new products for
which we file such notifications. For any of our products that are cleared
through the 510(k) process, modifications or enhancements that could
significantly affect the safety or efficacy of the device or that constitute a
major change to the intended use of the device will require new 510(k)
submissions. The FDA has implemented a policy under which certain device
modifications may be submitted as a “Special 510(k),” which will require only a
30-day review. Special 510(k)s are limited to those device modifications that do
not affect the intended use or alter the fundamental scientific technology of
the device and for which substantial equivalence can be demonstrated through
design controls.


7





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.





Foreign
Regulation





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 and is, in some countries, predicated on the product
having been approved by the FDA.





Third
Party Reimbursement





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





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





We are
actively pursuing listing of REPEL-CV on formulary in the United Kingdom,
Australia and Belgium which would allow for specific reimbursement in public
hospitals.  We are also supporting recently-appointed distributors in
Columbia, Uruguay, South Korea, Taiwan and Costa Rica in obtaining registration
to market and, in some instances, possible government reimbursement
approval.





Patents
and Proprietary Rights





In
connection with the polymer technology relating to the Yissum Agreement, we
currently hold eight United States patents, four European patents, one Canadian
patent and one Australian patent, relating to methods and compositions for
reducing or eliminating post-surgical adhesion formation as well as
bioresorbable polymeric compounds and polyurethane polymeric
compounds.  Among the claims referenced in our patents are claims
pertaining to:





·
            novel
      bioresorbable polymeric compounds of specified chemical structure and
      medical articles, including sutures and prosthetic devices, made from
      these materials as well as methods for making these
    materials;


·
            novel
      polyurethane polymeric compounds of specified chemical structure and
      medical articles, including sutures and wound and burn dressings made from
      these materials;


·
            novel
      bioresorbable polymer compounds of specified chemical structure and their
      use in post-operative adhesion
prevention;


·
            novel
      bioresorbable polymeric compositions based on AB polyester diblocks and
      triblocks;


·
            and
      novel polymeric compositions with reverse thermal gel
      properties.





These
issued patents are scheduled to expire on various dates from July 2016 through
May 2022.  In addition, there are a number of patent applications in
various stages of prosecution.   The expiration date of the first
patent relevant to REPEL-CV and other bioresorbable polymer products under
development is in 2016.  The U.S. patent terms may be extended for a
maximum of five years, depending upon the circumstances associated with
regulatory approval. Only one patent which covers a marketed product may be term
extended. If a patent expires before a product covered by such patent is
marketed, patent term extension does not apply.  Application for
extension of the patent due to expire in July 2016 is in review at the US
Patents & Trademarks Office.


8





In
connection with the polymer technology acquired from Phairson, we currently hold
two United States patents with claims for the treatment of trauma with a
composition comprising a polyanionic polymer and for a composition comprising
hydrolytically susceptible polyanionic polymer.





Competition





Our
adhesion prevention products are expected to compete with various currently
marketed products such as Interceed®, a
product of Johnson & Johnson, Seprafilm®, a
product of Genzyme, CoSeal®, a product of Angiotech Pharmaceuticals, Inc., and
Adept®, a product of ML Labs Ltd., both licensed in certain markets to Baxter
International, CardioWrap®, a product of Mast Surgical,and licensed, in certain
markets, to CryoLife and Preclude®, a
product of WL Gore.  Several other companies including, Anika
Therapeutics, Inc., Alliance Pharmaceuticals, Corp., Covidien, Integra Life
Sciences, 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.  Our products are being positioned to compete in market
segments where clinical efficacy, biocompatibility, ease of use and price are
the principal bases of competition.





Our lead
product, REPEL-CV, is the only anti-adhesion product approved by the FDA for use
in open heart surgeries.  We nevertheless encounter competition in the
United States from other products like CardioWrap and Preclude which are being
used off label to reduce adhesions particularly in staged procedures performed
on neonatal patients.  Internationally, a number of the
above-mentioned products are approved for the same indication. These competitive
products are not supported by controlled clinical studies of the type that have
been conducted for REPEL-CV through the FDA regulatory process, which, we
believe, has contributed to their achieving very limited use.





Manufacturing





We do not
have our own manufacturing facilities and do not currently intend to undertake
the direct manufacture of our products. REPEL-CV is manufactured by a series of
three independent contract manufacturers with whom we have established validated
manufacturing procedures and formal supply agreements for the production of the
polymer resin, polymer sheet stock and finished product, respectively. The
contract manufacturers are responsible to procure, test and inspect all
component materials used in the production of our products. The contract
manufacturers rely on various sources, approved by us, for the raw materials and
components. We believe that alternative sources for these raw materials and
components are available. We seek to ensure that our products are manufactured
in compliance with regulatory requirements and internally-established
specifications. We utilize independent testing facilities to evaluate products
produced by the manufacturers for quality assurance purposes. We believe we
currently have sufficient manufacturing capacity to allow for production of
REPEL-CV in quantities sufficient to support anticipated commercial
needs.





Ongoing
monitoring of the contract manufacturers’ performance is an integral part of our
quality system.  This includes active participation during production
and scheduled on-site audits of all elements of vendor quality controls. In
August 2006, in connection with obtaining CE Mark approval for REPEL-CV, we
received certification of our quality management system to ISO
13485:2003.





Marketing
and Sales





In April
2009, we began marketing and selling REPEL-CV in the United States through a
direct sales force comprised of both our own sales representatives and
independent sales representatives.  All of the field sales personnel
are expected to have experience selling cardiac device products into hospitals
and will focus their efforts on promoting the features and benefits of REPEL-CV
to both cardiovascular surgeons as well as the administrative
customers.  Consistent with the FDA approval for the pediatric
indication, the initial sales emphasis is targeted at pediatric surgical centers
as well as major hospitals where both pediatric and adult cardiothoracic
surgical procedures are performed.  By the end of 2009, we had
completed a series of product training programs for the sales personnel
providing broad coverage in most regions of the United States.  This
direct sales effort has been supported by the promotion of REPEL-CV in clinical
journals and at cardiothoracic surgical conventions.





An
incentive-based compensation plan has been developed to help us attract and
retain experienced and successful sales representatives currently working with
cardiac device companies who have established relationships with cardiac
surgeons providing them ready access to these key customers.  A
professional sales training program has been designed to enable these sales
representatives to be fully conversant with the features and benefits of
REPEL-CV.


9





A
multi-faceted advertising and sales promotion program has been developed to
support the field sales efforts.  REPEL-CV is the first and only
product with FDA approval for the reduction in the severity of adhesions in
pediatric patients who are likely to require reoperation via
sternotomy.  Our sales efforts are intended to address this unmet
clinical need and capitalize on this exclusive market opportunity.





REPEL-CV
has been available for sale in the European Union and certain Southeast Asian
and Middle Eastern markets since receipt, in August 2006, of CE Mark approval
for use in adult and pediatric cardiac surgery patients. In the international
markets, product sales are generated through a network of independent
distributors, all of whom are experienced in selling devices and medical
equipment for use by cardiac surgeons.  We are continuing to expand
and upgrade our international distribution network.  We have recently
received approvals from regulatory authorities in Australia, Brazil, Russia,
Saudi Arabia and India to market REPEL-CV for use in all patients who undergo
open heart surgery and have begun marketing the product in these countries
through independent distributors. We have also selected independent distributors
in several additional Far Eastern and Central/South American countries where
regulatory registrations for use of REPEL-CV in all cardiac surgery patients are
in process.





With
respect to SinusShield, we are currently in discussions with prospective
marketing/distribution partners who focus on the ENT surgical
market.





Human
Resources





As of
February 2010, we employed five full-time employees, one part-time employee and
retained two full-time consultants in the United States and one full-time
consultant in the United Kingdom.





Executive
Officers





The
Company's executive officers are as follows:




Name
              
              Age
              
              Positions with the CompanyRichard
      L. Franklin, MD
              
              64
              
              Executive
      Chairman and Chairman of the BoardRobert
      P. Hickey
              
              64
              
              President,
      CEO & CFO and DirectorEli
      Pines, Ph.D
              
              64
              
              Vice
      President and Chief Scientific
Officer





Richard L. Franklin, MD, has
served as our Executive Chairman since October 2008, Chairman of the Board of
Directors since June 2003 and as a director since December
2000.  Since July 2008, Dr. Franklin has been a director of Raptor
Pharmaceutical Corp., a public company focused on orphan drugs. Since 2007, Dr.
Franklin has been a director and Chief Executive Officer of Tarix
Pharmaceuticals, a private company developing compounds for the prevention of
thrombocytopenia and the enhancement of stem cell engraftment. Since September
2002, Dr. Franklin has been Chairman of DMS Data Systems, an internet-based
information services company.  From May 1996 to September 2002, Dr.
Franklin had been Chief Executive of Phairson, Ltd., a medical product
development company.  From January 1991 to May 1996, Dr. Franklin was
founder and principal of Richard Franklin & Associates and from January 1988
to December 1990, Dr. Franklin was with Boston Capital Group, both of which are
consulting firms to the healthcare industry.  From July 1986 to
December 1987, Dr. Franklin was head of Healthcare Corporate Finance at Tucker
Anthony, an investment banking firm.





Robert P. Hickey has served
as our 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 our 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. Mr. Hickey is a graduate of the University of
Scranton and received a Masters of Business Administration from Syracuse
University.


10





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





Consultants
and Advisors





We
utilize various consultants and advisors for research, development and testing
of our technologies and products. We periodically confer 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 us. Compensation to
consultants may take the form of cash, equity-based payments and royalties in
respect to covered products.  We do not believe that termination of
any individual consulting or advisory agreement would materially affect our
business. None of the consultants or advisors are employed by us and, therefore,
may have commitments to, or consulting or advisory contracts with, other
entities which may compete with their obligations to us.  Our
consultants and advisors are as follows:





Daniel Cohn,
      Ph.D.
                  
                  Dr.
      Daniel Cohn is Professor of Biomaterials Science and Head of the
      Biomedical Polymers Research Group, Casali Institute of Applied Chemistry,
      Hebrew University, Jerusalem, Israel. Dr. Cohn's main areas of research
      are biomedical resorbable polymers, surface tailoring of polymeric
      biomaterials, biomedical composites and the development of polymeric
      scaffolds for tissue engineering. Dr. Cohn developed our principal 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 sub-specialization 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.  Since October 2008, Dr. diZerega serves as our Medical
      Director on a part-time consulting basis.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.Eric
      A. Rose, M.D.
                  
                  Dr.
      Eric A. Rose is Chairman, Department of Health Policy and Associate
      Director for Clinical Outcomes at Mount Sinai Heart, New
    York.Samuel
      Weinstein, M.D.
                  
                  Dr.
      Samuel Weinstein is Director, Pediatric Cardiothoracic Surgery at The
      Children’s Hospital of Montefiore Medical Center, New York. His research
      interests include hypoplastic left heart syndrome, Marfan’s disease and
      cryoablation in Fontan revision
procedures.


11


Certain
Historical Activities
 
 We are a
Delaware corporation which was organized in August 1990 under the name of
BioMedical Polymers International, Ltd.  We changed our name to Life
Medical Sciences, Inc. in June 1992 and to SyntheMed, Inc. in May
2005.  In April 2006, we increased the number of our authorized shares
of Common Stock from 100,000,000 to 150,000,000.


Item
1A.   Risks Factors.





We
Have a History of Operating Losses and May Never Achieve
Profitability




We have incurred significant net losses
since inception. We had net losses of $4,404,000 in 2008 and $4,103,000 in 2009.
At December 31, 2009, we had an accumulated deficit of $61,275,000. Our lead
product, REPEL-CV, was recently approved for sale in the United States for a
limited pediatric indication and has generated limited revenue both domestically
and internationally. We expect to incur additional losses in connection with our
research and development activities, as well as our efforts to commercialize
REPEL-CV. Our ability to achieve profitability is dependent on obtaining FDA
approval to market REPEL-CV for the expanded adult indication and successfully
commercializing REPEL-CV in the United States.  Accordingly, the
extent of future losses and our ability to achieve profitability is uncertain.
We may never achieve or sustain a profitable level of operations.




We
Will Need Additional Capital to Fund Our Plan of Operations; Going Concern
Emphasis in Auditor’s Report




Our existing cash and cash equivalents,
together with anticipated revenue from operations, is not sufficient to fund our
planned operations through the end of 2010, even without allocating any spending
to the clinical studies needed for approval of the REPEL-CV adult indication in
the United States.  The report of our independent auditors relating to
our 2009 financial statements indicates that there is substantial doubt about
our ability to continue as a going concern.  Insufficient funds has
required us to delay, scale back or eliminate some of our operations including
research and development programs, and certain commercialization activities and
may require us to license or sell to third parties certain products or
technologies that we would otherwise seek to commercialize
independently.  We do not have sufficient cash resources, either on hand or anticipated from
operations, to fund the clinical studies required by the FDA for approval of the
REPEL-CV adult indication. As a result, we are exploring strategic and other
transactions to fund such studies in a way that would maximize value for our
shareholders.  We may not be able to complete such a transaction on
acceptable terms or at all. In addition, the terms of any financing may dilute
the holdings or adversely affect the rights of our existing stockholders. If we
are unable to enter into an acceptable strategic or other transaction or obtain
financing on acceptable terms, we may be forced to cease
operations.




We
Are Substantially Dependent on REPEL-CV to Generate Revenue




Our
commercial success is heavily dependent on REPEL-CV.  All of our
products and product candidates require regulatory approval prior to commercial
use, and many of our product candidates will require significant further
research, development and testing, including potentially extensive clinical
testing, prior to regulatory approval and commercial use. Sale of REPEL-CV in
the United States is currently limited to the pediatric indication and is
contingent upon our ability to generate sufficient interest, on the part of
cardiac surgeons and hospital management, in the use of an anti-adhesion product
which is additive in cost to the surgical procedure. Although REPEL-CV has been
on the market in a number of foreign countries for several years, we have not
achieved significant levels of overseas sales. Our ability to generate
meaningful revenue from REPEL-CV will be dependent on a variety of factors, many
of which are beyond our control.  These include:




·           Obtaining
expanded FDA and foreign regulatory approvals;




· Maintaining
satisfactory manufacturing, marketing and distribution
arrangements;




·           Degree
of market acceptance;




·           Level
of reimbursement by government and third party payers; and




·           Competition.




Our
failure to adequately address these risks will adversely affect our ability to
generate revenue.


12




Risk
That Technologies or Proposed Products Will Never Be Successfully
Developed




Certain aspects of our polymer
technology and our proposed products are under development and are subject to
the risks of failure inherent in the development of new technologies and
products based on new technologies. 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 manufacturable on a large scale, be economical to market, be
accepted by the marketplace, or generate sufficient revenues to support future
research and development programs.




If
We Fail to Obtain And Maintain The Regulatory Approvals or Clearances Necessary
to Make or Sell Our Products, Sales Could Be Delayed or Never
Realized




The jurisdictions in which we market
and plan to market REPEL-CV regulate this product as a medical device, and we
anticipate that many if not all of our other products and product candidates
would be similarly regulated. In most circumstances, we, as well as our
manufacturers, distributors and agents, must obtain regulatory clearances,
approvals and certifications and otherwise comply with extensive regulations
regarding safety, quality and efficacy standards. These regulations vary from
country to country, and the regulatory review can be lengthy, expensive and
uncertain. We may not obtain or maintain the regulatory clearances, approvals
and certifications necessary to make or market our products in our targeted
markets. Moreover, regulatory clearances, approvals and certifications that are
obtained may involve significant restrictions on the applications for which our
products can be used. In addition, we may be required to incur significant costs
in obtaining or maintaining our regulatory clearances, approvals and
certifications. If we do not obtain or maintain regulatory clearances, approvals
and certifications to enable us to make or market our products in the United
States or elsewhere, or if the clearances, approvals and certifications are
subject to significant restrictions, we may never generate significant revenues.
The regulatory requirements in some of the jurisdictions where we market or
intend to market our products are summarized below.




United States




Regulation by FDA. The FDA
regulates the clinical testing, manufacturing, labeling, distribution and
promotion of medical devices. In March 2007, the FDA accepted for review our PMA
application to market REPEL-CV in the United States for use in all
cardiothoracic surgical procedures.  In March 2009, the FDA approved
REPEL-CV for use in reducing the severity of post-operative adhesions in
pediatric patients who are likely to require reoperation via
sternotomy.  The approval was consistent with the earlier
recommendation in September 2007 of the FDA’s Circulatory System Devices
Advisory Panel, which also recommended the development of additional clinical
data as a basis for expanding the indicated use to include adult patients. As
stipulated in the PMA approval, we must conduct a post-approval safety study in
pediatric patients.  In August 2009, we reached an understanding with
the FDA regarding the additional clinical data requirements for the adult
indication.  Clearance to commence these clinical studies is subject
to submission to and approval by the FDA of an IDE application. We do not have
sufficient cash resources, either on hand or anticipated from operations, to
fund these clinical studies.  As a result, we are exploring strategic
and other transactions to fund such studies in a way that
would  maximize value for our shareholders.




We manufacture REPEL-CV in the United
States through outside third-party contract manufacturers. 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. REPEL-CV, as
well as any other products that we manufacture or distribute in the United
States, will be subject to extensive ongoing regulation by the FDA. Subsequent
discovery of previously unknown problems may result in restriction on a
product's use or withdrawal of the product from the market. Noncompliance with
applicable requirements can result in, among other things, fines, injunctions,
civil penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.





European Union and Other International
Markets




General. International sales
of medical devices are subject to the regulatory requirements of each country in
which the products are sold. Accordingly, the introduction of our product
candidates in markets outside the United States is subject to regulatory
approvals or clearances in those jurisdictions. The regulatory review process
varies from country to country. Many countries also impose product standards,
packaging and labeling requirements and import restrictions on medical devices.
In addition, each country has its own tariff regulations, duties and tax
requirements. To date, REPEL-CV has received approval for marketing in a limited
number of international markets.  The approval or clearance by foreign
government authorities is uncertain and can be expensive. Our ability to market
our products and product candidates could be substantially limited due to delays
in receipt of, or failure to receive, the necessary approvals or
clearances.


13




Requirement of CE Mark Certification
in the European Union. To market a product in the European Union, we must
be entitled to affix a CE Mark certification, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. A CE Mark enables us to market a product in all of
the countries of the European Union, as well as in other countries, such as
Switzerland and Israel, that have adopted the European Union's regulatory
standards. In August 2006 we received a CE Mark certification for the use of
REPEL-CV in cardiac surgeries. There can be no assurance that we will receive CE
Certification for any indication other than cardiac surgeries or that we will
receive CE Mark certifications for any of our other product
candidates.




Our
Patents and Proprietary Rights May Not Provide Us With Significant Competitive
Advantage




Our success will depend in part on our
ability to obtain and retain patent protection for our polymer technology and
product candidates, to preserve our trade secrets and to operate without
infringing the proprietary rights of third parties. In connection with the
polymer technology relating to the Yissum Agreement, we currently hold eight
United States patents, four European patents, one Canadian patent and one
Australian patent, relating to methods and compositions for reducing or
eliminating post-surgical adhesion formation as well as bioresorbable polymeric
compounds. In connection with the polymer technology acquired from Phairson, we
currently hold two United States patents with claims for the treatment of trauma
with a composition comprising a polyanionic polymer and for a composition
comprising hydrolytically susceptible polyanionic polymer.





Claims in pending patent applications
may not issue as patents, and issued patents may not provide us with meaningful
competitive advantages.  In addition, challenges may be instituted
against the validity or enforceability of any patent owned or licensed by us.
Furthermore, others may independently develop similar or superior
technologies, duplicate our technologies or design around the patented aspects
of our technologies. We may also infringe upon prior or future patents owned by
others, and may be forced to acquire licenses under patents belonging to others
for technology potentially useful or necessary to our business.  These
licenses may not be available on terms acceptable to us, if at all. Moreover,
patents issued to or licensed by us may be infringed by others. The cost of
litigation involving patents, whether brought by or against us, can be
substantial, and can result in adverse determinations to us, including
declaration of our patents as invalid.




We seek to protect our trade secrets
and proprietary know-how, in part, through confidentiality agreements with our
employees, consultants, advisors, collaborators and others. These agreements may
be violated by the other parties, we may not have adequate remedies for any
breach and our trade secrets may otherwise become known or be independently
developed by competitors. To the extent that consultants, key employees, third
parties involved in our projects or others independently develop technological
information, disputes may arise as to the proprietary rights to such
information, which may not be resolved in our favor.




Insufficient
Reimbursement From Government and Third Party Health Care Payers Will Negatively
Impact Our Ability to Successfully Commercialize REPEL-CV and Our Other
Products




Successful commercialization of
REPEL-CV and our 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 of
payment. Reimbursement policies vary among payers 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.
Adequate third-party reimbursement may not be available for us to establish
and maintain satisfactory price levels. Government and other third-party
payers are increasingly attempting to contain health care costs by limiting
both coverage and payment levels for new therapeutic products. If adequate
coverage and payment levels are not provided by government and third-party
payers for REPEL-CV and our other products and proposed products,
the market acceptance of these products would be adversely affected.
Internationally, reimbursement issues vary by country which can influence the
pace at which hospitals are willing to respond to surgeons' requests for new
products, particularly those that add to the total cost of the surgical
procedure rather than substituting for an existing product. In
some international markets, the use of new products may be delayed until
the product is included in a government tender under which the hospital can
apply for reimbursement. The submission and approval of tender applications
may only occur on a semi-annual or annual basis depending on the
country.


14




Our
Products May Never Achieve a Satisfactory Level of Market
Acceptance




Our future growth and profitability
will depend, in large part, on the acceptance by the medical community of
REPEL-CV and our other products and 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 proposed products. It is also important to the
commercial success of our products that our independent distributors and
representatives succeed in training a sufficient number of surgeons and in
providing them adequate instruction in the use of our products. This training
requires a commitment of time and money by surgeons that they may be unwilling
to give. Even if surgeons are willing, if they are not properly trained, they
may misuse or ineffectively use our products. This may result in unsatisfactory
patient outcomes, patient injury, negative publicity or lawsuits against us, any
of which could damage our business and reduce product sales.




Our
Reliance on Contract Manufacturers and Suppliers and Lack of Manufacturing
Experience May Hurt Our Ability to Supply Our Products on a Timely
Basis




We do not have our own manufacturing
facilities.  We rely on others for clinical and commercial
production.  In addition, some raw materials necessary for the
commercial manufacturing of our products are produced to distinct
specifications and may only be available from a limited number of
suppliers. We rely on a series of suppliers in the production of REPEL-CV,
each of whom performs a key role in production, and have not yet established
supply redundancies. Any delays or failures of the manufacturing
or packaging process at any of these suppliers, which to a large extent may
be beyond our control, could cause inventory problems or product shortages.
To be successful, however, we must be capable of manufacturing or
contracting for the manufacture of REPEL-CV and our products in
commercial quantities, in compliance with regulatory requirements and at
acceptable costs. We may manufacture certain products directly at such
time, if ever, that such products are successfully developed. We have no
experience with the direct manufacture of these proposed products. The
manufacture of these proposed products is complex and difficult, and will
require us to attract and retain experienced manufacturing personnel and to
obtain the use of a manufacturing facility in compliance with FDA and other
regulatory requirements. We may not be able to attract or retain
experienced personnel, and we may not be able to obtain the financing
necessary, to manufacture these products directly.




If
We Are Unable to Establish and Maintain an Effective Sales and Distribution
Network, Our Ability to Generate Sales and Become Profitable Will be
Impaired




We have established a network of
independent distributors to market and sell REPEL-CV in international
markets.  We have limited experience in establishing such a network
and may not be able to continue to establish new arrangements or maintain
existing arrangements in any particular country on desired terms, if at
all.  We are dependent upon the effectiveness of these distributors
and agents for the sale of REPEL-CV.  We cannot assure that the
distributors will perform their obligations in their respective territories as
expected, or that we will derive any revenue from these
arrangements.  Nor can we assure that our interests will continue to
coincide with those of our distributors and agents, or that our distributors and
agents will not seek to market independently, or with other companies, other
competitive products.  The complete product line represented by the
distributors, including REPEL-CV, is an important factor in the distributors’ or
agents’ ability to penetrate the market.  Accordingly, our ability to
penetrate the markets that we intend to serve is highly dependent upon the
quality and breadth of the other product lines carried by our distribution
network, the components of which may change from time to time, and over which we
have little or no control.  Any failure to establish and maintain an
effective sales and distribution network will impair our ability to generate
sales and become profitable.





In the
United States, we rely primarily on our own sales personnel and independent
representatives to market and sell REPEL-CV.  The addition of direct
sales personnel will increase our operating expenses. Furthermore, we cannot
assure that adding direct sales representatives will improve sales or that our
direct sales representatives will be successful in generating sufficient sales
to cover the cost of supporting their sales activities. To the extent we rely on
sales through independent representatives, any revenues we receive will depend
primarily on the efforts of these parties. We will not control the amount and
timing of marketing resources that these third parties devote to our
product.  Competition for qualified sales personnel and
representatives with the experience and skills we require is
intense.  We may experience difficulty attracting and retaining
qualified personnel and representatives to market or sell our products and we
may not be able to successfully implement this type of sales and distribution
method.


15




If
We are Not Able To Satisfy Our Obligations Under Technology Agreements, We May
Lose Rights to Technologies Important to Our Products




We have acquired the rights to
technologies pursuant to agreements with research institutions. Such
agreements, including the Yissum Agreement, contain provisions requiring
us, 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. We may not
be able to satisfy our obligations under these agreements. In the event that
certain patents and proprietary rights were to revert to the grantor, we
could be forced to cease sales of any and all products, such as REPEL-CV,
incorporating technology covered by such rights.




We
May Not Be Able To Compete Successfully Against Our Competitors




We are
engaged in rapidly evolving and highly competitive fields. Competition from
biotechnology companies, medical device manufacturers, pharmaceutical and
chemical companies and other competitors is intense. 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. Our products could be rendered noncompetitive or
obsolete by these and other competitors’ technological advances. We may be
unable to respond to technological advances through the development and
introduction of new products. Moreover, many of our existing and potential
competitors have substantially greater financial, marketing, sales,
distribution, manufacturing and technological resources than our company. These
competitors may be in the process of seeking FDA or other regulatory approvals
or clearances, or patent protection, for competitive products. Our competitors
could, therefore, commercialize competing products in advance of our products.
They may also enjoy substantial advantages over us in terms of:




·
            research
      and development expertise;


·
            experience
      in conducting clinical trials;


·
            experience
      in regulatory matters;


·
            manufacturing
      efficiency;


·
            name
      recognition;


·
            sales
      and marketing expertise;


·
            established
      distribution channels; and


·
            established
      relationships with health care providers and
  payers.





These advantages may limit the demand
for, and market acceptance of, our products.




Difficulties
of Operating in International Markets May Harm Sales of Our
Products




Internationally,
REPEL-CV is currently marketed in growing number of countries. We anticipate
that the international nature of our business will subject us and our foreign
distributors to the laws and regulations of the jurisdictions in which they
operate, and in which our products would be sold. The types of risks that we
face in international operations include:




·
            the
      imposition of governmental
controls;


·
            logistical
      difficulties in managing international operations;
  and


·
            fluctuations
      in foreign currency exchange rates.





Our international sales and operations,
if any, may be limited or disrupted if we cannot successfully meet the
challenges of operating internationally.





Use
of Hazardous Materials in Our Business May Expose us to Expensive
Claims




Medical
and biopharmaceutical research and development involves the controlled use
of hazardous materials. We and our 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 we believe that all of our current
contractors comply and anticipate that future contractors will comply with
safety procedures for handling and disposing of such materials under the
standards prescribed by federal, state and local regulations, we may be
exposed to fines and penalties for improper compliance with such
standards.  Moreover, the risk of accidental contamination or injury
from those materials cannot be completely eliminated. In the event of such
an accident, we could be held liable for any damages that result and any such
liability could be in excess of insured amounts and exceed the resources of
our company.


16




If
we Lose or Are Unable to Hire and Retain Qualified Personnel, we May Not Be Able
to Successfully Implement Our Plan of Operations




We are
dependent upon a limited number of key management, scientific and technical
personnel and consultants. In addition, our future success will depend in
part upon our ability to attract and retain highly qualified personnel. We
compete for such personnel with other companies, academic institutions,
government entities and other organizations. We may not be successful in
hiring or retaining qualified personnel. Loss of key personnel or the
inability to hire or retain qualified personnel could hurt our ability to
successfully implement our plan of operation.




We
Rely on Consultants For Certain Strategic Activities, Which Results in Less
Control Over Such Activities




We rely upon consultants and advisors
to assist in formulating research and development strategies, testing
and manufacturing and marketing-related issues.  We have less
control over the activities of our consultants than we do over our employees,
which may reflect negatively in the time and effort devoted to such
activities.  All of our consultants and advisors are employed
outside of our company and may have commitments or consulting or advisory
contracts with other entities that could conflict with their service to our
company.




We
May Be Exposed to Large Product Liability Claims




Our business exposes us to potential
liability risks that are inherent in the testing, manufacturing and
marketing of medical products. The use of our products and proposed
products in clinical trials may expose us to product liability claims and
possible adverse publicity. These risks also exist with respect to our
proposed products, if any, that receive regulatory approval for commercial
sale. We currently have product liability insurance coverage for the use of
our products in clinical trials and have obtained similar coverage for
commercial sale. Any product liability claim brought against us, with or without
merit, could result in the increase of our product liability insurance rates or
the inability to secure coverage in the future. In addition, we would have to
pay any amount awarded by a court in excess of policy limits. A product
liability or other judgment against our company in excess of insured
amounts or not covered by insurance could have a material adverse effect
upon our financial condition.




We
May Acquire Technologies or Companies in the Future, and These Acquisitions
Could Result In Dilution to Our Stockholders and Disruption of Our
Business




Entering
into an acquisition could divert management attention. We also could fail to
successfully assimilate the acquired company, which could lead to higher
operating expenses. Our stockholders could be diluted if we issue shares of our
stock to acquire another company or technology.





Risks
Related to Our Stock




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




The sale or availability for sale of
substantial amounts of our Common Stock, including shares issuable upon
exercise of outstanding stock options and warrants, in the public market
could adversely affect the market price of our Common Stock. As of February 28,
2010, we had 109,041,190 shares of Common Stock issued and outstanding and
the following shares of Common Stock were reserved for
issuance:




·
            1,475,000
      shares upon exercise of outstanding warrants, exercisable at $0.60 per
      share and expiring on April 3,
2010;





·
            210,000
      shares upon exercise of outstanding warrants, exercisable at $1.10 per
      share and expiring on August 13,
2011;





·
            10,000,000
      shares upon exercise of outstanding warrants, exercisable at $.50 per
      share and expiring on September 30,
2011;


17





·
            700,000
      shares upon exercise of outstanding warrants, exercisable at $.50 per
      share and expiring on September 30,
2012;





·
            5,000,000
      shares upon exercise of outstanding warrants, exercisable at $.20 per
      share and expiring on September 30,
2013;





·
            350,000
      shares upon exercise of outstanding warrants, exercisable at $.20 per
      share and expiring on September 30,
2013;





·
            4,000,000
      shares upon exercise of outstanding warrants, exercisable at $.20 per
      share and expiring on September 30,
2013;





·
            280,000
      shares upon exercise of outstanding warrants, exercisable at $.20 per
      share and expiring on September 30,
2013;





·
            13,583,416
      shares upon exercise of outstanding options, exercisable at prices ranging
      from $0.10 to $1.16 per share and expiring from April 23, 2010 to June 8,
      2019.





Substantially all of our outstanding
shares of Common Stock are presently saleable in the public market without
restriction. Exercise of substantially all of our outstanding options and resale
of more than half of the shares underlying our outstanding warrants are
presently covered by registration statements, which include a resale prospectus
for our “affiliates” (as that term is defined in the rules under the Securities
Act of 1933).  As such, holders of these options and warrants will be
free to sell the underlying shares in the public market without restriction so
long as the registration statements remain current.  In addition, many
of the warrants include a cashless exercise provision which, if utilized, would
permit the holder to sell the underlying shares in reliance upon Rule 144 under
the Securities Act of 1933 without commencement of a new holding
period.




Our Stock Price May Be Volatile and
the Market For Our Stock May be Illiquid




The
market price of our Common Stock has been and is likely to continue to be
highly volatile. Trading in our Common Stock has experienced low volume and
limited liquidity. Some of the factors that may affect the volatility and
liquidity of our stock price are:




·
            fluctuations
      in our operating results;


·
            our
      need and 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;


·
            changes
      in governmental regulations;
and


·
            developments
      with respect to patents or proprietary rights
  litigation.





Our
Shareholder Rights Plan and Provisions in Our Charter and Delaware Law May Deter
a Third Party From Seeking to Obtain Control of us or May Affect Your Rights as
a Stockholder




Our
Restated Certificate of Incorporation authorizes the issuance of a maximum
of 5,000,000 shares of Preferred Stock on terms that may be fixed by
our 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 our company more difficult or otherwise dilute the rights of
holders of the Common Stock and the market price of the Common Stock.
In addition, we may be subject to Delaware General Corporation Law
provisions that may have the effect of discouraging persons from pursuing a
non-negotiated takeover of our company and preventing certain changes of
control.  In addition, we have adopted a shareholder rights plan that
imposes a significant penalty upon any person or group that acquires 15% or more
of our outstanding common stock on terms not approved by our Board of
Directors.


18




Item
1B. Unresolved Staff Comments.




Not
Applicable




Item
2.  Properties.




Effective
June 1, 2006, we entered into a five-year lease for office space in a
multi-tenant building in Iselin, New Jersey. The location, which occupies 1,970
square feet, serves as our corporate headquarters. We have the right to cancel
the lease early without penalty on six months’ prior notice beginning after the
second year and we have an option to renew the lease for an additional five-year
period. We believe that this space is adequate for our present
needs.





Item
3. Legal Proceedings.





Our
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. [Removed and Reserved]


19





PART
II





Item
5.    Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.





Market
Information




Our
Common Stock is quoted on the OTC Bulletin Board under the trading symbol
“SYMD”.  The following sets forth the quarterly high and low bid
prices for our 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 StockBid Price ($)High
                              
                              
                              LowFiscal
      Year Ended December 31, 2008First
      Quarter
                              
                              
                              0.60
                              
                              
                              
                              0.34Second
      Quarter
                              
                              
                              0.66
                              
                              
                              
                              0.31Third
      Quarter
                              
                              
                              0.46
                              
                              
                              
                              0.15Fourth
      Quarter
                              
                              
                              0.24
                              
                              
                              
                              0.04Fiscal
      Year Ended December 31, 2009First
      Quarter
                              
                              
                              0.39
                              
                              
                              
                              0.07Second
      Quarter
                              
                              
                              0.40
                              
                              
                              
                              0.12Third
      Quarter
                              
                              
                              0.28
                              
                              
                              
                              0.15Fourth
      Quarter
                              
                              
                              0.32
                              
                              
                              
                              0.13




Approximate
Number of Equity Securities Holders





As of February 9, 2010, the number of
holders of record of our Common Stock was 302. We believe that there are in
excess of 1,200 beneficial holders of our Common Stock.





Dividends





We have
never paid a cash dividend on our Common Stock. We anticipate that for the
foreseeable future any earnings will be retained for use in our business and,
accordingly, do not anticipate the payment of any cash dividends.





Item
6.   Selected Financial Data.





Not Applicable.


20





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





Certain statements in this Report under
this Item 7 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, the success
of any pending or proposed clinical trial, the timing and ability to achieve
necessary regulatory approvals and market launch of any of our products or
product candidates .  Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of our company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such risks and
uncertainties include but are not limited to (i) potential adverse developments
regarding our efforts to obtain and maintain required FDA and other approvals
including, without limitation, approval by the FDA of an expanded indication of
REPEL-CV to include adult cardiac surgery patients; (ii) potential inability to
secure funding as and when needed or to engage in a strategic transaction to
support our activities and (iii) unanticipated delays associated with
manufacturing and marketing activities. See Item 1A. for a description of these
as well as other risks and uncertainties. Without limiting the foregoing, the
words “anticipates”, “plans”, “intends”, “expects” and similar expressions are
intended to identify such forward-looking statements. These statements speak
only as of the date of this Report or such earlier date to which the statement
may expressly refer.  We undertake 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.





The
discussion and analysis of our financial condition and results of operations set
forth below under “Results of Operations” and “Liquidity and Capital Resources”
should be read in conjunction with our financial statements and notes thereto
appearing elsewhere herein.





Overview





We are a
biomaterials company engaged in the development and commercialization of
innovative and cost-effective medical devices for therapeutic
applications.  Our products and product candidates, all of which are
based on our proprietary, bioresorbable polymer technology, are primarily
surgical implants designed to prevent or reduce the formation of adhesions (scar
tissue) following a broad range of surgical procedures.  Our lead
product, REPEL-CV® Bioresorbable Adhesion Barrier, is a bioresorbable film
designed to be placed over the surface of the heart at the conclusion of cardiac
surgery to reduce the formation of post-operative adhesions.




We have
been selling REPEL-CV domestically since obtaining US Food and Drug
Administration clearance in March 2009 and internationally since obtaining CE
Mark approval in August 2006.  In the United States and some foreign
countries, our marketing approval is limited to the pediatric market, while the
CE Mark approval, which covers the European Union and other countries, as well
as other foreign approvals subsequently obtained, apply broadly to both the
adult and pediatric market segments.  In 2009, we generated $360,000
in product sales from REPEL-CV, compared to $181,000 in the prior
year.




Following
FDA approval for the pediatric indication, we focused on clarifying the
additional clinical data that the FDA would require as a basis for expanding US
regulatory approval to include the adult indication.  In August 2009,
we reached an understanding with the FDA regarding these data requirements and
the scope of the related clinical studies.  Clearance to commence
these clinical studies is subject to submission to and approval by the FDA of an
IDE application.  We do not have sufficient cash resources, either on
hand or anticipated from operations, to fund these clinical
studies.  As a result, we are exploring strategic and other
transactions to fund such studies in a way that would  maximize value
for our shareholders.




We
believe that there are a number of opportunities to leverage our polymer film
technology used in REPEL-CV in other anatomic sites where the presence of a
temporary barrier at the surgical site may provide clinical benefit at the point
of a subsequent surgery through the reduction of post-operative
adhesions.  We are currently focusing on the following two
opportunities:




·
            In
      November 2008, we received 510(k) clearance from the FDA to market
      SinusShieldTM, a bioresorbable film intended to reduce adhesions and act as
      a space-occupying stent in nasal and sinus surgical procedures.
      SinusShield was developed utilizing the same polymer film used in
      REPEL-CV. We are continuing to explore a marketing/distribution
      relationship with prospective companies who focus on the ear, nose and
      throat surgical market.




21




·
            We
      have submitted an application with the European Union regulatory authority
      for the expansion of the CE Mark indication for our polymer film to
      include use as an anti-adhesion material in gynecologic surgical
      procedures.





Newly Adopted Accounting
Pronouncements





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
guidance now codified under Accounting Standards Codification (“ASC”) Topic
105-10, which establishes the FASB Accounting Standards Codification (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied in the preparation of financial statements in
conformity with GAAP. ASC Topic 105-10 explicitly recognizes rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
federal securities laws as authoritative GAAP for SEC registrants.  Upon
adoption of this guidance under ASC Topic 105-10, the Codification superseded
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
became non-authoritative.  The guidance under ASC Topic 105-10 became
effective for us as of September 30, 2009.  References made to
authoritative FASB guidance throughout this document have been updated to the
applicable Codification section.




On
October 10, 2008, the FASB issued FASB ASC 820-10-35 (Previously known as: (FSP
FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is
Not Active.”) which was effective upon issuance, including periods for which
financial statements have not been issued. It clarified the application of FASB
ASC 820-10 in an inactive market and provided an illustrative example to
demonstrate how the fair value of a financial asset is determined when the
market for that financial asset is inactive. The adoption of this FSP did not
have a material impact on our financial position and results of
operations.




In
April 2009, the FASB issued FASB ASC 820-10-65 (Previously known as: FSP
157-4 “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly”). Based on the guidance, if an entity determines that the
level of activity for an asset or liability has significantly decreased and that
a transaction is not orderly, further analysis of transactions or quoted prices
is needed, and a significant adjustment to the transaction or quoted prices may
be necessary to estimate fair value in accordance with Statement of Financial
Accounting Standards FASB ASC 820-10 (Prior authoritative literature: (SFAS)
No. 157 “Fair Value Measurements”). This FSP is to be applied prospectively
and is effective for interim and annual periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009. We
adopted this FSP for our quarter ended June 30, 2009. The adoption has had
no impact on our financial statements.




In 2008,
the FASB issued FASB ASC 815-40 (Previously known as: EITF 07-05, Determining
whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock). FASB ASC 815-40 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in FASB ASC 810-10-15 (Prior authoritative
literature: paragraph 11(a) of SFAS 133). The adoption of FASB ASC 815-40
effective January 1, 2009 did not have any impact on our financial
statements.




In
December 2007, the FASB issued FASB ASC 805-10 (Prior authoritative literature:
SFAS No. 141 (revised 2007), “Business Combinations”, which replaces
FASB Statement No. 141). FASB ASC 805-10 establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination.  FASB ASC
805-10 will change how business combinations are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. The
adoption of FASB ASC 805-10 did not have an impact on our financial position and
results of operations although it may have a material impact on accounting for
business combinations in the future which can not currently be
determined.




In April
2009, the FASB issued FASB ASC 805-10-05 (Previously known as: Statement No.
141(R)-1 "Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arises from Contingencies"). For business combinations, the
standard requires the acquirer to recognize at fair value an asset acquired or
liability assumed from a contingency if the acquisition date fair value can be
determined during the measurement period. The adoption of FASB ASC 805-10-05 as
of January 1, 2009 did not have an impact on our financial position and results
of operations; however it may have a material impact in the future which can not
currently be determined.


22




In
April 2009, the FASB issued FASB ASC 825-10-50 (Previously known as: FASB
Staff Position No. FAS 107-1) and FASB ASC 270-10-05 (Prior authoritative
literature: APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments,”) which requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This Staff Position is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We adopted this pronouncement as
of July 1, 2009 and it did not have a material impact on our financial
statements.




In May
2009, the FASB issued FASB ASC 855-10 (Previously known as:
SFAS No. 165, “Subsequent Events”) FASB ASC 855-10 establishes general
standards for accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are available to be issued
(“subsequent events”). More specifically, FASB ASC 855-10 sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
in the financial statements, identifies the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and the disclosures that should be made about events
or transactions that occur after the balance sheet date. FASB ASC 855-10
provides largely the same guidance on subsequent events which previously existed
only in auditing literature. The guidance under ASC Topic 855-10 became
effective for us as of June 30, 2009.




In
February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. 
Revised financial statements include financial statements revised as a result of
either correction of an error or retrospective application of GAAP. All of the
amendments in ASU 2010-09 are effective upon issuance of the final ASU, except
for the use of the issued date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. We adopted
ASU 2010-09 in February 2010 and did not disclose the date through which
subsequent events have been evaluated.




Recent Accounting
Pronouncements





In June
2009, the FASB has issued SFAS No. 167, Amendments to FASB Interpretation
No 46(R). SFAS No. 167 amends certain requirements of FASB Interpretation
No. 46 (revised December 2003), Consolidation of Variable Interest
Entities, to improve financial reporting by enterprises involved with variable
interest entities and to provide more relevant and reliable information to users
of financial statements. SFAS No. 167 becomes effective for us in 2010 and
has currently not been codified in the ASC. We do not expect that the
adoption of SFAS No. 167 will have a material impact on  our
financial statements.




In
October 2009, the FASB issued new guidance for revenue recognition with
multiple deliverables, which is effective for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010,
although early adoption is permitted. This guidance eliminates the residual
method under the current guidance and replaces it with the “relative selling
price” method when allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using vendor specific
objective evidence of selling price, if it exists, otherwise third-party
evidence of selling price shall be used. If neither exists for a deliverable,
the vendor shall use its best estimate of the selling price for that
deliverable. After adoption, this guidance will also require expanded
qualitative and quantitative disclosures. We are currently assessing the impact
of adoption on our financial position and results of operations.




Results
of Operations





Revenues
were $360,000 for 2009, compared to $181,000 for 2008, an increase of 99.2% or
$179,000.  Revenue is attributable to product sales of REPEL-CV in the
United States, European Union and other international markets.  The
increases in revenue is primarily attributable to our launch of REPEL-CV in the
United States in April 2009 and from initial stocking orders from new
international distributors.  Of 2009 revenue, approximately 40% was
attributable to customers in the United States.  For more detail on
geographic breakdown, see Note N of Notes to Financial Statements. The recent
FDA approval of REPEL-CV for use in pediatric patients who are likely to require
reoperation via sternotomy, coupled with the expansion of our international
distribution network, should result in increased revenue in future
periods.




Cost of
goods sold was $164,000 for 2009, compared to $102,000 for 2008, an increase of
60.5% or $62,000. The increase is mainly attributable to charges of $90,000 in
the current year period for failed inventory production runs in addition to the
costs associated with higher current year sales, offset by reductions to the
reserve for slow moving and obsolete inventory of $15,000 in 2009 as compared to
an increase to this reserve of $46,000 in the prior year . Cost of goods sold
reflects costs to process and package REPEL-CV into saleable form. The raw
material cost of the copolymer resin from which REPEL-CV is produced had not
previously been included as part of the cost of goods sold or finished goods
inventory cost as this was previously expensed as research and development
expense in 2005 and 2006. Had this cost been included, cost of goods sold would
have increased by $4,000 for the year ended December 31, 2008. Since 2008, costs
of goods sold  includes the raw material cost of the copolymer resin,
as the amount previously expensed as research and development expense has been
fully depleted during 2008.  (See Note B [4] and Note K of Notes to
Financial Statements)


23




Research
and development expenses totaled $1,387,000 for 2009, compared to $1,609,000 for
2008, a decrease of 13.8% or $222,000. The decrease is primarily attributable to
reductions of $94,000 in stock-based compensation expense, lower compensation
expense of $40,000, lower new product development costs of $89,000 and lower
product liability insurance expense of $19,000 offset by increases of $41,000 in
regulatory costs.




General
and administrative expenses totaled $1,421,000 for 2009, compared to $1,758,000
for 2008, a decrease of 19.1% or $337,000. The decrease is primarily
attributable to reductions in stock-based compensation expense of $262,000,
compensation expense of $71,000, legal fees of $30,000, and director fees,
investor relations and insurance expenses totaling $54,000, which were offset by
an increase in consulting expense of $90,000.




Sales and
marketing expenses totaled $1,508,000 for 2009, compared to $1,286,000 for 2008,
an increase of 17.3% or $222,000. The increase is primarily attributable to
increases totaling $222,000 in compensation-related  expenses and
other expenses related to the launch of REPEL-CV in the United States and
increased royalty expenses of $52,000, partially offset by a decrease in
consulting expenses of $76,000.




Interest
income totaled $20,000 for 2009, compared to $49,000 for 2008, a decrease of
58.5% or $29,000.  The decrease is primarily attributable to lower
average cash balances and lower interest rates.




We
realized other income from the reversal of liabilities of $5,000 for 2008; there
were no comparable transactions for 2009. The reversal of liabilities related to
trade and other payables which had been due and payable for at least six years
as of the date of reversal. The reversals were made due to the passage of time
and our belief, at the time of the respective reversals, that the underlying
claims would be barred by applicable statutes of limitations if recovery actions
were asserted. We do not anticipate reversing any of our existing liabilities in
the foreseeable future.




We
recorded an income tax benefit of $119,000 in 2008. This amount was attributable
to the receipt of funds associated with the sale of certain accumulated New
Jersey State tax operating losses. There was no comparable amount for 2009. (See
Note O of Notes to Financial Statements)





We
reported a net loss of $4,103,000 for 2009, compared to a $4,404,000 for 2008, a
decrease of 6.9% or $301,000.  The decrease is attributable to the
factors described above. We expect to incur losses for the foreseeable
future.





Liquidity
and Capital Resources





At
December 31, 2009 we had cash and cash equivalents of $963,000, compared to
$2,944,000 at December 31, 2008.





At
December 31, 2009 we had working capital of $816,000, compared to $2,829,000 at
December 31, 2008.





Net cash
used in operating activities during 2009 was $3,648,000, compared to $3,887,000
during 2008.  Net cash used in operating activities during 2009 was
primarily attributable to a net loss of $4,103,000, an increase of $28,000 in
accounts receivable and a decrease of $144,000 in accounts payable, partially
offset by decreases in inventory and prepaid expenses totaling $94,000, an
increase in accrued expenses of $96,000 and the impact of $437,000 in non-cash
expenses mainly comprised of stock-based compensation expense. Net cash used in
operating activities during 2008 was primarily attributable to a net loss of
$4,404,000, increases of $101,000 in accounts receivable and inventory and
decreases of $135,000 in accounts payable and accrued expenses, partially offset
by the impact of $740,000 in non-cash expenses mainly comprised of stock-based
compensation expense.





Net cash
provided by financing activities during 2009 was $1,667,000, compared to
$3,840,000 during 2008.  The 2009 amount is primarily comprised of
$1,643,000 of net proceeds from the sale of common stock, and $25,000 from the
exercise of stock options.  The 2008 amount is primarily comprised of
$3,683,000 of net proceeds from the sale of common stock, and $149,000 from the
exercise of stock options.





In
September and December 2009, we sold an aggregate of 9,000,000 units, each
consisting of one share of common stock and one warrant to purchase one share of
common stock at a purchase price of $.20 per share in a private placement,
resulting in net proceeds of $1,643,000. In September 2008, we sold an aggregate
of 10,000,000 units, each consisting of one share of common stock and one
warrant to purchase one share of common stock at a purchase price of $.40 per
share in a private placement, resulting in net proceeds of
$3,683,000.  In December 2008, we received $119,000 from the sale of
certain New Jersey state tax losses. On January 14, 2010, the Company received
proceeds of  $433,000 from the sale of certain New Jersey State tax
losses.


24





Our
existing cash and cash equivalents, together with anticipated revenue from
operations, is not sufficient to fund our planned operations through the end of
2010, even without allocating any spending to the clinical studies needed for
approval of the REPEL-CV adult indication in the United
States.  Insufficient funds has required us to delay, scale back or
eliminate some of our operations including research and development programs and
certain commercialization activities and may require us to license or sell to
third parties certain products or technologies that we would otherwise seek to
commercialize independently. We do not have sufficient cash resources, either on
hand or anticipated from operations, to fund the additional clinical studies
required for the REPEL-CV adult indication. As a result, we are exploring
strategic and other transactions to fund such studies in a way that
would  maximize value for our shareholders.  No assurance
can be given that additional financing or strategic arrangements will be
available on acceptable terms or at all. Under these circumstances there are
substantial doubts about our ability to continue as a going
concern.




At
December 31, 2009, we had employment agreements with four individuals that
expire as follows: two in September 2010, one in March 2010 and one in October
2012. Pursuant to these agreements, our commitment regarding cash severance
benefits aggregates $544,000 at December 31, 2009. We have also entered into
change of control agreements with our two executive officers pursuant to which,
upon the occurrence of events described therein, we could become obligated, in
addition to certain other benefits, to pay either 150% or 200%,
depending on the executive, of each such executive’s annual base salary plus the
greater of the prior year’s cash bonus or current year’s target
bonus.  Any severance payments under the employment agreements would
offset amounts required to be paid under the change of control agreements.





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





Not
Applicable.





Item
8.  Financial Statements and Supplementary Data.





The Index to Financial Statements
appears on page F-1, the Report of the Independent Registered Public Accounting
Firm appears on page F-2, and the Financial Statements and Notes to Financial
Statements appear on pages F-3 to F-22





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





None.





Item
9A(T).   Controls and Procedures.





Evaluation
of Disclosure Controls and Procedures





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





Annual
Report on Internal Control Over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule
13a-15(f).  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the criteria in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on our evaluation, management has concluded that
our internal control over financial reporting was effective as of
December 31, 2009.  This annual report does not include an attestation
report of our independent registered public accounting firm regarding internal
control over financial reporting pursuant to temporary rules of the Securities
and Exchange Commission.


25





Changes
in Internal Control Over Financial Reporting





In
connection with the evaluation referred to in the foregoing paragraph, we have
identified no change in our internal control over financial reporting that
occurred during the fourth quarter of 2009 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.





Inherent
Limitations on Effectiveness of Controls





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





Item
9B.  Other Information.





Not
Applicable.





PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance.





The
information called for by this item is incorporated by reference herein to the
definitive Proxy Statement to be filed by us pursuant to Regulation 14A for the
2010 annual meeting of stockholders.  Certain information with regard
to our executive officers is contained in Item 1 hereof and is incorporated by
reference in this Part III.





Item 11.  Executive
Compensation.





The
information called for by this item is incorporated herein by reference to the
definitive Proxy Statement to be filed by us pursuant to Regulation 14A for the
2010 annual meeting of stockholders.





Item 12.  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 us pursuant to Regulation 14A for the
2010 annual meeting of stockholders.





Item 13.  Certain
Relationships and Related Transactions.





The information called for by this item
is incorporated herein by reference to the definitive Proxy Statement to be
filed by us pursuant to Regulation 14A for the 2010 annual meeting of
stockholders.


26





Item
14.  Principal Accounting Fees and Services.





The information called for by this item
is incorporated herein by reference to the definitive Proxy Statement to be
filed by us pursuant to Regulation 14A for the 2010 annual meeting of
stockholders.





Part
IV





Item
15.  Exhibits, Financial Statement Schedules.





(a)(1)
      and (2)
                  
                  Financial
      Statements and Financial Statement Schedules – See page F-1.(a)(3)
                  
                  Exhibits3.1
                  
                  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)
                  
                  Amendment to Restated Certificate
      of Incorporation, dated April 22, 2005 (21)3.1(c)
                  
                  Amendment
      to Restated Certificate of Incorporation, dated April 27, 2006.
      (15)3.2
                  
                  By-Laws
      of Registrant. (1)3.3
                  
                  Certificate
      of Designations of Series D Junior Participating Preferred Stock of
      SyntheMed, Inc. (23)3.4
                  
                  Certificate
      of Elimination of Series A Convertible Preferred Stock, Series B
      Convertible Preferred Stock and Series C Convertible Preferred Stock.
      (23)4.1
                  
                  Rights
      Agreement, dated as of May 20, 2008, between SyntheMed, Inc. and American
      Stock Transfer & Trust Company, as Rights
      Agent.  (23)10.1
                  
                  The
      Registrant’s 2000 Stock Option Plan. (8) (9)10.2
                  
                  Agreement,
      dated June 14, 1991, between Registrant and Yissum Research Development
      Company of the Hebrew University of Jerusalem (“Yissum”).
    (1)10.3
                  
                  Form
      of Indemnification Agreement entered into between Registrant and certain
      officers and directors of Registrant. (2)10.4
                  
                  Assignment
      of certain rights relating to the polymer technology to Registrant by
      Yissum. (3)10.5
                  
                  Amendment
      No. 1 dated as of February 1994 to the Agreement between Registrant and
      Yissum. (6)10.6
                  
                  Amendment
      No. 2 dated as of January 1, 1996 to the Agreement between the Registrant
      and Yissum. (2)10.7
                  
                  Amendment
      No. 3 dated as of October 1, 1996 to the Agreement between the Registrant
      and Yissum. (2)10.8
                  
                  Amendment
      No. 4 dated as of April 24, 2002 to the Agreement between the Registrant
      and Yissum. (12)10.9
                  
                  Amendment
      No. 5 dated as of February 16, 2007 to the Agreement between the
      Registrant and Yissum. (22)10.10
                  
                  Amendment
      No. 6 dated as of February 6, 2009 to the Agreement between the Registrant
      and Yissum. (25)10.11
                  
                  Letter
      agreement dated as of January 24, 2010 modifying certain terms of the
      Agreement between the Registrant and Yissum. *10.12
                  
                  2001
      Non-Qualified Stock Option Plan and Stock Option Agreement.
      (11)10.13
                  
                  Indemnity
      letter between Registrant and Eli Pines Ph.D. dated March 1, 2003. (8)
      (12)


27





10.14
                  
                  Assignment
      and Amendment Agreement dated March 18, 2003, among the Registrant,
      Phairson Medical, Ltd., Swiss Federal Institute of Technology and
      University of Zurich (including underlying development contract).
      (12)10.15
                  
                  Employment
      Agreement dated October 1, 2008 between the Registrant and Robert P.
      Hickey. (8) (24)10.16
                  
                  Consulting
      Agreement dated October 1, 2008 between the Registrant and Richard L.
      Franklin, MD. (8) (24)10.17
                  
                  Consulting
      Agreement dated October 1, 2008 between the Registrant and Gere S.
      diZerega, MD. (8) (24)10.18
                  
                  Employment
      Agreement dated June 19, 2006 between the Registrant and Eli Pines, PhD.
      (8) (18)10.19
                  
                  Contract
      effective as of December 1, 1998, between Phairson Medical, Ltd. and
      Professor J. A. Hubbell, as amended (including letter agreement dated
      January 14, 2003, assigning same to Registrant). (12)10.20
                  
                  Form
      of Broker Warrant issued in April 2006 equity financing to Agent’s
      designees covering an aggregate of 1,475,000 shares.
  (16)10.21
                  
                  The
      Registrant’s 2006 Stock Option Plan. (17)10.22
                  
                  Change
      of Control Agreement dated June 19, 2006 between the Registrant and Eli
      Pines, PhD. (8) (18)10.23
                  
                  Change
      of Control Agreement dated June 19, 2006 between the Registrant and Robert
      P. Hickey. (8) (18)10.24
                  
                  Change
      of Control Agreement dated May 1, 2007 between the Registrant and Marc
      Sportsman. (8) (20)10.25
                  
                  Form
      of ISO and Non-Qualified Stock Option Agreements under the Registrant’s
      2006 Stock Option Plan. (21)10.26
                  
                  Stock
      Option Amendment Agreement, dated as of April 27, 2007, in favor of Robert
      P. Hickey. (20)10.27
                  
                  Stock
      Option Amendment Agreement, dated as of April 27, 2007, in favor of Eli
      Pines, PhD. (20)10.28
                  
                  Form
      of Broker Warrant issued in the August 2007 equity placement to Agent's
      designees, covering an aggregate of 210,000 shares.(20)10.29
                  
                  Supply
      Agreement, dated as of June 12, 2007, between our company and Diagnostic
      Chemicals Limited, doing business as BioVectra (portions of this exhibit
      have been redacted and filed separately with the SEC pursuant to a request
      for confidential treatment). (20)10.30
                  
                  Supply
      Agreement, dated as of March 29, 2007, between our company and Chem
      Development Inc. (portions of this exhibit have been
      omitted  and filed separately with the SEC pursuant to a request
      for confidential treatment).  (19)10.31
                  
                  Supply
      Agreement, dated as of March 18, 2007, between our company and Surgical
      Technologies Inc. (portions of this exhibit have been
      omitted  and filed separately with the SEC pursuant to a request
      for confidential treatment). (19)10.32
                  
                  Form
      of Subscription Agreement for September 2008 unit placement (including
      form of investor warrants). (24)10.33
                  
                  Agency
      Agreement for September 2008 unit placement. (24)10.34
                  
                  Form
      of Broker Warrant to placement agent for 700,000 shares for September 2008
      unit placement. (24)10.35
                  
                  Stock
      Option Agreement dated October 1, 2008 between Registrant and Richard L.
      Franklin, MD.
(25)


28





10.36
                  
                  Stock
      Option Agreement dated October 1, 2008 between Registrant and Gere S.
      diZerega, MD. (25)10.37
                  
                  Form
      of Subscription Agreement for investors in the September/December 2009
      unit placement (including form of investor warrant), pursuant to which an
      aggregate of 9,000,000 units were sold.(27)10.38
                  
                  Agency
      Agreement dated September 30, 2009 between SyntheMed, Inc. and Clubb
      Capital Limited, as placement agent. (27)10.39
                  
                  Broker
      warrant issued for 630,000 shares to the placement agent in connection
      with the September/December
  2009  placement.(27)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, a  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 (Reg.
      No. 33-94008) declared effective on September 22, 1992.(2)
                  Incorporated
      by reference to Registrant’s Registration Statement on Form S-1 (Reg. 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)
                  Intentionally
      omitted.(5)
                  Intentionally
      omitted.(6)
                  Incorporated
      by reference to the Registrant’s report on Form 10-K for the year ended
      December 31, 1994.(7)
                  Intentionally
      omitted(8)
                  Indicates
      a management contract or compensatory plan or
  arrangement.(9)
                  Incorporated
      by reference to the Registrant’s Registration Statement on Form S-8 filed
      in January 2000.(10)
                  Intentionally
      omitted.(11)
                  Incorporated
      by reference to the Registrant’s report on Form 10-K for the year ended
      December 31, 2001.(12)
                  Incorporated
      by reference to the Registrant’s report on Form 10-KSB for the year ended
      December 31, 2002.(13)
                  Intentionally
      omitted.(14)
                  Intentionally
      omitted.(15)
                  Incorporated
      by reference to the Registrant’s report on Form 10-QSB for the quarter
      ended March 31, 2006.(16)
                  Incorporated
      by reference to the Registrant’s report on Form 8-K filed in April
      2006.(17)
                  Incorporated
      by reference to the Registrant’s Schedule 14A definitive proxy statement
      for its 2006 annual meeting of  stockholders.(18)
                  Incorporated
      by reference to the Registrant’s Registration Statement on Form SB-2/A
      (Reg. No. 333-134746) filed on July 28, 2006.(19)
                  Incorporated
      by reference to the Registrant’s report on Form 10-QSB for the quarter
      ended March 31, 2007.(20)
                  Incorporated
      by reference to the Registrant’s report on Form 10-QSB for the quarter
      ended June 30, 2007.(21)
                  Incorporated
      by reference to the Registrant’s report on Form 10-KSB for the year ended
      December 31, 2006.(22)
                  Incorporated
      by reference to the Registrant’s report on Form 10-KSB for the year ended
      December 31, 2007.(23)
                  Incorporated
      by reference to the Registrant’s report on Form 8-K filed in May
      2008.(24)
                  Incorporated
      by reference to the Registrant’s report on Form 10-Q for the quarter ended
      September 30, 2008.(25)
                  Incorporated
      by reference to the Registrant’s report on Form 10-K for the year ended
      December 31, 2008.(26)
                  Incorporated
      by reference to the Registrant’s report on Form 8-K filed February 25,
      2009.(27)
                  Incorporated
      by reference to the Registrant’s report on Form 10-Q for the quarter ended
      September 30,
2009.




29





SIGNATURES





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





SyntheMed,
      Inc.(Registrant)By:
              /s/ Robert P. HickeyRobert
      P. HickeyPresident,
      CEO and CFO(principal
      executive, financial and accounting
officer)





Dated:  March
22, 2010





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





Signatures
              
              Title
              
              Date/s/ Richard L. Franklin,
    M.D.
              
              Executive
      Chairman andRichard
      L. Franklin, M.D.
              
              Chairman
      of the Board
              
              March
      22, 2010/s/ Robert P. Hickey
              
              Director,
      President, CEO and CFO
              
              March
      22, 2010Robert
      P. Hickey
              
              (principal
      executive, financial andaccounting
      officer)/s/ David G. P. Allan
              
              Director
              
              March
      22, 2010David
      G. P. Allan/s/ Joerg Gruber
              
              Director
              
              March
      22, 2010Joerg
      Gruber/s/ Barry R. Frankel
              
              Director
              
              March
      22, 2010Barry
      R. Frankel/s/ Walter R. Maupay, Jr.
              
              Director
              
              March
      22, 2010Walter
      R. Maupay, Jr.




30





INDEX
TO FINANCIAL STATEMENTS





Page NumberReport
      of Independent Registered Public Accounting Firm
              F-2Balance
      Sheets
              F-3Statements
      of Operations
              F-4Statements
      of Changes in Stockholders’ Equity
              F-5Statements
      of Cash Flows
              F-6Notes
      to Financial Statements
              F-7




F-1


REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




Board of
Directors and Stockholders


SyntheMed,
Inc.





We have
audited the accompanying balance sheets of SyntheMed, Inc. (the "Company") as of
December 31, 2008 and 2009 and the related statements of operations,
changes in stockholders' equity and cash flows for each of the years in the
two-year period ended December 31, 2009.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company's internal control over financial
reporting.  Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over
reporting.  Accordingly, we express no such opinion.  An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of SyntheMed, Inc. as of
December 31, 2009, and the results of its operations and its cash flows for
each of the years in the two-year period ended December 31, 2009 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, limited
revenues and cash outflows from operating activities and does not have
sufficient cash or working capital to meet anticipated requirements through
2010. These matters raise substantial doubt 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.





/s/
EISNER LLP




New
York, New York


March 19,
2010




See
accompanying notes to financial statements.
  F-2





SYNTHEMED,
INC.





BALANCE
SHEETS


(In
thousands, except per share data)





December 31,
                    
                    
                    December 31,2008
                    
                    
                    2009ASSETSCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    2,944
                    
                    
                    $
                    963Accounts
      receivable, net of allowance for doubtful accounts of $14 and $29,
      respectively
                    
                    
                    36
                    
                    
                    
                    49Inventory,
      net
                    
                    
                    199
                    
                    
                    
                    126Prepaid
      expenses and deposits
                    
                    
                    78
                    
                    
                    
                    57Total
      current assets
                    
                    
                    3,257
                    
                    
                    
                    1,195Machinery,
      equipment and software, less accumulated depreciation
                    
                    
                    74
                    
                    
                    
                    26TOTAL
                    
                    $
                    3,331
                    
                    
                    $
                    1,221LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                    
                    $
                    208
                    
                    
                    $
                    64Accrued
      expenses
                    
                    
                    212
                    
                    
                    
                    308Insurance
      note payable
                    
                    
                    8
                    
                    
                    
                    7Total
      current liabilities
                    
                    
                    428
                    
                    
                    
                    379Commitments
      and other contingencies (Note I)Stockholders’
      equity:Preferred
      stock, $.01 par value; shares authorized - 5,000; issued and outstanding -
      noneCommon
      stock, $.001 par value; shares authorized - 150,000 issued and outstanding
      - 98,746 and 109,041
                    
                    
                    99
                    
                    
                    
                    109Additional
      paid-in capital
                    
                    
                    59,976
                    
                    
                    
                    62,008Accumulated
      deficit
                    
                    
                    (57,172
                    )
                    
                    
                    (61,275
                    )Total
      stockholders’ equity
                    
                    
                    2,903
                    
                    
                    
                    842TOTAL
                    
                    $
                    3,331
                    
                    
                    $
                    1,221





See
accompanying notes to financial statements.


F-3


SYNTHEMED,
INC.





STATEMENTS
OF OPERATIONS


(In
thousands, except per share data)





Year Ended December 31,2008
              
              
              2009Revenue:Product
      sales
              
              $
              181
              
              
              $
              360Revenue
              
              
              181
              
              
              
              360Cost
      of goods sold
              
              
              102
              
              
              
              164Gross
      profit
              
              
              79
              
              
              
              196Operating
      expenses:Research
      and development
              
              
              1,609
              
              
              
              1,387General
      and administrative
              
              
              1,758
              
              
              
              1,421Sales
      and marketing
              
              
              1,286
              
              
              
              1,508Operating
      expenses
              
              
              4,653
              
              
              
              4,316Loss
      from operations before other income / (expense)
              
              
              (4,574
              )
              
              
              (4,120
              )Other
      income/(expense):Interest
      income
              
              
              49
              
              
              
              20Interest
      expense
              
              
              (3
              )
              
              
              (3
              )Other
              
              
              5
              
              
              
              -Loss
      before income tax benefit
              
              
              (4,523
              )
              
              
              (4,103
              )Income
      tax benefit
              
              
              119
              
              
              
              -Net
      loss
              
              $
              (4,404
              )
              
              $
              (4,103
              )Net
      loss per common share – basic and diluted
              
              $
              (0.05
              )
              
              $
              (0.04
              )Weighted
      average shares outstanding – basic and diluted
              
              
              90,479
              
              
              
              100,923




See
accompanying notes to financial statements.


F-4


SYNTHEMED,
INC.





STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY


(In
thousands)





Additional
                            
                            
                            Net
      Loss andCommon
                            
                            
                            Paid-in
                            
                            
                            Comprehensive
                            
                            
                            AccumulatedShares
                            
                            
                            Amount
                            
                            
                            Capital
                            
                            
                            Loss
                            
                            
                            Deficit
                            
                            
                            TotalsBalance
      January 1, 2008
                            
                            
                            87,621
                            
                            
                            $
                            88
                            
                            
                            
                            55,497
                            
                            
                            
                            
                            
                            
                            (52,768
                            )
                            
                            
                            2,817Exercise
      of options
                            
                            
                            1,125
                            
                            
                            
                            1
                            
                            
                            
                            148
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            149Shares
      issued in connection with private placement, net of offering
      costs
                            
                            
                            10,000
                            
                            
                            
                            10
                            
                            
                            
                            3,673
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            3,683Stock-based
      compensation relating to options
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            658
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            658Net
      loss for the year
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (4,404
                            )
                            
                            
                            (4,404
                            )
                            
                            
                            (4,404
                            )Balance
      December 31, 2008
                            
                            
                            98,746
                            
                            
                            
                            99
                            
                            
                            
                            59,976
                            
                            
                            
                            
                            
                            
                            
                            (57,172
                            )
                            
                            
                            2,903Exercise
      of options
                            
                            
                            706
                            
                            
                            
                            1
                            
                            
                            
                            24
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            25Shares
      issued in connection with private placement, net of offering
      costs
                            
                            
                            9,000
                            
                            
                            
                            9
                            
                            
                            
                            1,634
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            1,643Stock-based
      compensation relating to options
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            267
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            267Shares
      issued for performance bonus and board fees
                            
                            
                            589
                            
                            
                            
                            
                            
                            
                            
                            107
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            107Net
      loss for the year
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            (4,103
                            )
                            
                            
                            (4,103
                            )
                            
                            
                            (4,103
                            )Balance
      December 31, 2009
                            
                            
                            109,041
                            
                            
                            $
                            109
                            
                            
                            $
                            62,008
                            
                            
                            
                            
                            
                            
                            $
                            (61,275
                            )
                            
                            $
                            842







F-5





SYNTHEMED,
INC.





STATEMENTS
OF CASH FLOWS


(In
thousands)





YearEndedDecember31,2008
                
                
                2009Cash
      flows from operating activities:Net
      loss
                
                $
                (4,404
                )
                
                $
                (4,103
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                61
                
                
                
                48Amortization
      of acquired technology
                
                
                21Reversal
      of liabilities
                
                
                (5
                )Stock
      based compensation relating to options
                
                
                658
                
                
                
                267Shares
      issued in settlement of a liability
                
                
                
                
                
                
                107Increase
      in allowance for doubtful accounts
                
                
                
                
                
                
                15Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                
                
                (17
                )
                
                
                (28
                )(Increase)
      decrease in inventory
                
                
                (84
                )
                
                
                73Decrease
      in prepaid expenses
                
                
                13
                
                
                
                21(Decrease)
      in accounts payable
                
                
                (32
                )
                
                
                (144
                )(Decrease)/
      increase in accrued expenses
                
                
                (98
                )
                
                
                96Net
      cash used in operating activities
                
                
                (3,887
                )
                
                
                (3,648
                )Cash
      flows from financing activities:Net
      proceeds from the issuance of common stock
                
                
                3,683
                
                
                
                1,643Net proceeds/
      (repayment) from insurance note payable
                
                
                8
                
                
                
                (1
                )Proceeds
      from exercise of stock options and warrants
                
                
                149
                
                
                
                25Net
      cash provided by financing activities
                
                
                3,840
                
                
                
                1,667Net
      (Decrease) in cash and cash equivalents
                
                
                (47
                )
                
                
                (1,981
                )Cash
      and cash equivalents at beginning of period
                
                
                2,991
                
                
                
                2,944Cash
      and cash equivalents at end of period
                
                $
                2,944
                
                
                $
                963Supplementary
      disclosure of non-cash operating activities:Issuance
      of 589,000 common shares in settlement of a liability
                
                $
                -
                
                
                $
                107






F-6





SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
A) - The Company and Going Concern:





The
Company is a biomaterials company engaged in the development and
commercialization of innovative and cost-effective medical devices for
therapeutic applications.  The Company’s products and product
candidates, all of which are based on its proprietary, bioresorbable polymer
technology, are primarily surgical implants designed to prevent or reduce the
formation of adhesions (scar tissue) following a broad range of surgical
procedures.  The Company’s lead product, REPEL-CV Bioresorbable
Adhesion Barrier, is a bioresorbable film designed to be placed over the surface
of the heart at the conclusion of cardiac surgery to reduce the formation of
post-operative adhesions.




The
Company has been selling REPEL-CV domestically since obtaining US Food and Drug
Administration  clearance in March 2009 and internationally since
obtaining CE Mark approval in August 2006.  In the United States and
some foreign countries, the marketing approval is limited to the pediatric
market, while the CE Mark approval, which covers the European Union and other
countries, as well as other foreign approvals subsequently obtained, apply
broadly to both the adult and pediatric market segments.  In 2009, the
Company generated $360,000 in product sales from REPEL-CV, compared to $181,000
in the prior year.




Following
FDA approval for the pediatric indication, the Company focused on clarifying the
additional clinical data that the FDA would require as a basis for expanding US
regulatory approval to include the adult indication.  In August 2009,
an understanding was reached with the FDA regarding these data requirements and
the scope of the related clinical studies.  Clearance to commence
these clinical studies is subject to submission to and approval by the FDA of an
Investigational Device Exemption application.  The Company does not
have sufficient cash resources, either on hand or anticipated from operations,
to fund these clinical studies.  As a result, the Company is exploring
strategic and other transactions to fund such studies in a way that would
maximize value for its shareholders.




The
Company believes that there are a number of opportunities to leverage its
polymer film technology used in REPEL-CV in other anatomic sites where the
presence of a temporary barrier at the surgical site may provide clinical
benefit at the point of a subsequent surgery through the reduction of
post-operative adhesions.  The current focus is on the following two
opportunities:




·
            In
      November 2008, the Company received 510(k) clearance from the FDA to
      market SinusShield, a bioresorbable film intended to reduce adhesions and
      act as a space-occupying stent in nasal and sinus surgical procedures.
      SinusShield was developed utilizing the same polymer film used in
      REPEL-CV. The Company is continuing to explore a marketing/distribution
      relationship with prospective companies who focus on the ENT surgical
      market.




·
            The
      Company has submitted an application with the European Union regulatory
      authority for the expansion of the CE Mark indication for its polymer film
      to include use as an anti-adhesion material in gynecologic surgical
      procedures.





The
accompanying financial statements have been prepared on a going concern basis
which contemplates continuity of operations, realization of assets and
satisfaction of liabilities in the ordinary course of business. As shown in the
accompanying financial statements, the Company has limited revenues, has
experienced negative cash flows from operating activities and has experienced
substantial net losses during the years ended December 31, 2008 and 2009. The
balance of cash and cash equivalents as of December 31, 2009 will not be
sufficient to meet the anticipated cash requirements through 2010, based on the
present plan of operation.    Insufficient funds has
required the Company to delay, scale back or eliminate some of its operations
including research and development programs and certain commercialization
activities and may require the Company to license or sell to third parties
certain products or technologies that it would otherwise seek to commercialize
independently. The Company does not have sufficient cash resources, either on
hand or anticipated from operations, to fund the additional clinical studies
required for approval of the REPEL-CV adult indication in the United States. As
a result, it is exploring strategic and other transactions to fund such studies
in a way that would maximize value for its shareholders.  No assurance
can be given that additional financing or strategic arrangements will be
available on acceptable terms or at all. Under these circumstances there are
substantial doubts about the Company’s ability to continue as a going
concern.  The financial statements do not include any adjustments
relating to the recoverability and classification of the carrying amount of
recorded assets or the amount and classification of liabilities that might be
necessary if the Company is unable to continue as a going
concern.


F-7


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
B) - Summary of Significant Accounting Policies:





[1]   Revenue
recognition policy:





The
Company recognizes revenue when the amounts become fixed and determinable, when
product is shipped to customers and receipt of payment is reasonably assured.
Terms of sale are “f.o.b. shipping point” with the customer covering all costs
of shipment and insurance. All sales are final with no right of return except
for defective product.





[2]   Cash
and cash equivalents:





The
Company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents. The Company deposits cash and cash
equivalents with high credit quality financial institutions and believe any
amounts in excess of insurance limitations to be at minimal
risk.  Cash and cash equivalents held in these accounts are insured by
the Federal Deposit Insurance Corporation up to a maximum of $250,000 through
December 31, 2013, and $100,000 thereafter.





[3]   Accounts
Receivable:





Accounts
receivable are stated at estimated net realizable value. Management evaluates
the need for an allowance for doubtful accounts based on a combination of
historical experience, aging analysis and information on specific accounts. In
cases where management is aware of circumstances that may impair a specific
customer’s ability to meet its financial obligations, management records a
specific allowance against amounts due and reduces the net recognized receivable
to the amount that we believe will be collected. For all other customers, the
Company maintains a reserve that considers the total receivables outstanding,
historical collection rates and economic trends. Account balances are written
off when collection efforts have been exhausted and the potential for recovery
is considered remote. At December 31, 2008 and 2009, the allowance for doubtful
accounts was $14,000 and $29,000, respectively.





[4]   Inventory:





Inventory
is stated at the lower of cost or market, as determined by the first-in,
first-out method. The Company maintains an allowance for potentially slow moving
and obsolete inventories. Management reviews on-hand inventory for potential
slow moving and obsolete amounts and estimate the level of inventory reserve
accordingly. The Company’s allowance for slow moving and obsolete inventories
includes an allowance for on-hand finished goods inventory which is within six
months of the expiration date.





December 31,2008
                      
                      
                      2009Raw
      materials
                      
                      $
                      139,000
                      
                      
                      $
                      79,000Work
      in process
                      
                      
                      33,000
                      
                      
                      
                      -Finished
      goods
                      
                      
                      73,000
                      
                      
                      
                      53,000245,000
                      
                      
                      
                      132,000Slow
      moving and obsolete inventories
                      
                      
                      (46,000
                      )
                      
                      
                      (6,000
                      )$
                      199,000
                      
                      
                      $
                      126,000




F-8


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





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





[4]   Inventory: (continued)





During
the twelve months ended December 31, 2009, management has disposed of $26,000 of
slow moving and obsolete inventory.





The
production of the Company’s inventory is outsourced to third party facilities
located in Ohio, Minnesota and Prince Edward Island, Canada.





[5]  Machinery, equipment
and software, including depreciation and amortization:





Machinery,
equipment and computer software are recorded at cost and are depreciated using
the straight-line method based upon an estimated useful life of 3-5 years.
Acquired technology is amortized on a straight line basis over its estimated
economic life of 5 years. Equipment used in research and development is also
being used by us to manufacture our inventory.





[6]  Research and
development:





Substantially all research and
development activities, new clinical studies and new product development are
outsourced (see Note H).  Research and development costs, representing
principally new product development and manufacturing development, are charged
to expense as incurred.





[7]  Patent
costs:





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





[8]  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, on an ongoing basis. We evaluate our estimates,
including those related to uncollectible receivables, the useful lives of long
lived assets including machinery, equipment and software, stock-based
compensation and income taxes, 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.





[9]  Loss
per share:





Basic
loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during each
period.  Diluted loss per share for the years ended December 31, 2008
and 2009 excludes the effect of the potential exercise or conversion of
securities which would result in the issuance of incremental shares of common
stock because the effect would be anti-dilutive.





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


December 31,2008
                  
                  
                  2009Options
                  
                  
                  13,818,000
                  
                  
                  
                  13,195,000Warrants
                  
                  
                  12,385,000
                  
                  
                  
                  22,015,00026,203,000
                  
                  
                  
                  35,210,000




F-9


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





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





[10]  Stock-based
compensation:





Effective
January 1, 2006, the Company adopted FASB ASC 718 “Compensation
– Stock Compensation”, , which requires the recognition of the expense
related to the fair value of stock-based compensation awards within the
statement of income. The Company elected the modified prospective transition
method as permitted by FASB ASC 718. Under
this transition method, stock-based compensation expense for the years ended
December 31, 2008 and 2009 includes compensation expense for unvested
stock-based compensation awards that were outstanding as of January 1, 2006,
respectively, for which the requisite service was rendered during the
year.  The stock-based compensation costs for these awards granted
prior to January 1, 2006 were based on the grant date fair value estimated in
accordance with the original provisions of FASB ASC 718.
Compensation expense for all stock-based compensation awards granted subsequent
to January 1, 2006 is based on the grant date fair value estimated in accordance
with the provisions of FASB ASC 718recorded on the straight-line basis over the requisite service
period.




[11]  Newly
Adopted Accounting Pronouncements :





In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
guidance now codified under Accounting Standards Codification (“ASC”) Topic
105-10, which establishes the FASB Accounting Standards Codification (the
“Codification”) as the source of authoritative accounting principles recognized
by the FASB to be applied in the preparation of financial statements in
conformity with GAAP. ASC Topic 105-10 explicitly recognizes rules and
interpretive releases of the Securities and Exchange Commission (“SEC”) under
federal securities laws as authoritative GAAP for SEC registrants.  Upon
adoption of this guidance under ASC Topic 105-10, the Codification superseded
all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
became non-authoritative.  The guidance under ASC Topic 105-10 became
effective for the Company as of September 30, 2009.  References made
to authoritative FASB guidance throughout this document have been updated to the
applicable Codification section.





On
October 10, 2008, the FASB issued FASB ASC 820-10-35 (Previously known as: (FSP
FAS 157-3, “Determining the Fair Value of a Financial Asset in a Market That Is
Not Active.”) which was effective upon issuance, including periods for which
financial statements have not been issued. It clarified the application of FASB
ASC 820-10 in an inactive market and provided an illustrative example to
demonstrate how the fair value of a financial asset is determined when the
market for that financial asset is inactive. The adoption of this FSP did not
have a material impact on the Company’s financial position and results of
operations.





In
April 2009, the FASB issued FASB ASC 820-10-65 (Previously known as: FSP
157-4 “Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly”). Based on the guidance, if an entity determines that the
level of activity for an asset or liability has significantly decreased and that
a transaction is not orderly, further analysis of transactions or quoted prices
is needed, and a significant adjustment to the transaction or quoted prices may
be necessary to estimate fair value in accordance with Statement of Financial
Accounting Standards FASB ASC 820-10 (Prior authoritative literature: (SFAS)
No. 157 “Fair Value Measurements”). This FSP is to be applied prospectively
and is effective for interim and annual periods ending after June 15, 2009
with early adoption permitted for periods ending after March 15, 2009. The
company adopted this FSP for its quarter ended June 30, 2009. The adoption
has no impact on the Company’s financial statements.





In 2008,
the FASB issued FASB ASC 815-40 (Previously known as: EITF 07-05, Determining
whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own
Stock). FASB ASC 815-40 provides guidance on determining what types of
instruments or embedded features in an instrument held by a reporting entity can
be considered indexed to its own stock for the purpose of evaluating the first
criteria of the scope exception in FASB ASC 810-10-15 (Prior authoritative
literature: paragraph 11(a) of SFAS 133). The adoption of FASB ASC 815-40
effective January 1, 2009 did not have any impact on the Company’s financial
statements.


F-10


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





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





[11]  Newly
Adopted Accounting Pronouncements : (continued)





In
December 2007, the FASB issued FASB ASC 805-10 (Prior authoritative literature:
SFAS No. 141 (revised 2007), “Business Combinations”, which replaces
FASB Statement No. 141). FASB ASC 805-10 establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. The Statement
also establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination.  FASB ASC
805-10 will change how business combinations are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. The
adoption of FASB ASC 805-10 did not have an impact on the Company’s financial
position and results of operations although it may have a material impact on
accounting for business combinations in the future which can not currently be
determined.





In April
2009, the FASB issued FASB ASC 805-10-05 (Previously known as: Statement No.
141(R)-1 "Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arises from Contingencies"). For business combinations, the
standard requires the acquirer to recognize at fair value an asset acquired or
liability assumed from a contingency if the acquisition date fair value can be
determined during the measurement period. The adoption of FASB ASC 805-10-05 as
of January 1, 2009 did not have an impact on the Company's financial position
and results of operations, however it may have a material impact in the future
which can not currently be determined.





In
April 2009, the FASB issued FASB ASC 825-10-50 (Previously known as: FASB
Staff Position No. FAS 107-1) and FASB ASC 270-10-05 (Prior authoritative
literature: APB 28-1, “Interim Disclosures about Fair Value of Financial
Instruments,”) which requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well
as in annual financial statements. This Staff Position is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. The Company adopted this
pronouncement as of July 1, 2009 and it did not have a material impact on the
financial statements.





In
May 2009, the FASB issued FASB ASC 855-10 (Previously known as:
SFAS No. 165, “Subsequent Events”) FASB ASC 855-10 establishes general
standards for accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are available to be issued
(“subsequent events”). More specifically, FASB ASC 855-10 sets forth the period
after the balance sheet date during which management of a reporting entity
should evaluate events or transactions that may occur for potential recognition
in the financial statements, identifies the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements and the disclosures that should be made about events
or transactions that occur after the balance sheet date. FASB ASC 855-10
provides largely the same guidance on subsequent events which previously existed
only in auditing literature. The guidance under ASC Topic 855-10 became
effective for the Company as of June 30, 2009.





In
February 2010, FASB issued ASU 2010-09 Subsequent Event (Topic 855) Amendments
to Certain Recognition and Disclosure Requirements. ASU 2010-09 removes the
requirement for an SEC filer to disclose a date through which subsequent events
have been evaluated in both issued and revised financial statements. 
Revised financial statements include financial statements revised as a result of
either correction of an error or retrospective application of GAAP. All of the
amendments in ASU 2010-09 are effective upon issuance of the final ASU, except
for the use of the issued date for conduit debt obligors. That amendment is
effective for interim or annual periods ending after June 15, 2010. The Company
adopted ASU 2010-09 in February 2010 and did not disclose the date through which
subsequent events have been evaluated.





[12]  Recent
Accounting Pronouncements :





In
June 2009, the FASB has issued SFAS No. 167, Amendments to FASB
Interpretation No 46(R). SFAS No. 167 amends certain requirements of FASB
Interpretation No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, to improve financial reporting by enterprises
involved with variable interest entities and to provide
more relevant and reliable information to users of financial statements. SFAS
No. 167 becomes effective for the Company in 2010 and has currently not
been codified in the ASC. The Company does not expect that the adoption of
SFAS No. 167 will have a material impact on the Company’s financial
statements.


F-11


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





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





[12]  Recent
Accounting Pronouncements : (continued)





In
October 2009, the FASB issued new guidance for revenue recognition with
multiple deliverables, which is effective for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010,
although early adoption is permitted. This guidance eliminates the residual
method under the current guidance and replaces it with the “relative selling
price” method when allocating revenue in a multiple deliverable arrangement. The
selling price for each deliverable shall be determined using vendor specific
objective evidence of selling price, if it exists, otherwise third-party
evidence of selling price shall be used. If neither exists for a deliverable,
the vendor shall use its best estimate of the selling price for that
deliverable. After adoption, this guidance will also require expanded
qualitative and quantitative disclosures. The Company is currently assessing the
impact of adoption on its financial position and results of
operations.





(NOTE
C) – Acquired Technology:





In March
2003, the Company purchased certain polymer technology from Phairson Medical,
Ltd., a private medical technology company based in the United Kingdom, for
approximately 6,896,000 shares of restricted Common Stock of the
Company.  These assets comprise a series of United States and foreign
patent applications as well as scientific and clinical documentation. The
Company also assumed Phairson’s rights and obligations under a development
agreement with the Swiss Federal Institute of Technology and the University of
Zurich, as well as with the principal investigator of the technology development
project, Professor JA Hubbell.  Under these agreements, the Company is
required to pay royalties of no more than 1.1% of net sales of products
incorporating the technology.  If the Company fails to sublicense the
technology or pursue development efforts involving the technology for a period
of two years or more, the Company is obligated to negotiate a return of the
technology to the university.  Management believes that its
development efforts have met the requirements of the agreement.





(NOTE
D) – Machinery, Equipment and Software:





Machinery, equipment and software
consist of the followingat December
31:





2008
                    
                    
                    2009
                    
                    Estimated
                      usefullifeMachinery
      and equipment
                    
                    $
                    219,000
                    
                    
                    $
                    219,000
                    
                    5
      yearsOffice
      equipment and software
                    
                    
                    65,000
                    
                    
                    
                    65,000
                    
                    3
      years284,000
                    
                    
                    
                    284,000Less
      accumulated depreciation
                    
                    
                    210,000
                    
                    
                    
                    258,000$
                    74,000
                    
                    
                    $
                    26,000




F-12


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
E) – Note Payable - Insurance:





In March
2009, the Company entered into two short term financing agreements for product
liability and directors and officers liability insurance premiums totaling
$134,000, payable in monthly installments including interest of $6,700 and
$7,000, respectively. The monthly installments are due through December 2009 and
January 2010, respectively and carry interest of 4.9% per annum.





In March
2008, the Company entered into two short term financing agreements for our
product liability and directors and officers liability insurance premiums
totaling $205,000, payable in monthly installments including interest of $9,800
and $7,900, respectively. The monthly installments were due through December
2008 and January 2009, respectively, and carry interest of 4% and 3.8% per
annum, respectively.





(NOTE
F) – Stockholders’ Equity:





[1]  Common
stock:





In
September and December 2009, the Company sold an aggregate of 9,000,000 units,
each consisting of one share of common stock and one warrant to purchase one
share of common stock, at a purchase price of $.20 per unit in a private
placement, resulting in gross cash proceeds of $1,800,000. The private placement
occurred in two closings, the first on September 30, 2009 for total proceeds of
$1,000,000 and the second on December 24, 2009 for total proceeds of $800,000.
The warrants are exercisable for shares at a price of $.20 per share, and are
scheduled to expire on September 30, 2013. In connection with the financing, the
Company paid a placement agent (the “Agent”) a commission of $126,000 in cash,
representing 7% of the gross proceeds raised, and warrants to purchase an
aggregate of 630,000 shares of common stock, representing 7% of the number of
units sold in the financing. The agent warrants are identical to the investor
warrants. The Company also reimbursed the Agent for certain financing-related
expenses totaling $31,000 including legal fees. One of the Company’s directors,
Mr. Joerg Gruber, is Chairman and a director of the Agent.





In
accordance with measures previously adopted by the Company’s Board of Directors
under which 65% of the cash portion of performance bonuses and Board fees would
be payable in shares, (i) effective February 6, 2009, the Company granted an
aggregate of 282,750 shares of common stock to certain of the Company’s officers
and other employees in full satisfaction of $42,000 in aggregate performance
bonus compensation for 2008 otherwise payable at that time in cash to such
individuals and (ii) during 2009,  the Company granted an aggregate of
306,250 shares of common stock to the Company’s non-employee directors in full
satisfaction of $65,000 in aggregate Board fees otherwise payable in cash to
such directors and attributable to the four quarters of 2009.  In each
case, the shares were valued at fair market value on the date of grant, as
reflected by the prior trading day's closing price. The transactions were not
registered under the Securities Act of 1933, in reliance on the exemption
provided by Section 4(2) thereunder.





On
September 30, 2008, the Company raised $4,000,000 in gross proceeds from a
private placement of 10,000,000 units, each consisting of one share of common
stock and one warrant to purchase one share of common stock, at a purchase price
of $.40 per unit. The warrants are exercisable for shares at a price of $.50 per
share, and are scheduled to expire on September 30, 2011.




In
connection with the financing, the Company paid to the agent a commission of
$280,000 in cash, representing 7% of the gross proceeds raised, and warrants to
purchase an aggregate of 700,000 shares of common stock, representing 7% of the
number of shares sold in the financing. The agent warrants are identical to the
investor warrants, except that the Agent warrants expire on September 30, 2012.
The Company also reimbursed the Agent for certain financing-related expenses
totaling approximately $37,000 including legal fees.





The grant
date fair value of the warrants issued to the Agent using the Black-Scholes
pricing on September 30, 2008, September 30, 2009 and December 31, 2009 was
$75,000, $66,000 and $38,000, respectively. The resulting charges did not have
an impact on Total Stockholders’ Equity. The assumptions utilized to determine
the fair values are indicated in the following table:


F-13


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
F) – Stockholders’ Equity:  (continued)





[1]  Common
stock:  (continued)





Year Ended December 31,2008
                    
                    
                    2009Exercise
      price at date of grantfor
      warrants granted during the period
                    
                    $
                    0.50
                    
                    
                    $
                    0.20Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %Expected
      volatility
                    
                    
                    94.1
                    %
                    
                    
                    97.7%-
      98.4
                    %Risk
      free interest rate
                    
                    
                    2.28
                    %
                    
                    
                    1.45%-1.58
                    %Expected
      life
                    
                    3-4
      years
                    
                    
                    3.76
      - 4 years





[2]  Warrants:




As of
December 31, 2009, the following warrants were outstanding to purchase up
to 22,015,000 shares of the Company’s Common Stock:





1,475,000
                                
                                exercisable
      at $0.60 per share which expire on April 3, 2010210,000
                                
                                exercisable
      at $1.10 per share which expire on August 13, 201110,000,000
                                
                                exercisable
      at $0.50 per share which expire on September 30, 2011700,000
                                
                                exercisable
      at $0.50 per share which expire on September 30, 20125,000,000
                                
                                exercisable
      at $0.20 per share which expire on September 30, 2013350,000
                                
                                exercisable
      at $0.20 per share which expire on September 30, 20134,000,000
                                
                                exercisable
      at $0.20 per share which expire on September 30, 2013280,000
                                
                                exercisable
      at $0.20 per share which expire on September 30, 201322,015,000




[3]  Options:




At
December 31, 2009, the Company had three stock-based compensation plans: the
2000 Non-Qualified Stock Option Plan, under which the Company is authorized to
issue non-qualified stock options to purchase up to an aggregate of 1,000,000
shares of Common Stock; the 2001 Non-Qualified Stock Option Plan, under which
the Company is authorized to issue non-qualified stock options to purchase up to
an aggregate of 10,000,000 shares of Common Stock and the 2006 Stock Option
Plan, under which the Company is authorized to issue incentive stock options and
non-qualified stock options to purchase up to an aggregate of 5,000,000 shares
of Common Stock. The exercise price is determined by the Compensation Committee
of the Board of Directors at the time of the granting of an option. Options vest
over a period not greater than five years, and expire no later than ten years
from the date of grant.





At
December 31, 2009, options to purchase 80,000 shares of Common Stock were
outstanding pursuant to the 2000 Plan, options to purchase 7,872,000 shares of
Common Stock were outstanding pursuant to the 2001 Plan and options to purchase
4,543,000 shares of Common Stock were outstanding pursuant to the 2006 Plan. At
December 31, 2009, there were 769,000 options available for grant under these
plans.  In addition, options to purchase 700,000 shares of Common
Stock issued outside of the plans are outstanding pursuant to other
agreements.  These options vest over various periods and expire no
later than ten years from the date of grant. Some of the outstanding options are
subject to performance-based vesting.


F-14


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
F) – Stockholders’ Equity:  (continued)





[3]  Options:  (continued)




A summary
of the status of the Company’s stock options as of December 31, 2008 and 2009,
and changes during the years ended on those dates is presented below (in
thousands, except per share data):





2008
                          
                          
                          2009
                          
                          Weighted-Weighted-
                          
                          
                          
                          
                          
                          Weighted-
                          
                          AverageAverage
                          
                          
                          
                          
                          
                          Average
                          
                          Remaining
                          
                          AggregateExercise
      Price
                          
                          
                          
                          
                          
                          Exercise
      Price
                          
                          Contractual
                          
                          IntrinsicShares
                          
                          
                          Per
      Share
                          
                          
                          Shares
                          
                          
                          Per
      Share
                          
                          Term
                          
                          ValueOutstanding
      at beginning of year
                          
                          
                          12,872
                          
                          
                          $
                          0.40
                          
                          
                          
                          13,818
                          
                          
                          $
                          0.44
                          
                          5.5
      YearsGranted
                          
                          
                          2,390
                          
                          
                          
                          0.54
                          
                          
                          
                          1,470
                          
                          
                          
                          0.18
                          
                          9.2
      YearsExercised
                          
                          
                          (1,125
                          )
      *
                          
                          
                          0.13
                          
                          
                          
                          (983
                          )
      **
                          
                          
                          0.12Canceled,
      expired or forfeited
                          
                          
                          (319
                          )
                          
                          
                          0.74
                          
                          
                          
                          (1,110
                          )
                          
                          
                          0.48Outstanding
      at end of year
                          
                          
                          13,818
                          
                          
                          
                          0.44
                          
                          
                          
                          13,195
                          
                          
                          
                          0.43
                          
                          4.3
      Years
                          
                          $
                          368Options
      exercisable at year-end
                          
                          
                          11,688
                          
                          
                          
                          0.41
                          
                          
                          
                          11,305
                          
                          
                          
                          0.43
                          
                          3.4
      Years
                          
                          $
                          277Vested
      and expected to vest after December 31
                          
                          
                          13,251
                          
                          
                          
                          0.43
                          
                          
                          
                          11,977
                          
                          
                          
                          0.42
                          
                          3.7
      Years
                          
                          $
                          302Weighted-average
      grant date fair value of options granted during the year
                          
                          
                          
                          
                          
                          $
                          0.30
                          
                          
                          
                          
                          
                          
                          $
                          0.16




*
Includes 75,000 options which were exercised using a cashless feature that
resulted in the net issuance of 40,000 shares of common stock.


**
Includes 783,000 options which were exercised using a cashless feature that
resulted in the net issuance of 506,000 shares of common stock.





The total
intrinsic value of options exercised during the year ended December 31, 2008 and
2009 was $139,000 and $200,000, respectively.





As of
December 31, 2009, there was approximately $79,000 of unrecognized stock
compensation related to unvested awards (net of estimated forfeitures) expected
to be recognized over the next 19 months.





During
the years ended December 31, 2008 and 2009, the Company granted 2,390,000 and
1,470,000 options, respectively, including those granted to non-employee
directors and non-employees. For 2008, the Company recorded a total charge of
$658,000, which is comprised of $96,000, $431,000 and $131,000 in research and
development expense, general and administrative expense and sales and marketing
expense, respectively.  For 2009, the Company recorded a total charge
in respect of these grants of $266,000, which is comprised of a credit of $8,000
in research and development expense and charges of $148,000 and $126,000, in
general and administrative expense and sales and marketing expense,
respectively.





Included
in the preceding table are 1,075,000 and 260,000 options granted to non-employee
directors in 2008 and 2009, respectively. The weighted-average grant date fair
value of such options was $0.26 and $0.27, respectively.  Also
included in the preceding table are 420,000 and 200,000 options granted to other
non-employees in 2008 and 2009, respectively.  The weighted average
grant date fair value of such options was $0.24 and $0.26, respectively, and a
stock-based compensation charge of $179,000 and $103,000 was recorded in 2008
and 2009, respectively.


F-15




SYNTHEMED,
INC.
 
 NOTES
TO FINANCIAL STATEMENTS




(NOTE
F) – Stockholders’ Equity:  (continued)





[3]  Options:  (continued)





Under ASC 718 forfeitures are estimated
at the time of valuation and reduce expense ratably over the vesting period.
This estimate is adjusted periodically based on the extent to which actual
forfeitures differ, or are expected to differ, from the previous
estimate.





At
December 31, 2009, the Company had 1,510,000 options outstanding which vest upon
the achievement of certain performance criteria including FDA-related milestones
associated with REPEL-CV and other product development programs, certain sales
and marketing activities, new product and business development initiatives,
financing activities and market based criteria. The performance-based options
have a term of 10 years from date of grant and an exercise price range of $0.10
to $1.00. Of these options, 100,000 relate to the achievement of certain
FDA-related milestones and the Company has recorded an estimated expense of
$8,000 in research and development for these options, 910,000 relate to specific
performance criteria including FDA-related milestones associated with REPEL-CV
and other product development programs, certain sales and marketing activities,
new product and business development initiatives, financing activities,
regulatory and administrative activities and the Company has recorded an
estimated charge of $7,000, $13,000 and $1,000 in research and development,
general and administrative and sales and marketing expense, respectively, for
these options and 500,000 relate to market condition criteria for the Company’s
common stock and the Company has recorded an estimated charge of $79,000 in
general and administrative expense for these options. The Company has valued
these market condition options utilizing the Black-Scholes option pricing model
rather than the preferable Lattice method due to the subjectivity of the Lattice
method’s assumptions when compared to the Black-Scholes pricing model and the
estimated immaterial difference between the two methods given the short term
vesting requirements of one and two years. At each reporting period for the
performance based grants only, management re-evaluates the probability that the
vesting contingency will be satisfied and adjusts the fair value charge
accordingly.





The
Company uses the Black-Scholes option pricing model to determine the weighted
average fair value of options. The fair value of options at date of grant and
the assumptions utilized to determine such values are indicated in the following
table:





Year
      Ended December 31,2008
                          
                          
                          2009Weighted
      average fair value at date of grantfor
      options granted during the period
                          
                          $
                          0.30
                          
                          
                          $
                          0.16Dividend
      yield
                          
                          
                          0
                          %
                          
                          
                          0
                          %Expected
      volatility
                          
                          
                          93.9%-95
                          %
                          
                          
                          94.2%-98
                          %Risk free interest rate
                          
                          
                          1.74%
      -2.79
                          %
                          
                          
                          1.16%
      - 2
                          %Expected
      life
                          
                          7 -
      10 years
                          
                          
                          10
      years





The following table summarizes
information for stock options outstanding at December 31, 2009 (in thousands,
except per share data):





Options Outstanding
                        
                        
                        Options ExercisableWeighted-Average
                        
                        Weighted-Average
                        
                        
                        
                        
                        
                        Weighted-AverageRange
                        
                        Number
                        
                        Remaining
                        
                        Exercise Price
                        
                        
                        Number
                        
                        
                        Exercise PriceExercise Prices
                        
                        Outstanding
                        
                        Contractual Life
                        
                        Per Share
                        
                        
                        Exercisable
                        
                        
                        Per Share$0.10
      - 0.12
                        
                        
                        4,377
                        
                        2.3
      years
                        
                        $
                        0.12
                        
                        
                        
                        3,467
                        
                        
                        $
                        0.120.13
      – 0.98
                        
                        
                        8,418
                        
                        4.9
      years
                        
                        
                        0.56
                        
                        
                        
                        7,688
                        
                        
                        
                        0.561.00
      - 1.16
                        
                        
                        400
                        
                        8.0
      years
                        
                        
                        1.06
                        
                        
                        
                        150
                        
                        
                        
                        1.1613,195
                        
                        4.2
      years
                        
                        $
                        0.43
                        
                        
                        
                        11,305
                        
                        
                        $
                        0.43


F-16


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE G) - Income
Taxes:





At December 31, 2009, we have
approximately $48,250,000 of net operating loss carryforwards to offset future
federal taxable income and approximately $865,000 of research and development
tax credit carryforwards available to offset future federal income tax, subject
to limitations for alternative minimum tax. The Company’s ability to utilize the
net operating losses and research and development tax credit carryforwards in
future years may be limited in accordance with the provisions of Section 382 of
the Internal Revenue Code, because of the changes in ownership that have
occurred in the prior years.





The
Company’s net operating loss and research and development credit carryforwards
expire as follows:





Year
                          
                          Net Operating Loss
                          
                          
                          Research
                            and Development
                            Tax Credit2010
                          
                          $
                          3,854,000
                          
                          
                          $
                          11,0002011
                          
                          
                          4,648,000
                          
                          
                          
                          53,0002012
                          
                          
                          7,018,000
                          
                          
                          
                          267,0002013
      - 2029
                          
                          
                          32,730,000
                          
                          
                          
                          534,000$
                          48,250,000
                          
                          
                          $
                          865,000





The Company has participated in the Tax
Benefit Transfer Program administered by the State of New Jersey under which
$1,449,000 in eligible loss carryforwards, covering the tax years 2006, were
sold to PSEG Services Corporation in 2008. There were no such sales in 2009.
(See Note O of Notes
to Financial Statements)





The
Company received a cash payment of approximately $119,000 in 2008. This is
reflected as income tax benefits in the accompanying Statement of Operations. At
December 31, 2009, the Company has net operating loss carryforwards for New
Jersey State income tax purposes of approximately $13,657,000 which expire
through 2024.





The
deferred tax asset, which amounted to $18,507,000 at December 31, 2009, has been
offset by a valuation allowance against the entire benefit due to management's
uncertainty regarding the future profitability of the Company and ability to
utilize the benefit. The valuation allowance was increased by $249,000 in 2008
and $301,000 in
2009.





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:





Year Ended December 31,2008
                
                
                2009Income
      tax benefit at the federal statutory rate
                
                $
                (1,538,000
                )
                
                $
                (1,395,000
                )State
      and local income taxes, net of effect on federal taxes
                
                
                (271,000
                )
                
                
                (246,000
                )Increase
      in valuation allowance
                
                
                249,000
                
                
                
                301,000Sale
      of state net operating loss carryforwards
                
                
                (119,000
                )
                
                
                0Reduction
      in deferred tax asset from transfer of state net operating loss
      carryforwards
                
                
                130,000
                
                
                
                0Expired
      net operating losses
                
                
                1,375,000
                
                
                
                1,340,000Benefit
      of research and development credit
                
                
                (31,000
                )
                
                
                (29,000
                )Other
                
                
                86,000
                
                
                
                29,000$
                (119,000
                )
                
                $
                0




F-17


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS







(NOTE
G) - Income Taxes: (continued)





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





2008
                
                
                2009Net
      operating loss carryforward
                
                $
                16,947,000
                
                
                $
                17,226,000Research
      and development credit carryforward
                
                
                847,000
                
                
                
                865,000Other
                
                
                412,000
                
                
                
                416,00018,206,000
                
                
                
                18,507,000Valuation
      allowance
                
                
                (18,206,000
                )
                
                
                (18,507,000
                )$
                0
                
                
                $
                0





As a
result of the implementation of FASB ASC 740-10-25 (Previously known as:
Financial Accounting Standards Board interpretation No. 48 Accounting for
Uncertainty in Income Taxes), the Company recognized no material adjustment to
unrecognized tax benefits. At the adoption date of January 1, 2007, we had
$16,908,000 of unrecognized tax benefits, all of which would affect our
effective tax rate if recognized. At December 31, 2009 the Company has $
18,507,000 of unrecognized tax benefits.





The
Company recognizes interest and penalties related to uncertain tax positions in
general and administrative expense. As of December 31, 2009, we have not
recorded any provisions for accrued interest and penalties related to uncertain
tax positions.





By
statute, tax years 2005–2008 remain open to examination by the major taxing
jurisdictions to which we are subject.





(NOTE
H) - Research and License Agreements:





[1]  Yissum
agreement:





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





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


F-18


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





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





[1]  Yissum
Agreement (continued)





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
fails 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.  The agreement has
subsequently been amended on several occasions to permit the Company additional
time to minimum net sales or income targets in exchange for payment of minimum
royalties.  Accordingly, the Company has paid Yissum an aggregate of
$850,000 in minimum royalties to preserve our rights under the Yissum Agreement
for performance years 2001 through 2009.  A modification to the 2009
minimum royalty payment was agreed whereby the Company paid $50,000 of the
$200,000 obligation in January 2010 with the balance, along with accumulated
interest and a potential transaction-related premium, due upon the completion of
a strategic transaction. The Company’s rights under the Yissum Agreement are
preserved through the end of 2011 either through the payment of the 5% royalty
on net sales or an annual minimum royalty of $250,000 for performance year
2010.  Any and all minimum royalty payments made by the Company to
Yissum shall be applied against the maximum royalty obligation referenced
above.  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 assigned by Yissum to the Company
will revert in full to Yissum.





[2]  Phairson Technology





In March
2003, we purchased certain polymer technology from Phairson Medical, Ltd., a
private medical technology company based in the United Kingdom, for
approximately 6,896,000 shares of restricted Common Stock of the
Company.  These assets comprise a series of United States and foreign
patent applications as well as scientific and clinical documentation. We 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, we are required to pay royalties
of no more than 1.1% of net sales of products incorporating the
technology.  If we fail to sublicense the technology or pursue
development efforts involving the technology for a period of two years or more,
we are obligated to negotiate a return of the technology to the
university.  Management believes that its development efforts have met
the requirements of the agreement.





[3]  diZerega
agreement:





In 1995,
the Company entered into an agreement with Gere S. diZerega, M.D. to receive
consulting services limited to the research, development, clinical testing,
regulatory approval, marketing and sales of commercial products for the
prevention of surgical adhesions and intra-peritoneal drug delivery, in each
case utilizing polymeric materials licensed to the Company by the Yissum
Research and Development Company of the Hebrew University of Jerusalem (Note H
[1]).





Pursuant
to this agreement, the Company is obligated to pay a royalty of one percent of
all net sales of its covered products in any and all countries. The Agreement
continues until the end of fifteen years from the date of the first commercial
sale of such covered product in that country.





The
Company incurred $2,000 and $3,000 in royalty expense relating to this agreementfor the year ended
December 31, 2008 and 2009, respectively.


F-19


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
I) - Commitments and Other Matters:





[1]  Employment
agreement:





At
December 31, 2009, the Company had
employment agreements with four individuals that expire as follows: two in
September 2010, one in March 2010 and one in October 2012. Pursuant to these
agreements, the
Company’s commitment regarding cash severance benefits aggregates
$544,000 at December 31, 2009. The Company has
also entered into change of control agreements with its two executive officers
pursuant to which, upon the occurrence of events described therein, the Company could
become obligated, in addition to certain other benefits, to pay either 150% or
200%, depending on the executive, of each such executive’s annual base salary
plus the greater of the prior year’s cash bonus or current year’s target
bonus.  Any severance payments under the employment agreements would
offset amounts required to be paid under the change of control
agreements.





[2]  Supplier
concentration:





In 2007,
the Company
finalized contractual supplier arrangements with three contract manufacturers
replacing our prior primary supplier.  For the years ended December
31, 2008 and 2009, we paid our current suppliers $294,000 and $157,000,
respectively, in connection with such services.





[3]   Lease
commitments:





We have a
cancelable five year operating lease commitment for office facilities space
through 2011. The lease is cancelable upon giving the landlord six months’ prior
written notice (without any early termination penalties) to be effective at any
time between the expiration of the 24th month
and the expiration of the 48th month
of the lease term.  The operating lease agreement is subject to
predetermined rate increases in accordance with the signed rental
agreement.  Rent is charged to operating expense on a straight-line
basis over the term of lease where contractual increases effect rent
payments.  Rent expense under the operating lease for the year ended
December 31, 2008 and 2009 was $37,000 and $39,000,
respectively.





Future minimum lease payments under
operating leases consisted of the following at December 31,
2009:





Year Ending
                            December 31,
                          
                          Amount2010
                          
                          
                          39,0002011
                          
                          
                          16,000Total
      future minimum lease payments
                          
                          $
                          55,000





(NOTE
J) - Related Parties:





In 2008,
the Company
entered into a consulting agreement calling for fees of $100,000 per annum to be
paid to Richard L. Franklin, MD, in consideration for his services as Executive
Chairman of the Board of Directors. The Company paid
$25,000 and $100,000 in fees under this agreement in 2008 and 2009,
respectively.





See NOTE
F [1] with respect to private placements the Company
consummated in 2008 and 2009 through a placement agent of which one of of the Company’s
directors, Mr. Joerg Gruber, is chairman and a director.





(NOTE K) -Cost of
Goods Sold:





The
initial quantities of finished goods sold did not have the cost of raw materials
factored in as this cost was previously expensed as research and development in
prior periods.  As of December 31, 2008, the finished goods inventory
produced from this raw material was fully depleted.


F-20


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE K) -Cost of
Goods Sold:  (continued)





The
following table illustrates the effect on cost of goods sold and gross profit if
the cost of the raw materials of $4,000 had been included in finished goods
inventory for the year ended December 31, 2008 (in thousands):





Year
      Ended
                          December
      31, 2008Reported
      Net Sales
                        
                        $
                        181
                        
                        
                        
                        100
                        %Pro
      forma COGS
                        
                        
                        106
                        
                        
                        
                        59
                        %Pro
      forma Gross Profit
                        
                        $
                        75
                        
                        
                        
                        41
                        %





Included
in the COGS at December 31, 2008 is the cost to maintain a reserve for slow
moving and obsolete inventory in the amount of $46,000 for on-hand finished
goods inventory which is within six months of the expiration date and $19,000 of
costs for the resin copolymer. Included in the COGS at December 31, 2009
are charges of $90,000 for failed inventory production runs and $32,000 of costs
for the resin copolymer offset by reductions to the reserve for slow moving and
obsolete inventory of $15,000.





(NOTE L) -Retirement Plan:





In March
2007, the
Company adopted a defined contribution retirement plan which qualifies
under section 401(k) of the Internal Revenue Code. The plan allows all
employees, upon commencement of employment, to voluntarily contribute amounts
not exceeding the maximum allowed under the Internal Revenue Code. The Company isobligated to make a matching contribution equal to 100% of the salary
deferral contributions made up to the first 4% of total compensation. During the
years ended December 31, 2008 and 2009, the Company made
matching contributions in the amount of $26,000 and $34,000, respectively, to
the plan.





(NOTE
M) – Shareholder Rights Plan:





On April
25, 2008, the
Company’s Board of Directors approved the adoption of a shareholder
rights plan. The Board of Directors has declared a dividend distribution of one
right for each share of the Company’s
common stock outstanding as of the close of business on June 2, 2008. Initially,
the rights will be represented by the Company’s
common stock certificates, will not be traded separately from the common stock
and will not be exercisable. The rights generally will become exercisable
following any person becoming an “acquiring person” by acquiring, or commencing
a tender offer to acquire, beneficial ownership of 15% or more of the
outstanding shares of the Company’s
common stock. If a person becomes an “acquiring person,” each holder of a right,
other than the acquirer, would be entitled to receive, upon payment of the then
purchase price, a number of shares of the Company’s
common stock or other securities having a value equal to twice the purchase
price. If the
Company is acquired in a merger or other business combination transaction
after any such event, each holder of a right, other than the acquirer, would be
entitled to receive, upon payment of the then purchase price, shares of the
acquiring company having a value equal to twice the purchase price. The rights
are scheduled to expire on June 2, 2018 unless earlier redeemed, terminated or
exchanged in accordance with the terms of the shareholder rights
plan.





(NOTE
N) – Nature of Business:





Commencing
in the quarter ended June 30, 2009, the Company began
selling REPEL-CV in the United States. The following table summarizes the Company’s
Revenues and Long-Lived Assets at December 31 (in thousands):


F-21


SYNTHEMED,
INC.





NOTES
TO FINANCIAL STATEMENTS





(NOTE
N) – Nature of Business:  (continued)




Geographic
      InformationDecember 31,
                              
                              
                              December 31,2008
                              
                              
                              2009
                              
                              
                              2008
                              
                              
                              2009Revenues
                              
                              
                              Long-Lived AssetsUnited
      States
                              
                              $
                              -
                              
                              
                              $
                              145
                              
                              
                              $
                              74
                              
                              
                              $
                              26Saudi
      Arabia
                              
                              
                              -
                              
                              
                              
                              35
                              
                              
                              
                              -
                              
                              
                              
                              -Italy
                              
                              
                              70
                              
                              
                              
                              24
                              
                              
                              
                              -
                              
                              
                              
                              -Czech
      Republic
                              
                              
                              24
                              
                              
                              
                              30
                              
                              
                              
                              -
                              
                              
                              
                              -Turkey
                              
                              
                              43
                              
                              
                              
                              4
                              
                              
                              
                              -
                              
                              
                              
                              -Romania
                              
                              
                              -
                              
                              
                              
                              13
                              
                              
                              
                              -
                              
                              
                              
                              -Dubai
                              
                              
                              -
                              
                              
                              
                              17
                              
                              
                              
                              -
                              
                              
                              
                              -Brazil
                              
                              
                              -
                              
                              
                              
                              20
                              
                              
                              
                              -
                              
                              
                              
                              -France
                              
                              
                              -
                              
                              
                              
                              21
                              
                              
                              
                              -
                              
                              
                              
                              -Greece
                              
                              
                              10
                              
                              
                              
                              7
                              
                              
                              
                              -
                              
                              
                              
                              -Spain
                              
                              
                              12
                              
                              
                              
                              -Other
      countries
                              
                              
                              22
                              
                              
                              
                              44
                              
                              
                              
                              -
                              
                              
                              
                              -$
                              181
                              
                              
                              $
                              360
                              
                              
                              $
                              74
                              
                              
                              $
                              26





(NOTE
O) – Subsequent Events:





On
January 11, 2010, the Company paid
Yissum $50,000 in partial satisfaction of its 2009 royalty
obligation.  (see Note H [1])





On
January 14, 2010, the Company
received proceeds of $433,000 from the sale of certain New Jersey state tax
losses.





In March
2010, based on the recommendation of the Compensation Committee of the Company’s Board
of Directors, the Board of Directors approved a performance-based bonus
arrangement for Mr. Robert Hickey and Dr. Eli Pines. Under the arrangement, Mr.
Hickey would be entitled to a maximum cash bonus equal to $100,000 and Dr. Pines
would be entitled to a maximum cash bonus equal to $60,000 for calendar
year 2010.  The Board of Directors also granted performance-based
options to purchase 350,000 shares of common stock to Mr. Hickey and 200,000
shares of common stock to Dr. Pines under the Company’s 2006 Stock Option Plan,
in each case exercisable at $0.11 per share and expiring ten years from
grant.   Entitlement to the cash bonuses as well as vesting of
the performance-based options is at the discretion of the Compensation
Committee, and is anticipated to occur in early 2011 when the Compensation
Committee reviews 2010 performance.





In March
2010, the Board of Directors extended to December 31, 2010 the expiration date
of the following stock options that were scheduled to expire on March 21, 2010:
Dr. Richard Franklin, 1,000,000 shares; Mr. Robert Hickey, 500,000 shares; and
Dr. Eli Pines, 233,333 shares. At the same time, the exercise price for each of
these stock options was increased from $0.12 per share to $.14 per
share.





In March
2010, the Company entered into a short term financing agreement for its product
liability insurance premiums totaling $59,000, payable in monthly installments
including interest of $6,000. The monthly installments are due through January
2011, and carry interest of 4.5% per annum.


F-22