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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-KSB

(Mark One)
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT OF 1934

      For the fiscal year ended December 31, 2004

                                       OR

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

      For the transition period _______ to ________

                         COMMISSION FILE NUMBER: 0-20580

                           LIFE MEDICAL SCIENCES, INC.
             (Exact name of registrant as specified in its charter)

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

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

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

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

                                      NONE
                              (Title of each class)

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

                     COMMON STOCK--PAR VALUE $.001 PER SHARE
                                (Title of class)

      Indicate by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO |_|

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

      The aggregate market value of the common equity held by  non-affiliates of
the registrant as of February 25, 2005 was approximately $13.9 million.

      As of February  20, 2005,  59,962,447  shares of Common  Stock,  $.001 par
value, of the registrant were issued and outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE:

      Portions  of the  registrant's  definitive  proxy  statement  to be  filed
pursuant to Regulation 14A in connection  with  solicitation  of proxies for its
2005 Annual Meeting of Stockholders  are incorporated by reference into Part III
of this Form 10-KSB.

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<PAGE>

                                INTRODUCTORY NOTE

      Certain  statements in this Report on Form 10-KSB (the "Report") under the
caption  "Management's  Discussion  and  Analysis  or  Plan of  Operations"  and
elsewhere  constitute  "forward-looking  statements"  within the  meaning of the
Private Securities Litigation Reform Act of 1995, including, without limitation,
statements  regarding future cash requirements and the ability of the company to
raise capital. Such forward-looking  statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results,  performance
or achievements of the Company, or industry results, to be materially  different
from any future results,  performance,  or achievements  expressed or implied by
such  forward-looking  statements.  Such  factors  include,  among  others,  the
following:  delays in product  development;  problems  or delays  with  clinical
trials;  failure to receive or delays in receiving regulatory approval;  lack of
enforceability of patents and proprietary rights; lack of reimbursement; general
economic  and  business   conditions;   industry   capacity;   industry  trends;
demographic changes; competition;  material costs and availability;  the loss of
any significant  customers;  changes in business strategy or development  plans;
quality of management;  availability,  terms and deployment of capital; business
abilities  and  judgment of  personnel;  availability  of  qualified  personnel;
changes in, or the failure to comply  with,  government  regulations;  and other
factors referenced in this Report. When used in the Report,  statements that are
not  statements  of  historical  facts  may  be  deemed  to  be  forward-looking
statements.  Without limiting the foregoing,  the words "anticipates",  "plans",
"intends",  "expects"  and similar  expressions  are  intended to identify  such
forward-looking  statements which speak only as of the date hereof.  The Company
undertakes  no  obligation  to publicly  release the results of any revisions to
these  forward-looking  statements  that  may  be  made  to  reflect  events  or
circumstances   after  the  date  hereof  or  to  reflect  the   occurrence   of
unanticipated events.


                                       1
<PAGE>

                                     PART I

Item 1.   Business

General

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

      In March  2004,  the  Company  realized  $2,841,000  from the  exercise of
warrants  to  purchase  11,833,000  shares of the  Company's  common  stock.  In
December 2004, the Company received $295,000 from the sale of certain New Jersey
state tax losses. These funds are being used to fund the REPEL-CV clinical trial
as well as other product development activities and operating expenses.

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

Certain Historical Activities

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

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

      The Company previously developed and marketed the Sure-Closure SystemTM, a
disposable  wound  closure  device.   The  Company,   in  July  1994,  sold  the
Sure-Closure System to MedChem Products, Inc. ("MedChem") which was subsequently
acquired by C.R. Bard, Inc. ("C.R.  Bard"). In October 1997, Zimmer Orthopaedics
acquired the Sure - Closure System from C.R.  Bard.  The Company  received a 10%
royalty on all net sales of the  Sure-Closure  System products  through June 30,
2004. In September 2004, the Company  recorded a gain on deferred royalty income
of  $174,000.  This gain was  associated  with the  write  off of the  remaining
balance of deferred  royalty income upon the expiration of the royalty period of
the underlying  agreement.  The  Sure-Closure  System was invented at the Rambam
Medical  Center,  an affiliate of  Technion-Israel  Institute of  Technology  in
Haifa,  Israel  and the  intellectual  property  rights  relating  thereto  were
assigned to the Company in 1992.


                                       2
<PAGE>

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

Post-Operative Adhesions

      Adhesions are fibrous  structures  that connect  tissues or organ surfaces
that are not normally joined.  They are an undesirable side effect of the body's
normal  healing  process  following  damage  to  tissue.   Adhesions  can  cause
significant complications such as bowel obstruction following abdominal surgery,
infertility   following   gynecologic  surgery,   serious  complications  during
secondary  cardiovascular surgical procedures,  restricted limb motion following
orthopedic  surgery,  and pain following any surgery.  Moreover,  adhesions that
form as a result of surgery can  increase the  complexity,  duration and risk of
subsequent surgery. According to industry sources, in the United States surgeons
perform an estimated 440,000 abdominal  operations annually to remove adhesions,
and the annual cost in the United  States for the removal of such  adhesions  is
estimated at $2.0 billion in inpatient treatment charges.

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

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

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


                                       3
<PAGE>

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

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

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

-----------------------------------------------------------------------------------------------------------------------------
REPEL(TM)             Preventing or reducing post-operative         IDE approval for a pivotal           $100 Million
                      surgical adhesions in gynecological and       clinical trial in
Barrier Film          general surgical procedures.                  gynecological
                                                                    procedures.

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

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

-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Based on industry estimates.

REPEL-CV

      REPEL-CV is a  bioresorbable  adhesion  barrier film designed to be placed
over the surface of the heart at the  conclusion of the surgical  procedure.  In
October 2003, the Company  initiated the  multi-center  randomized,  controlled,
pivotal  clinical  trial  based on an  Investigational  Device  Exemption  (IDE)
granted by the Food and Drug  Administration  (FDA). The objectives of the trial
are to further  demonstrate  the efficacy of REPEL-CV in reducing the extent and
severity of adhesions after open heart surgery in a neonatal patient population.
It is currently  anticipated  that this trial will be completed by the middle of
2006 and, assuming a favorable outcome,  will be submitted to the FDA as a basis
for obtaining approval to commercialize  REPEL-CV for use in cardiac surgery. In
January 2005, the Company  announced that a planned interim  analysis of patient
data from the REPEL-CV  trial was  completed by a DSMB  comprised of medical and
biostatistical specialists who are not participating in the trial. Based on data
from over forty patients, the DSMB recommended that the trial proceed as planned
and that no modifications  to the trial protocol were indicated.  In March 2003,
the Company  completed a feasibility  clinical  trial for REPEL-CV in open heart
surgical  procedures.  This trial commenced during the first quarter of 2002 and
patient  enrollment was completed  during the third quarter of 2002.  This trial
provided  initial  information on the  effectiveness of REPEL-CV in reducing the
formation of post-operative  adhesions in open heart surgical procedures as well
as  additional   safety  data.  In  February  2000,  the  Company   concluded  a
multi-center,  randomized,  controlled U.S. pilot clinical trial for REPEL-CV in
open heart surgical procedures.  In the pilot clinical trial, REPEL-CV was rated
safe and well  tolerated  when  compared  to the  control of  standard  surgical
technique. REPEL-CV was evaluated in a series of pre-clinical studies which were
conducted at the University of Southern  California and at New York Presbyterian
Medical  Center.  Throughout  these  studies,  REPEL-CV  was  rated  as safe and
well-tolerated  and was shown to virtually prevent the formation of adhesions to
the surface of the heart.

REPEL-AFIB

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


                                       4
<PAGE>

REPEL

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

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

RESOLVE

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

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

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

RELIEVE

      Gels of higher  viscosities may also be beneficial in addressing  adhesion
formation in articulating  joints subsequent to orthopedic  surgical  procedures
and involving  the spinal canal after spinal  surgery.  The RELIEVE  category of
viscous gel products have been under development through  pre-clinical  studies.
Candidate  materials have been evaluated in a surrogate hand tendon model and in
a  feasibility  study  in  spinal  surgery.  Further  development  work has been
deferred due to the Company's  limited  financial  resources and emphasis on the
REPEL-CV clinical development program.


                                       5
<PAGE>

Polymer Technology

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

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

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

      The Yissum Agreement continues until the later of the last date upon which
the patents covering the products governed by the Yissum Agreement expire or the
end of a period  of 15  years  from the  date of the  first  commercial  sale of
products  under  the  assigned  technology.  Yissum  has the  right  in its sole
discretion to terminate the Yissum  Agreement  and/or enter into  contracts with
others in order to grant them a license  for the  development,  manufacture  and
marketing of a product and the other rights detailed in the Yissum Agreement if,
among other things,  (i) the Company stops  manufacturing  and/or  marketing the
product  for a period  of more  than 12  months;  or (ii) the  Company  breaches
theYissum  Agreement,  a receiver or  liquidator is appointed for the Company or
attachment is made over a substantial part of the Company's assets, or execution
proceedings  are taken  against the Company and the same is not  remedied or set
aside within the time periods specified in the Yissum  Agreement.  As originally
agreed, the agreement provided an additional right of termination on the part of
Yissum in the event the Company failed to achieve the first  commercial  sale by
December 31, 2001 or net sales or income of at least  $1,000,000 by December 31,
2002.  Subsequently,  the agreement was amended to permit the Company additional
time to achieve product  commercialization and minimum net sales. As amended, so
long as the Company fails to achieve  $1,000,000 in net sales or income,  Yissum
is  prohibited  from  terminating  the  agreement  or  contracting  with  others
regarding the subject matter  thereof,  provided the Company pays minimum annual
royalties  to Yissum in the amount of $50,000  for each of  calendar  years 2001
through 2005, and $100,000 for each of calendar years 2006 through 2007. Any and
all minimum  royalty  payments  made by the  Company to Yissum  shall be applied
against the maximum royalty obligation referenced above. Because the Company has
not yet commercialized any products,  the previously  referenced minimum royalty
payments of $50,000  each were made to Yissum for the years ended  December  31,
2001,  December 31, 2002,  December 31, 2003 and December 31, 2004.  The Company
has agreed to indemnify Yissum under certain circumstances. Upon the termination
by Yissum of the  Yissum  Agreement  for any  reason,  the  patents  and  patent
applications licensed by Yissum to the Company will revert in full to Yissum.

Government Regulation

      FDA and Other Regulations

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


                                       6
<PAGE>

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

      Devices

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

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

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

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

      Third Party Reimbursement

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


                                       7
<PAGE>

Patents and Proprietary Rights

      In connection  with the polymer  technology,  the Company  currently holds
seven United  States  patents,  one  Australian  patent and one Canadian  patent
relating to methods and compositions  for reducing or eliminating  post-surgical
adhesion formation as well as bioresorbable polymeric compounds and polyurethane
polymeric  compounds.  The first US patent claims novel bioresorbable  polymeric
compounds of specified  chemical  structure.  Also claimed are medical articles,
including sutures and prosthetic  devices,  made from these materials as well as
methods  for  making  these  materials.   The  second  US  patent  claims  novel
polyurethane  polymeric compounds of specified chemical structure.  Also claimed
are medical articles,  including sutures and wound and burn dressings. The third
and fourth US patents claim novel  bioresorbable  polymer compounds of specified
chemical  structure and their use in  post-operative  adhesion  prevention.  The
fifth and seventh US patents claim novel  bioresorbable  polymeric  compositions
based on AB polyester  diblocks and triblocks.  The sixth US patent claims novel
polymeric  compositions  with reverse thermal gel properties.  These patents are
scheduled to expire on various  dates from 2008 through  2021.  The Company also
has numerous  patent  applications  pertaining  to various  novel  bioresorbable
polymeric  compounds  and,  in certain  instances,  their use in  post-operative
adhesion prevention on file with the US and international patent agencies.

Competition

      The Company's  adhesion  prevention  products are expected to compete with
various currently marketed products such as InterceedTM,  a product of Johnson &
Johnson, SeprafilmTM, a product of Genzyme Biosurgery, Adhibit(TM), a product of
Angiotech  Pharmaceuticals,  Inc. and GoretexTM,  a product of WL Gore.  Several
other  companies  including ML Labs Ltd.,  Anika  Therapeutics,  Inc.,  Alliance
Pharmaceuticals,  Corp.,  Confluent  Surgical Inc.,  Macropore Inc. and Fziomed,
Inc.  either  are or  may be  pursuing  the  development  of  products  for  the
prevention of adhesions.  The anti-adhesion market is characterized by a limited
number of products  currently  on the market with limited (as a percent of total
surgical procedures using such products) penetration. The Company's products are
in the developmental  stage in a market where clinical efficacy and, to a lesser
extent,   strength  of  existing  product  lines  are  the  principal  bases  of
competition.

Manufacturing

      Polymer  Technology  Group,  Inc.  ("PTG") has been the Company's  primary
supplier and is in a position to produce its  proposed  products for testing and
commercial  purposes.  However,  the Company is developing  alternate sources of
supply for its current product. The contract manufacturer(s) procures, tests and
inspects all raw materials  used in the  production  of the  Company's  proposed
products. The contract  manufacturer(s)  relies on various sources,  approved by
the Company,  for its raw materials and  components.  The Company  believes that
alternative  sources for these raw materials and components  are available.  The
Company seeks to ensure that its products are  manufactured  in compliance  with
regulatory requirements.  The Company utilizes independent testing facilities to
evaluate products produced by the manufacturer for quality assurance purposes.

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

Marketing and Sales

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

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

Product Liability and Insurance

      The Company's  business  exposes it to potential  liability risks that are
inherent in the testing,  manufacturing and marketing of medical  products.  The
Company  has  obtained  product  liability  insurance  for its  clinical  trials
providing coverage in an aggregate amount of $10,000,000.


                                       8
<PAGE>

Human Resources

      As of  February  2005,  the  Company  employed  two full  time  employees.
Research and  development  activities are conducted  through  arrangements  with
various  consultants  and  companies  in Europe,  Israel and the United  States.
Subject to availability of sufficient financing, the Company intends to increase
its number of full time employees as it expands its clinical  trials and product
development activities and begins to market its products.

Executive Officers of the Company

      The Company's executive officers are as follows:

                   Name               Age          Positions with the Company
           -------------------------  ---        ------------------------------
           Robert P. Hickey.......... 59         President, CEO & CFO
           Eli Pines, Ph.D........... 59         Vice  President and Chief
                                                 Scientific Officer

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

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

Consultants and Advisors

      The Company  utilizes  various  consultants  and  advisors  for  research,
development  and  testing  of  its  technologies   and  products.   The  Company
periodically  confers with such consultants and advisors as necessary to discuss
research,  development  and testing  strategies and specific  details of certain
projects.  Certain of the listed  consultants  and  advisors  have  entered into
agreements   specifying  the  terms  and  scope  of  their  individual  advisory
relationship with the Company.  The Company does not believe that termination of
any individual  consulting or advisory  agreement  would  materially  affect its
business.  None of the  consultants or advisors are employed by the Company and,
therefore,  may have  commitments to, or consulting or advisory  contracts with,
other  entities  which may compete with their  obligations  to the Company.  The
Company's consultants and advisors are as follows:

     Daniel Cohn, Ph.D.        Dr.  Daniel Cohn is  Professor  of  Biomaterials
                               Science  and  Head  of the  Biomedical  Polymers
                               Research  Group,  Casali  Institute  of  Applied
                               Chemistry, Hebrew University, Jerusalem, Israel.
                               Dr. Cohn's main areas of research are biomedical
                               resorbable   polymers,   surface   tailoring  of
                               polymeric  biomaterials,  biomedical  composites
                               and the  development of polymeric  scaffolds for
                               tissue  engineering.   Dr.  Cohn  developed  the
                               Company's polymer technology.

     Michael P. Diamond, M.D.  Dr.  Michael P. Diamond,  since 1994, has served
                               as Professor of  Obstetrics  and  Gynecology  at
                               Wayne State University in Detroit, Michigan, and
                               Director  of  the   Division   of   Reproductive
                               Endocrinology and Infertility.  Dr. Diamond is a
                               Board-certified Obstetrician/Gynecologist with a
                               subspecialization in Reproductive  Endocrinology
                               and    Infertility.    He   has    long-standing
                               involvement   in  animal  and  clinical   trials
                               assessing postoperative adhesion development.


                             9
<PAGE>

     Gere S. diZerega, M.D.    Dr. Gere S. diZerega is Professor, Department of
                               Obstetrics and Gynecology at Women's'  Hospital,
                               University   of  Southern   California   Medical
                               Center. Dr. diZerega's areas of research include
                               post-operative adhesions, peritoneal healing and
                               post-surgical wound repair.

     Steven R. Gundry, M.D.    Dr.   Steven  R.   Gundry  is  Director  of  the
                               International  Heart  Institute  at the  Dessert
                               Regional  Medical Center,  Palm Springs,  CA and
                               Professor, Departments of Surgery and Pediatrics
                               at Loma Linda University School of Medicine. Dr.
                               Gundry  is  a  Board  certified   cardiothoracic
                               surgeon with  research  interests in  myocardial
                               protection, minimally invasive surgery, robotics
                               and cardiovascular surgery.

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

     Eric A. Rose, M.D.        Dr.  Eric A.  Rose is  Chairman,  Department  of
                               Surgery at College of  Physicians  & Surgeons of
                               Columbia University, New York,  Surgeon-in-Chief
                               of  Columbia-Presbyterian  Medical  Center,  New
                               York and Director,  Cardio-Thoracic  Services at
                               St.  Michael's  Medical  Center,   Newark,   New
                               Jersey.

     Samuel Weinstein, M.D.    Dr. Samuel  Weinstein is Assistant  Professor of
                               Surgery,  Division of  Pediatric  Cardiothoracic
                               Surgery,  Children's  Hospital at The Ohio State
                               University    Medical   Center.   His   research
                               interests   include   hypoplastic   left   heart
                               syndrome,  Marfan's  disease and cryoablation in
                               Fontan revision procedures.

Risk Factors

      Risk that  Technologies  or Proposed  Products Will Never Be  Successfully
Developed

      The Company's  polymer  technology  and proposed  products are still under
development and are subject to the risks of failure  inherent in the development
of new  technologies  and  products  based on new  technologies.  The  Company's
polymer  technology  and  proposed  products  will require  significant  further
research,  development and testing,  including  extensive  clinical  testing and
regulatory  approval,  prior to  commercial  use. No assurance can be given that
such proposed products will prove to be safe, efficacious and non-toxic, receive
requisite regulatory approvals,  demonstrate substantial therapeutic benefit, be
commercialized  on  a  timely  basis,  experience  no  design  or  manufacturing
problems, be manufactured on a large scale, be economical to market, be accepted
by the marketplace,  or generate  sufficient revenues to support future research
and development programs.

      Risks Associated With Uncertainties of Clinical Trials

      The Company is required to obtain approval from the FDA prior to marketing
its  proposed  therapeutic  products  in the United  States and the  approval of
foreign  regulatory  authorities to commercialize its proposed products in other
countries. To obtain such approvals, the Company is required to prove the safety
and efficacy of its proposed products through extensive  preclinical studies and
clinical  trials.  The  Company  is in  various  stages  of  such  testing.  The
completion  of any of the  Company's  clinical  trials  is  dependent  upon many
factors  including the rate of patient  enrollment and the  heterogeneity of the
patients and indications to be treated. Delays in patient enrollment, as well as
the  heterogeneity  of patients  and  indications  to be treated,  may result in
increased trial costs and delays in FDA submissions, which could have a material
adverse effect on the Company.

      A number of companies in the biotechnology and  pharmaceutical  industries
have  suffered  significant  setbacks in  clinical  trials,  even after  showing
promising  results  in  earlier  studies or trials.  Although  the  Company  has
obtained favorable results to date in preclinical studies and clinical trials of
certain of its proposed products,  such results may not be predictive of results
that will ultimately be obtained in or throughout such  preclinical  studies and
clinical  trials.  There can be no assurance that the Company will not encounter
problems in its clinical  trials that will cause the Company to delay or suspend
its clinical trials,  that the clinical trials of its proposed  products will be
completed at all, that such testing will  ultimately  demonstrate  the safety or
efficacy of such  proposed  products or that any proposed  products will receive
regulatory approval on a timely basis, if at all. If any such problems occur, it
could have a material adverse affect on the Company.


                                       10
<PAGE>

      Capital Needs;  Uncertainty of Additional Funding;  Going Concern Emphasis
in Auditors Report

The cash balance as of December 31, 2004 is not sufficient to meet the Company's
cash  requirements  through 2005.  As of December 31, 2004,  there were warrants
outstanding to purchase up to 6,634,000  shares of the Company's Common Stock at
$0.12 per share  which  would  result in gross  proceeds  of  $796,000  if fully
exercised. These warrants are scheduled to expire on March 26, 2005. Even if the
warrants  are  fully  exercised,  the  Company  anticipates  seeking  additional
financing in 2005, subject to market conditions and obtaining  acceptable terms.
There can be no  assurance  that the  warrants  will be  exercised  or that such
arrangements or financings will be available as needed or on terms acceptable to
the  Company.  As a result  of the  Company's  limited  capital  resources,  the
Company's  auditors  have  indicated in their  report that there is  substantial
doubt about the Company's  ability to continue as a going  concern.  The Company
will be  required  to  raise  substantial  additional  funds  to  fund  existing
operations, continue to conduct necessary research and development,  preclinical
studies and clinical trials, to commercialize its proposed products, and to fund
the  growth  that is  expected  to occur  if any of its  proposed  products  are
approved for marketing.  The Company would seek such additional  funding through
collaborative  arrangements with strategic partners,  licensing arrangements for
certain of its proposed products,  and additional public or private  financings,
including equity financings. Any additional equity financings may be dilutive to
stockholders.  There can be no assurance  that such  arrangements  or financings
will be available as needed or on terms acceptable to the Company.  Insufficient
funds may require the Company to delay,  scale back or eliminate  some or all of
its research and development programs, or require it to license to third parties
certain  products or  technologies  that the  Company  would  otherwise  seek to
commercialize itself.


      Limited Operating History; History of Losses

      The Company's  operations to date,  have consisted  primarily of research,
development  and  testing  of its  technologies  and  the  commercialization  of
CLINICEL(TM)  and the  Sure-Closure  System.  With the  exception  of the  third
quarter  of  1994,  when the gain on the  sale of the  Sure-Closure  System  was
realized,  and the first quarter of 1999, when other income was recorded related
to the reduction of prior period debt, the Company has incurred  significant net
losses from its inception.  The Company experienced net losses of $1,577,000 and
$1,841,000  for the years ended  December  31, 2003 and 2004,  respectively.  At
December 31, 2004, the Company had an accumulated  deficit of  $42,102,000.  The
Company  expects to incur  additional  losses as its research,  development  and
preclinical  studies  and  clinical  trials  continue to expand.  The  Company's
ability to achieve a profitable  level of operations  or generate  positive cash
flows from operations is dependent on successfully completing the development of
its  proposed   products,   obtaining   required   regulatory   approvals,   and
manufacturing  and selling its  proposed  products.  Accordingly,  the extent of
future  losses and the time  required  to  achieve  profitability,  if ever,  is
uncertain.  There can be no assurance that the Company will achieve or sustain a
profitable level of operations.

      No Assurance of Regulatory Approvals; Potential Delays

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

      Manufacturers  of medical  devices are  required to obtain FDA approval of
their manufacturing  facilities and processes, to adhere to applicable standards
for  manufacturing  practices  and to  engage  in  extensive  recordkeeping  and
reporting.  Failure to obtain or delays in obtaining  regulatory approvals would
adversely affect the manufacturing and marketing of the Company's products,  the
Company's  financial  position and the Company's  revenues,  if any. When and if
approvals are granted, the Company, the approved device, the manufacture of such
device and the  facilities in which such device is  manufactured  are subject to
ongoing regulatory review.  Subsequent  discovery of previously unknown problems
may result in  restriction  on a product's use or withdrawal of the product from
the  market.   Adverse  government  regulation  that  might  arise  from  future
legislative or administrative  action,  particularly as it relates to healthcare
reform and product pricing, cannot be predicted.

      Patents  and  Proprietary   Rights;  No  Assurance  of  Enforceability  or
Significant Competitive Advantage


                                       11
<PAGE>

      The  Company's  success  will depend  heavily on its ability to obtain and
retain patent  protection  for its polymer  technology  and other  products,  to
preserve its trade secrets and to operate  without  infringing  the  proprietary
rights of third  parties.  The Company owns seven  United  States  patents,  one
Australian patent and one Canadian patent relating to its polymer technology. In
addition, the Company has filed for patents in a number of countries and intends
to file  additional  patent  applications  in other  countries.  There can be no
assurance  that the  claims in the  pending  patent  applications  will issue as
patents,  that any issued  patents  will  provide the Company  with  significant
competitive  advantages,  that  challenges  will not be  instituted  against the
validity  or  enforceability  of  any  patent  owned  by  the  Company,  or,  if
instituted,  that such challenges will not be successful. The cost of litigation
to uphold the validity and prevent  infringement of a patent can be substantial.
Furthermore,  there  can be no  assurance  that  others  will not  independently
develop similar or superior  technologies,  duplicate the Company's technologies
or design around the patented aspects of the Company's technologies. The Company
could incur substantial costs in proceedings before the United States Patent and
Trademark Office, including interference proceedings. The proceedings could also
result in adverse decisions as to the patentability of the Company's licensed or
assigned  inventions.  Further,  there can be no assurance that the Company will
not infringe upon prior or future patents owned by others, that the Company will
not need to acquire  licenses  under patents  belonging to others for technology
potentially  useful or necessary to the Company,  or that such  licenses will be
available  to the  Company,  if at all,  on  terms  acceptable  to the  Company.
Moreover, there can be no assurance that any patent issued to or licensed by the
Company will not be infringed by others.  Lastly, there can be no assurance that
third parties will not bring suits  against the Company for patent  infringement
or for declaratory judgment to have the patents owned or licensed by the Company
declared invalid.

      The Company seeks to protect its trade secrets and  proprietary  know-how,
in part,  through  confidentiality  agreements with its employees,  consultants,
advisors,  collaborators  and  others.  There  can be no  assurance  that  these
agreements will not be violated by the other parties, that the Company will have
adequate  remedies for any breach,  or that the Company's trade secrets will not
otherwise  become known or be  independently  developed by  competitors.  To the
extent that consultants,  key employees, third parties involved in the Company's
projects or others independently develop technological information, disputes may
arise  as to the  proprietary  rights  to  such  information,  which  may not be
resolved in favor of the Company.

      Dependence on Reimbursement

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

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

      Uncertain Market Acceptance of Proposed Products

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

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

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


                                       12
<PAGE>

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

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

      Competition and Technological Obsolescence

      The Company is engaged in rapidly evolving and highly competitive  fields.
Competition  from  biotechnology   companies,   medical  device   manufacturers,
pharmaceutical and chemical companies and other competitors is intense.  Many of
these  companies have  substantially  greater  capital  resources,  research and
development staffs,  facilities and experience in obtaining regulatory approvals
than the Company as well as  substantially  more  experience than the Company in
the  manufacturing,  marketing  and  sale of  products.  Academic  institutions,
hospitals,   governmental   agencies  and  other  public  and  private  research
organizations are also conducting research and seeking patent protection and may
develop  competing  products  or  technologies  on their  own or  through  joint
ventures.  The Company  believes that its competitive  position will be based on
its  ability to create  and  maintain  scientifically  advanced  technology  and
proprietary  products,  obtain required government  approvals on a timely basis,
develop and  manufacture  its proposed  products on a  cost-effective  basis and
successfully  market its products.  There can be no assurance that the Company's
current  or  proposed  products  under  development  will  be  able  to  compete
successfully  with  existing  products or products  under  development  by other
companies, universities and other institutions.

      Risk of Using Hazardous Materials

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

      Dependence Upon Attraction and Retention of Key Personnel and Consultants

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

      Risk of Product Liability Claims; Insufficient Insurance

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


                                       13
<PAGE>

      Anti-Takeover Provisions

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

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

      The sale or availability for sale of substantial  amounts of the Company's
Common Stock,  including  shares  issuable upon  exercise of  outstanding  stock
options and warrants and upon  conversion of outstanding  convertible  preferred
stock in the public  market  could  adversely  affect  the  market  price of the
Company's  Common  Stock.  As of February 25, 2005,  the Company had  59,962,447
shares of Common Stock issued and outstanding and the following shares of Common
Stock were reserved for issuance:

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

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

      o     11,179,000 shares upon exercise of outstanding options,  exercisable
            at prices  ranging from $0.023 to $7.88 per share and expiring  from
            May 29, 2005 to October 3, 2013.

      Approximately 40% of the currently  outstanding shares of Common Stock, as
well as  substantially  all of the shares  issuable upon exercise of outstanding
options,  are freely tradable without restriction unless held by an affiliate of
the Company as that term is defined under the Securities Act.

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

      Possible Volatility of Stock Price and Illiquid Trading

      The market price of the  Company's  Common Stock has been and is likely to
continue  to be highly  volatile.  Trading  in the  Company's  Common  Stock has
experienced  low volume and limited  liquidity.  Factors such as fluctuations in
the Company's operating results, and/or ability to obtain capital, shortfalls in
revenue or earnings  from levels  expected by securities  analysts,  outcomes of
clinical  trials and  regulatory  submissions,  announcements  of  technological
innovations  or new  products  by the Company or its  competitors,  governmental
regulations,  developments  with  respect  to  patents  or  proprietary  rights,
litigation, public concern as to the safety of products developed by the Company
or others and general market conditions may have a significant adverse effect on
the market price of the Common Stock.

Item 2. Properties

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

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

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Security Holders

      None.


                                       14
<PAGE>

                                     PART II

Item 5.  Market  for the  Registrant's  Common  Equity and  Related  Stockholder
Matters.

(a)   Market Information

      The  Company's  Common  Stock  traded  on  the  National   Association  of
Securities Dealers Automated  Quotation System ("Nasdaq") Stock Market under the
symbol CHAI from  September  22, 1992 to August 27, 1998.  Effective  August 28,
1998,  the Company's  Common Stock was delisted from Nasdaq  because the Company
failed to satisfy applicable maintenance criteria.  Since delisting from Nasdaq,
the  Company's  Common  Stock has been  quoted on the OTC  Bulletin  Board.  The
following  sets forth the quarterly  high and low bid price for the Common Stock
for the periods presented.  Such quotations reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.

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

Fiscal Year Ended December 31, 2003
     First Quarter                                     .35                .12

     Second Quarter                                    .70                .22

     Third Quarter                                     .60                .39

     Fourth Quarter                                    .47                .26

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

     Second Quarter                                    .53                .33

     Third Quarter                                     .51                .34

     Fourth Quarter                                    .60                .28

Fiscal Year Ended December 31, 2005

     January 1 through February 20, 2005               .45                .35


(b)   Approximate Number of Equity Securities Holders

      As of February 20, 2005,  the number of holders of record of the Company's
Common Stock was 238. The Company believes that the number of beneficial holders
of its Common Stock on such date was in excess of 1,500.

(c)   Dividends

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


                                       15
<PAGE>

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

Overview

      Since its  inception,  the Company has been engaged  primarily in research
and   development  of  its   technologies   and  proposed   products,   and  the
commercialization  of CLINICEL and the  Sure-Closure  System.  In early 2000, in
conjunction with the  discontinuation  of the CLINICEL product line, the Company
refocused  its  strategy  solely  toward the  development  of  products  for the
prevention  and/or reduction of post-surgical  adhesions and drug delivery.  The
Company's product development efforts are currently focused on its lead product,
REPEL-CV, a bioresorbable  adhesion barrier intended for use in cardiac surgery.
In October 2003, the Company  initiated the multi-center  pivotal clinical trial
on REPEL-CV which is currently anticipated to be completed in mid 2006.

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

Results of Operations

      The Company had revenue of $23,000 and $30,000 for the fiscal  years ended
December 31, 2004 and 2003, respectively, that represented royalties on sales of
the Sure-Closure System. Pursuant to the terms of the underlying agreement,  the
Company's right to receive royalty payments  associated with Sure Closure System
product sales expired with respect to sales occurring after June 30, 2004.

      The Company incurred  research and development  expenses of $1,263,000 and
$832,000  for the fiscal years ended  December 31, 2004 and 2003,  respectively.
The increase was  primarily  attributable  to higher costs  associated  with the
REPEL-CV pivotal clinical trial and manufacturing development. It is anticipated
that these expenses will continue to increase as the Company expands its product
development activities.

      General and administrative expenses totaled $1,138,000 for the fiscal year
ended  December 31, 2004 as compared to $1,216,000  for the previous  year.  The
decrease was primarily  attributable to lower stock-based  compensation  expense
partially offset by higher product  liability  insurance and investor  relations
expenses.

      Interest  income  increased to $13,000 for the fiscal year ended  December
31, 2004 from $3,000 for the prior  fiscal  year.  The  increase  was  primarily
attributable to higher average cash balances.

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

      Interest expense of $6,000 for the fiscal year ended December 31, 2004 was
equal to the amount reported in the prior year.

      The  Company  realized a gain on  settlement  of debt of  $15,000  for the
fiscal year ended  December 31,  2003.  This gain  represents  the effect of the
forgiveness of portions of outstanding trade liabilities upon settlement.

      The Company  realized  other  income from the reversal of  liabilities  of
$61,000 and $236,000  for the fiscal years ended  December 31, 2004 and December
31, 2003,  respectively.  During 2004, the Company reversed liabilities relating
to trade  transactions  which  where due and payable on or before  December  31,
1998.  During 2003, the Company  reversed  liabilities  of $194,000  relating to
customer  credits and a $42,000  customer  advance since all related matters are
beyond the statute of limitations. The reversals were made due to the passage of
time and the  Company's  belief that the  underlying  claims  would be barred by
applicable  statutes of limitation if recovery actions were asserted at the time
of the respective reversals.


                                       16
<PAGE>

      The  Company  recorded a benefit for income  taxes of $295,000  during the
fiscal year ended  December  31, 2004 as compared to $193,000 in the prior year.
These amounts were attributable to the receipt of funds associated with the sale
of certain  accumulated New Jersey State tax operating losses. The increase over
prior year was primarily  attributable  to the larger total fund budgeted by the
State for the underlying program.

      The Company  reported a net loss of  $1,841,000  for the fiscal year ended
December  31, 2004 as compared to a net loss of  $1,577,000  for the prior year.
The  increase  in the  current  period net loss is  attributable  to the factors
described above.

      The Company  reflected  deemed  non-cash  dividends on preferred  stock of
$74,000 for the fiscal year ended  December 31, 2004  resulting in a net loss to
common  stockholders  of $1,915,000;  in the prior fiscal year,  deemed non-cash
dividends on preferred stock of $324,000 was recorded resulting in a net loss to
common stockholders of $1,901,000.

Liquidity and Capital Resources

      At December 31, 2004 the Company had cash of  $1,861,000  compared to cash
of $680,000 at December 31, 2003.  The primary use of these funds is to fund the
Company's research and development related to anti-adhesion products and general
and administrative expenses associated with these activities.

      At December 31, 2004 the Company had working capital of $1,227,000.

      Net cash used in operating  activities  was $1,504,000 for the fiscal year
ended December 31, 2004 as compared to $1,310,000 for the prior fiscal year. Net
cash used in operating  activities  for the fiscal year ended  December 31, 2004
was primarily due to a net loss of $1,841,000  reduced by the non-cash effect of
$219,000  in  stock-based  compensation  expense  and the  $289,000  increase in
accrued  expenses  and  increased  by the  non-cash  effect of $174,000  gain on
deferred royalty income. Net cash used in operating activities in the prior year
was primarily due to a net loss of $1,577,000  reduced by the non-cash effect of
$534,000 in  stock-based  compensation  expense and  increased  by the  non-cash
effect of $236,000 related to the reversal of liabilities.

      Net cash used in  investing  activities  was  $145,000 for the fiscal year
ended  December 31, 2004 for the purchase of production  equipment and leasehold
improvements as compared to $4,000 for the prior year for the purchase of office
equipment.

      Net cash  provided  from  financing  activities  for the fiscal year ended
December 31, 2004 was  $2,830,000 as compared to $1,497,000 for the prior fiscal
year.  Net cash provided  from  financing  activities  for the fiscal year ended
December 31, 2004  represented  the proceeds  from the exercise of stock options
and warrants.  Net cash provided from  financing  activities for the fiscal year
ended December 31, 2003 was comprised of $692,000 net proceeds from the issuance
of Series C Convertible  Preferred Stock and $805,000 proceeds from the exercise
of stock options and warrants.

      The cash  balance as of December  31, 2004 is not  sufficient  to meet the
Company's cash  requirements  through 2005. As of December 31, 2004,  there were
warrants  outstanding to purchase up to 6,634,000 shares of the Company's Common
Stock at $0.12 per share  which  could  result in gross  proceeds of $796,000 if
fully exercised.  These warrants are scheduled to expire on March 26, 2005. Even
if the warrants are fully exercised,  the Company anticipates seeking additional
financing in 2005, subject to market conditions and obtaining  acceptable terms.
The Company will be required to raise  substantial  additional funds to continue
the clinical development and commercialization of REPEL-CV, as well as its other
proposed products. There can be no assurance that the warrants will be exercised
or that such  arrangements or financings will be available as needed or on terms
acceptable  to  the  Company.  The  Company  has  received  a  report  from  the
independent  auditors  containing an explanatory  paragraph stating that certain
conditions  raise  doubt  about the  Company's  ability to  continue  as a going
concern.


                                       17
<PAGE>

      At  December  31,  2004 the Company  had  employment  agreements  with two
executives that expire in March 2006 and May 2006. Pursuant to these agreements,
the  Company's   commitment  regarding  early  termination  benefits  aggregates
$347,000 at December 31, 2004.

Item 7. Financial Statements.

      The Index to Financial  Statements  appears on page F-1, the Report of the
Independent  Registered  Public  Accounting  Firm  appears on page F-2,  and the
Financial  Statements and Notes to Financial  Statements  appear on pages F-3 to
F-15.

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

      None.

Item 8A. Controls and Procedures

      (a) Evaluation of disclosure controls and procedures.  The chief executive
officer  who  is  also  the  chief  financial  officer,   after  evaluating  the
effectiveness of the Company's  "disclosure controls and procedures" (as defined
in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15-d-14(c)) as of the
end of the period  covered by this  annual  report (the  "Evaluation  Date") has
concluded that as of the Evaluation Date, our disclosure controls and procedures
were  adequate and designed to ensure that material  information  relating to us
and required to be disclosed in the reports we file or submit to the  Securities
and Exchange Commission would be made known to him.

      (b)  Changes in  internal  controls.  In  connection  with the  evaluation
referred to in (a) above, we have  identified no change in our internal  control
of financial reporting that has materially affected,  or is reasonably likely to
materially affect, our internal control over financial reporting.


                                       18
<PAGE>

                                    PART III

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

      The  information  called  for by this item is  incorporated  by  reference
herein to the definitive  Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 2004 fiscal year.  Certain
information with regard to the executive officers of the Company is contained in
Item 1 hereof and is incorporated by reference in this Part III.

Item 10. Executive Compensation.

      The  information  called  for by  this  item  is  incorporated  herein  by
reference to the definitive  Proxy Statement to be filed by the Company pursuant
to Regulation 14A within 120 days after the close of the 2004 fiscal year.

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

      The  information  called  for by  this  item  is  incorporated  herein  by
reference to the definitive  Proxy Statement to be filed by the Company pursuant
to Regulation 14A within 120 days after the close of the 2004 fiscal year.

Item 12. Certain Relationships and Related Transactions.

      The  information  called  for by  this  item  is  incorporated  herein  by
reference to the definitive  Proxy Statement to be filed by the Company pursuant
to Regulation 14A within120 days after the close of the 2004 fiscal year.

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

        Exhibits.

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

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

3.1(b)  Intentionally omitted.

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

3.2     By-Laws of Registrant. (1)

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

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

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

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

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

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


                                       19
<PAGE>

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

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

10.16   Amendment  No. 1 dated as of  February  1994 to the  Agreement
        between Registrant and Yissum. (6)

10.19   Amendment  No. 2 dated as of January 1, 1996 to the  Agreement
        between the Registrant and Yissum. (2)

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

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

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

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

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

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

10.33   Intentionally omitted.

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

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

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

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

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

10.38   Intentionally omitted.

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

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

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

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

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

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

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


                                       20
<PAGE>

23.1    Consent of  Eisner LLP. *

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

      (b)   Reports on Form 8-K
            None


                                       21
<PAGE>

                                   SIGNATURES

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


                                    Life Medical Sciences, Inc.
                                    (Registrant)

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



Dated:  March 7, 2005

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

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

<S>                                     <C>                                    <C>
/s/ Richard L. Franklin, M.D.           Chairman of the Board                  March 7, 2005
---------------------------------
Richard L. Franklin, M.D.

 /s/ Robert P. Hickey                   Director, President, CEO and CFO       March 7, 2005
---------------------------------       (principal executive, financial and
Robert P. Hickey                        accounting officer)


/s/ David G. P. Allan                   Director                               March 7, 2005
---------------------------------
David G. P. Allan

/s/ Edward A. Celano                    Director                               March 7, 2005
---------------------------------
Edward A. Celano

/s/ Barry R. Frankel                    Director                               March 7, 2005
---------------------------------
Barry R. Frankel

/s/ Walter R. Maupay                    Director                               March 7, 2005
---------------------------------
Walter R. Maupay
</TABLE>


                                       22
<PAGE>

<TABLE>
<CAPTION>
                          INDEX TO FINANCIAL STATEMENTS


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

<S>                                                                           <C>
Report of Independent Registered Public Accounting Firm....................   F-2
Balance Sheet..............................................................   F-3
Statements of Operations...................................................   F-4
Statements of Changes in Stockholders' Equity (Capital Deficit)............   F-5
Statements of Cash Flows...................................................   F-6
Notes to Financial Statements..............................................   F-7
</TABLE>


<PAGE>

             Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Life Medical Sciences, Inc.

      We have audited the accompanying  balance sheet of Life Medical  Sciences,
Inc.  (the  "Company")  as of December  31, 2004 and the related  statements  of
operations, changes in stockholders' equity (capital deficit) and cash flows for
each of the  years  in the  two-year  period  ended  December  31,  2004.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

      In our opinion, the financial statements  enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences,  Inc.
as of December 31, 2004 and the results of its operations and its cash flows for
each of the years in the two-year  period ended  December 31, 2004 in conformity
with U.S. generally accepted accounting principles.

      The accompanying financial statements have been prepared assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note A to the
financial statements,  the Company has experienced recurring net losses, and has
minimal  working  capital and  stockholders'  equity at December 31, 2004.  As a
result,  substantial  doubt exists about the Company's  ability to continue as a
going concern.  Management's plans in regard to these matters are also discussed
in Note A. The financial  statements do not include any  adjustments  that might
result from the outcome of this uncertainty.


Eisner LLP

New York, New York
March 4, 2005


                                      F-2
<PAGE>

<TABLE>
<CAPTION>
                           LIFE MEDICAL SCIENCES, INC.

                                  BALANCE SHEET
                      (In thousands, except per share data)

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

                                                 ASSETS
<S>                                                                              <C>
Current assets:
    Cash and cash equivalents .............................................      $  1,861
    Prepaid expenses ......................................................            40
                                                                                 --------
            Total current assets ..........................................         1,901

Acquired technology, less accumulated amortization ........................           225
Machinery and equipment, less accumulated depreciation ....................           134
                                                                                 --------

                      TOTAL ...............................................      $  2,260


                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable .....................................................      $    310
     Accrued expenses .....................................................           364

            Total current liabilities .....................................           674

Convertible note payable ..................................................           110
                                                                                 --------
            Total liabilities .............................................           784
                                                                                 --------

Commitments and other matters (Note I)

Stockholders' equity:
     Preferred stock, $.01 par value; shares authorized - 5,000; issued and
         outstanding - none
     Common stock, $.001 par value; shares authorized - 100,000;
       issued and outstanding - 59,962 ....................................            60
     Additional paid-in capital ...........................................        43,518
     Accumulated deficit ..................................................       (42,102)
                                                                                 --------
               Total stockholders' equity .................................         1,476
                                                                                 --------
                      TOTAL ...............................................      $  2,260
                                                                                 ========
</TABLE>


                 See accompanying notes to financial statements.


                                      F-3
<PAGE>

<TABLE>
<CAPTION>
                           LIFE MEDICAL SCIENCES, INC.

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


                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                          2003           2004
                                                                        --------       --------
<S>                                                                     <C>            <C>
Revenue:
   Royalty income ................................................      $     30       $     23
                                                                        --------       --------

Operating expenses:
   Research and development ......................................           832          1,263
   General and administrative ....................................         1,216          1,138
                                                                        --------       --------
          Operating expenses .....................................         2,048          2,401
                                                                        --------       --------

Loss from operations .............................................        (2,018)        (2,378)

Other income/(expense):
Interest income ..................................................             3             13
Gain on deferred royalty income ..................................                          174
Interest expense .................................................            (6)            (6)
Reversal of liabilities ..........................................           236             61
Gain on settlement of debt .......................................            15             --
                                                                        --------       --------

Loss before benefit for income taxes .............................        (1,770)        (2,136)
Benefit for income taxes .........................................           193            295
                                                                        --------       --------

Net loss .........................................................        (1,577)        (1,841)
Beneficial conversion on convertible preferred stock .............          (324)           (74)
                                                                        --------       --------

Net loss attributable to common stockholders .....................      $ (1,901)      $ (1,915)
                                                                        ========       ========

Net loss attributable to common stockholders per share - basic and
   diluted .......................................................      $  (0.06)      $  (0.03)
                                                                        ========       ========

Weighted average shares outstanding - basic and diluted ..........        34,346         55,798
</TABLE>


                 See accompanying notes to financial statements.


                                      F-4
<PAGE>


<TABLE>
<CAPTION>
                           LIFE MEDICAL SCIENCES, INC.

         STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
                                 (In thousands)

                                                                                   Additional      Unearned
                                          Preferred                Common            Paid-in       Stock-Based   Accumulated
                                     Shares      Amount      Shares      Amount      Capital      Compensation     Deficit
                                   --------    --------    --------    --------    --------      -------------   -----------

<S>                                   <C>      <C>           <C>       <C>         <C>           <C>             <C>
Balance - January 1, 2003 .....       1,112    $     11      16,759    $     17    $ 38,140      $   (114)       $(38,684)
   Conversion of Series B
   preferred stock ............      (1,112)        (11)     11,125          11
   Common stock issued in asset
   acquisition ................                               6,896           7         337
   Options and warrants
   exercised ..................                               6,703           6         799
   Series C preferred stock
   financing ..................         663           7                                 685
   Stock-based compensation ...                                                         287
   Amortization of employee ...
   stock-based compensation ...                                                                        97
   Net loss for the year ......                                                                                    (1,577)
                                   --------    --------    --------    --------    --------      --------        --------

Balance December 31, 2003 .....         663           7      41,483          41      40,248           (17)        (40,261)
   Conversion of Series C
   preferred stock ............        (663)         (7)      6,634           7
   Options and warrants
   exercised ..................                              11,845          12       2,818
   Stock-based compensation ...                                                         452
   Amortization of employee
   stock-based compensation ...                                                                        17
   Net loss for the year ......                                                                                    (1,841)
                                   --------    --------    --------    --------    --------      --------        --------
Balance December 31, 2004 .....                              59,962    $     60    $ 43,518                      $(42,102)
                                   ========    ========    ========    ========    ========      ========        ========
</TABLE>

                 See accompanying notes to financial statements.


                                      F-5
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                            STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                                         -----------------------
                                                                           2003         2004
                                                                          -------     -------
<S>                                                                       <C>         <C>
Cash flows from operating activities:
    Net loss .........................................................    $(1,577)    $(1,841)
    Adjustments to reconcile net loss to net cash used in operations:
        Depreciation .................................................                     15
        Deferred royalty income ......................................        (30)        (23)
        Stock-based compensation .....................................        534         219
        Amortization of acquired technology ..........................         51          68
        Gain on deferred royalty income ..............................                   (174)
        Gain on settlement of debt ...................................        (15)
        Reversal of liabilities ......................................       (236)        (61)
        Changes in operating assets and liabilities:
            (Increase) in prepaid expenses ...........................        (20)         (3)
           Increase in accounts payable ..............................         25           7
           Increase/(Decrease) in accrued expenses ...................        (42)        289
                                                                          -------     -------
                Net cash used in operating activities ................     (1,310)     (1,504)
                                                                          -------     -------
Cash flows from investing activities:
    Purchase of equipment ............................................         (4)       (145)
                                                                          -------     -------
        Net cash used in investing activities ........................         (4)       (145)
                                                                          -------     -------
Cash flows from financing activities:
    Proceeds from issuance of convertible preferred stock ............        692
    Proceeds from exercise of stock options and warrants .............        805       2,830
                                                                          -------     -------
       Net cash provided by financing activities .....................      1,497       2,830
                                                                          -------     -------

Net  increase in cash ................................................        183       1,181
Cash and cash equivalents at beginning of year .......................        497         680
                                                                          -------     -------
Cash and cash equivalents at end of year .............................    $   680     $ 1,861
                                                                          =======     =======
Supplementary cash flow information:
    Interest paid ....................................................    $     6     $     6
Non-cash investing and financing activities:
    Common stock and options issued with the acquisition of technology        344
    Conversion of Series B preferred stock into common  stock ........         11
    Conversion of Series C preferred stock into common stock .........                      7
</TABLE>


                 See accompanying notes to financial statements.


                                      F-6
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS


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

      Life Medical Sciences, Inc. (the "Company"),  incorporated in the state of
Delaware,   is  a  biomaterials   company   engaged  in  the   development   and
commercialization  of anti-adhesion and drug delivery  products.  Products under
development,  all of which  are  based on the  Company's  licensed  proprietary,
bioresorbable  polymer  technology,  are primarily  medical devices  designed to
prevent or reduce the  formation of adhesions  (scar  tissue)  following a broad
range of surgical  procedures.  The Company's  product  development  efforts are
currently focused on its lead product,  REPEL-CV(TM),  a bioresorbable  adhesion
barrier  intended  for use in cardiac  surgery.  In October  2003,  the  Company
initiated the multi-center pivotal clinical trial on REPEL-CV.  In January 2005,
the Company  announced that a planned interim  analysis of patient data from the
REPEL-CV  trial was  completed by a Data and Safety  Monitoring  Board  ("DSMB")
comprised of medical and biostatistical specialists who are not participating in
the trial. Based on data from over forty patients, the DSMB recommended that the
trial proceed as planned and that no  modifications  to the trial  protocol were
indicated.  In March 2004, the Company received  proceeds of $2,830,000 from the
exercise of warrants and options to purchase  11,845,000 shares of the Company's
common stock. In December 2004, the Company  received  $295,000 from the sale of
certain  New Jersey  state tax  losses.  These  funds are being used to fund the
REPEL-CV  clinical  trial as well as other product  development  activities  and
operating expenses.

      The  accompanying  financial  statements  have  been  prepared  on a going
concern basis. As shown in the accompanying  financial  statements,  the Company
has  experienced  recurring net losses,  has used its cash in operations and has
minimal  working  capital and  stockholders'  equity at December 31, 2004.  As a
result,  the  Company  has  limited  resources   available  for  its  continuing
operations. As a result, substantial doubt exists about the Company's ability to
continue as a going concern.  The Company's  continuation  as a going concern is
dependent  upon  obtaining  sufficient  financing  to fund  its  operations  and
ultimately to achieve profitability,  which in turn is dependent on successfully
completing  the  development  of  its  proposed  products,   obtaining  required
regulatory  approvals and manufacturing and selling its proposed  products.  The
Company intends to pursue additional equity financings including the exercise of
outstanding  warrants as well as continued  participation  in the New Jersey Tax
Benefit  Transfer  Program.  There is no  assurance  that  initiatives  to raise
additional capital will be successful or that other financing  arrangements will
be available  or that the Company will achieve or sustain a profitable  level of
operations.  The financial  statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.

(NOTE B) - Summary of Significant Accounting Policies:

[1] Revenue Recognition:

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

[2] Cash and cash equivalents:

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

[3] Depreciation and Amortization:

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

[4] Research and development:

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


                                      F-7
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

[5] Patent costs:

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

[6] Use of estimates:

      The  preparation  of financial  statements in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management to make estimates and assumptions 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  such as  expected  cash flows  used to  determine  recoverability  of
intangible assets.

[7] Stock-based compensation:

      The Company  follows the intrinsic  value based method in  accounting  for
stock-based employee  compensation under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related interpretations. The
Company has adopted the  disclosure-only  provisions  of  Statement of Financial
Accounting Standards ("SFAS") No. 123 and SFAS No. 148.

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


<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------

                                                                           2003        2004
                                                                        -------     -------
<S>                                                                     <C>         <C>
        Reported net loss attributable to common stockholders           $(1,901)    $(1,915)
        Stock-based employee compensation expense

            included in reported net loss                                   107          79
        Stock-based employee compensation determined under
            the fair value based method                                    (161)       (557)
                                                                        -------     -------

        Pro forma net loss attributable to common stockholders          $(1,955)    $(2,393)
                                                                        =======     =======

        Loss per common share attributable to common stockholders
           (basic and diluted):
                As reported                                             $ (0.06)    $ (0.03)
                                                                        =======     =======
                Pro forma                                               $ (0.06)    $ (0.04)
                                                                        =======     =======
</TABLE>

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

                                                         Year Ended December 31,
                                                         -----------------------
                                                          2003            2004
                                                          ----            ----
                 Dividend yield                             0%             0%
                 Expected volatility                      104%           103%
                 Risk free interest rate                  3.8%           2.2%
                 Expected life                       2.5 years      2.5 years

                 See accompanying notes to financial statements.


                                      F-8
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

[8] Earnings (loss) per share: (continued)

      Basic earnings (loss) per share is computed by dividing the income or loss
by the weighted average number of shares of common stock outstanding during each
period.  Diluted earnings (loss) per share for the years ended December 2003 and
2004 excludes the effect from the potential exercise or conversion of securities
which would result in the issuance of incremental shares of common stock because
the effect would be anti-dilutive.

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

                                                           December 31,
                                                   ------------------------
                                                       2003          2004
                                                   ----------    ----------

                   Convertible promissory notes       110,000       110,000
                   Convertible preferred stock      6,634,000
                   Options                          9,574,000    11,179,000
                   Warrants                        19,270,000     7,228,000
                                                   ----------    ----------
                                                   35,588,000    18,517,000
                                                   ==========    ==========

[9] Impairment of Intangible Assets

      This  intangible  asset is reviewed for  impairment  annually and whenever
events or changes in circumstances indicate that the related carrying amount may
not be  recoverable  over the  remaining  useful life.  In  connection  with the
acquired  technology  as  described  in  Notes  C and E  [1],  the  Company  has
considered  whether  impairment in its carrying value exists.  Based on the best
information  available to the  management,  the  carrying  value of the asset is
recoverable.

[10] Recently issued accounting pronouncements:

      In December  2004,  the FASB issued FASB  Statement No. 123 (Revised 2004)
"Share-Based  Payment:  an  Amendment of FASB  Statements  No. 123 and 95" ("FAS
123R").  FAS 123R is effective for public  entities that file as small  business
issuers as of the first  interim or annual  reporting  period that begins  after
December 31, 2005. Therefore, we will adopt it during fiscal 2006. FAS 123R sets
accounting  requirements for "share-based"  compensation to employees,  requires
companies to  recognize in the income  statement  the  grant-date  fair value of
stock  options  and other  equity-based  compensation  issued to  employees  and
disallows  the  use of the  intrinsic  value  method  of  accounting  for  stock
compensation.  We are currently  evaluating  the impact that this statement will
have on our results of operations.

(NOTE C) - Acquired Technology:

      In March 2003,  the Company  purchased  assets which  comprise a series of
United States and foreign patent applications as well as scientific and clinical
documentation.  In  connection  with  this  transaction,  the  Company  ascribed
$344,000 of value to this technology.  For the years ended December 31, 2003 and
2004, the Company recorded amortization of $51,000 and $68,000, respectively.

(NOTE D) - Machinery and Equipment:

      Machinery and equipment consists of the following at December 31:

                                                                    Estimated
                                                        2004        useful life
                                                    ----------      ------------

                   Machinery and equipment          $   145,000     5 years
                   Office equipment                       4,000     3 years
                                                    ----------

                                                       149,000
                   Less accumulated depreciation        15,000
                                                    ----------
                                                    $  134,000
                                                    ==========

                 See accompanying notes to financial statements.


                                      F-9
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

(NOTE E) - Convertible Promissory Notes:

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

(NOTE F) - Stockholders' Equity:

[1] Common stock:

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

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

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

[2] Preferred stock:

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

                 See accompanying notes to financial statements.


                                      F-10
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

[2] Preferred stock: (continued)

      The Company  allocated the proceeds  between the Series B Preferred  Stock
($524,000)  and the detachable  warrants based on the relative fair values.  The
Company  computed the  beneficial  conversion  feature of the Series B Preferred
Stock,  which was limited to the  proceeds  allocated  to the Series B Preferred
Stock and which is being  amortized over the one-year  period through  automatic
conversion.  Accordingly  $419,000  and  $105,000  were  charged to the net loss
attributable  to common  stockholders  for the years ended December 31, 2002 and
2003, respectively.

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

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

[3] Warrants:

      As of December 31, 2004, there were warrants outstanding to purchase up to
7,228,000  shares  of the  Company's  common  stock at $0.12  per share of which
warrants for  6,634,000  shares and 594,000  shares expire on March 26, 2005 and
March 26, 2007, respectively.

[4] Options:

      The Company may issue  options to purchase up to an aggregate of 1,000,000
shares of common stock pursuant to its 2000 Non-Qualified Stock Option Plan (the
"2000  Plan")  and  10,000,000  shares  of  common  stock  pursuant  to its 2001
Non-Qualified  Stock Option Plan (the "2001  Plan").  Only  non-qualified  stock
options to purchase  shares may be granted under the 2000 Plan and the 2001 Plan
to  employees  and  directors of the Company or agents,  medical and  scientific
advisors,  or consultants  to the Company.  In the case of the 2000 Plan and the
2001 Plan, the exercise price is determined by the Compensation Committee of the
Board of Directors at the time of the granting of an option. Options vest over a
period not greater than five years,  and expire no later than ten years from the
date of grant.

      At December 31, 2004,  options to purchase  677,000 shares of common stock
were  outstanding  pursuant to the 2000 Plan and  options to purchase  8,292,000
shares of common stock were outstanding  pursuant to the 2001 Plan. In addition,
options to purchase 2,210,000 shares of common stock are outstanding pursuant to
other  agreements.  These options vest over various  periods and expire no later
than ten years from the date of vesting.

      At December 31, 2004,  there were  1,876,000  options  available for grant
under these plans.  Operating expenses include the following charges relating to
stock options:

                                                      Year Ended December 31,
                                                      -----------------------
                                                      2003              2004
                                                    --------          --------

                     Employees/Director             $107,000           $79,000
                     Consulting fees                 427,000           140,000
                                                    --------          --------
                                                    $534,000          $219,000
                                                    ========          ========

                 See accompanying notes to financial statements.


                                      F-11
<PAGE>

                           LIFE MEDICAL SCIENCES, INC.

                          NOTES TO FINANCIAL STATEMENTS

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

[4] Options: (continued)

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

      A summary of the status of the Company's  stock options as of December 31,
2003 and 2004,  and changes  during the years ended on those dates is  presented
below (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                       2003                        2004
                                               ------------------           -----------------
                                                           Weighted-                    Weighted-
                                                            Average                      Average
                                             Shares      Exercise Price   Shares      Exercise Price
                                             ------      --------------   ------      --------------
<S>                                           <C>             <C>          <C>            <C>
     Outstanding at beginning of year         9,360           $0.76        9,574          $0.50
     Granted                                    350            0.28        2,035           0.50
     Exercised                                  (69)           0.15          (12)          0.20
     Forfeited/Expired                          (67)           3.10         (418)          2.22
     Outstanding at end of year               9,574            0.50       11,179           0.43
     Options exercisable at year-end          7,581            0.58       10,119           0.40

     Weighted-average grant date fair
     value of options granted during the
     year                                                      0.26                        0.31
</TABLE>

      Included in the preceding table are 350,000 and 485,000 options granted to
non-employees  and non-employee  directors in 2003 and 2004,  respectively.  The
weighted-average  grant  date fair  value of such  options  was $0.26 and $0.43,
respectively.

      Options to purchase 5,200,000 shares of common stock,  including 2,200,000
to officers and 3,000,000 to a director,  pursuant to the 2001 Plan were granted
at the closing of the Series B Offering in March 2002.  The options  vest in one
third  increments  as of the grant date and the first and  second  anniversaries
thereof and will expire no later than seven  years from the vesting  dates.  The
exercise price for the options is $0.12 per share.  At the closing of the Series
B  Offering,  the market  price of the  Company's  common  stock was $0.38.  The
Company recorded $534,000 and $157,000 of compensation  expense  attributable to
these options in 2003 and 2004, respectively.

      The  following  table  summarizes  information  about fixed stock  options
outstanding at December 31, 2004 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                    Options Outstanding                             Options Exercisable
                  ---------------------------------------------------------       ---------------------
                                     Weighted-Average
     Range              Number          Remaining          Weighted-Average      Number     Weighed Average
Exercise Prices      Outstanding     Contractual Life      Exercise Price     Exercisable   Exercise Price
---------------      -----------     ----------------      --------------     -----------   --------------

<S>  <C>               <C>            <C>                    <C>               <C>           <C>
     $0.02 - 0.82        9,664         6 years                $0.23             8,714         $0.19
      1.00 - 2.00        1,402         2 years                 1.52             1,292          1.48
      4.00 - 4.75          108         2 years                 4.01               108          4.01
      7.00 - 7.88            5          1 year                 7.57                 5          7.57
                       -------          ------               ------            ------        ------
                        11,179         4 years                $0.43            10,119         $0.40
</TABLE>

                 See accompanying notes to financial statements.


                                      F-12
<PAGE>

(NOTE G) - Income Taxes:

      At December 31, 2004,  the Company has  approximately  $38,914,000  of net
operating  loss  carryforwards  to offset  future  federal  taxable  income  and
approximately  $773,000 of research  and  development  tax credit  carryforwards
available  to offset  future  federal  income tax,  subject to  limitations  for
alternative minimum tax. The ability of the Company to utilize its net operating
losses and research and development tax credit carryforwards in future years may
be limited in  accordance  with the  provisions  of Section 382 of the  Internal
Revenue Code.

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

                                                               Research
                                                             and Development
                       Year       Net Operating Loss           Tax Credit
                       ----       ------------------           ----------

                       2005          $     50,000
                       2006               803,000
                       2007             1,519,000               $   69,000
                       2008             4,044,000                    31,000
                   2009 - 2024         32,498,000                   673,000
                                    -------------              ------------
                                     $ 38,914,000               $  773,000
                                    =============              ============

      The  Company  has   participated  in  the  Tax  Benefit  Transfer  Program
administered by the State of New Jersey under which $2,459,000 and $3,677,000 in
eligible loss  carryforwards,  covering the tax year 1998, were sold to PSE&G in
exchange for cash  payments of  approximately  $193,000 and $295,000 in 2003 and
2004, respectively. The Company anticipates similar transactions during 2005 and
beyond,  contingent  upon  approvals from the State  Department of Taxation.  At
December 31, 2004,  the Company has net  operating  loss  carryforwards  for New
Jersey  State  income tax  purposes of  approximately  $10,738,000  which expire
through 2010.

      The deferred federal tax asset,  which amounted to $15,340,000 at December
31, 2004 has been offset by a valuation allowance against the entire benefit due
to management's  uncertainty  regarding the future profitability of the Company.
The valuation  allowance has been increased by $527,000 in 2003 and decreased by
$48,000 in 2004.

      The income tax  benefit  of  $193,000  and  $295,000  for the years  ended
December  31,  2003 and 2004  reflect  the  Company's  participation  in the Tax
Benefit Transfer Program described above.

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

                                                       Year Ended December 31,
                                                       -----------------------
                                                         2003          2004
                                                       ---------     ---------

Income tax benefit at the federal statutory rate       $(602,000)    $(726,000)
State and local income taxes, net of effect on
federal taxes                                           (106,000)     (128,000)
Increase in valuation allowance                          527,000       817,000
Sale of state net operating loss carryforwards          (193,000)     (295,000)
Reduction in deferred tax asset from transfer of
state net operating loss carryforwards                   221,000       331,000
Other                                                    (40,000)     (294,000)
                                                       ---------     ---------

                                                       $(193,000)    $(295,000)
                                                       =========     =========

                 See accompanying notes to financial statements.


                                      F-13
<PAGE>

(NOTE G) - Income Taxes: (continued)

The deferred tax asset at December 31 is as follows:

                                                    2003              2004
                                                ------------     ------------

Net operating loss carryforward                 $ 13,376,000     $ 13,231,000
Research and development credit carryforward         672,000          733,000
Other                                                500,000          536,000
                                                ------------     ------------
                                                  14,548,000       14,500,000
Valuation allowance                              (14,548,000)     (14,500,000)
                                                ------------     ------------
                                                $          0     $          0
                                                ============     ============


(NOTE H) - Research and License Agreements:

[1] Yissum agreement:

      During  June  1991,  the  Company  entered  into a  research  and  license
agreement (the "Agreement") with Yissum Research and Development  Company of the
Hebrew University of Jerusalem  ("Yissum"),  which was amended in February 1994,
as of January 1996,  as of October 1996 and as of April 2002,  pursuant to which
the Company finances and Yissum conducts  research and development at the Hebrew
University of Jerusalem in the field of biomedical polymers.  In connection with
the Agreement,  Yissum assigned to the Company its worldwide  rights to patents,
patent  applications  and know-how to develop,  manufacture  and market products
relating to this technology.

      Pursuant to the  Agreement,  the Company is  obligated to pay a royalty of
five  percent  of all net  sales of the  Company's  products  derived  under the
Agreement.  The maximum  amount of  royalties  to be paid during the term of the
Agreement is  $5,500,000.  The Agreement  continues  until the later of the last
date upon which the patents expire, or at the end of fifteen years from the date
of the first commercial sale pursuant to the assignment. Yissum has the right in
its sole  discretion  to  terminate  the  Agreement  if,  among other things the
Company does not attain certain  milestones by specified dates. The January 1996
amendment gives the Company options for three one-year extensions, through 2004,
of the periods in which certain milestones must be attained,  each for a payment
of $50,000 and the 2002 amendment gives the Company similar options through 2007
for an annual  payment,  in 2005, of $50,000 and, in 2006 and 2007, of $100,000.
Upon  termination  of  the  Agreement  for  any  reason,  the  patents,   patent
applications  and  know-how  assigned by Yissum to the Company in June 1991 will
revert in full to Yissum. In addition,  in the event of a material breach of the
Agreement by the Company,  all patents and patent applications  derived from the
research shall revert to Yissum.

[2] Dimotech agreement:

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

(NOTE I) - Commitments and Other Matters:

[1] Lease:

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

                 See accompanying notes to financial statements.


                                      F-14
<PAGE>

(NOTE I) - Commitments and Other Matters: (continued)

[2] Employment agreement:

      At December  31,  2004,  the Company has  employment  agreements  with two
executives  which  expire  in  March  2006  and  May  2006.  Pursuant  to  these
agreements,  the  Company's  commitment  regarding  early  termination  benefits
aggregates $347,000 at December 31, 2004.

[3] Supplier concentration:

      Polymer  Technology  Group,  Inc.  ("PTG") has been the Company's  primary
supplier and is in a position to produce its  proposed  products for testing and
commercial  purposes.  However,  the Company is developing  alternate sources of
supply for its current  product.  For the year ended December 31, 2004 and 2003,
the Company paid $131,783 and $103,524,  respectively, to PTG in connection with
such services.

[4] Reversal of liabilities:

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

      During  2004,  the  Company  reversed  liabilities  of  $61,000  primarily
relating to trade transactions with former vendors. The underlying  transactions
occurred  during or before 1998,  and there has been little or no  communication
with the parties regarding these transactions since that time. Accordingly,  the
Company  believes  that any claim for these amounts at this time would be barred
by applicable  statutes of limitations.  Should the Company be required to honor
these claims in the future,  it would result in a charge to income and adversely
affect liquidity.

(NOTE J) - Sure-Closure System Sale:

      In July 1994,  the  Company  sold or assigned  to MedChem  Products,  Inc.
("MedChem")  substantially all of its assets related to the Sure-Closure System,
a disposable wound closure device,  including  rights,  agreements and licenses.
The terms of the agreement  provide that the Company is entitled to royalties of
10% of the net sales (as defined in the  agreement),  through June 30, 2004,  of
the  Sure-Closure  System  and any line  extensions  or future  embodiments.  In
connection  with this  transaction,  $644,000 was  recorded as deferred  royalty
income and through  December  31, 2003 has been reduced by $447,000 of royalties
earned. A number of the Company's agreements with Technion and Dimotech, related
to the  Sure-Closure  System,  were assigned to MedChem in  connection  with the
sale. In connection with one such agreement, the Company may be liable for a two
percent  royalty on sales of the  Sure-Closure  System in the event that MedChem
does not pay these royalties.  Upon expiration of the royalty period on June 30,
2004, pursuant to the agreement,  the $174,000 remaining balance of the deferred
royalty income was written off. (See NOTE B [1])

(NOTE K) - Related Party:

      In 2003 and 2004, the Company paid $120,000 and $75,000,  respectively, in
business management consulting fees to Richard L. Franklin,  MD, the Chairman of
the Board of Directors.

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

                 See accompanying notes to financial statements.


                                      F-15
<PAGE>

(NOTE L) - Gain on Settlement of Debt:

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

                 See accompanying notes to financial statements.


                                      F-16