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, 2008oro
                      TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                        For
      the transition period
      from                                                             
      toCommission 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 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 $31,200,000 based on
the last reported sale price of the registrant’s common stock as of
June 30, 2008.




At
February 28, 2009, 99,028,858 shares of registrant’s Common Stock were
outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrant's proxy statement for the
2009 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
            
            18Item 2
            
            Properties
            
            18Item
      3
            
            Legal
      Proceedings
            
            19Item
      4
            
            Submission of Matters to a Vote
      of Security Holders
            
            19Part II
            
            Item 5
            
            Market for Registrant’s Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            
            19Item 6
            
            Selected Financial Data
            
            20Item
      7
            
            Management’s Discussion and
      Analysis of Financial Condition and Results of
      Operations
            
            20Item 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 Accounting Fees and
      Services
            
            26Part IV
            
            Item 15
            
            Exhibits, Financial Statement
      Schedules
            
            26Signatures
            
            29











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
commercialization efforts are currently focused on our lead product, REPEL-CV®
Bioresorbable Adhesion Barrier (“REPEL-CV”), for use in cardiac
surgery.  REPEL-CV is a bioresorbable film designed to be placed over
the surface of the heart at the conclusion of surgery to reduce the formation of
post-operative adhesions.





In March
2009, the US Food and Drug Administration (“FDA”) issued the Premarket Approval
(“PMA”) for 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 plan to conduct a post-approval safety study
in pediatric patients.  We are in continuing discussion with the FDA
to define the additional data necessary to support approval of an expanded adult
indication.  Establishment of these additional data requirements
remains a strategic priority for our company and we are hopeful of a timely
resolution, yet we are not in a position to predict either the timing of any
such resolution or the nature and scope of any such additional data
requirements.





In the
United States, we intend to market REPEL-CV through a direct sales force
comprised of both company and independent sales representatives. REPEL-CV has
been available for sale in the European Union and certain Southeast Asian
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. In July 2008, we received Health Canada’s approval to
market REPEL-CV for use in pediatric patients who undergo open heart surgery,
and have begun marketing the product in Canada through an independent
distributor.




In
November 2008, we received 510(k) clearance to market from the FDA for
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 currently in
discussions with prospective marketing/distribution partners who focus on the
ear, nose and throat (“ENT”) surgical market.





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 reduce post-operative complications.  Examples include
the reduction of adhesions in the pelvic cavity following gynecologic surgery
and the reduction of peridural adhesions in spine surgery.




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 plan to conduct a post-approval safety study
in pediatric patients.  We are in continuing discussion with the FDA
to define the additional data necessary to support an expanded adult
indication.  Establishment of these additional data requirements
remains a strategic priority for our company and we are hopeful of a timely
resolution, yet we are not in a position to predict either the timing of any
such resolution or the nature and scope of any such additional data
requirements.





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.





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 to market from the FDA
for 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 plan 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.





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 adhesion
models.  We are currently conducting similar studies on the current
generation film which has proven, in clinical trials, to reduce adhesions in the
pericardial cavity. 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 initiated preclinical studies to determine whether
our polymer film reduces the extent and severity of peridural
adhesions.   We are assessing the requirements for both obtaining
CE Mark approval for our polymer film in these indications as well as receiving
FDA approvals to initiate clinical trials.  The initiation of one or
more US clinical trials would be contingent on obtaining additional
financing.





4


RESOLVE





We
plan to address the market opportunity associated with the incidence of
post-operative adhesion formation in gynecologic and general abdominal surgery
through the development of viscous solutions derived from our proprietary
bioresorbable polymer technology.  The objective is to provide
surgeons with products that are effective in reducing the extent and severity of
adhesions and are easy to use in both open and less-invasive surgical
procedures.





We have
been evaluating bioresorbable materials that coat tissue surfaces as a means of
providing broad-based versus site specific protection against adhesion
formation.  This approach has particular application in gynecological
and general abdominal surgery due to the “bowl shaped” anatomical configuration
of the peritoneal cavity. The 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
previous 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.  Although progress with these preclinical studies
was made during 2007, this development program has been placed on hold pending
resolution of the REPEL-CV PMA application and the raise of additional
financing.





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.  We are
attempting 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 placed on hold pending
resolution of the REPEL-CV PMA application and the raise of additional
financing.





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 $1,609,000 in 2008 and $2,180,000 in 2007 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 $700,000
in minimum royalties to preserve our rights under the Yissum Agreement for
performance years 2001 through 2008.  We have recently negotiated a
similar amendment whereby our rights are preserved through the end of 2011
through the payment, if necessary, of annual minimum royalties of $200,000 for
performance year 2009 and $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.





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





7


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.





We
are pursuing a reimbursement strategy to support the sale of REPEL-CV in the
United States.  We have identified an ICD-9-CM reimbursement code
which hospitals can use, which may result in the receipt of additional
reimbursement for the use of REPEL-CV in open heart surgical procedures once a
pattern of product usage has been established.





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, France
and Belgium which would allow for specific reimbursement in public
hospitals.  We are also supporting newly-appointed distributors in
Brazil, Columbia, Uruguay, Russia and Australia in obtaining registration to
market and, in some instances, government reimbursement approval.





Patents
and Proprietary Rights





In
connection with the polymer technology relating to the Yissum Agreement, we
currently hold seven United States patents, two European patents 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
September 2020.  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.





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, Adhibit®, a product of Angiotech Pharmaceuticals, Inc.,
CardioWrap®, a product of Mast Surgical, Adept®, a product of ML Labs Ltd. and
Preclude®, a
product of WL Gore.  Several other companies including, Anika
Therapeutics, Inc., Alliance Pharmaceuticals, Corp., Covidien, Wright Medical,
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 currently being sold in the European Union and certain
Southeast Asian markets where several 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.  In the United States, although there are
currently no anti-adhesion products approved by the FDA for use in open heart
surgery, products like CardioWrap and Preclude are being used off label to
reduce adhesions particularly in staged procedures performed on neonatal
patients.





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





We plan
to market REPEL-CV in the United States through a direct sales effort comprised
of both our own sales representatives complemented by 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 will be targeted at pediatric surgical
centers as well as major hospitals where both pediatric and adult cardiothoracic
surgical procedures are performed.





An
incentive-based compensation plan has been developed which should allow us to
attract 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.





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.





9


In
September 2006, we launched REPEL-CV for sale in certain EU countries and
several Southeast Asian markets through a network of independent distributors,
all of whom are experienced at selling devices and medical equipment to cardiac
surgeons.  We are continuing to upgrade our existing distribution
relationships as needed to increase the penetration of these
markets.   We are also supporting newly-appointed distributors in
Brazil, Columbia, Uruguay, Russia and Australia in obtaining registration to
market and, in some instances, government reimbursement approval.





Now
that we have obtained FDA approval, we intend to pursue regulatory approval and
registration in other countries, such as Japan, South Korea and China, where
local regulatory approval is conditioned in part upon US regulatory
approval.  We are currently in discussion with prospective distributor
partners in many of these markets.





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





Human
Resources





As of
February 2009, we employed five full-time employees, one part-time employee in
the United States and one full-time consultant in the United Kingdom. Subject to
availability of sufficient financing and FDA approval of the REPEL-CV PMA, we
intend to increase the number of full-time employees during 2009 in support of
the launch of REPEL-CV in the United States.





Our
Executive Officers





The
Company's executive officers are as follows:








Name
              Age
              Posititons
      with the CompanyRichard L. Franklin,
      MD
              63
              Executive Chairman
      and Chairman of the BoardRobert P.
      Hickey
              63
              President, CEO &
      CFOEli Pines,
      Ph.D
              63
              Vice President and
      Chief Scientific OfficerMarc
    Sportsman
              54
              Vice President of
      Sales




Richard L. Franklinhas
served in a consulting capacity as our Executive Chairman since October 2008, as
Chairman of the Board of Directors since June 2003 and as a director since
December 2000.  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.





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.





10


Marc Sportsmanhas served as
our Vice President of Sales since May 2007.  From April 2003 until February
2007, Mr. Sportsman served as vice president of sales for ATS Medical, Inc., a
cardiac surgical device company.  Prior to joining ATS Medical, Mr.
Sportsman was employed for 17 years by St. Jude Medical, Inc. during which time
he served in various field sales positions of increasing responsibilities
including his last position as area vice president.   Mr. Sportsman is
a graduate of the University of Missouri-Kansas City.





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 has served 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.




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





Eric A. Rose,
      M.D.
            Dr.
      Eric A. Rose is Chairman, Department of 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


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 $4,623,000 in 2007 and $4,404,000 in 2008.
At December 31, 2008, we had an accumulated deficit of $57,172,000. Our lead
product, REPEL-CV, has recently been approved for sale in the United States for
a limited pediatric indication and, to date, has generated limited revenue in
international markets. 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 and on developing, manufacturing
and marketing other product candidates.  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
Are Substantially Dependent on REPEL-CV to Generate Revenue




Our
near term 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 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 certain EU and Southeast
Asian countries for approximately two 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.




Risk
that Technologies or Proposed Products Will Never Be Successfully
Developed




Certain aspects of our polymer
technology and our proposed products are still under development and are subject
to the risks of failure inherent in the development of new technologies and
products based on new technologies. 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.




12


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 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 Adhesion Barrier 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 plan to conduct a post-approval safety study
in pediatric patients.  We are in continuing discussion with the FDA
to define the additional data necessary to support an expanded adult
indication.  Establishment of these additional data requirements
remains a strategic priority for our company and we are hopeful of a timely
resolution, yet we are not in a position to predict either the timing of any
such resolution or the nature and scope of any such additional data
requirements.





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.




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.




13


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 for the next twelve
months. As a result, the report of our independent auditors relating to our 2008
financial statements indicates that there is substantial doubt about our ability
to continue as a going concern. We anticipate seeking to raise additional
capital, most likely through equity-based financing, in the second half of 2009
to fund our planned operations. We may not be able to obtain financing 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.
Insufficient funds may require us to delay, limit or eliminate some or all of
our planned activities, or require us to license to third parties certain
products or technologies that we would otherwise seek to commercialize on our
own.




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 seven
United States patents, two European patents 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 the 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 agents
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 and agents to market and sell REPEL-CV in European and
other countries.  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.  If and to the extent we are successful in establishing such
arrangements, we will be dependent upon the effectiveness of our distributors
and agents for the sale of REPEL-CV.  We cannot assure that the
distributors and agents 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 and agents, 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 intend to 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 the EU, certain Southeast Asian countries and
Canada. 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,
2009, we had 99,028,858 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;





·
            14,148,000
      shares upon exercise of outstanding options, exercisable at prices ranging
      from $0.09 to $1.16 per share and expiring from March 21, 2009 to February
      6, 2019.





Substantially all of our outstanding
shares of Common Stock are presently saleable in the public market without
restriction. Exercise of all of our outstanding options and resale of the shares
underlying all of our outstanding warrants, is presently covered by effective
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 are presently
free to sell the underlying shares in the public market without
restriction.




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.




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
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.





18





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.  Submission of Matters to a Vote of Security Holders.





None.





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
      Stock
                  Bid Price ($)High
                
                
                LowFiscal Year Ended
      December 31, 2007First
      Quarter
                
                
                1.02
                
                
                
                0.70Second
      Quarter
                
                
                1.02
                
                
                
                0.80Third
      Quarter
                
                
                1.32
                
                
                
                0.68Fourth
      Quarter
                
                
                0.75
                
                
                
                0.45Fiscal Year Ended
      December 31, 2008First
      Quarter
                
                
                0.60
                
                
                
                0.34Second
      Quarter
                
                
                0.66
                
                
                
                0.31Third
      Quarter
                
                
                0.46
                
                
                
                0.15Fourth
      Quarter
                
                
                0.24
                
                
                
                0.04




Approximate
Number of Equity Securities Holders





As of February 25, 2009, the number of
holders of record of our Common Stock was 303. We believe that there are in
excess of 1,300 beneficial holders of our Common Stock.





19


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.





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





Certain statements in this Report under
this Item 6 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 including REPEL-CV.  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 required FDA and
other regulatory approvals; (ii) potential inability to secure funding as and
when needed 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
commercialization efforts are currently focused on our lead product, REPEL-CV®
Bioresorbable Adhesion Barrier (“REPEL-CV”), for use in cardiac
surgery.  REPEL-CV is a bioresorbable film designed to be placed over
the surface of the heart at the conclusion of surgery to reduce the formation of
post-operative adhesions.





In March
2009, the US Food and Drug Administration (“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 plan to
conduct a post-approval safety study in pediatric patients.  We are in
continuing discussion with the FDA to define the additional data necessary to
support approval of an expanded adult indication.  Establishment of
these additional data requirements remains a strategic priority for our company
and we are hopeful of a timely resolution, yet we are not in a position to
predict either the timing of any such resolution or the nature and scope of any
such additional data requirements.





In the
United States, we intend to market REPEL-CV through a direct sales force
comprised of both company and independent sales representatives. REPEL-CV has
been available for sale in the European Union and certain Southeast Asian
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. In July 2008, we received Health Canada’s approval to
market REPEL-CV for use in pediatric patients who undergo open heart surgery,
and have begun marketing the product in Canada through an independent
distributor.





20


In
November 2008, we received 510(k) clearance to market from the FDA for
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 currently in
discussions with prospective marketing/distribution partners who focus on the
ear, nose and throat (“ENT”) surgical market.





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 reduce post-operative complications.  Examples include
the reduction of adhesions in the pelvic cavity following gynecologic surgery
and the reduction of peridural adhesions in spine surgery.




Newly Adopted Accounting
Pronouncements





Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards
("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"), for assets and
liabilities measured at fair value on a recurring basis.  SFAS 157
accomplished the following key objectives:





·
            Defines
      fair value as the price that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market participants
      at the measurement date;





·
            Establishes
      a three-level hierarchy ("valuation hierarchy") for fair value
      measurements;





·
            Requires
      consideration of the Company's creditworthiness when valuing liabilities;
      and





·
            Expands
      disclosures about instruments measured at fair
  value.





The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date.  A financial
instrument's categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.  The three levels of the valuation hierarchy and the
distribution of the company's financial assets within it are as
follows:





·
            Level
      1 - inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 - inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.





·
            Level
      3 - inputs to the valuation methodology are unobservable and significant
      to the fair value measurement.





Our
assets carried at fair value on a recurring basis are our investments in money
market accounts.  The cash and cash equivalents have been classified
within level 1, as their valuation is based on quoted prices for identical
assets in active markets.





Effective
January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement 115”
(“SFAS 159”).  This statement provides companies with an option to report
selected financial assets and liabilities at fair value.  As of December
31, 2008, we have not elected to use the fair value option allowed by SFAS 159
and hence, SFAS 159 did not have a material effect on our financial position,
results of operations, cash flows or financial statement
disclosures.





21


On
October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset in a Market That Is Not Active.” The FSP was effective upon
issuance, including periods for which financial statements have not been issued.
The FSP clarified the application of SFAS 157 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.





Recent Accounting
Pronouncements





In
2008, the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05
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
paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and early application
is not permitted. Management believes the adoption of EITF 07-05 in fiscal 2009
will not have any impact on the Company.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations”, which replaces FASB Statement No. 141. SFAS 141(R)
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. SFAS 141(R) is effective as of the beginning of an entity’s
fiscal year that begins after December 15, 2008, which corresponds to our
year beginning January 1, 2009. SFAS 141(R) 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 SFAS No. 141(R) will
have no 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
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51 (SFAS 160).”
SFAS 160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. FAS 160
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary.  This statement is effective as of the
beginning of an entity’s first fiscal year beginning after December 15,
2008, which corresponds to our year beginning January 1, 2009. The adoption of
SFAS No. 160 will have no impact on our financial position and results of
operations although it will materially change the accounting and reporting for
minority interests in the future, which will be recharacterized as
noncontrolling interests and classified as a component of stockholder’s
equity.





In
December 2007, the FASB ratified the consensus reached on Emerging Issues Task
Force Issue No. 07-1, “Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property” (“EITF 07-1”).
 EITF 07-1 defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties.
 EITF 07-1 will be effective for our fiscal year beginning January 1, 2009.
 We are currently evaluating the potential impact of this standard on our
financial statements.





In
May 2008, FASB issued FAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). This statement documents the hierarchy of
the various sources of accounting principles and the framework for selecting the
principles used in preparing financial statements. FAS 162 is effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. FAS 162 did not have a material impact on our financial
statements.





Results
of Operations




Revenues
were $181,000 for 2008, compared to $134,000 for 2007, an increase of 35.1% or
$47,000.  Revenue is attributable to product sales of REPEL-CV in the
European Union and other international markets.  The increase in
revenue for 2008, as compared to the prior year period is primarily attributable
to higher sales volume resulting from both existing distributors and from
initial stocking orders from new international distributors. With the FDA
approval of REPEL-CV for use in pediatric patients who are likely to require
reoperation via sternotomy, we anticipate achieving increased revenue in future
periods.




22


Cost of
goods sold was $102,000 for 2008, compared to $29,000 for 2007, an increase of
251.7% or $73,000. The increase in cost of goods sold for 2008 as compared to
the prior year period is mainly attributable to an increase in the reserve for
slow moving and obsolete inventory of $46,000 and increased raw material costs
of $19,000. 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, and by $16,000 for the year ended December 31, 2007. Costs of goods
sold in future periods will include 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 L of Notes
to Financial Statements)




Research
and development expenses totaled $1,609,000 for 2008, compared to $2,180,000 for
2007, a decrease of 26.2% or $571,000. The decrease for the current year period
is primarily attributable to reductions of $312,000 in regulatory costs and
$272,000 in stock-based compensation expense. We anticipate that research and
development expenses may increase as we pursue a post approval safety study in
pediatric patients, and possible clinical studies in support of FDA approval of
the adult indication.




General
and administrative expenses totaled $1,758,000 for 2008, compared to $2,139,000
for 2007, a decrease of 17.8% or $381,000.  The decrease for the
current year period is primarily attributable to reductions in stock-based
compensation expense of $269,000, investor relations expenses of $137,000 and
legal and insurance expenses of $44,000 partially offset by an increase in
compensation expense of $72,000.




Sales and
marketing expenses totaled $1,286,000 for 2008, compared to $1,131,000 for 2007,
an increase of 13.7% or $155,000.  The increase for the current year
period is mainly attributable to an increase in compensation expense of $165,000
reflecting the full-year compensation for our Vice President of Sales who was
hired in May 2007.  We anticipate continued increases in sales and
marketing expenses associated with the US marketing of REPEL-CV and as we pursue
broader international distribution.




Interest income totaled
$49,000 for 2008, compared to $105,000 for 2007, a decrease of 53.3% or
$56,000.  The decrease is primarily attributable to lower average cash
balances and lower interest rates.





Interest expense
totaled $3,000for 2008,compared to $1,000 for
2007.The increase was attributable to charges resulting from the
financing of our product liability and directors and officers liability
insurance premiums in 2008.





We
realized other income from the reversal of liabilities of $5,000 for 2008,
compared to $136,000 for the comparable prior year period, a decrease of 96.3%
or $131,000. The reversal of liabilities in both years 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, based on the advise of legal counsel,that, at the time of the respective
reversals, the underlying claims would be barred by applicable statutes of
limitations if recovery actions were asserted. We do not currently anticipate
reversing any of the remaining liabilities in the foreseeable
future.





We
recorded an income tax benefit of $119,000 in 2008, compared to $482,000 in
2007. These amounts were attributable to the receipt of funds associated with
the sale of certain accumulated New Jersey State tax operating losses. The
decrease compared to the prior year is primarily attributable to a reduction in
the amount of accumulated losses approved for sale.





We
reported a net loss of $4,404,000 for 2008, compared to a $4,623,000 for 2007, a
decrease of 4.7% or $219,000.  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, 2008 we had cash and cash equivalents of $2,944,000, compared to
$2,991,000 at December 31, 2007.





23


At
December 31, 2008 we had working capital of $2,829,000, compared to $2,661,000
at December 31, 2007.





Net cash
used in operating activities during 2008 was $3,887,000, compared to $3,582,000
during 2007.  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 used in
operating activities during 2007 was primarily attributable to a net loss of
$4,623,000, a net reduction of $226,000 in accounts payable and accrued expenses
including reversal of liabilities and a net increase of $24,000 in accounts
receivable, inventory and prepaid expenses partially offset by the impact of
$1,291,000 in non-cash expenses mainly comprised of stock-based compensation
expense.





Net cash used in investing
activities during 2007 was $25,000; there was no comparable figure for 2008.Net cash used in investing activities during 2007 was associated with the
acquisition of computer equipment and office furniture.





Net cash
provided from financing activities during 2008 was $3,840,000, compared to
$2,876,000 during 2007.  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.  The 2007 amount is comprised of $2,697,000
of net proceeds from the sale of common stock and $249,000 from the exercise of
stock options and warrants, offset by the repayment of a $70,000 convertible
promissory note that matured in February
2007.





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.





The
balance of cash and cash equivalents as of December 31, 2008 is not sufficient
to meet our anticipated cash requirements through 2009, based on our present
plan of operation.  As a result, we anticipate seeking to raise
additional capital during the second half of 2009.  Additional capital
may not be available as and when needed or on terms favorable or acceptable to
us.  Equity financings may be dilutive to existing
stockholders.  Insufficient funds may require us to delay, scale back
or eliminate some or all of our research and development programs and
commercialization plans, or require us to license to third parties certain
products or technologies that we would otherwise seek to commercialize
independently.  As a result of our limited capital resources and
recurring net losses, our auditors have disclosed in their report on our
financial statements that there is substantial doubt about our ability to
continue as a going concern.





At
December 31, 2008, we had
employment agreements with five individuals that expire as follows: two in
September 2009, one in March 2010, one in May 2010 and one in October 2012.
Pursuant to these agreements, our commitment regarding cash severance benefits
aggregates $670,000 at December 31, 2008. We have also entered into change of
control agreements with our three 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.




24




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, 2008.  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.





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 2008 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.





25


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
2009 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
2009 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
2009 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 2009 annual meeting of
stockholders.





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 2009 annual meeting of
stockholders.





Part
IV





Item
15.  Exhibits, Financial Statement Schedules.




3.1
            Restated
      Certificate of Incorporation of Registrant, filed December 26, 1991, as
      amended. (1)3.1(a)
            Amendment
      to Restated Certificate of Incorporation, dated August 21, 1992.
      (1)3.1(b)
            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 Convertibe 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) (7)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
            2001
      Non-Qualified Stock Option Plan and Stock Option Agreement.
      (11)10.12
            Indemnity
      letter between Registrant and Eli Pines Ph.D. dated March 1, 2003. (8)
      (12)10.13
            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)10.14
            Employment
      Agreement dated October 1, 2008 between the Registrant and Robert P.
      Hickey (8) (24)10.15
            Consulting
      Agreement dated October 1, 2008 between the Registrant and Richard L.
      Franklin, MD (8) (24).10.16
            Consulting
      Agreement dated October 1, 2008 between the Registrant and Gere S.
      diZerega, MD (8) (24).10.17
            Employment
      Agreement dated June 19, 2006 between the Registrant and Eli Pines, PhD.
      (8) (18)10.18
            Employment
      Agreement dated May 1, 2007 between the Registrant and Marc Sportsman. (8)
      (20)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
            Asset
      Purchase Agreement between Registrant and Phairson Medical, Ltd. dated
      March 18, 2003. (12)10.21
            Form
      of Broker Warrant issued in April 2006 equity financing to Agent’s
      designees covering an aggregate of 1,475,000 shares.
  (16)






26


10.22
                  The
      Registrant’s 2006 Stock Option Plan. (17)10.23
                  Change
      of Control Agreement dated June 19, 2006 between the Registrant and Eli
      Pines, PhD. (8) (18)10.24
                  Change
      of Control Agreement dated June 19, 2006 between the Registrant and Robert
      P. Hickey. (8) (18)10.25
                  Change
      of Control Agreement dated May 1, 2007 between the Registrant and Marc
      Sportsman. (8) (20)10.26
                  Form
      of ISO and Non-Qualified Stock Option Agreements under the Registrant’s
      2006 Stock Option Plan. (21)10.27
                  Stock
      Option Amendment Agreement, dated as of April 27, 2007, in favor of Robert
      P. Hickey. (20)10.28
                  Stock
      Option Amendment Agreement, dated as of April 27, 2007, in favor of Eli
      Pines, PhD. (20)10.29
                  Form
      of Subscription Agreement for August 2007 equity placement.
      (20)10.30
                  Form
      of Investor Rights Agreement for August 2007 equity placement.
      (20)10.31
                  Agency
      Agreement for August 2007 equity placement. (20)10.32
                  Form
      of Broker Warrant issued to Agent's designees covering an aggregate of
      210,000 shares.(20)10.33
                  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)10.34
                  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)10.35
                  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)10.36
                  Form
      of Subscription Agreement for September 2008 unit placement (including
      form of investor warrants). (24)10.37
                  Agency
      Agreement for September 2008 unit placement. (24)10.38
                  Form
      of Broker Warrant to placement agent for 700,000 shares for September 2008
      unit placement. (24)10.39
                  Stock
      Option Agreement dated October 1, 2008 between Registrant and Richard L.
      Franklin, MD. *10.40
                  Stock
      Option Agreement dated October 1, 2008 between Registrant and Gere S.
      diZerega, MD. *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.


27


(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
agreement.(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 Scheduled 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 8-K filed February 25,
      2009.




28




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
27, 2009





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
      27, 2009/s/ Robert P. Hickey
                    
                    Director,  President,
      CEO and CFO
                    March
      27, 2009Robert
      P. Hickey
                    
                    (principal
      executive, financial and accounting officer)/s/ David G. P.
      Allan
                    
                    Director
                    March
      27, 2009David
      G. P. Allan/s/ Joerg Gruber
                    
                    Director
                    March
      27, 2009Joerg
    Gruber/s/ Barry R. Frankel
                    
                    Director
                    March
      27, 2009Barry R.
      Frankel/s/ Walter R. Maupay,
    Jr.
                    
                    Director
                    March
      27, 2009Walter
      R. Maupay, Jr.








29





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 2007 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, 2008.  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, 2008 and 2007, and the results of its operations and its cash
flows for each of the years in the two-year period ended December 31, 2008
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 which raise substantial
doubt about its ability to continue as a going concern.  Management's
plans in regard to these matters are also discussed in
Note A.  The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.








/s/
EISNER LLP





New York,
New York


March 23,
2009





F-2





SYNTHEMED,
INC.





BALANCE
SHEETS


(In
thousands, except per share data)




December
      31,
                                          
                                          
                                          December
      31,2007
                                          
                                          
                                          2008ASSETSCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          2,991
                                          
                                          
                                          $
                                          2,944Accounts
      receivable, net
                                          
                                          
                                          19
                                          
                                          
                                          
                                          36Inventory,
      net
                                          
                                          
                                          115
                                          
                                          
                                          
                                          199Prepaid
      expenses and deposits
                                          
                                          
                                          91
                                          
                                          
                                          
                                          78Total
      current assets
                                          
                                          
                                          3,216
                                          
                                          
                                          
                                          3,257Acquired
      technology, less accumulated amortization
                                          
                                          
                                          21Machinery,
      equipment and software, less accumulated depreciation
                                          
                                          
                                          135
                                          
                                          
                                          
                                          74TOTAL
                                          
                                          $
                                          3,372
                                          
                                          
                                          $
                                          3,331LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                                          
                                          $
                                          245
                                          
                                          
                                          $
                                          208Accrued
      expenses
                                          
                                          
                                          310
                                          
                                          
                                          
                                          212Note
      payable - insurance
                                          
                                          
                                          
                                          
                                          
                                          
                                          8Total
      current liabilities
                                          
                                          
                                          555
                                          
                                          
                                          
                                          428Stockholders'
      equity:Preferred
      stock, $.01 par value; shares authorized - 5,000;issued
      and outstanding - noneCommon
      stock, $.001 par value; shares authorized - 150,000issued
      and outstanding - 87,621 and 98,746
                                          
                                          
                                          88
                                          
                                          
                                          
                                          99Additional
      paid-in capital
                                          
                                          
                                          55,497
                                          
                                          
                                          
                                          59,976Accumulated
      deficit
                                          
                                          
                                          (52,768
                                          )
                                          
                                          
                                          (57,172
                                          )Total
      stockholders' equity
                                          
                                          
                                          2,817
                                          
                                          
                                          
                                          2,903TOTAL
                                          
                                          $
                                          3,372
                                          
                                          
                                          $
                                          3,331





F-3


SYNTHEMED,
INC.





STATEMENTS
OF OPERATIONS


(In
thousands, except per share data)





Year
      Ended December 31,2007
              
              
              2008Revenue:Product
      sales
              
              $
              134
              
              
              $
              181Revenue
              
              
              134
              
              
              
              181Cost
      of goods sold
              
              
              29
              
              
              
              102Gross
      profit
              
              
              105
              
              
              
              79Operating
      expenses:Research
      and development
              
              
              2,180
              
              
              
              1,609General
      and administrative
              
              
              2,139
              
              
              
              1,758Sales
      and marketing
              
              
              1,131
              
              
              
              1,286Operating
      expenses
              
              
              5,450
              
              
              
              4,653Loss
      from operations before other income / (expense)
              
              
              (5,345
              )
              
              
              (4,574
              )Other
      income/(expense):Interest
      income
              
              
              105
              
              
              
              49Interest
      expense
              
              
              (1
              )
              
              
              (3
              )Reversal
      of liabilities
              
              
              136
              
              
              
              5Loss
      before income tax benefit
              
              
              (5,105
              )
              
              
              (4,523
              )Income
      tax benefit
              
              
              482
              
              
              
              119Net
      loss
              
              $
              (4,623
              )
              
              $
              (4,404
              )Net
      loss per common share – basic and diluted
              
              $
              (0.05
              )
              
              $
              (0.05
              )Weighted
      average shares outstanding – basic and diluted
              
              
              85,114
              
              
              
              90,479




F-4


SYNTHEMED,
INC.





STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY


(In
thousands)




Common
                                                                                                                        
                                                                                                                        
                                                                                                                        Additional
      Paid-in
                                                                                                                        
                                                                                                                        
                                                                                                                        Net
      Loss and Comprehensive
                                                                                                                        
                                                                                                                        
                                                                                                                        AccumulatedShares
                                                                                                                        
                                                                                                                        
                                                                                                                        Amount
                                                                                                                        
                                                                                                                        
                                                                                                                        Capital
                                                                                                                        
                                                                                                                        
                                                                                                                        Loss
                                                                                                                        
                                                                                                                        
                                                                                                                        Deficit
                                                                                                                        
                                                                                                                        
                                                                                                                        TotalsBalance
      January 1, 2007
                                                                                                                        
                                                                                                                        
                                                                                                                        82,945
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        83
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        51,390
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (48,145
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        3,328Exercise
      of options
                                                                                                                        
                                                                                                                        
                                                                                                                        1,082
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        177
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        178Exercise
      of Series C warrants
                                                                                                                        
                                                                                                                        
                                                                                                                        594
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        70
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        71Shares
      issued in connection with privateplacement,
      net of offering costs
                                                                                                                        
                                                                                                                        
                                                                                                                        3,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,694
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,697Stock-based
      compensationrelating
      to options
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,166
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,166Net
      loss for the year
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (4,623
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,623
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,623
                                                                                                                        )Balance
      December 31, 2007
                                                                                                                        
                                                                                                                        
                                                                                                                        87,621
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        88
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        55,497
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        (52,768
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        2,817Exercise
      of options
                                                                                                                        
                                                                                                                        
                                                                                                                        1,125
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        148
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        149Shares
      issued in connection with privateplacement,
      net of offering costs
                                                                                                                        
                                                                                                                        
                                                                                                                        10,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        10
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,673
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        3,683Stock-based
      compensationrelating
      to options, net of taxes
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        658
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        658Net
      loss for the year
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (4,404
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,404
                                                                                                                        )
                                                                                                                        
                                                                                                                        
                                                                                                                        (4,404
                                                                                                                        )Balance
      December 31, 2008
                                                                                                                        
                                                                                                                        
                                                                                                                        98,746
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        99
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        59,976
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        (57,172
                                                                                                                        )
                                                                                                                        
                                                                                                                        $
                                                                                                                        2,903




F-5





SYNTHEMED,
INC.





STATEMENTS
OF CASH FLOWS


(In
thousands)














Year
      Ended December 31,2007
                
                
                2008Cash
      flows from operating activities:Net
      loss
                
                $
                (4,623
                )
                
                $
                (4,404
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                
                
                57
                
                
                
                61Stock-based
      compensation
                
                
                1,166
                
                
                
                658Amortization
      of acquired technology
                
                
                68
                
                
                
                21Reversal
      of liabilities
                
                
                (136
                )
                
                
                (5
                )Changes
      in operating assets and liabilities:(Increase)
      in accounts receivable
                
                
                (14
                )
                
                
                (17
                )(Increase)
      in inventory
                
                
                (77
                )
                
                
                (84
                )Decrease
      in prepaid expenses
                
                
                67
                
                
                
                13Increase
      / (decrease)  in accounts payable
                
                
                243
                
                
                
                (32
                )(Decrease)
      in accrued expenses
                
                
                (333
                )
                
                
                (98
                )Net
      cash used in operating activities
                
                
                (3,582
                )
                
                
                (3,887
                )Cash
      flows from investing activities:Purchase
      of equipment
                
                
                (25
                )Cash
      flows from financing activities:Repayment
      of convertible note payable
                
                
                (70
                )Net proceeds from issuance of common stock
                
                
                2,697
                
                
                
                3,683Net proceeds from note payable - insurance
                
                
                
                
                
                
                8Proceeds from exercise of options and warrants
                
                
                249
                
                
                
                149Net
      cash provided by financing activities
                
                
                2,876
                
                
                
                3,840Net
      decrease in cash and cash equivalents
                
                
                (731
                )
                
                
                (47
                )Cash
      and cash equivalents at beginning of year
                
                
                3,722
                
                
                
                2,991Cash
      and cash equivalents at end of year
                
                $
                2,991
                
                
                $
                2,944Supplementary
      cash flow information:Interest
      paid
                
                $
                1
                
                
                $
                3Income
      taxes paid
                
                
                5
                
                
                
                3





F-6




SYNTHEMED,
INC.


NOTES
TO FINANCIAL STATEMENTS




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





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
commercialization efforts are currently focused on our lead product, REPEL-CV®
Bioresorbable Adhesion Barrier (“REPEL-CV”), for use in cardiac
surgery.  REPEL-CV is a bioresorbable film designed to be placed over
the surface of the heart at the conclusion of surgery to reduce the formation of
post-operative adhesions.





In March
2009, the US Food and Drug Administration (“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 plan to
conduct a post-approval safety study in pediatric patients.  We are in
continuing discussion with the FDA to define the additional data necessary to
support approval of an expanded adult indication.  Establishment of
these additional data requirements remains a strategic priority for our company
and we are hopeful of a timely resolution, yet we are not in a position to
predict either the timing of any such resolution or the nature and scope of any
such additional data requirements.





In the
United States, we intend to market REPEL-CV through a direct sales force
comprised of both company and independent sales representatives. REPEL-CV has
been available for sale in the European Union and certain Southeast Asian
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. In July 2008, we received Health Canada’s approval to
market REPEL-CV for use in pediatric patients who undergo open heart surgery,
and have begun marketing the product in Canada through an independent
distributor.





In
November 2008, we received 510(k) clearance to market from the FDA for
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 currently in
discussions with prospective marketing/distribution partners who focus on the
ear, nose and throat (“ENT”) surgical market.





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 reduce post-operative complications.  Examples include
the reduction of adhesions in the pelvic cavity following gynecologic surgery
and the reduction of peridural adhesions in spine surgery.





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, we have limited revenues, have experienced
negative cash flows from operating activities and have experienced substantial
net losses during the years ended December 31, 2007 and 2008. As a result, we
have limited resources available to pursue our business operations and
substantial doubt exists about our ability to continue as a going concern. Our
continuation as a going concern is dependent upon obtaining sufficient financing
to fund our operations and ultimately to generate cash flows from operations,
which is dependent on successfully completing the development of our products
and proposed products, obtaining required regulatory approvals and manufacturing
and selling our products and proposed products. We intend to pursue additional
equity financings. If we are unable to obtain
sufficient capital as and when needed we may be forced to delay, scale back or
eliminate some or all of our operations including our research and development
programs and commercialization plans, and/or license to third parties certain
products or technologies that we would otherwise seek to commercialize
independently, There is no assurance that initiatives to raise additional
capital will be successful or that other financing arrangements will be
available on terms acceptable to us or that we will achieve or generate positive
cash flows from operations. The financial statements do not include any
adjustments relating to the





F-7


SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS
  (NOTE A) - The Company and Basis
of Presentation: (continued)





recoverability
and classification of the carrying amount of recorded assets or the amount and
classification of liabilities that might be necessary if we are unable to
continue as a going concern.





(NOTE
B) - Summary of Significant Accounting Policies:





[1]   Revenue
recognition policy:





We
recognize 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.  All sales were outside the United States of
America.





[2]   Cash
and cash equivalents:





We
consider all highly liquid investments purchased with a maturity of three months
or less to be cash equivalents. We deposit 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, 2009 and $100,000,
thereafter.





[3]   Accounts
Receivable:





Accounts
receivable are stated at estimated net realizable value. We evaluate our 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, we maintain 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 2007, the allowance for doubtful accounts was $14,000
and $0, respectively.





[4]   Inventory:





Inventory
is stated at the lower of cost or market, as determined by the first-in,
first-out method. We maintain an allowance for potentially slow moving and
obsolete inventories. We review on-hand inventory forpotential
slow moving and obsolete amounts and estimate the level of inventory reserve
accordingly. Our 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
      31,2007
                                                    
                                                    
                                                    2008Raw
      materials
                                                    
                                                    $
                                                    28,000
                                                    
                                                    
                                                    $
                                                    139,000Work
      in process
                                                    
                                                    
                                                    47,000
                                                    
                                                    
                                                    
                                                    33,000Finished
      goods
                                                    
                                                    
                                                    45,000
                                                    
                                                    
                                                    
                                                    73,000120,000
                                                    
                                                    
                                                    
                                                    245,000Slow
      moving and obsolete inventories
                                                    
                                                    
                                                    (5,000
                                                    )
                                                    
                                                    
                                                    (46,000
                                                    )$
                                                    115,000
                                                    
                                                    
                                                    $
                                                    199,000





F-8





SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[4]   Inventory: (continued)





The
production of our inventory is outsourced through 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 I).  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, 2007 and 2008 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 diluted computation, are as
follows:




December 31,2007
                              
                              
                              2008Options
                              
                              
                              12,872,000
                              
                              
                              
                              13,818,000Warrants
                              
                              
                              1,685,000
                              
                              
                              
                              12,385,00014,557,000
                              
                              
                              
                              26,203,000







F-9




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[10]  Impairment
of Intangible Assets:





Intangible assets
with finite lives are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be recoverable
over the remaining useful life. Management is also required to evaluate the
useful lives each reporting period. When intangible assets with finite useful
lives are tested for impairment, management uses the estimated future cash flows
directly associated with, and that are expected to arise as a direct result of,
the use of the assets. If the carrying amount exceeds the estimated undiscounted
cash flows, an impairment may be indicated. The carrying amount is then compared
to the estimated discounted cash flows, and if there is an excess, such amount
is recorded as an impairment.





[11]  Stock-based
compensation:





Effective
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
Payment”, 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 SFAS
No. 123(R). Under this transition method, stock-based compensation expense for
the years ended December 31, 2008 and 2007 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 SFAS No. 123. 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 SFAS No. 123(R) recorded on the straight-line basis over the requisite
service period.




[12]  Newly
Adopted Accounting Pronouncements :




Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"), for assets
and liabilities measured at fair value on a recurring basis.  SFAS 157
accomplished the following key objectives:





·
            Defines
      fair value as the price that would be received to sell an asset or paid to
      transfer a liability in an orderly transaction between market participants
      at the measurement date;





·
            Establishes
      a three-level hierarchy ("valuation hierarchy") for fair value
      measurements;





·
            Requires
      consideration of a company's creditworthiness when valuing liabilities;
      and





·
            Expands
      disclosures about instruments measured at fair
  value.





The
valuation hierarchy is based upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date.  A financial
instrument's categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.  The three levels of the valuation hierarchy and the
distribution of the Company's financial assets within it are as
follows:





·
            Level
      1 - inputs to the valuation methodology are quoted prices (unadjusted) for
      identical assets or liabilities in active
  markets.





·
            Level
      2 - inputs to the valuation methodology include quoted prices for similar
      assets and liabilities in active markets, and inputs that are observable
      for the assets or liability, either directly or indirectly, for
      substantially the full term of the financial
  instrument.








F-10





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





[12]  Newly
Adopted Accounting Pronouncements : (continued)





·
            Level
      3 - inputs to the valuation methodology are unobservable and significant
      to the fair value measurement.





The
Company's assets carried at fair value on a recurring basis are its investments
in money market accounts.  The cash and cash equivalents have been
classified within level 1, as their valuation is based on quoted prices for
identical assets in active markets.





Effective
January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities - including an amendment of FASB Statement 115”
(“SFAS 159”).  This statement provides companies with an option to report
selected financial assets and liabilities at fair value.  As of December
31, 2008, we have not elected to use the fair value option allowed by SFAS 159
and hence SFAS 159 did not have a material effect on our financial position,
results of operations, cash flows or financial statement
disclosures.





On
October 10, 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of
a Financial Asset in a Market That Is Not Active.” The FSP was effective upon
issuance, including periods for which financial statements have not been issued.
The FSP clarified the application of SFAS 157 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.





[13]  Recent
Accounting Pronouncements :





In
2008, the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded
Feature) Is Indexed to an Entity’s Own Stock, (“EITF 07-05”). EITF 07-05
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
paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and early application
is not permitted. Management believes the adoption of EITF 07-05 in fiscal 2009
will not have any impact on the Company.





In December 2007, the FASB
issued SFAS No. 141 (revised 2007), “Business Combinations”, which
replaces FASB Statement No. 141. SFAS 141(R) 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. SFAS 141(R) is
effective as of the beginning of an entity’s fiscal year that begins after
December 15, 2008, which corresponds to our year beginning January 1, 2009.
SFAS 141(R) 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 SFAS No. 141(R) will have no 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
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statement—amendments of ARB No. 51 (SFAS 160).”
SFAS 160 states that accounting and reporting for minority interests will be
recharacterized as noncontrolling interests and classified as a component of
equity.  The Statement also establishes reporting requirements that provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. FAS 160
applies to all entities that prepare consolidated financial statements, except
not-for-profit organizations, but will affect only those entities that have an
outstanding noncontrolling interest in one or more subsidiaries or that
deconsolidate a subsidiary.  This statement is effective as of the
beginning of an entity’s first fiscal year beginning after December 15,
2008, which





F-11




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[13]  Recent
Accounting Pronouncements :  (continued)





corresponds
to our year beginning January 1, 2009. The adoption of SFAS No. 160 will have no
impact on our financial position and results of operations although it will
materially change the accounting and reporting for minority interests in the
future, which will be recharacterized as noncontrolling interests and classified
as a component of stockholder’s equity.





In
December 2007, the FASB ratified the consensus reached on Emerging Issues Task
Force Issue No. 07-1, “Accounting for Collaborative Arrangements Related to the
Development and Commercialization of Intellectual Property” (“EITF 07-1”).
 EITF 07-1 defines collaborative arrangements and establishes reporting
requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties.
 EITF 07-1 will be effective for our fiscal year beginning January 1, 2009.
 We are currently evaluating the potential impact of this standard on our
financial statements.





In
May 2008, FASB issued FAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“FAS 162”). This statement documents the hierarchy of
the various sources of accounting principles and the framework for selecting the
principles used in preparing financial statements. FAS 162 is effective 60 days
following the Securities and Exchange Commission’s approval of the Public
Company Accounting Oversight Board amendments to AU Section 411, “The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles”. FAS 162 did not have a material impact on our financial
statements.




(NOTE
C) – Acquired 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.





In
connection with this transaction, we recorded $344,000 as the fair value of this
technology which includes (i) $330,000, representing the deemed value of the
shares issued based upon the approximate $0.0478 value per share paid by
investors in the contemporaneous private placement of Series C Convertible
Preferred Stock and related warrants; (ii) $11,000 in transaction-related costs
and (iii) $3,000 representing the fair value of the options


issued as
a finder’s fee.  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.  Certain stockholders of Phairson have participated in
previous financings of our Company and Richard Franklin, our Company’s Chairman,
is a stockholder in and has served as CEO of Phairson. The fair value of the
options to purchase 100,000 shares of Common Stock issued as a finder’s fee was
determined to be $3,000 at the time of the transaction using the Black Scholes
pricing model.





A
useful life of 5 years was assigned to the acquired technology considering the
stage of product development, the estimated period during which patent
protection could be enforced, which would go well beyond five years from the
acquisition date, the development cycle time for medical devices of the type
envisioned by us based on such technology, as well as potential technology
obsolescence over time. For each of the years ended December 31, 2007 and 2008,
we recorded amortization of $68,000 and $21,000, respectively.  At
December 31, 2008, the acquired technology has been fully
amortized.





F-12




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


(NOTE
D) – Machinery, Equipment and Software:





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





Estimated2007
                  
                  
                  2008
                  
                  useful lifeMachinery
      and equipment
                  
                  $
                  219,000
                  
                  
                  $
                  219,000
                  
                  5
      yearsOffice
      equipment and software
                  
                  
                  65,000
                  
                  
                  
                  65,000
                  
                  3
      years284,000
                  
                  
                  
                  284,000Less
      accumulated depreciation
                  
                  
                  149,000
                  
                  
                  
                  210,000$
                  135,000
                  
                  
                  $
                  74,000





(NOTE
E) - Convertible Promissory Notes:





A $70,000 5-year, 5% convertible
promissory note, convertible into common stock at a conversion price of $1.00
per share, matured on February 22, 2007 and was repaid in full.





(NOTE
F) – Note Payable - Insurance:





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





(NOTE
G) – Stockholders’ Equity:





[1]  Common
stock:





On September 30, 2008,
we 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, we paid a placement 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.
We also reimbursed the agent for certain financing-related expenses totaling
approximately $37,000 including legal fees. One of our directors, Mr. Joerg
Gruber, is Chairman and a director of the placement agent.





In
August and September 2007, we sold an aggregate of 3,000,000 shares of common
stock at a purchase price of $1.00 per share in a private placement, resulting
in gross cash proceeds of $3,000,000. The private placement occurred in two
closings, the first on August 14, 2007 for total proceeds of $2,800,000 and the
second on September 7, 2007 for $200,000.  In connection with the
financing, we paid a placement agent a commission of $210,000 in cash,
representing 7% of the proceeds raised by the agent, and we also issued warrants
to purchase an aggregate of 210,000 shares of common stock, representing 7% of
the number of shares sold by the agent in the financing.  The warrants
are exercisable at an exercise price equal to $1.10 per share at any time until
August 13, 2011. We incurred certain financing-related expenses including legal
fees totaling $93,000.





F-13




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


(NOTE
G) – Stockholders’ Equity:  (continued)
 
 [1]  Common
stock:  (continued)




In
connection with the above noted financing, we entered into subscription
agreements and an investor rights agreement with the investors, as well as an
agency agreement with the placement agent. One of our directors,
Mr.


Joerg
Gruber, is chairman and a director of the placement agent. Pursuant to the
investor rights agreement, we filed a registration statement with the United
States Securities and Exchange Commission covering resale of the securities sold
in the private placement. The registration statement has been declared effective
for both private placements.





The
grant date fair value of the warrants issued to the placement agent using the
Black-Scholes pricing on August 14, 2007 and September 30, 2008 was $128,000 and
$75,000, 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:




Year Ended December 31,2007
                                    
                                    
                                    2008Exercise
      price at date of grantfor
      warrants granted during the period
                                    
                                    $
                                    1.10
                                    
                                    
                                    $
                                    0.50Dividend
      yield
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    0
                                    %Expected
      volatility
                                    
                                    
                                    95.8
                                    %
                                    
                                    
                                    94.1
                                    %Risk
      free interest rate
                                    
                                    
                                    4.42
                                    %
                                    
                                    
                                    2.28
                                    %Expected
      life
                                    
                                    4
    years
                                    
                                    
                                    3-4 years
  [2]  Warrants:





In
March 2007, we received proceeds of approximately $71,000 from the exercise of
warrants to purchase 594,000 shares of Common Stock. The warrants were issued to
the placement agent in the Series C Convertible Preferred Stock private
placement in March 2003.





As
of December 31, 2008, the following warrants were outstanding to purchase
up to 12,385,000 shares of our 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, 201212,385,000





[3]  Options:




At December 31, 2008, we
have three stock-based compensation plans: the 2000 Non-Qualified Stock Option
Plan, under which we are 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 we are 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 we are 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.





F-14




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[3]  Options:  (continued)





At
December 31, 2008, options to purchase 115,000 shares of Common Stock were
outstanding pursuant to the 2000 Plan, options to purchase 8,583,000 shares of
Common Stock were outstanding pursuant to the 2001 Plan and options to purchase
4,170,000 shares of Common Stock were outstanding pursuant to the 2006 Plan. In
addition, options to purchase 950,000 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
vesting. Some of the outstanding options are subject to performance-based
vesting.





At December 31, 2008, there were 1,102,000 options available for grant under
these plans.




A
summary of the status of our stock options as of December 31, 2007 and 2008, and
changes during the years ended on those dates is presented below (in thousands,
except per share data):


2007
                                
                                
                                2008Shares
                                
                                
                                Weighted-AverageExercise PricePer Share
                                
                                
                                Shares
                                
                                
                                Weighted-AverageExercise Price Per
      Share
                                
                                Weighted-AverageRemaining
                                  ContractualTerm
                                
                                AggregateIntrinsicValueOutstanding
      at beginning of year
                                
                                
                                13,437
                                
                                
                                $
                                0.36
                                
                                
                                
                                12,872
                                
                                
                                $
                                0.40
                                
                                5.4
      YearsGranted
                                
                                
                                1,715
                                
                                
                                
                                0.84
                                
                                
                                
                                2,390
                                
                                
                                
                                0.54
                                
                                9.3
      YearsExercised
                                
                                
                                (1,117
                                )**
                                
                                
                                0.16
                                
                                
                                
                                (1,125
                                )
                                
                                
                                0.13Canceled,
      expired or forfeited
                                
                                
                                (1,163
                                )
                                
                                
                                1.19
                                
                                
                                
                                (319
                                )
                                
                                
                                0.74Outstanding
      at end of year
                                
                                
                                12,872
                                
                                
                                
                                0.40
                                
                                
                                
                                13,818
                                
                                
                                
                                0.44
                                
                                5.5
      Years
                                
                                $
                                2Options
      exercisable at year-end
                                
                                
                                12,014
                                
                                
                                
                                0.36
                                
                                
                                
                                11,688
                                
                                
                                
                                0.41
                                
                                5.1
      Years
                                
                                $
                                2Vested
      and expected to vest after
                                
                                
                                2,079
                                
                                
                                
                                0.78
                                
                                
                                
                                1,378
                                
                                
                                
                                0.60
                                
                                8.6
      Years
                                
                                $
                                0December
      31Weighted-average
      grant date fairvalue
      of options granted during
                                
                                
                                
                                
                                
                                $
                                0.75
                                
                                
                                
                                
                                
                                
                                $
                                0.30the
      year






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





The
total intrinsic value of options exercised during the year ended December 31,
2008 and 2007 was $139,000 and $741,000. respectively.





The
following summarizes the activity of our stock options that have not vested for
the year ended December 31, 2008 (in thousands, except per share
data):





Shares
                
                
                Weighted
      Average Exercise PriceNonvested
      at January 1, 2008
                
                
                858
                
                
                $
                0.90Granted
                
                
                2,390
                
                
                
                0.54Canceled,
      expired or forfeited
                
                
                (130
                )
                
                
                1.25Vested
                
                
                (988
                )
                
                
                0.63Nonvested
      at December 31, 2008
                
                
                2,130
                
                
                $
                0.60





F-15






SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS





[3]  Options:  (continued)





As
of December 31, 2008, there was approximately $260,000 of unrecognized stock
compensation related to unvested awards (net of estimated forfeitures) expected
to be recognized over the next 31 months.





We
granted 2,390,000 and 1,715,000 options, including those granted to non-employee
directors and non-employees, for the year ended December 31, 2008 and 2007,
respectively. We have recorded a total charge in 2008 in respect of these grants
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 the year ended December 31, 2008. We have
recorded a total charge of $1,166,000 which is comprised of $370,000, $700,000
and $96,000 in research and development expense, general and administrative
expense and sales and marketing expense, respectively, for the year ended
December 31, 2007.





Included
in the preceding table are 325,000 and 1,075,000 options granted to non-employee
directors in 2007 and 2008, respectively.  The weighted-average grant
date fair value of such options was $0.77 and $0.26,
respectively.  Also included in the preceding table are 235,000 and
420,000 options granted to other non- employees
in 2007 and 2008, respectively.  The weighted average grant date fair
value of such options was $0.66 and $0.24, respectively and a stock-based
compensation charge of $315,000 and $179,000 was recorded in 2007 and 2008,
respectively.





Under SFAS 123R 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, 2008, we had 1,485,000 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 7 to 10 years from date of grant and an exercise price range of
$0.30 to $1.00. Of these 1,485,000 performance-based options, 235,000 options
relate to the achievement of certain FDA-related milestones for which an
estimated expense of $37,000 was recorded in research and development in 2007.
During 2008, the Company granted 750,000 options relate to market condition
criteria for SyntheMed’s common stock for which a charge of $23,000 was recorded
in general and administrative expense. We 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. Of the remaining 500,000 performance-based options, at
December 31, 2008, we determined that a portion of these options will likely
vest and have, therefore, recorded an estimated $29,000 in research and
development expense, $60,000 in general and administrative expense and $31,000
in sales and marketing expense associated with such options. At each reporting
period for the performance based grants only, we will re-evaluate the
probability that the contingency will be resolved and adjust the fair value
charge accordingly.





We
use 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:





F-16




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[3]  Options:  (continued)




Year Ended December 31,2007
                                      
                                      
                                      2008Weighted
      average fair value at date of grantfor
      options granted during the period
                                      
                                      $
                                      0.75
                                      
                                      
                                      $
                                      0.30Dividend
      yield
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      0
                                      %Expected
      volatility
                                      
                                      
                                      95.7
                                      %
                                      
                                      
                                      94.4
                                      %Risk
      free interest rate
                                      
                                      
                                      4.51%-
      4.73
                                      %
                                      
                                      
                                      1.74%-
      2.79
                                      %Expected
      life
                                      
                                      2 -
      10 years
                                      
                                      
                                      7 -
      10 years


The following table summarizes
information for stock options outstanding at December 31, 2008 (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$
                                          0.09
      - 0.12
                                          
                                          
                                          
                                          4,300
                                          
                                          1
      year
                                          
                                          $
                                          0.12
                                          
                                          
                                          
                                          4,300
                                          
                                          
                                          $
                                          0.120.13
      – 0.98
                                          
                                          
                                          
                                          9,118
                                          
                                          6
      years
                                          
                                          
                                          0.56
                                          
                                          
                                          
                                          7,238
                                          
                                          
                                          
                                          0.561.00
      - 2.00
                                          
                                          
                                          
                                          400
                                          
                                          8 years
                                          
                                          
                                          1.06
                                          
                                          
                                          
                                          150
                                          
                                          
                                          
                                          1.1613,818
                                          
                                          6
      years
                                          
                                          $
                                          0.44
                                          
                                          
                                          
                                          11,688
                                          
                                          
                                          $
                                          0.41




(NOTE H) - Income
Taxes:





At December 31, 2008, we have
approximately $48,141,000 of net operating loss carryforwards to offset future
federal taxable income and approximately $847,000 of research and development
tax credit carryforwards available to offset future federal income tax, subject
to limitations for alternative minimum tax. Our 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.





Our net operating loss and research and development credit carryforwards expire
as follows:




Researchand
      DevelopmentYear
                          
                          Net Operating Loss
                          
                          
                          Tax Credit2009
                          
                          $
                          3,376,000
                          
                          
                          $
                          11,0002010
                          
                          
                          3,854,000
                          
                          
                          
                          11,0002011
                          
                          
                          4,648,000
                          
                          
                          
                          53,0002012
      - 2028
                          
                          
                          36,263,000
                          
                          
                          
                          772,000$
                          48,141,000
                          
                          
                          $
                          847,000




F-17




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


(NOTE
H) - Income Taxes: (continued)





We have participated in the Tax Benefit
Transfer Program administered by the State of New Jersey under which $7,332,000
in eligible loss carryforwards, covering the tax years 2004 through 2006, were
sold to PSEG Services Corporation.





We
received cash payments of approximately $482,000 and $119,000 in 2007 and 2008,
respectively. This is reflected as income tax benefits in the accompanying
Statement of Operations. At December 31, 2008, we have net operating loss
carryforwards for New Jersey State income tax purposes of approximately
$9,616,000 which expire through 2023.





The deferred tax asset,
which amounted to $18,206,000 at December 31, 2008 has been offset by a
valuation allowance against the entire benefit due to management's uncertainty
regarding the future profitability of our Company and ability to
utilize the benefit. The valuation allowance was increased by $1,049,000 in 2007
and $249,000 in
2008.





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 31,2007
                        
                        
                        2008Income
      tax benefit at the federal statutory rate
                        
                        $
                        (1,736,000
                        )
                        
                        $
                        (1,538,000
                        )State
      and local income taxes, net of effect on federal taxes
                        
                        
                        (306,000
                        )
                        
                        
                        (271,000
                        )Increase
      in valuation allowance
                        
                        
                        1,049,000
                        
                        
                        
                        249,000Sale
      of state net operating loss carryforwards
                        
                        
                        (482,000
                        )
                        
                        
                        (119,000
                        )Reduction
      in deferred tax asset from transfer of state net operating loss
      carryforwards
                        
                        
                        529,000
                        
                        
                        
                        130,000Expired
      net operating losses
                        
                        
                        517,000
                        
                        
                        
                        1,375,000Benefit
      of research and development credit
                        
                        
                        (61,000
                        )
                        
                        
                        (31,000
                        )Other
                        
                        
                        8,000
                        
                        
                        
                        86,000$
                        (482,000
                        )
                        
                        $
                        (119,000
                        )







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





2007
                  
                  
                  2008Net
      operating loss carryforward
                  
                  $
                  16,473,000
                  
                  
                  $
                  16,947,000Research
      and development credit carryforward
                  
                  
                  846,000
                  
                  
                  
                  847,000Other
                  
                  
                  638,000
                  
                  
                  
                  412,00017,957,000
                  
                  
                  
                  18,206,000Valuation
      allowance
                  
                  
                  (17,957,000
                  )
                  
                  
                  (18,206,000
                  )$
                  0
                  
                  
                  $
                  0








F-18




SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


(NOTE H) - Income Taxes:
(continued)




As
a result of the implementation of FIN 48, we 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, 2008 we have $ 18,206,000 of
unrecognized tax benefits.





We
recognize interest and penalties related to uncertain tax positions in general
and administrative expense. As of December 31, 2008, 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
I) - Research and License Agreements:





[1]  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 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 us, except as set
forth below. We are permitted to grant licenses of our polymer technology upon
certain terms and conditions. We have agreed to favorably consider manufacturing
in Israel products resulting from our 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, 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 theYissum 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 minimum net sales
or income targets in exchange for payment of minimum
royalties.  Accordingly, we have paid Yissum an aggregate of $700,000
in minimum royalties to preserve our rights under the Yissum Agreement for
performance years 2001 through 2008.  We have recently negotiated a
similar amendment whereby our rights are preserved through the end of 2011
through the payment, if necessary, of annual minimum royalties of $200,000 for
performance year 2009 and $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.





F-19






SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS


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





[2]  Phairson Technology





See
Note (C) to the Notes to Financial Statements.





[3]  diZerega
agreement:





In 1995, we 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 us by the Yissum Research and Development Company of the Hebrew University of
Jerusalem (note I [1]).





Pursuant
to this agreement, we are obligated to pay a royalty of one percent of all net
sales of our 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.





In
2008, we incurred $2,000 in royalty expense relating to this agreement.





(NOTE
J) - Commitments and Other Matters:





[1]  Employment
agreement:





At December 31, 2008, we had employment
agreements with five individuals that expire as follows: two in September 2009,
one in March 2010, one in May 2010 and one in October 2012. Pursuant to these
agreements, our commitment regarding cash severance benefits aggregates $670,000
at December 31, 2008. We have also entered into change of control agreements
with our three 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 such
executives’ annual base salaries 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, we finalized contractual
supplier arrangements with three contract manufacturers replacing our prior
primary supplier.  For the years ended December 31, 2007 and 2008, we
paid our current suppliers $402,000 and $294,000, respectively, in connection
with such services.





[3]  Reversal
of liabilities:





During
2007 and 2008, we reversed liabilities of $136,000 and $5,000, respectively,
primarily relating to trade transactions with former vendors.  The
underlying transactions occurred during or before 2001 and 2002,
respectively, and there has been no communication with the parties
regarding these transactions since that time.  Accordingly, based
on advice of legal counsel, we believe that any claim for
these amounts at this time would be barred by applicable statutes of
limitations.




F-20






SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS
  (NOTE J) - Commitments and Other
Matters:  (continued)





[4]   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 2007 was $37,000 and $36,000,
respectively.





Future minimum lease payments under
operating leases consisted of the following at December 31,
2008:




Year
      EndingDecember
      31,
                    
                    Amount2009
                    
                    
                    38,0002010
                    
                    
                    39,0002011
                    
                    
                    16,000Total
      future minimum lease payments
                    
                    $
                    93,000





(NOTE
K) - Related Parties:





In 2008, we 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. In 2008, we paid $25,000 in fees under this
agreement. No such fees were paid in 2007.





See
NOTE G [1] with respect to private placements we consummated in 2007 and 2008
through a placement agent of which one of our directors, Mr. Joerg Gruber, is
chairman and a director.





(NOTE L) -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.





The following table illustrates the effect on cost of goods sold and gross
profit if the cost of the raw materials of $17,000 and $3,000 had been included
in finished goods inventory for the years ended December 31, 2007 and 2008 (in
thousands), respectively:





Year
      Ended
                
                
                Year
      EndedDecember
      31, 2007
                
                
                December
      31, 2008Reported
      Net Sales
                
                $
                134
                
                
                
                100
                %
                
                $
                181
                
                
                
                100
                %Pro
      forma COGS
                
                
                45
                
                
                
                34
                %
                
                
                106
                
                
                
                59
                %Pro
      forma Gross Profit
                
                $
                89
                
                
                
                66
                %
                
                $
                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.





F-21






SYNTHEMED,
INC.
 NOTES
TO FINANCIAL STATEMENTS
  (NOTE M) - Retirement
Plan:





In
March 2007, we 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. We are
obligated 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, 2007 and 2008, we made matching contributions in the amount
of $32,000 and $26,000, respectively, to the plan.





(NOTE
N) – Shareholder Rights Plan:





On
April 25, 2008, our 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 our common stock outstanding as of the close of business
on June 2, 2008. Initially, the rights will be represented by our 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 our
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 our common stock or other securities
having a value equal to twice the purchase price. If we are 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
O) – Subsequent Events:





On
January 5, 2009, we paid Yissum $150,000 in satisfaction of our 2008 royalty
obligation.  (see Note I [1])





In
February 2009, based on the recommendation of the Compensation Committee of our
Board of Directors, our Board of Directors approved a performance-based bonus
arrangement for Mr. Robert Hickey, Dr. Eli Pines and Mr. Sportsman. Under the
arrangement, Mr. Hickey would be entitled to a maximum cash bonus equal to
$100,000, Dr. Pines would be entitled to a maximum cash bonus equal to $60,000
and Mr. Sportsman would be entitled to a maximum cash bonus equal to $75,000 for
calendar year 2009, in each case subject to satisfaction of specific performance
criteria.  In February 2009, the Compensation Committee of our Board
of Directors granted performance-vested options under our 2006 Stock Option Plan
to our executive officers: Mr. Hickey – options to purchase an aggregate of
350,000 shares, Dr. Pines – options to purchase an aggregate of 200,000 shares
and Mr. Sportsman – options to purchase an aggregate of 200,000 shares. These
options will vest based upon the level of satisfaction of the 2009 performance
criteria approved by the Compensation Committee for each executive officer, are
exercisable at $0.10 per share, the fair market value on the date the 2009
performance criteria were approved by the Compensation Committee, and expire ten
years from the date of the grant.





On
March 9, 2009 we announced that the U.S. Food and Drug Administration (FDA) has
approved the Pre-market Approval (PMA) application for REPEL-CV® Adhesion
Barrier for use in pediatric cardiac surgery patients.