**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, 2006**


**OR**


o
            **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**




**SYNTHEMED,
      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.)**





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





**(732)
      404-1117**


**(Issuer’s
      telephone number, including area code** )





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


**NONE**


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





**COMMON
      STOCK--PAR VALUE $.001 PER SHARE**


**(Title
      of class)**





Check
      whether the issuer (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
o


Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      SB, contained in this form, 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


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





The
      issuer’s revenue for its fiscal year ended December 31, 2006 was
      $142,200.





The
      aggregate market value of the common equity held by non-affiliates of the
      registrant as of February 23, 2007 was approximately $59.9 million.





As
      of
      February 23, 2007, 83,021,479 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 2007 Annual
      Meeting of Stockholders are incorporated by reference into Part III of this
      Form
      10-KSB.





Transitional
      Small Business Disclosure Format (Check one): YES o   NO x









**INTRODUCTORY
      NOTE**




Certain
      statements in this 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 our company to raise capital. Such
      forward-looking statements involve known and unknown risks, uncertainties and
      other factors which may cause our actual results, performance or achievements,
      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 this 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-




**PART
      I**




**Item
      1. Business**





**General**




We
      are 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 our 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. Our
      product development efforts are currently focused on our lead product,
      REPEL-CV®, a bioresorbable adhesion barrier intended for use in cardiac
      surgery.




In
      September 2006, we reported positive efficacy results from the multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. REPEL-CV is a bioresorbable
      film designed to be placed over the surface of the heart at the conclusion
      of
      surgery to reduce the formation of post-operative adhesions (scar tissue).
      We
      feel confident that the pivotal trial achieved its primary clinical endpoint
      based on the level of reduction in the extent and severity of adhesions. The
      pivotal trial was conducted at 15 pediatric cardiac surgery centers throughout
      the United States, and enrolled 144 neonatal patients who had undergone staged,
      open-heart surgical procedures. In this trial, surgeons used a four point
      grading system to determine the extent and severity of adhesions in the
      patients. Over 70% of the REPEL-CV treated patients were completely free of
      clinically-significant adhesions, the most severe grade of adhesions measured,
      as compared to less than 30% in the control patients, with a *p* value
< 0.0001. In the primary clinical endpoint assessment, the mean extent of
      clinically-significant adhesions in the control patients was 2.5 times greater
      than in the REPEL-CV patients, with a *p* value =
      0.0005. We have incorporated the results of this trial into the Premarket
      Approval (PMA) submission documentation for the United States Food and Drug
      Administration (“FDA”) as a basis for obtaining approval to market REPEL- CV in
      the United States for use in all cardiothoracic surgical procedures. Pending
      FDA
      approval, we plan to launch REPEL-CV in the US through a direct sales effort
      in
      the later half of 2007.




In
      August, 2006 we received the CE Mark approval to market REPEL- CV for use in
      cardiac surgery within the European Union (EU) and in other international
      markets. In September 2006, we launched REPEL-CV for sale in the EU and certain
      Southeast Asian markets through a network of independent distributors, all
      of
      whom are experienced at selling devices and medical equipment to cardiac
      surgeons.




In
      June
      2006, we announced the successful completion of a multi-center clinical study
      for REPEL- CV involving several leading cardiac surgery centers in Europe.
      At
      the point of the second surgical procedure, 13 of the 15 patients in the study
      were free of clinically-significant adhesions representing a significant
      improvement over the typical experience among patients who have undergone
      secondary open heart procedures.




In
      April
      2006, we sold an aggregate of 15,000,000 shares of Common Stock in a private
      placement at a purchase price of $.40 per share, resulting in net cash proceeds
      of $5,765,000. In December 2006, we received $456,000 from the sale of certain
      New Jersey state tax losses.




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





**Certain
      Historical Activities**




In
      March
      2003, we
      completed the purchase of the polymer technology assets of a private medical
      technology company based in the United Kingdom, Phairson Medical Limited (and
      an
      affiliated entity; collectively, “Phairson”), in exchange for the issuance of
      6,895,561 shares of our restricted Common Stock. The assets comprise a series
      of
      United  -2-


States
      and foreign patent applications as well as scientific and clinical documentation
      that provides us a second platform technology for future product development.
      We
      also assumed Phairson’s rights and obligations under a development agreement
      with the Swiss Federal Institute of Technology and the University of Zurich,
      as
      well as with the principal investigator of the technology development project,
      Professor JA Hubbell. Under these agreements, we are required to pay royalties
      of no more than 1.1% of net sales of products incorporating the technology.
      If
      we fail to sublicense the technology or pursue development efforts involving
      the
      technology for a period of two years or more, we are obligated to negotiate
      a
      return of the technology to the university. Management believes that our
      development efforts to date have met the requirements of the agreement.
      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 our 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 our Company, and Richard Franklin, our Chairman, is a stockholder
      and has served as CEO of Phairson. In connection with the acquisition, we
      granted an option, exercisable for seven years, to purchase up to 100,000 shares
      of Common Stock at $.09 per share to Dr. Gere S. diZerega, who has served as
      a
      medical consultant to both companies and who assisted in identifying the
      acquisition opportunity. Dr. diZerega had previously served as a director of
      our
      Company.





We
      previously developed and marketed the Sure-Closure System TM ,
      a
      disposable wound closure device. In July 1994, we 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. We received a 10% royalty on all net sales
      of
      the Sure-Closure System products through June 30, 2004. In September 2004,
      we
      recorded royalty income of $174,000. This income 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 us in 1992.




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





**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


-3-




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, we believe that most surgeries will benefit from routine use
      of
      our adhesion prevention products. We believe that current products for the
      prevention or reduction of adhesions in gynecologic and general surgery are
      limited by various shortcomings including: (i) undesirable handling
      characteristics in the surgical environment, (ii) diminished efficacy in the
      presence of blood, (iii) inability to be used in laproscopic procedures, and
      (iv) failure to be absorbed. We believe that our products under development
      may
      not suffer from some if not all of these shortcomings and as a result may become
      the preferred method of treatment for the prevention or reduction of adhesions.
      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. We believe that our products will provide an additional
      clinical benefit in that they have been shown to uniformly dissolve without
      forming particles or breakdown products.





**Products
      and Proposed Products**





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




**Product**
              **Potential**
                **Therapeutic
                  Application**
              **Status**
              **Est.
                  Annual Market Potential*****REPEL-CV**
                Barrier
                  Film
              Preventing
                  or reducing post-operative surgical adhesions in open heart surgical
                  procedures.
              Positive
                  Pivotal Trial ResultsCE
                  Mark (EU) Approval
                Marketed
                  outside US
              $300
                  Million**REPEL-AFIB****Ô**
                Drug
                  Delivery
              Intraoperative
                  prevention of surgically-induced atrial fibrillation.
              Preclinical
                  development
              $1
                  Billion**REPEL****Ô**
                Barrier
                  Film
              Preventing
                  or reducing post-operative surgical adhesions in gynecological
                  and general
                  surgical procedures.
              IDE
                  approval for a pivotal clinical trial in gynecological procedures.
                  Project
                  on hold.
              $100
                  Million**RESOLVE****Ô**
                Viscous
                  Solution
              Preventing
                  or reducing post-operative surgical adhesions in gynecological
                  and general
                  abdominal surgery.
              Preclinical
                  development
              $400
                  Million**RELIEVE****Ô**
                Viscous
                  Gel
              Preventing
                  or reducing post-operative surgical adhesions in orthopedic and
                  spinal
                  surgery.
              Preclinical
                  development
              $300
                  Million





*
            Extrapolated
                from industry data.




*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 to reduce the formation
      of post-operative adhesions (scar tissue). In
      August, 2006 we received the CE Mark approval to market REPEL-CV for use in
      cardiac surgery within the European Union (EU) and in other international
      markets. In September 2006, we launched REPEL-CV for sale in the EU and certain
      Southeast Asian markets through a network of independent distributors, all
      of
      whom are experienced at selling devices and medical equipment to cardiac
      surgeons. Our ability to market REPEL-CV in the United States is subject to
      approval by the FDA of a PMA submission incorporating the results of the pivotal
      trial discussed below.





Pivotal
      Trial





In
      September 2006, we reported positive efficacy results from the multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. We feel confident that the
      pivotal trial achieved its primary clinical endpoint based on the level of
      reduction in the extent and


-4-




severity
      of adhesions. The pivotal trial was conducted at 15 pediatric cardiac surgery
      centers throughout the United States, and enrolled 144 neonatal patients who
      had
      undergone staged, open-heart surgical procedures. In this trial, surgeons used
      a
      four point grading system to determine the extent and severity of adhesions
      in
      the patients. Over 70% of the REPEL-CV treated patients were completely free
      of
      clinically-significant adhesions, the most severe grade of adhesions measured,
      as compared to less than 30% in the control patients, with a *p* value
< 0.0001. In the primary clinical endpoint assessment, the mean extent of
      clinically-significant adhesions in the control patients was 2.5 times greater
      than in the REPEL-CV patients, with a *p* value =
      0.0005.





European
      Clinical Study





In
      June
      2006, we announced the successful completion of a multi-center clinical study
      for REPEL- CV involving several leading cardiac surgery centers in Europe.
      At
      the point of the second surgical procedure, 13 of the 15 patients in the study
      were free of clinically-significant adhesions representing a significant
      improvement over the typical experience among patients who have undergone
      secondary open heart procedures.





Previous
      Studies





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





*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. We have evaluated prototype films
      in
      preclinical screening studies and intend to conduct further product
      development.




*REPE* *L*




REPEL
      adhesion barrier film was the first in the series of bioresorbable adhesion
      prevention products from our 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  -5-
  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%, whereas the control patients’
median extent was greater than 75%. Based on these results, FDA has granted
      approval to initiate the pivotal clinical trial. Initiation of this trial has
      been deferred due to our limited financial resources and emphasis on other
      development programs and commercialization of REPEL-CV.





*RESOLVE*





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




We
      have
      been evaluating bioresorbable materials that coat tissue surfaces as a means
      of
      providing broad-based versus site specific protection against adhesion
      formation. This approach has particular application in gynecological and general
      abdominal surgery due to the “bowl shaped” anatomical configuration of the
      peritoneal cavity. The viscous solutions would be used as an instillate that
      is
      poured (open procedures) or injected (laparoscopic procedures) into the
      peritoneal cavity at the conclusion of the procedure to coat and lubricate
      the
      tissue surfaces thereby protecting the organs from adhesion formation. The
      viscous solutions would continue to recoat the traumatized tissue surfaces
      as
      the patient is ambulated during the immediate post-operative recovery
      phase.




In
      previous preclinical studies, a number of formulations of these instillate
      materials had been evaluated 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. This development program was recently reactivated and additional
      preclinical studies are underway.





*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. We are attempting to exploit our
      proprietary bioresorbable reverse thermal gel polymer technology in the
      development of viscous gels for these indications. The novelty of this
      technology is, in part, associated with its ability to rapidly transition from
      a
      liquid at room temperature to a viscous gel when exposed to the temperature
      of
      internal tissue surfaces. We are continuing to evaluate prototype materials
      based on our technology in preclinical surgical models.





**Our
      Polymer Technology**




Our
      bioresorbable polymer technology is based on a proprietary group of polymers.
      We
      believe that these polymers display desirable properties which enable them
      to be
      tailored to a wide variety of applications. These properties include
      bioresorbability, flexibility and strength. Unlike many other polymer systems
      that may cause untoward tissue responses, polymers derived from our proprietary
      polymer technology are highly biocompatible. The acquisition of the polymer
      technology assets from Phairson in March 2003 provided us with a second distinct
      family of polymer materials which have demonstrated positive results in
      preliminary pre-clinical adhesion prevention studies. In addition to products
      for the prevention or reduction of post-operative adhesions, we believe that
      potential medical applications for our polymer technology include resorbable
      sutures, stents, coatings for implantable devices and drug delivery
      systems.




We
      incurred expenses of $2,163,000 in 2006, $1,524,000 in 2005 and $1,382,000
      in
      2004 on company-sponsored research and development activities. Our research
      and
      development activities are currently conducted through arrangement with various
      consultants, companies and institutions in the United States, Europe and Israel.




*Yissum
      Agreement*




Our
      principal polymer technology was developed at the Hebrew University of
      Jerusalem. We entered into an agreement with Yissum Research Development Company
      of the Hebrew University of Jerusalem (“Yissum”) dated


-6-




June
      14,
      1991, as amended (the “Yissum Agreement”), pursuant to which we agreed to
      finance research and development conducted at the Hebrew University of Jerusalem
      in the field of biomedical polymers. Pursuant to the Yissum Agreement, Yissum
      assigned to us their worldwide rights to patents, patent applications and
      know-how to develop, manufacture and market products relating to this
      technology. Under the terms of the Yissum Agreement, all rights in the research
      or products developed are owned solely by us, except as set forth below. We
      are
      permitted to grant licenses of our polymer technology upon certain terms and
      conditions. We have agreed to favorably consider manufacturing in Israel
      products resulting from our polymer technology and to explore opportunities
      to
      do so.





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




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





**Government
      Regulation**




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





*US
      Food and Drug Administration*





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




In
      order
      to obtain FDA approval of a new drug, a biologic or device, companies must
      submit proof of safety and efficacy. In most cases such proof entails extensive
      clinical and preclinical laboratory tests. The testing and
      preparation


-7-




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 we may encounter significant difficulties or costs in our
      efforts to obtain FDA approvals which could delay or preclude us from marketing
      any product we may develop. The FDA may also require postmarketing testing
      and
      surveillance of approved products, or place other conditions on the
      approvals.




*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.
      REPEL-CV and other products currently under development utilizing our polymer
      technology are classified as Class III devices, requiring a PreMarket Approval
      (“PMA”) application review process prior to commercial distribution in the
      United States.




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




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




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


-8-





**Patents
      and Proprietary Rights**





In
      connection with the polymer technology under license from Yissum, we currently
      hold ten United States patents, two European 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. Among the claims referenced
      in
      our patents are claims pertaining to:




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


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


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


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


·
            and
                novel polymeric compositions with reverse thermal gel properties.





These
      patents are scheduled to expire on various dates from 2008 through 2023. In
      connection with the polymer technology acquired from Phairson, we currently
      hold
      two United States patents with claims for the treatment of trauma with a
      composition comprising a polyanionic polymer and for a composition comprising
      hydrolytically susceptible polyanionic polymer. We also have 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**





** Our
      adhesion prevention products are expected to compete with various currently
      marketed products such as Interceed TM ,
      a
      product of Johnson & Johnson, Seprafilm TM ,
      a
      product of Genzyme, Adhibit Ô ,
      a
      product of Angiotech Pharmaceuticals, Inc., CardioWrap Ô ,
      a
      product of Mast Surgical, AdeptTM, a product of ML Labs Ltd. and
      Goretex TM ,
      a
      product of WL Gore. Several other companies including, Anika Therapeutics,
      Inc.,
      Alliance Pharmaceuticals, Corp., Confluent Surgical Inc., LifeCore Biomedical,
      Inc and Fziomed, Inc. either are or may be pursuing the development of products
      for the prevention of adhesions. The anti-adhesion market is characterized
      by a
      limited number of products currently on the market with limited (as a percent
      of
      total surgical procedures using such products) penetration. Our products are
      being positioned to compete in a market where clinical efficacy,
      biocompatibility, ease of use and price are the principal bases of competition.
      Our lead product, REPEL-CV, is currently being sold in the European Union and
      certain southeast Asian markets where several of the above, mentioned products
      are approved for the same indication.





**Manufacturing**




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





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





**Marketing
      and Sales**





We
      are
      pursuing a varied sales and marketing strategy that is intended to be responsive
      to the competitive and practical implications inherent in each market
      environment. In the European Union and other international markets, REPEL-CV
      is
      being marketed by a network of independent distributors experienced at marketing
      cardiac devices to the cardiothoracic surgeon. Specific performance criteria
      are
      incorporated in our agreements with distributors to measure the level of
      emphasis and effectiveness of the sales efforts. At this time, we do not feel
      that we have created a dependence on any single customer, the loss of which
      would result in a material adverse effect on our business.




In
      the
      United States, subject to obtaining FDA marketing approval for REPEL-CV, we
      plan
      to establish our own direct sales organization in response to the concentration
      of cardiac surgical procedures among a limited number of large metropolitan
      hospitals.


-9-




**Human
      Resources**





As
      of
      February 2007, we employed four full-time employees. Subject to availability
      of
      sufficient financing and a positive FDA regulatory review of the REPEL-CV PMA,
      we intend to increase the number of full-time employees during 2007 as we
      prepare to launch REPEL-CV in the United States.





**Our
      Executive Officers**





The
      Company's executive officers are as follows:




**Name**
            
            **Age**
            
            **Positions
                with the Company**Robert
                P. Hickey
            
            61
            
            President,
                CEO & CFOEli
              Pines, Ph.D
            
            61
            
            Vice
              President and Chief Scientific Officer


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




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





**Consultants
      and Advisors**





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





**Daniel
                Cohn, Ph.D**.
            Dr.
                Daniel Cohn is Professor of Biomaterials Science and Head of the
                Biomedical Polymers Research Group, Casali Institute of Applied Chemistry,
                Hebrew University, Jerusalem, Israel. Dr. Cohn's main areas of research
                are biomedical resorbable polymers, surface tailoring of polymeric
                biomaterials, biomedical composites and the development of polymeric
                scaffolds for tissue engineering. Dr. Cohn developed our 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
                ReproductiveEndocrinology
                and Infertility. He has long-standing involvement in animal and clinical
                trials assessing postoperative adhesion development.




-10-




**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 Director, Pediatric Cardiothoracic Surgery at
                The
                Children’s Hospital of Montifiore Medical Center, New York. His research
                interests include hypoplastic left heart syndrome, Marfan’s disease and
                cryoablation in Fontan revision
                procedures.


**Risks
      Related to Our Business**




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




Our
      operations in recent years have consisted primarily of research, development
      and
      testing of our technologies and product candidates. We have incurred significant
      net losses since inception. We had net losses of $2,148,000 in 2005 and
      $3,895,000 in 2006. At December 31, 2006, we had an accumulated deficit of
      $48,145,000. We currently have no products approved for marketing in the United
      States and only recently began marketing REPEL-CV overseas. We expect to incur
      additional losses in connection with our research and development activities,
      as
      well as our efforts to commercialize REPEL-CV. Our ability to achieve
      profitability is dependent on obtaining regulatory approval to market REPEL-CV,
      and successfully commercializing REPEL-CV, in the United States and on
      successfully developing, manufacturing and marketing other product candidates.
      Accordingly, the extent of future losses and our ability to achieve
      profitability is uncertain. We may never achieve or sustain a profitable level
      of operations.




*We
      Are Substantially Dependent on* *REPEL-CV
      to Generate Revenue*




Other
      than REPEL-CV, we have no product or product candidates in a commercialization
      or pre-commercialization stage of development. Our product candidates will
      require significant further research, development and testing, including
      extensive clinical testing and regulatory approval, prior to commercial use.
      We
      have only recently begun marketing REPEL-CV in Europe. Sale of REPEL-CV in
      the
      United States is contingent upon attaining FDA approval, the timing and
      certainty of which cannot be predicted. Our ability to generate meaningful
      revenue from REPEL-CV will be dependent on a variety of factors, many of which
      are beyond our control. These include:




·
            Obtaining
                necessary FDA and foreign regulatory
                approvals;




·
            Establishing
                and maintaining satisfactory manufacturing, marketing and distribution
                arrangements;  -11-




·
            Degree
                of market acceptance;




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




·
            Competition.




If
      we are
      not able to adequately address these risks, we may not be able to achieve
      revenue in the time frame anticipated, if at all.




*R* *isk
      that Technologies or Proposed Products Will Never Be Successfully
      Developed*




Certain
      of our 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. Our 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.




*If
      we
      fail to obtain and maintain the regulatory approvals or
      clearances* *necessary to make or sell our products, sales could be delayed or never
      realized*




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




United
      States




*Regulation
      by FDA* .
      The FDA
      regulates the clinical testing, manufacturing, labeling, distribution and
      promotion of medical devices. In October 2003, we initiated a US-based
      multi-center pivotal clinical trial on REPEL-CV for use in cardiac surgeries.
      The pivotal clinical trial was completed in September 2006. A number of
      companies in our industry have suffered significant setbacks in clinical trials,
      even after showing promising results in earlier studies or trials. We cannot
      assure investors that the data from the trial will support FDA clearance or
      approval to market this product for the designated use. Failure to obtain FDA
      marketing clearance or approval will result in our inability to sell REPEL-CV
      in
      the United States, which may cause us to need capital sooner than
      anticipated.




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




European
      Union and Other International Markets




*General* .
      International sales of medical devices are subject to the regulatory
      requirements of each country in which the products are sold. Accordingly, the
      introduction of our product candidates in markets outside the United States
      is
      subject to regulatory approvals or clearances in those jurisdictions. The
      regulatory review process varies from country to country. Many countries also
      impose product standards, packaging and labeling requirements and import
      restrictions on medical devices. In addition, each country has its own tariff
      regulations, duties and tax


-12-




requirements.
      The approval or clearance by foreign government authorities is uncertain and
      can
      be expensive. Our ability to market our product candidates could be
      substantially limited due to delays in receipt of, or failure to receive, the
      necessary approvals or clearances.




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




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




Our
      existing cash, cash equivalents and short-term investments, together with
      anticipated revenue from operations, is not sufficient to fund our planned
      operations for the next 12 months. As a result, the report of our independent
      auditors relating to our 2006 financial statements indicates that there is
      substantial doubt about our ability to continue as a going concern. We
      anticipate seeking to raise additional capital, most likely through equity
      financing, in the near term to fund our planned operations. We may not be able
      to obtain financing on acceptable terms or at all. In addition, the terms of
      any
      financing may dilute the holdings or adversely effect the rights of our existing
      stockholders. Insufficient funds may require us to delay, limit or eliminate
      some or all of our planned activities, or require us to license to third parties
      certain products or technologies that we would otherwise seek to commercialize
      on our own.




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




Our
      success will depend heavily on our ability to obtain and retain patent
      protection for our polymer technology and product candidates, to preserve our
      trade secrets and to operate without infringing the proprietary rights of
      third parties. We own ten United States patents, one Australian patent and
      one
      Canadian patent relating to our polymer technology. In addition, we have filed
      applications for patents in a number of countries and intend to file additional
      patent applications in other countries. Claims in the pending patent
      applications may not issue as patents, and issued patents may not provide us
      with meaningful competitive advantages. In addition, challenges may be
      instituted against the validity or enforceability of any patent owned or
      licensed by us. Furthermore, others may independently develop similar or
      superior technologies, duplicate our technologies or design around the patented
      aspects of our technologies. We may also infringe upon prior or future patents
      owned by others, and may be forced to acquire licenses under patents belonging
      to others for technology potentially useful or necessary to our business. These
      licenses may not be available on terms acceptable to us, if at all. Moreover,
      patents issued to or licensed by us may be infringed by others. The cost of
      litigation involving patents, whether brought by or against us, can be
      substantial, and can result in adverse determinations to us, including
      declaration of our patents as invalid.




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




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




Successful
      commercialization of REPEL-CV and our proposed products may depend in part
      on
      the availability of adequate reimbursement from third-party health care
      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. Adequate third-party reimbursement may not be available for
      us to establish and maintain satisfactory price levels. 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. If adequate coverage and payment levels are not provided
      by government and third-party payors for REPEL-CV and our proposed
      products, the market acceptance of these products would be adversely
      affected. Internationally, reimbursement issues vary by country which can
      influence the pace at which hospitals are willing to respond to the surgeons'
      request for new products,


-13-




particularly
      those that add to the total cost of the surgical procedure rather than
      substituting for an existing product. In some international markets, the
      use of new products may be delayed until the product is included in a
      government tender under which the hospital can apply for reimbursement. The
      submission and approval of tender applications may only occur on a
      semi-annual or annual basis depending on the country.




*Our
      Products May Never Achieve a Satisfactory Level of Market Acceptance*




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




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




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




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




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




In
      the
      United States, subject to obtaining FDA marketing approval, we intend to rely
      primarily on our own sales personnel and representatives to market and sell
      REPEL-CV. The addition of direct sales representatives will increase our
      operating expenses. Furthermore, we cannot assure that adding direct sales
      representatives will improve sales or that our direct sales representatives
      will
      be successful in generating sufficient sales to cover the cost of supporting
      their sales activities. We may experience difficulty attracting and retaining
      qualified personnel to market or sell our products and we may not be able to
      successfully implement this type of sales and distribution
      method.


-14-




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




We
      have
      acquired the rights to technologies pursuant to agreements with research
      institutions. Such agreements, including the Yissum Agreement, contain
      provisions requiring us, among other things, to develop, commercialize
      and/or market products, to achieve minimum sales and/or income levels
      within certain periods of time, to meet minimum funding requirements and to
      make royalty payments in order to maintain the patents and other rights
      granted thereunder. In addition, the patents and proprietary rights revert
      to the grantor on certain dates and/or upon the occurrence of certain
      conditions. We may not be able to satisfy our obligations under these
      agreements. In the event that certain patents and proprietary rights were
      to revert to the grantor, we could be forced to cease sales of any and all
      products, such as REPEL-CV, incorporating technology covered by such
      rights.




** *We
      May Not Be Able To Compete Successfully Against Our Competitors*




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




•
            
            research
                and development expertise;•
            
            experience
                in conducting clinical trials;•
            
            experience
                in regulatory matters;•
            
            manufacturing
                efficiency;•
            
            name
                recognition;•
            
            sales
                and marketing expertise;•
            
            established
                distribution channels; and•
            
            established
                relationships with health care providers and payors.




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




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




We
      have
      begun to market REPEL-CV in Europe. We anticipate that the international nature
      of our business will subject us and our foreign distributors to the laws and
      regulations of the jurisdictions in which they operate, and in which our
      products would be sold. The types of risks that we face in international
      operations include:




•
            
            the
                imposition of governmental controls;•
            
            logistical
                difficulties in managing international operations; and•
            
            fluctuations
                in foreign currency exchange rates.




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




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




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


-15-




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




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




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




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




*We
      May Be Exposed to Large Product Liability Claims*




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




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




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




**Risks
      Related to Our Stock**




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




The
      sale
      or availability for sale of substantial amounts of our Common Stock,
      including shares issuable upon exercise of outstanding stock options and
      warrants, in the public market could adversely affect the market price of our
      Common Stock. As of February 23, 2007, we had 83,021,479 shares of Common
      Stock issued and outstanding and the following shares of Common Stock were
      reserved for issuance:




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





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





·
            14,350,000
                shares upon exercise of outstanding options, exercisable at prices
                ranging
                from $0.023 to $4.75 per share and expiring from March 5, 2007 to
                February
                16, 2017.




Substantially
      all of our outstanding shares of Common Stock are presently saleable in the
      public market without restriction, except that sale of the shares remaining
      unsold under our resale registration statement declared effective by the
      Securities and Exchange Commission in August 2006 and related to our April
      2006
      private placement of 15,000,000 shares as well as the shares underlying the
      warrants listed above, is subject to continued effectiveness of an existing
      resale registration statement. Exercise of all of our outstanding options is
      presently covered by effective registration statements, which include a resale
      prospectus for our “affiliates” (as that term is defined in the rules under the
      Securities Act of 1933). As such, holders of these options are presently free
      to
      sell the underlying shares in the public market without restriction. In addition
      to the foregoing, if and to the extent we are successful in raising additional
      equity-based financing, we will likely be required to register for immediate
      resale the


-16-




Common
      Stock issued or issuable in connection with such financing .




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




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




·
            fluctuations
                in our operating results;




·
            our
                need and ability to obtain capital;




·
            shortfalls
                in revenue or earnings from levels expected by securities
                analysts;




·
            outcomes
                of clinical trials and regulatory
                submissions;




·
            announcements
                of technological innovations or new products by the Company or its
                competitors;




·
            changes
                in governmental regulations; and




·
            developments
                with respect to patents or proprietary rights
                litigation.




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




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




**Item
      2.** **Properties**




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





**Item
      3.  Legal Proceedings**





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.


-17-




**PART
      II**





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




**(a)** **Market
      Information**




Our
      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, our Common Stock was
      delisted from Nasdaq because we failed to satisfy applicable maintenance
      criteria. Since delisting from Nasdaq, our Common Stock has been quoted on
      the
      OTC Bulletin Board. Since May 2005, the trading symbol for our Common Stock
      has
      been SYMD. The following sets forth the quarterly high and low bid price for
      our
      Common Stock for the periods presented. Such quotations reflect inter-dealer
      prices, without retail mark-up, mark-down or commission and may not necessarily
      represent actual transactions.




**Common
                  Stock****Bid
                  Price ($)****High**
              
              **Low**Fiscal
                  Year Ended December 31, 2005First
                  Quarter
              
              
              .45
              
              
              .31Second
                  Quarter
              
              
              .45
              
              
              .34Third
                  Quarter
              
              
              .41
              
              
              .31Fourth
                  Quarter
              
              
              .44
              
              
              .35Fiscal
                  Year Ended December 31, 2006First
                  Quarter
              
              
              .90
              
              
              .40Second
                  Quarter
              
              
              .85
              
              
              .56Third
                  Quarter
              
              
              1.23
              
              
              .65Fourth
                  Quarter
              
              
              1.20
              
              
              .84


**(b)** **Approximate
      Number of Equity Securities Holders**





As
      of
      February 27, 2007, the number of holders of record of our Common Stock was
      339.
      We believe that there are in excess of 1,500 beneficial holders of our Common
      Stock.





**(c)** **Dividends**





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


-18-




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





**Overview**




We
      are a
      biomaterials company engaged in the development and commercialization of
      innovative and cost-effective medical devices for therapeutic applications.
      Products under development, all of which are based on our licensed proprietary,
      bioresorbable polymer technology, are surgical implants designed to prevent
      or
      reduce the formation of adhesions (scar tissue) following a broad range of
      surgical procedures. Our product development efforts are currently focused
      on
      our lead product, REPEL-CV Adhesion Barrier, for use in cardiac
      surgery.




In
      September 2006, we reported positive efficacy results from the multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. REPEL-CV is a bioresorbable
      film designed to be placed over the surface of the heart at the conclusion
      of
      surgery to reduce the formation of post-operative adhesions (scar tissue).
      We
      feel confident that the pivotal trial achieved its primary clinical endpoint
      based on the level of reduction in the extent and severity of adhesions. The
      pivotal trial was conducted at 15 pediatric cardiac surgery centers throughout
      the United States, and enrolled 144 neonatal patients who had undergone staged,
      open-heart surgical procedures. In this trial, surgeons used a four point
      grading system to determine the extent and severity of adhesions in the
      patients. Over 70% of the REPEL-CV treated patients were completely free of
      clinically-significant adhesions, the most severe grade of adhesions measured,
      as compared to less than 30% in the control patients, with a *p* value
< 0.0001. In the primary clinical endpoint assessment, the mean extent of
      clinically-significant adhesions in the control patients was 2.5 times greater
      than in the REPEL-CV patients, with a *p* value =
      0.0005. We have incorporated the results of this trial into the Premarket
      Approval (PMA) submission documentation for the United States Food and Drug
      Administration (“FDA”) as a basis for obtaining approval to market REPEL-CV in
      the United States for use in all cardiothoracic surgical
      procedures.




In
      June
      2006, we announced the successful completion of a multi-center clinical study
      for REPEL-CV involving several leading cardiac surgery centers in Europe. At
      the
      point of the second surgical procedure, 13 of the 15 patients in the study
      were
      free of clinically-significant adhesions representing a significant improvement
      over the typical experience among patients who have undergone secondary open
      heart procedures. In August, 2006 we received the CE Mark approval to market
      REPEL-CV for use in cardiac surgery within the European Union (EU) and in other
      international markets. In September 2006, we launched REPEL-CV for sale in
      the
      EU and certain southeast Asian markets through a network of independent
      distributors, all of whom are experienced at selling devices and medical
      equipment to cardiac surgeons.




Our
      bioresorbable polymer technology is based on a proprietary group of polymers.
      We
      believe that these polymers display desirable properties, which enable them
      to
      be tailored to a wide variety of applications. These properties include
      bioresorbability, flexibility, strength and biocompatibility. Potential
      applications for products derived from these polymers are in medical areas
      such
      as the prevention of post-operative adhesions, sutures, stents, implantable
      device coatings and drug delivery.




The
      following discussion and analysis of our financial condition and results of
      operations should be read in conjunction with our financial statements and
      notes
      thereto appearing elsewhere herein.


**Change
          in Accounting Principal**
 
 Effective
          January 1, 2006, we adopted Statement of Financial Accounting Standards
          (“SFAS”)
          No. 123R, “Share Based Payment.” We elected to use the modified prospective
          transition method, therefore, prior period results were not restated. Prior
          to
          the adoption of SFAS 123R, stock-based compensation expense related to
          employee
          and director stock options was not recognized in the results of operations
          if
          the exercise price was at least equal to the market value of the common
          stock on
          the grant date, in accordance with Accounting Principles Board Opinion
          No. 25,
“Accounting for Stock Issued to Employees”. As a result, the recognition of
          employee stock-based compensation expense was generally limited to the
          expense
          attributed to stock option modifications, as well as the amortization of
          certain
          acquisition-related deferred compensation.


**New
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) has issued
      interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An
      Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for,
      and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting
      for
      uncertainty in income taxes recognized in an enterprise’s financial statements
      in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. FIN 48 also provides guidance on derecognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure, and transition. FIN 48 is effective for fiscal years beginning
      after
      December 15, 2006. We are currently evaluating the impact FIN 48 will have
      on
      our results of operations and financial position.




In
      September 2006, the Securities and Exchange Commission (SEC) issued
      Staff Accounting Bulletin 108, “Considering the Effects on Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements,” (“SAB 108”). SAB 108 requires registrants to quantify errors using
      both the income statement method (i.e. iron curtain method) and the rollover
      method and requires adjustment if either method indicates a material error.
      If a
      correction in the current year relating to prior year errors is material to
      the
      current year, then the prior year financial information needs to be corrected.
      A
      correction to the prior year results that are not material to those years,
      would
      not require a “restatement process” where prior financials would be amended. SAB
      108 is effective for our


-19-




year
      ended after December 31, 2006. The adoption of the SAB 108 did not have a
      material effect on our financial position, results of operations or cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
      define fair value, establish a framework for measuring fair value in accordance
      with generally accepted accounting principles, and expand disclosures about
      fair
      value measurements. SFAS No. 157 will be effective for fiscal years beginning
      after November 15, 2007, the beginning of our 2008 fiscal year. We are assessing
      the impact of the adoption of SFAS No. 157 will have on our financial position
      and results of operations.




In
      February, 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
      Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to
      choose to measure many financial assets and financial liabilities at fair value.
      Unrealized gains and losses on items for which the fair value option has been
      elected are reported in earnings. SFAS No. 159 is effective for fiscal years
      beginning after November 15, 2007. We are currently assessing the impact of
      SFAS
      No. 159 on our financial position and results of operations.





**Results
      of Operations** ****




Revenue
      for the fiscal year ended December 31, 2006 of $142,000, is attributable to
      the
      sales of our lead product, REPEL-CV. This represents revenue earned since the
      product’s overseas launch in September 2006 following receipt of CE Mark
      approval, and is attributable to sales in the European Union and in other
      international markets. There was no revenue reported for the fiscal year ended
      December 31, 2005 and we had no products approved for sale at that time. We
      anticipate increasing revenue from REPEL-CV product sales during 2007. The
      rate
      of increase will depend on numerous factors, many of which are beyond our
      control, including rate of market acceptance among cardiac surgeons and the
      timing and scope of the PMA approval to market REPEL-CV in the United
      States.




Cost
      of
      goods sold of $21,000 for the fiscal year ended December 31, 2006, reflects
      costs to process and package the REPEL-CV into saleable form. The cost of the
      raw material is not included as part of the cost of goods sold or inventory
      cost
      as this was previously expensed as research and development expense in prior
      periods. Had raw material costs been included in cost of goods sold, costs
      of
      goods sold for the year would have been $39,000. Costs of goods sold will
      include raw material costs in future periods once the amount previously expensed
      as research and development expense has been fully depleted. There was no cost
      of goods sold reported for the fiscal year ended December 31, 2005 as we sold
      no
      products during the year. (See Note L of Notes to Financial
      Statements)




We
      incurred research and development expenses of $2,163,000 and $1,524,000 for
      the
      fiscal years ended December 31, 2006 and 2005, respectively. The increase in
      expenditures for the fiscal year ended December 31, 2006 compared to the prior
      year is primarily attributable to a non-cash charge of $240,000 associated
      with
      adoption of SFAS 123R, stock-based compensation expense and the modification
      of
      the term of certain stock options and cash charges associated with higher
      compensation, manufacturing development and consulting expenditures incurred
      during 2006. We anticipate that research and development expenses will continue
      to increase as we expand our product development activities.




General
      and administrative expenses totaled $2,173,000 for the fiscal year ended
      December 31, 2006 as compared to $937,000 for the prior year. The increase
      in
      expenditures compared to the prior year is primarily attributable to non-cash
      charges of $1,058,000 associated with the adoption of SFAS 123R, stock-based
      compensation expense and the modification of the term of certain stock options
      and cash charges associated with higher compensation and higher consulting
      and
      legal expenses which were primarily associated with the launch of REPEL-CV
      in
      the European Union and
      other international markets. The increases were offset by the reclassification
      of royalty expense into sales and marketing expense for 2006 .




We
      incurred sales and marketing expenses of $320,000 for
      the
      fiscal year ended December 31, 2006 ;
      there
      were no comparable expenses during the prior year. These expenses are primarily
      associated with sales and marketing of REPEL- CV,
      which was launched in the
      European Union and other international markets in September 2006. Also included
      in sales and marketing expenses is royalty expense of $101,000 in respect of
      royalties relating to REPEL-CV, which had been recorded as general and
      administrative expense in 2005, and has been classified in 2006 as a sales
      and
      marketing expense as a result of having achieved our first commercial sale
      during the year. During 2007, we anticipate


-20-




an
      increased level of sales and marketing expense as we prepare for a US launch
      of
      REPEL-CV. The level and rate of increase will depend on a number of factors
      including the anticipated timing of and other developments related to the FDA’s
      PMA approval process.





**** Interest
      income increased to $119,000 for
      the
      fiscal year ended December 31, 2006 ,
      compared to $28,000 for the prior fiscal year. This increase compared to the
      prior year is primarily attributable to higher average cash balances and higher
      interest rates.




A
      gain on
      settlement of debt of $22,000 was recorded for
      the
      fiscal year ended December 31, 2006 associated
      with the settlement of outstanding trade payables; there were no comparable
      amounts recorded during the prior year.




Interest
      expense remained relatively unchanged at $5,000 for
      the
      fiscal year ended December 31, 2006, compared
      to $6,000 for the prior year.




We
      realized other income from the reversal of liabilities of $47,000 and $37,000
      for the fiscal years ended December
      31, 2006 and December 31, 2005 ,
      respectively. The reversal of liabilities during 2006 and 2005 related to trade
      and other business transactions which were due and payable on or before December
      31, 2000 and December 31, 1999, respectively. The reversals were made due to
      the
      passage of time and our belief that the underlying claims would be barred by
      applicable statutes of limitations if recovery actions were asserted at the
      time
      of the respective reversals.




We
      recorded an income tax benefit of $456,000 during the fiscal year ended December
      31, 2006 as compared to $254,000 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 compared to
      the
      prior year is primarily attributed to a decrease in the number of companies
      participating in the program.




We
      reported a net loss of $3,895,000 for the fiscal year ended December 31, 2006
      as
      compared to a net loss of $2,148,000 for the prior year. The increase in the
      current period net loss is attributable to the factors described above. We
      expect
      to incur losses in the foreseeable future.





**Liquidity
      and Capital Resources**




At
      December 31, 2006 we had cash and cash equivalents of $3,722,000 compared to
      $735,000 at December 31, 2005. The primary use of these funds is to fund our
      research and development related to anti-adhesion products and general and
      administrative expenses associated with these activities and sales and marketing
      expenses for the commercialization of REPEL-CV .




At
      December 31, 2006 we had working capital of $3,072,000 as compared to a working
      capital deficit of $57,000 at December 31, 2005.




Net
      cash
      used in operating activities was $2,669,000 for the fiscal year ended December
      31, 2006 as compared to $1,922,000 for the prior fiscal year. Net cash used
      in
      operating activities for the fiscal year ended December 31, 2006, was primarily
      due to a net loss of $3,895,000 partially offset by the impact of $1,298,000
      in
      non-cash expenses comprised of stock-based compensation expenses, primarily
      due
      to the adoption of SFAS 123R and the modification of options which extended
      the
      exercise period by one year, which were partially offset by a net reduction
      of
      $16,000 in accounts payable and accrued expenses and increases of $107,000
      in
      accounts receivable, inventory and prepaid expenses. Net cash used in operating
      activities for the prior year period was primarily due to a net loss of
      $2,148,000 reduced by increases of $209,000 in accounts payable and accrued
      expenses.




Net
      cash
      used in investing activities was $94,000 for the fiscal year ended December
      31,
      2006 for the purchase of a new accounting software package, office furniture
      and
      office equipment; there were no similar transactions during 2005.




Net
      cash
      provided from financing activities for the fiscal year ended December 31, 2006
      was $5,750,000, as compared to $796,000 for the prior year period. The current
      year amount was comprised of $5,765,000 of net proceeds from the sale of Common
      Stock and $25,000 from the exercise of outstanding options offset by the
      repayment of a $40,000 convertible promissory note that matured in August 2006.
      The prior year amount resulted from the exercise of warrants.




The
      balance of cash and cash equivalents as of December 31, 2006 is not sufficient
      to meet our anticipated cash requirements through 2007, based on our present
      plan of operation. As a result, we are seeking to raise
      additional


-21-




capital.
      Additional capital may not be available as and when needed or on terms favorable
      or acceptable to us. E quity
      financings may be dilutive to existing stockholders.  Insufficient
      funds may require us to delay, scale back or eliminate some or all of our
      research and development programs and commercialization plans, or require us
      to
      license to third parties certain products or technologies that we would
      otherwise seek to commercialize independently. As
      a
      result of our limited capital resources and recurring net losses, our auditors
      have disclosed in their report on our financial statements that there is
      substantial doubt about our ability to continue as a going concern.





At
      December 31, 2006, we had employment agreements with four executives that expire
      as follows: two in September 2007, one in March 2009 and one in May 2009.
      Pursuant to these agreements, our commitment regarding cash severance benefits
      aggregates $495,000 at December 31, 2006. We have also entered into change
      of
      control agreements with our two executive officers pursuant to which, upon
      the
      occurrence of events described therein, we could become obligated, in addition
      to certain other benefits, to pay amounts equal to 200% and 150% of such
      officers’ annual base salaries, respectively, plus the greater of the prior
      year’s cash bonus or current year’s target bonus. Any severance payments under
      the employment agreements would offset amounts required to be paid under the
      change of control agreements .





**Item
      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-19.





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





None.





**Item
      8A.** **Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**




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




In
      connection with the evaluation referred to in the foregoing paragraph, we have
      identified no change in our


Internal
      control over financial reporting that occurred during the quarter ended December
      31, 2006 that has materially affected, or is reasonably likely to materially
      affect, our internal control over financial reporting.





**Inherent
      Limitations on Effectiveness of Controls**




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


-22-




**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 us pursuant to Regulation 14A for
      the
      2007 annual meeting of stockholders. Certain information with regard to our
      executive officers is contained in Item 1 hereof and is incorporated by
      reference in this Part III.





**Item
      10.  Executive Compensation** .





The
      information called for by this item is incorporated herein by reference to
      the
      definitive Proxy Statement to be filed by us pursuant to Regulation 14A for
      the
      2007 annual meeting of stockholders.





**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 us pursuant to Regulation 14A for
      the
      2007 annual meeting of stockholders.





**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 us pursuant to Regulation 14A for
      the
      2007 annual meeting of stockholders.




**Item
      13.  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)
            Amendment
                to Restated Certificate of Incorporation, dated April 22,
                2005*




3.1(c)
            Amendment
                to Restated Certificate of Incorporation, dated April 27, 2006. (15)




3.2
            By-Laws
                of Registrant. (1)




10.1
            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 ofRegistrant.
                (2)





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




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





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)





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





10.32
            Indemnity
                letter between Registrant and Eli Pines Ph.D. dated March 1, 2003.
                (8)
                (12)


-23-


10.33
            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)





10.34
            Employment
                Agreement dated June 19, 2006 between the Registrant and Robert P.
                Hickey.
                (8) (18)





10.39
            Employment
                Agreement dated June 19, 2006 between the Registrant and Eli Pines,
                PhD.
                (8) (18)





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
                agreement dated April 22, 2005 in favor of Robert P. Hickey.
                (14)





10.46
            Option
                agreement dated April 22, 2005 in favor of Eli Pines PhD.
                (14)





10.47
            Form
                of Subscription Agreement for April 2006 equity financing (including
                Supplement). (16)





10.48
            Form
                of Investor Rights Agreement for April 2006 equity financing.
                (16)





10.49
            Agency
                Agreement dated as of April 3, 2006 between SyntheMed, Inc. and Clubb
                Capital Limited. (16)





10.50
            Form
                of Broker Warrant issued to Agent’s designees covering an aggregate of
                1,475,000 shares. (16)





10.51
            The
                Registrant’s 2006 Stock Option Plan.
                (17)





10.52
            Change
                of Control Agreement dated June 19, 2006 between the Registrant and
                Eli
                Pines, PhD. (8) (18)





10.53
            Change
                of Control Agreement dated June 19, 2006 between the Registrant and
                Robert
                P. Hickey. (8) (18)





10.54
            Form
                of ISO and Non-Qualified Stock Option Agreements under the Registrant’s
                2006 Stock Option Plan.*




23.1
            Consent
                of Eisner LLP. *





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





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





*
            Filed
                herewith.




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


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


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


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


(5)
            Intentionally
                omitted.




-24-




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


(7)
            Intentionally
                omitted


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


(9)
            Incorporated
                by reference to the Registrant’s Registration Statement on Form S-8 filed
                in January 2000.


(10)
            Intentionally
                omitted.


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


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


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


(14)
            Incorporated
                by reference to the Registrant’s report on Form 10-KSB for the year ended
                December 31, 2005.


(15)
            Incorporated
                by reference to the Registrant’s report on Form 10-QSB for the quarter
                ended March 31, 2006.


(16)
            Incorporated
                by reference to the Registrant’s report on Form 8-K filed in April
                2006.


(17)
            Incorporated
                by reference to the Registrant’s Schedule 14A definitive proxy statement
                for it’s 2006 annual meeting of
                stockholders.


(18)
            Incorporated
                by reference to the Registrant’s Registration Statement on Form SB-2/A
                (Reg. No. 333-134746) filed on July 28,
                2006.






**Item
      14. Principal Accountant Fees and Services.**





**** The
      information called for by this item is incorporated herein by reference to
      the
      definitive Proxy Statement to be filed by us pursuant to Regulation 14A for
      the
      2007 annual meeting of stockholders.


-25-




SIGNATURES





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








SyntheMed,
      Inc.


(Registrant)




By: /s/
      Robert P. Hickey


Robert
      P.
      Hickey


President,
      CEO and CFO


(principal
      executive, financial and accounting officer)




Dated:
      March 9, 2007





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





**Signatures**
            
            **Title**
            
            **Date**/s/
                Richard L. Franklin, M.D.
            
            Chairman
                of the Board
            
            March
                9, 2007**Richard
                L. Franklin, M.D.**/s/
                Robert P. Hickey
            
            Director,
                President, CEO and CFO
            
            March
                9, 2007**Robert
                P. Hickey**
            
            (principal
                executive, financial and accounting officer)/s/
                David G. P. Allan
            
            Director
            
            March
                9, 2007**David
                G. P. Allan**/s/
                Edward A. Celano
            
            Director
            
            March
                9, 2007**Edward
                A. Celano**/s/
                Barry R. Frankel
            
            Director
            
            March
                9, 2007**Barry
                R. Frankel**/s/
                Walter R. Maupay
            
            Director
            
            March
                9, 2007**Walter
                R. Maupay**




-26-




**INDEX
      TO FINANCIAL STATEMENTS**




Page
                  NumberReport
                  of Independent Registered Public Accounting Firm
              F-2Balance
                  Sheet
              F-3Statements
                  of Operations
              F-4Statements
                  of Changes in Stockholders’ Equity
              F-5Statements
                  of Cash Flows
              F-6Notes
                  to Financial Statements
              F-7
  F-1
  **Report
        of Independent Registered Public Accounting Firm**
   Board
        of
        Directors and Stockholders
 SyntheMed,
        Inc.
  We
        have
        audited the accompanying balance sheet of SyntheMed, Inc. (the “Company”) as of
        December 31, 2006 and the related statements of operations, changes in
        stockholders’ equity and cash flows for each of the years in the two-year period
        ended December 31, 2006. 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 referred to above present fairly, in all
        material respects, the financial position of SyntheMed, Inc. as of
        December 31, 2006, and the results of its operations and its cash flows for
        each of the years in the two-year period ended December 31, 2006, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  As
        discussed in Note B[9] to the financial statements, effective January 1,
        2006,
        the Company changed its method of accounting for stock-based compensation
        in
        accordance with Statement of Financial Accounting Standards No. 123 (R),
        “Share-Based Payment”.
  The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note A to the financial
        statements, the Company has experienced recurring net losses, limited revenues
        and cash outflows from operating activities which raise substantial doubt
        about
        its ability to continue as a going concern. Management’s plans in regard to
        these matters are also discussed in Note A. The financial statements do not
        include any adjustments that might result from the outcome of this
        uncertainty.
   Eisner
        LLP
  New
        York,
        New York
 March
        6,
        2007
 F-2
  **SYNTHEMED,
        INC.**
 
 **BALANCE
        SHEET**
 **(In
        thousands, except per share data)**
  **December
                  31,****2006****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              3,722Accounts
                  receivable
              
              
              5Inventory
              
              
              38Prepaid
                  expenses and deposits
              
              
              158Total
                  current assets
              
              
              3,923Acquired
                  technology, less accumulated amortization
              
              
              89Machinery
                  and equipment, less accumulated depreciation
              
              
              166TOTAL
              
              $
              4,178
 **LIABILITIES
        AND STOCKHOLDERS’ EQUITY**
 Current
                    liabilities:Accounts
                    payable
                
                $
                138Accrued
                    expenses
                
                
                643Convertible
                    note payable
                
                
                70Total
                    current liabilities
                
                
                851Commitments
                    and other matters (Notes H and I)Stockholders’
                    equity:Preferred
                    stock, $.01 par value; shares authorized - 5,000; issued andoutstanding
                    - noneCommon
                    stock, $.001 par value; shares authorized - 150,000;issued
                    and outstanding - 82,945
                
                
                83Additional
                    paid-in capital
                
                
                51,389Accumulated
                    deficit
                
                
                (48,145
                )Total
                    stockholders’ equity
                
                
                3,327TOTAL
                
                $
                4,178
 See
          accompanying notes to financial statements.
 F-3
  **SYNTHEMED,
        INC.**
 
 **STATEMENTS
        OF OPERATIONS**
 **(In
        thousands, except per share data)**
  **Year
                  Ended December 31,****2005**
              
              **2006**Revenue:Product
                  sales
              
              
              —
              
              $
              142Revenue
              
              
              —
              
              
              142Cost
                  of goods sold
              
              
              —
              
              
              21Gross
                  profit
              
              
              —
              
              
              121Operating
                  expenses:Research
                  and development
              
              $
              1,524
              
              
              2,163General
                  and administrative
              
              
              937
              
              
              2,173Sales
                  and marketing
              
              
              —
              
              
              320Operating
                  expenses
              
              
              2,461
              
              
              4,656Loss
                  from operations before other income / (expense)
              
              
              (2,461
              )
              
              (4,535
              )Other
                  income/(expense):Interest
                  income
              
              
              28
              
              
              119Other
                  income
              
              
              
              
              
              1Gain
                  on settlement of debt
              
              
              
              
              
              22Interest
                  expense
              
              
              (6
              )
              
              (5
              )Reversal
                  of liabilities
              
              
              37
              
              
              47Loss
                  before income tax benefit
              
              
              (2,402
              )
              
              (4,351
              )Income
                  tax benefit
              
              
              254
              
              
              456Net
                  loss
              
              $
              (2,148
              )
              $
              (3,895
              )Net
                  loss - basic and diluted
              
              $
              (0.03
              )
              $
              (0.05
              )Weighted
                  average shares outstanding - basic and diluted
              
              
              65,070
              
              
              78,725
 See
          accompanying notes to financial statements.
 F-4
  **SYNTHEMED,
        INC.**
 
 **STATEMENTS
        OF CHANGES IN STOCKHOLDERS’ EQUITY**
 **(In
        thousands)**
 **Additional****Common**
                
                **Paid-in**
                
                **Comprehensive**
                
                **Accumulated****Shares**
                
                **Amount**
                
                **Capital**
                
                **Loss**
                
                **Deficit**
                
                **Totals**Balance
                    - January 1, 2005
                
                
                59,962
                
                $
                60
                
                $
                43,518
                
                
                
                
                
                ($42,102
                )
                $
                1,476Exercise
                    of Series Cwarrants
                
                
                6,634
                
                
                6
                
                
                790
                
                
                
                
                
                
                
                
                796Options
                    issued toconsultants
                
                
                
                
                
                
                
                
                10
                
                
                
                
                
                
                
                
                10Net
                    loss for the year
                
                
                
                
                
                
                
                
                
                
                
                (2,148
                )
                
                (2,148
                )
                
                (2,148
                )Balance
                    December 31, 2005
                
                
                66,596
                
                
                66
                
                
                44,318
                
                
                
                
                
                (44,250
                )
                
                134Exercise
                    of options
                
                
                224
                
                
                1
                
                
                24
                
                
                
                
                
                
                
                
                25Shares
                    issued in connection
                
                
                16,125
                
                
                16
                
                
                5,749
                
                
                
                
                
                
                
                
                5,765with
                    private placement, net of expensesStock-based
                    compensation
                
                
                
                
                
                
                
                
                633
                
                
                
                
                
                
                
                
                633Issuance
                    of options
                
                
                
                
                
                
                
                
                665
                
                
                
                
                
                
                
                
                665to
                    directors and employeesNet
                    loss for the year
                
                
                
                
                
                
                
                
                
                
                
                (3,895
                )
                
                (3,895
                )
                
                (3,895
                )Balance
                    December 31, 2006
                
                
                82,945
                
                $
                83
                
                $
                51,389
                
                
                
                
                
                ($48,145
                )
                $
                3,327
   See
          accompanying notes to financial statements.
 F-5
  **SYNTHEMED,
        INC.**
 
 **STATEMENTS
        OF CASH FLOWS**
 **(In
        thousands)**
  **Year
                  Ended December 31,****2005**
              
              **2006**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,148
              )
              $
              (3,895
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              30
              
              
              32Stock-based
                  compensation
              
              
              10
              
              
              1,298Amortization
                  of acquired technology
              
              
              68
              
              
              68Reversal
                  of liabilities
              
              
              (37
              )
              
              (47
              )Gain
                  on settlement of debt
              
              
              
              
              
              (22
              )Changes
                  in operating assets and liabilities:(Increase)
                  in accounts receivable
              
              
              
              
              
              (5
              )(Increase)
                  in inventory
              
              
              
              
              
              (38
              )(Increase)
                  in prepaid expenses
              
              
              (54
              )
              
              (64
              )(Decrease)
                  in accounts payable
              
              
              86
              
              
              (152
              )Increase
                  in accrued expenses
              
              
              123
              
              
              156Net
                  cash used in operating activities
              
              
              (1,922
              )
              
              (2,669
              )Cash
                  flows from investing activities:Purchase
                  of equipment
              
              
              
              
              
              (94
              )Net
                  cash used in investing activities
              
              
              
              
              
              (94
              )Cash
                  flows from financing activities:Repayment
                  of Convertible note payable
              
              
              
              
              
              (40
              )Net
                  proceeds from issuance of common stock
              
              
              
              
              
              5,765Proceeds
                  from exercise of options and warrants
              
              
              796
              
              
              25Net
                  cash provided by financing activities
              
              
              796
              
              
              5,750Net
                  increase/(decrease) in cash and cash equivilents
              
              
              (1,126
              )
              
              2,987Cash
                  and cash equivalents at beginning of year
              
              
              1,861
              
              
              735Cash
                  and cash equivalents at end of year
              
              $
              735
              
              $
              3,722Supplementary
                  cash flow information:Interest
                  paid
              
              $
              6
              
              $
              5Income
                  taxes paid
              
              
              1
              
              
              1
 See
        accompanying notes to financial statements.
 F-6
  **SYNTHEMED,
        INC.**
  **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        A) - The Company and Basis of Presentation:**
  We
        are a
        Delaware corporation which was organized in August 1990 and adopted our new
        name
        SyntheMed, Inc. in May 2005. In April 2006, we increased the number of our
        authorized shares of Common Stock from 100,000,000 to 150,000,000.
  We
        are 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 our 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
        product development efforts are currently focused on our lead product, REPEL-CV,
        a bioresorbable adhesion barrier intended for use in cardiac surgery.
  In
        August, 2006 we received regulatory (CE Mark) approval to market REPEL-CV
        for
        use in cardiac surgery within the European Union (EU) and in other international
        markets. In September 2006, we launched REPEL-CV for sale in the EU and certain
        Southeast Asian markets through a network of independent distributors,
        experienced at selling devices and medical equipment to cardiac
        surgeons.
  In
        April
        2006, we sold an aggregate of 15,000,000 shares of Common Stock in a private
        placement at a purchase price of $.40 per share, resulting in net cash proceeds
        of $5,765,000. In December 2006, we received $456,000 from the sale of the
        Company’s certain New Jersey state tax net operating losses. The proceeds are
        being used to fund operations.
  The
        accompanying financial statements have been prepared on a going concern basis.
        As shown in the accompanying financial statements, we have limited revenues
        and
        cash outflows from operating activities and have experienced a substantial
        net
        loss during the year ended December 31, 2006. As a result, we have limited
        resources available to pursue our business operations and substantial doubt
        exists about our ability to continue as a going concern. Our continuation
        as a
        going concern is dependent upon obtaining sufficient financing to fund our
        operations and ultimately to generate cash flows from operations, which is
        dependent on successfully completing the development of our proposed products,
        obtaining required regulatory approvals and manufacturing and selling these
        proposed products. We intend to pursue additional equity financings as well
        as
        continue to participate 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 we will achieve
        or
        generate positive cash flows from operations. The financial statements do
        not
        include any adjustments that might be necessary if we are unable to continue
        as
        a going concern.
  **(NOTE
        B) - Summary of Significant Accounting Policies:**
 
 [1]
              Revenue
                  Recognition Policy:
 
 We
        recognize revenue when the amounts become fixed and determinable. Revenue
        is
        recognized when product is shipped to customers. Terms of sale are “f.o.b.
        shipping point” with the customer covering all costs of shipment and insurance.
        All sales are final with no right of return except for defective product.
 
 [2]
              Cash
                  and cash equivalents:
 
 We
        consider all highly liquid investments purchased with an original maturity
        of
        three months or less to be cash equivalents.
 
 [3]
              Accounts
                  Receivable:
 
 Accounts
        receivable are stated at estimated net realizable value. An allowance for
        doubtful accounts will be recorded based on a combination of historical
        experience, aging analysis and information on specific accounts. Account
        balances will be written off against the allowance after all means of collection
        have been exhausted and the potential for recovery is considered remote.
        The
        Company has not recorded an allowance against its receivables based upon
        management's estimate that the balance at December 31, 2006 is fully
        collectable.
 F-7
 **SYNTHEMED,
          INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        B) - Summary of Significant Accounting Policies:
        (continued)**
 
 [4]
              Inventory*:*
 
 Inventory
        is stated at the lower of cost or market, as determined by the first-in,
        first-out method.
  **December
                  31,****2006**Raw
                  materials
              
              
              —Work
                  in process
              
              $
              35,000Finished
                  goods
              
              
              3,00038,000Less
                  allowance for obsolescence
              
              
              —$
              38,000
 
 The
        Company outsources the production of its inventory which is located at third
        party facilities in both Ohio and Minnesota.
 
 [5]
              Depreciation
                  and Amortization:
 
 Machinery,
        equipment and computer software are recorded at cost and are depreciated
        using
        the straight-line method based upon an estimated useful life of 3-5 years.
        Acquired technology is amortized on a straight line basis over its estimated
        economic life of 5 years. Equipment used in research and development also
        is
        being used by the company to manufacture its inventory.
 
 [6]
              Research
                  and development:
  Substantially
        all research and development activities are outsourced (see Note H). Research
        and development costs representing principally clinical trials and manufacturing
        development are charged to expense as incurred.
 
 [7]
              Patent
                  costs:
 
 Costs
        incurred in connection with acquiring patent rights and the protection of
        proprietary technologies are charged to expense as incurred.
 
 [8]
              Use
                  of estimates:
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions, such as expected cash flows used to determine
        recoverability of intangible assets, that affect the reported amounts of
        assets
        and liabilities and disclosure of contingent assets and liabilities at the
        date
        of the financial statements and the reported amounts of revenue and expenses
        during the reporting period. Actual results could differ from those estimates.
 
 [9]
              Stock-based
                  compensation:
 
 Effective
        January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”)
        No. 123R, “Share Based Payment.” We elected to use the modified prospective
        transition method, therefore, prior period results were not restated. Prior
        to
        the adoption of SFAS 123R, stock-based compensation expense related to employee
        and director stock options was not recognized in the results of operations
        if
        the exercise price was at least equal to the market value of the common stock
        on
        the grant date, in accordance with Accounting Principles Board Opinion No.
        25,
“Accounting for Stock
 F-8
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
  **(NOTE
        B) - Summary of Significant Accounting Policies:
        (continued)**
  [9]
              Stock-based
                  compensation: (continued)
 
 Issued
        to
        Employees”. As a result, the recognition of employee stock-based compensation
        expense was generally limited to the expense attributed to stock option
        modifications, as well as the amortization of certain acquisition-related
        deferred compensation.
  SFAS
        123R
        requires all share-based payments to employees, including grants of employee
        stock options, to be recognized as compensation expense over the requisite
        service period (generally the vesting period) in the financial statements
        based
        on their fair values. For options with graded vesting, the Company fair values
        the stock option grants and recognizes compensation expense as if each vesting
        portion of the award was a separate award. Under the modified prospective
        method, awards that were granted, modified, or settled on or after January
        1,
        2006 are measured and accounted for in accordance with SFAS 123R. The impact
        of
        forfeitures that may occur prior to vesting is also estimated and considered
        in
        the amount of expense recognized. In addition, the realization of tax benefits
        in excess of amounts recognized for financial reporting purposes will be
        recognized as a financing activity rather than as an operating
        activity.
  No
        tax
        benefits were attributed to the stock-based compensation expense because
        a
        valuation allowance was maintained for all net deferred tax assets. We elected
        to adopt the alternative method of calculating the historical pool of windfall
        tax benefits as permitted by FASB Staff Position (FSP) No. SFAS 123R-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based
        Payment Awards.” This is a simplified method to determine the pool of windfall
        tax benefits that is used in determining the tax effects of stock compensation
        in the results of operations and cash flow reporting for awards that were
        outstanding as of the adoption of SFAS 123R.
  The
        following table illustrates the effect on net loss if the fair value based
        method of SFAS No. 123 had been applied to all awards for the year ended
        December 31, 2005 (in thousands, except per share data):
  Reported
                  net loss
              
              $
              (2,148
              )Stock-based
                  employee compensation determined underthe
                  fair value based method
              
              
              (442
              )Pro
                  forma net loss
              
              $
              (2,590
              )Loss
                  per common share (basic and diluted):As
                  reported
              
              $
              (0.03
              )Pro
                  forma
              
              $
              (0.04
              )
   [10]
                  Loss
                      per share:
 
 Basic
        loss per share is computed by dividing the net loss by the weighted average
        number of shares of Common Stock outstanding during each period. Diluted
        loss
        per share for the years ended December 31, 2005 and 2006 excludes the effect
        of
        the potential exercise or conversion of securities which would result in
        the
        issuance of incremental shares of common stock because the effect would be
        anti-dilutive.
 F-9
  **SYNTHEMED,
        INC.**
  **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        B) - Summary of Significant Accounting Policies:
        (continued)**
  [10]
              Loss
                  per share: (continued)
 
 Securities
        and the related potential number of Common Shares not included in the diluted
        computation, are as follows:
 
 **December
                  31,****2005**
              
              **2006**Convertible
                  promissory notes
              
              
              110,000
              
              
              70,000Options
              
              
              12,181,000
              
              
              13,437,000Warrants
              
              
              594,000
              
              
              2,069,00012,885,000
              
              
              15,576,000
 
 [11]
              Impairment
                  of Intangible Assets:
 
 Intangible
        assets are 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. We have considered whether there has been
        impairment in the carrying value of the acquired technology described in
        Note C.
        Accordingly, whenever events or circumstances indicate that the carrying
        amount
        of an asset may not be recoverable, management assesses the recoverability
        of
        the assets. Management is also required to evaluate the useful lives each
        reporting period. When events or circumstances indicate, intangible assets
        with
        finite useful lives, are tested for impairment by using the estimated future
        cash flows directly associated with, and that are expected to arise as a
        direct result of, the use of the assets. If the carrying amount exceeds the
        estimated undiscounted cash flows, an impairment may be indicated. The carrying
        amount is then compared to the estimated discounted cash flows, and if
        there is an excess, such amount is recorded as an impairment. Based on the
        best
        information available to management. The Company has evaluated the fair value
        of
        the asset and concluded that the fair value exceeds the carrying value of
        the
        asset and therefore there is no impairment.
  [12]
              Recently
                  issued accounting pronouncements:
 
 In
        June
        2006, the Financial Accounting Standards Board (“FASB”) has issued
        interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An
        Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for,
        and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting
        for
        uncertainty in income taxes recognized in an enterprise’s financial statements
        in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure, and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. We are currently evaluating the impact FIN 48 will have
        on
        our results of operations and financial position.
  In
        September 2006, the Securities and Exchange Commission (SEC) issued
        Staff Accounting Bulletin 108, “Considering the Effects on Prior Year
        Misstatements when Quantifying Misstatements in Current Year Financial
        Statements,” (“SAB 108”). SAB 108 requires registrants to quantify errors using
        both the income statement method (i.e. iron curtain method) and the rollover
        method and requires adjustment if either method indicates a material error.
        If a
        correction in the current year relating to prior year errors is material
        to the
        current year, then the prior year financial information needs to be corrected.
        A
        correction to the prior year results that are not material to those years,
        would
        not require a “restatement process” where prior financials would be amended. SAB
        108 is effective for our year ended December 31, 2006. that the adoption
        of the
        SAB 108 did not have a material effect on our financial position, results
        of
        operations or cash flows.
  In
        September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” to
        define fair value, establish a framework for measuring fair value in accordance
        with generally accepted accounting principles, and expand disclosures about
        fair
        value measurements. SFAS No. 157 will be effective for fiscal years beginning
        after November 15, 2007, the beginning of our 2008 fiscal year. We are assessing
        the impact of the adoption of SFAS No. 157 will have on our financial position
        and results of operations.
  In
        February, 2007, the FASB issued SFAS No. 159 “The Fair Value Option for
        Financial Assets and Financial Liabilities”. SFAS No. 159 permits entities to
        choose to measure many financial assets and financial liabilities at fair
        value.
        Unrealized gains and losses on items for which the fair value option has
        been
        elected are reported in earnings. SFAS No. 159 is effective for fiscal years
        beginning after November 15, 2007. We are currently assessing the impact
        of SFAS
        No. 159 on our financial position and results of operations.
 F-10
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 
 **(NOTE
        C) - Acquired Technology:**
 
 In
        March
        2003, we purchased certain polymer technology from Phairson Medical, Ltd.,
        a
        private medical technology company based in the United Kingdom, for
        approximately 6,896,000 shares of restricted Common Stock of the Company.
        These
        assets comprise a series of United States and foreign patent applications
        as
        well as scientific and clinical documentation. We also assumed Phairson’s rights
        and obligations under a development agreement with the Swiss Federal Institute
        of Technology and the University of Zurich, as well as with the principal
        investigator of the technology development project,
        Professor JA Hubbell. Under these agreements, we are required to pay royalties
        of no more than 1.1% of net sales of products
        incorporating the technology. If we fail to sublicense the technology or
        pursue
        development efforts involving the technology for a period of two years or
        more,
        we are obligated to negotiate a return of the technology to the university.
        Management believes that its development efforts have met the requirements
        of
        the agreement.
  In
        connection with this transaction, we recorded $344,000 as the fair value
        of this
        technology which includes (i) $330,000, representing the deemed value of
        the
        shares issued (approximately $0.0478 per share) paid by investors in the
        contemporaneous private placement of Series C Convertible Preferred Stock
        and
        related warrants; (ii) $11,000 in transaction-related costs and (iii) $3,000
        representing the fair value of the options issued as a finder’s fee. In
        connection with the acquisition, we granted an option, exercisable for seven
        years, to purchase up to 100,000 shares of Common Stock at $.09 per share
        to Dr.
        Gere S. diZerega, who has served as a medical consultant to both companies
        and
        who assisted in identifying the acquisition opportunity. Dr. diZerega had
        previously served as a director of our Company. Certain stockholders of Phairson have
        participated in previous financings of our Company and Richard Franklin,
        our
        Company’s Chairman, is a stockholder in and
        has
        served as CEO of Phairson.
  A
        useful
        life of 5 years was assigned to the acquired technology considering the stage
        of
        product development, the estimated period during which patent protection
        could
        be enforced, which would go well beyond five years from the acquisition date,
        the development cycle time for medical devices of the type envisioned by
        us
        based on such technology, as well as potential technology obsolescence over
        time. For each of the years ended December 31, 2005 and 2006, we recorded
        amortization of $ 68,000. At December 31, 2006, accumulated amortization
        totaled
        $255,000.
  The
        fair
        value of the options to purchase 100,000 shares of Common Stock issued as
        a
        finder’s fee was determined to be $3,000 at the time of the transaction using
        the Black Scholes pricing model.
  **(NOTE
        D) - Machinery, Equipment and Software:**
 
 Machinery,
        equipment and software consists of the following **** at
        December 31:
  **2006**
              
              
              **Estimated**
                **useful
                  life**Machinery
                  and equipment
              
              $
              198,000
              
              
              5
                  yearsOffice
                  equipment and software
              
              
              60,000
              
              
              3
                  years258,000Less
                  accumulated depreciation
              
              
              92,000$
              166,000
 
 **(NOTE
        E) - Convertible Promissory Notes:**
 
 $70,000
        5-year, 5% convertible promissory note matured February 22, 2007 which was
        payable to PTG (see Note I [2]), and convertible into Common Shares at a
        conversion price of $1.00 per share was repaid. $40,000 5-year, 6.5% convertible
        promissory note which matured August 1, 2006 which was payable to Dimotech,
        Ltd. (See Note H [2]) and convertible into Common Shares at a conversion
        price
        of $1.00 per share was repaid.
 F-11
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        F) - Stockholders’ Equity:**
  [1]
              Common
                  stock:
  In
        March
        2005, we issued 6,634,000 shares of Common Stock as a result of the exercise
        of
        warrants issued during the Series C private placement.
  In
        November 2005, our Board of Directors approved an increase in the number
        of
        authorized shares from 105 million to 155 million shares, consisting of (i)
        150
        million shares of Common Stock, par value $.001 per share (“Common Stock”), and
        (ii) 5 million shares of Preferred Stock, par value $.01 per share (“Preferred
        Stock”), which was approved at the Company’s 2006 annual stockholder
        meeting.
  In
        April
        2006, we sold an aggregate of 15,000,000 shares of Common Stock in a private
        placement at a purchase price of $.40 per share, resulting in gross cash
        proceeds of $6,000,000. In connection with the financing, we paid a placement
        agent a commission equal to $590,000, representing 10% of the proceeds raised
        by
        the agent ($449,840 of which was paid, at the agent’s election, by issuance of
        1,124,600 shares of Common Stock at the offering price of $0.40 per share,
        and
        the balance of which was paid in cash) and we issued to the placement agent
        warrants to purchase an aggregate of 1,475,000 shares of Common Stock,
        representing 10% of the number of shares sold by the agent in the financing.
        The
        warrants are exercisable at an exercise price equal to $.60 per share at
        any
        time until April 3, 2010. We incurred additional offering costs of $78,000
        including amounts to the placement agent for certain financing-related expenses
        including legal fees.
  In
        connection with the financing, we entered into subscription agreements and
        an
        investor rights agreement with the investors,
        as well as an agency agreement with the placement agent. Pursuant to the
        investor rights agreement, we filed a registration statement with the United
        States Securities and Exchange Commission covering resale of the securities
        sold
        in the private placement which has been declared effective. We have agreed
        to
        use our best efforts to keep the resale registration statement effective
        for two
        years.
  [2]
              Warrants:
 
 As
        of
        December 31, 2006, there were warrants outstanding to purchase up to
        2,069,000 shares of our Common Stock:
  594,000
              
              
              exercisable
                  at $0.12 per share which expire on March 26, 20071,475,000
              
              
              exercisable
                  at $0.60 per share which expire on April 3, 20102,069,000
  [3]
              Options:
 
 At
        December 31, 2006, we have three stock-based compensation plans: the 2000
        Non-Qualified Stock Option Plan, under which we are authorized to issue
        non-qualified stock options to purchase up to an aggregate of 1,000,000 shares
        of Common Stock; the 2001 Non-Qualified Stock Option Plan, under which we
        are
        authorized to issue non-qualified stock options to purchase up to an aggregate
        of 10,000,000 shares of Common Stock and the 2006 Stock Option Plan, under
        which
        we are authorized to issue incentive stock options and non-qualified stock
        options to purchase up to an aggregate of 5,000,000 shares of Common Stock.
        The
        2006 Stock option plan was approved at our 2006 Annual Stockholders meeting.
        The
        exercise price is determined by the Compensation Committee of the Board of
        Directors at the time of the granting of an option. Options vest over a period
        not greater than five years, and expire no later than ten years from the
        date of
        grant.
 F-12
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        F) - Stockholders’ Equity: (continued)**
  [3]
              Options:
                  (continued)
 
 At
        December 31, 2006, options to purchase 727,000 shares of Common Stock were
        outstanding pursuant to the 2000 Plan, options to purchase 9,802,000 shares
        of
        Common Stock were outstanding pursuant to the 2001 Plan and options to purchase
        1,510,000 shares of Common Stock were outstanding pursuant to the 2006 Plan.
        In
        addition, options to purchase 1,398,000 shares of Common Stock issued outside
        of
        the plans are outstanding pursuant to other agreements. These options vest
        over
        various periods and expire no later than ten years from the date of
        vesting.
  At
        December 31, 2006, there were 3,681,000 options available for grant under
        these
        plans.
  In
        2004,
        the compensation committee modified certain options previously granted to
        a
        former director. We extended the expiration date of 125,000 options granted
        under the 2001 Plan from one year after date of separation to October 12,
        2007.
        We 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, we recorded a fair value charge
        of
        $62,000. In addition, we 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 expires on October 12, 2007.
  A
        summary
        of the status of our stock options as of December 31, 2005 and 2006, and
        changes
        during the years ended on those dates is presented below (in thousands, except
        per share data):
 **2005**
                
                **2006****Weighted-Average
                    Exercise Price**
                
                
                
                **Weighted-Average
                    Exercise Price**
                
                **Weighted
                    Average Remaining Contractual**
                
                **Aggregate
                    Intrinsic****Shares**
                
                **Per
                    Share**
                
                **Shares**
                
                **Per
                    Share**
                
                **Term**
                
                **Value**Outstanding
                    at beginning of year
                
                
                11,279
                
                $
                0.44
                
                
                12,181
                
                $
                0.34
                
                
                4
                    YearsGranted
                    (including extended)
                
                
                1,535
                
                
                0.36
                
                
                1,560
                
                
                0.79
                
                
                8.6
                    YearsExercised
                
                
                ---
                
                
                
                
                
                (224
                )
                
                0.11Forfeited/Expired
                
                
                (633
                )
                
                2.14
                
                
                (80
                )
                
                2.00Outstanding
                    at end of year
                
                
                12,181
                
                
                0.34
                
                
                13,437
                
                
                0.39
                
                
                3.1
                    Years*
                
                $
                6,618Options
                    exercisable at year-end
                
                
                10,827
                
                
                0.30
                
                
                12,368
                
                
                0.36
                
                
                2.6
                    Years*
                
                $
                6,409Weighted-average
                    grant date fairvalue
                    of options granted during the year
                
                
                
                
                $
                0.30
                
                
                
                
                $
                0.79
 
 *
                  During
                      the year ended December 31, 2006, we extended the expiration
                      date of
                      various options by one year, with exercise prices ranging from
                      $0.05 -
                      $4.75 and expiration dates ranging from March 31, 2006 through
                      December
                      31, 2006, granted to employees, directors, consultants and
                      former
                      employees and directors. As a result of this option modification,
                      we
                      recorded an expense of approximately $384,000 of which $41,000
                      was for
                      employees and directors, $133,000 was for consultants and $210,000
                      was for
                      former employees and directors. We calculated the incremental
                      value based
                      on the excess of the fair value of the modified award over
                      the fair value
                      of the original option measured immediately before its terms
                      were modified
                      based on current circumstances using the Black Scholes option
                      pricing
                      model.
  F-13
  **SYNTHEMED,
        INC.**
  **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        F) - Stockholders’ Equity: (continued)**
  [3]
              Options:
                  (continued)
 
 The
        total
        intrinsic value of options exercised during the year ended December 31, 2006
        was
        $183,000.
  Included
        in the preceding table are 605,000 and 365,000 options granted to non-employee
        directors in 2005 and 2006, respectively. The weighted-average grant date
        fair
        value of such options was $0.36 and $0.80, respectively. Also included in
        the
        preceding table are 100,000 and 50,000 options granted to other non-employees
        in
        2005 and 2006, respectively. The weighted average grant date fair value of
        such
        options was $0.36 and $0.80, respectively and a stock-based compensation
        charge
        of $10,000 and $285,000 was recorded in 2005 and 2006,
        respectively.
  The
        following summarizes the activity of our stock options that have not vested
        for
        the year ended December 31, 2006 (in thousands, except per share
        data):
 
 **Shares**
              
              **Weighted
                  Average Exercise Price**Nonvested
                  at January 1, 2006
              
              
              1,354
              
              $
              0.60Granted
              
              
              1,560
              
              
              0.79Canceled
                  or expired
              
              
              (80
              )
              
              2.00Vested
              
              
              (1,765
              )
              
              0.66Nonvested
                  at December 31, 2006
              
              
              1,069
              
              $
              0.75
  As
        of
        December 31, 2006, there was approximately $533,000 of unrecognized stock
        compensation related to unvested awards (net of estimated forfeitures) expected
        to be recognized over the next 21 months.
  We
        granted 1,535,000 and 1,560,000 options in the periods ended December 31,
        2005
        and 2006, respectively. We have recorded a charge (exclusive of options
        extended) of $240,000 and $1,058,000 in research and development expense
        and
        general and administrative expense, respectively, for the fair value of the
        options granted for the year ended December 31, 2006.
  At
        December 31, 2006, we had 135,000 options outstanding which vest upon FDA
        approval of certain planned products: 85,000 options associated with the
        PMA
        approval for REPEL-CV Adhesion Barrier and 50,000 options associated with
        the
        IND approval of a drug delivery development program. We also has 35,000 options
        that vest upon the one year anniversary of the PMA approval for REPEL-CV.
        These
        options have a term ranging from 5 - 7 years from date of vesting and an
        exercise price range of $0.26 to $2.00. At this time, we cannot determine
        when
        the FDA approvals, if any, will be obtained and therefore the Company has
        not
        recorded compensation expense related to these options. The Company will
        record
        an expense upon submission and acceptance of the FDA Application.
  We
        use
        the Black-Scholes option pricing model to determine the weighted average
        fair
        value of options. The fair value of options at date of grant and the assumptions
        utilized to determine such values are indicated in the following
        table:
 
 Year
                  Ended December 31,2005
              
              2006Weighted
                  average fair value at date of grant for options granted during
                  the
                  period
              
              $
              0.30
              
              $
              0.79Dividend
                  yield
              
              
              0
              %
              
              0
              %Expected
                  volatility
              
              
              98
              %
              
              99
              %Risk
                  free interest rate
              
              
              3.8
              %
              
              4.7
              %Expected
                  life
              
              
              7
                  years
              
              
              7
                  - 10 years
 
 F-14
  **SYNTHEMED,
        INC.**
  **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        F) - Stockholders’ Equity: (continued)**
  [3]
              Options:
                  (continued)
 
 The
        following table summarizes information for stock options outstanding at December
        31, 2006 (in thousands, except per share data):
  **Options
                  Outstanding**
              
              **Options
                  Exercisable**Weighted-Average
              
              Weighted-Average
              
              
              
              Weighted-AverageRange
              
              Number
              
              Remaining
              
              Exercise
                  Price
              
              Number
              
              Exercise
                  PriceExercise
                  Prices
              
              Outstanding
              
              Contractual
                  Life
              
              Per
                  Share
              
              Exercisable
              
              Per
                  Share$0.02
                  - 0.12
              
              
              5,717
              
              
              1
                  year
              
              $
              0.12
              
              
              5,717
              
              $
              0.120.13
                  - 0.81
              
              
              6,768
              
              
              4
                  years
              
              
              0.47
              
              
              5,870
              
              
              0.461.00
                  - 2.00
              
              
              896
              
              
              2
                  years
              
              
              1.31
              
              
              725
              
              
              1.264.00
                  - 4.75
              
              
              56
              
              
              5
                  months
              
              
              4.03
              
              
              56
              
              
              4.0313,437
              
              
              3
                  years
              
              $
              0.39
              
              
              12,368
              
              $
              0.36
 
 **(NOTE
        G) - Income Taxes:**
 
 At
        December 31, 2006, we have approximately $44,093,000 of net operating loss
        carryforwards to offset future federal taxable income and approximately $855,000
        of research and development tax credit carryforwards available to offset
        future
        federal income tax, subject to limitations for alternative minimum tax. The
        ability of us to utilize the net operating losses and
        research and development tax credit carryforwards in
        future years may be limited in accordance with the provisions of Section
        382 of
        the Internal Revenue Code. Because of the changes in ownership that have
        occured
        in the prior years, certain net operating losses will be limited as to use
        in
        any particular year based upon 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**2007
              
              $
              1,519,000
              
              $
              69,0002008
              
              
              4,044,000
              
              
              31,0002009
              
              
              3,376,000
              
              
              11,0002010
                  - 2026
              
              
              35,154,000
              
              
              744,000$
              44,093,000
              
              $
              855,000
 
 We
        have
        participated in the Tax Benefit Transfer Program administered by the State
        of
        New Jersey under which $8,874,000 in eligible loss carryforwards, covering
        the
        tax years 1998 through 2004, were sold to PSEG Services Corporation. The
        company
        received cash payments of approximately $254,000 and $456,000 in 2005 and
        2006,
        respectively. This is reflected as income tax benefits in the accompanying
        Statement of Operations. We anticipate similar transactions during 2007 and
        beyond, contingent upon approvals from the State Department of Taxation.
        At
        December 31, 2006, we have net operating loss carryforwards for New Jersey
        State
        income tax purposes of approximately $7,896,000 which expire through
        2013.
 F-15
 
  **SYNTHEMED,
          INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
  
 **(NOTE
        G) - Income Taxes: (continued)**
  The
        deferred federal tax asset, which amounted to $16,908,000 at December 31,
        2006
        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 $1,368,000 in 2005 and increased
        by
        $1,040,000 in 2006.
  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,****2005**
              
              **2006**Income
                  tax benefit at the federal statutory rate
              
              $
              (816,000
              )
              $
              (1,479,000
              )State
                  and local income taxes, net of effect on federal taxes
              
              
              (144,000
              )
              
              (261,000
              )Increase
                  in valuation allowance
              
              
              1,368,000
              
              
              1,040,000Sale
                  of state net operating loss carryforwards
              
              
              (254,000
              )
              
              (456,000
              )Reduction
                  in deferred tax asset from transfer of state net operating loss
                  carryforwards
              
              
              286,000
              
              
              512,000NJ
                  Net Operating Loss
              
              
              (644,000
              )Benefit
                  of research and development credit
              
              
              (57,000
              )
              
              (65,000
              )Other
              
              
              7,000
              
              
              253,000$
              (254,000
              )
              $
              (456,000
              )
 
 The
        deferred tax asset at December 31 consists of the following:
 
 **2005**
              
              **2006**Net
                  operating loss carryforward
              
              $
              14,519,000
              
              $
              15,469,000Research
                  and development credit carryforward
              
              
              790,000
              
              
              855,000Other
              
              
              560,000
              
              
              584,00015,868,000
              
              
              16,908,000Valuation
                  allowance
              
              
              (15,868,000
              )
              
              (16,908,000
              )$
              0
              
              $
              0
 
 **(** **NOTE
        H) - Research and License Agreements:**
 
 [1]
              Yissum
                  agreement:
 
 In
        1991,
        we entered into a research and license agreement (the “Agreement”) with Yissum
        Research and Development Company of the Hebrew University of Jerusalem
        (“Yissum”), as amended pursuant to which we finance 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 us their worldwide rights to patents, patent applications and
        know-how to develop, manufacture and market products relating to this
        technology.
  Pursuant
        to the Agreement, we are obligated to pay a royalty of five percent of all
        net
        sales of our products derived under the Agreement. The maximum amount of
        royalties to be paid during the term of the Agreement is $5,500,000. Through
        February 28, 2007, the Company has paid $1,150,000 towards the maximum amount
        of
        $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 we do not attain
        certain milestones by specified dates. The January 1996 amendment gives us
        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  F-16
  **SYNTHEMED,
          INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(** **NOTE
        H) - Research and License Agreements: (continued)**
  [1]
              Yissum
                  agreement: (continued)
 
 amendment
        gives us similar options through 2007 for an annual payment, in 2004 (paid
        in
        2005), of $50,000 and, in 2005, 2006 (paid in 2006 and 2007, respectively),
        of
        $100,000 which
        protects our technology licensing agreement through fiscal year
        2007. Upon
        termination of the Agreement for any reason, the patents, patent applications
        and know-how assigned by Yissum to us in June 1991 will revert in full to
        Yissum. In addition, in the event of a material breach of the Agreement by
        us,
        all patents and patent applications derived from the research shall revert
        to
        Yissum.
 
 [2]
              Dimotech
                  Ltd. agreement:
 
 During
        July 1995, we entered into an agreement with Dimotech Ltd., pursuant to which
        we
        financed and Dimotech conducted research and development with regard to the
        scar
        management program. In connection with the agreement, Dimotech assigned to
        us
        their 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, we
        reached
        a settlement with Dimotech with respect to past due royalties and accrued
        interest aggregating $125,000. Pursuant to the settlement, we 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. In
        August
        2006, we repaid the $40,000 note payable.
  [3]
              diZerega
                  agreement:
 
 In
        1995,
        we entered into an agreement to receive consulting services limited to the
        research, development, clinical testing, regulatory approval, marketing and
        sales of commercial products for the prevention of surgical adhesions and
        intra-peritoneal drug delivery, in each case utilizing polymeric materials
        licensed to us by the Yissum Research and Development Company of the Hebrew
        University of Jerusalem (note H [1]).
  Pursuant
        to the Agreement, we are obligated to pay a royalty of one percent of all
        net
        sales of our covered products in any and all countries. The Agreement continues
        until end of fifteen years from the date of the first commercial sale of
        such
        covered product in that country.
  In
        2006,
        we incurred $1,000 in royalty expense relating to this agreement.
 
 **(NOTE
        I) - Commitments and Other Matters:**
  [1]
              Employment
                  agreement:
 
 At
        December 31, 2006, we have employment agreements with four executives, two
        of which expire in September 2007, and the others in March 2009 and May 2009.
        Pursuant to these agreements, our commitment regarding early termination
        benefits aggregates $495,000 at December 31, 2006.
 
 [2]
              Supplier
                  concentration:
 
 In
        2006,
        we established contractual supplier arrangements replacing Polymer Technology
        Group, Inc. (“PTG”) which had been our prior primary supplier. For the year
        ended December 31, 2005 and 2006, we paid these suppliers $220,000 and $452,000,
        respectively, in connection with such services.
 
 [3]
              Reversal
                  of liabilities:
 
 During
        2006 and 2005, we reversed liabilities of $47,000 and $37,000, respectively,
        primarily relating to trade transactions with former vendors.  The
        underlying transactions occurred during or before 2000 and 1999,
        respectively, and there has been no communication with the  parties
        regarding these transactions since that time.  Accordingly, we
        believe that any claim for these amounts at this time would be barred
        by applicable statutes of limitations.
 F-17
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        I) - Commitments and Other Matters: (continued)**
 
 [4]
              Lease
                  commitments:
 
 The
        Company has a cancelable operating lease commitment for office facilities
        space.
        Lease is cancelable upon giving the landlord 6 months prior written notice
        to be
        effective at any time between the expiration of the 24 th month
        and the expiration of the 48 th month of
        the lease term. The operating lease agreement is subject to predetermined
        rate
        increases in accordance with the signed rental agreements. Rent is charged
        to
        operating expense on a straight-line basis over the term of leases where
        contractual increases effect rent payments. Rent expense under operating
        leases
        for the year ended December 31, 2006 was $21,000. There was no rent expense
        incurred in 2005.
 
 Future
        minimum lease payments under operating leases consisted of the following
        at
        December 31, 2006:
  **Year
                  Ending****December
                  31,**
              
              **Operating**2007
              
              $
              35,0002008
              
              
              37,0002009
              
              
              38,0002010
              
              
              39,0002011
              
              
              16000Total
                  future minimum lease payments
              
              $
              165,000
  [5]
              Reclassifications:
 
 We
        have
        reclassified approximately $224,000 of compensation charges during 2006 from
        general and administrative expenses to research and development expenses
        associated with the adoption of SFAS 123R, stock-based
        compensation.
  **(NOTE
        J) - Related Parties:**
  See
        NOTE
        F [1] with respect to our transaction with Phairson Ltd., a company in which
        the
        Chairman of our Board of Directors, is a stockholder and former
        CEO.
  Prior
        to
        securing office space in May, 2006, our activities had been conducted at
        the
        premises of our Chief Executive Officer and stockholder on a rent free
        basis.
  **(NOTE
        K) -** **Cost
        of Goods Sold:**
  The
        initial quantities of finished goods sold do not have the cost of raw materials
        factored in as this cost was previously expensed as research and development
        in
        prior periods. We estimate that remaining raw material that was previously
        expensed as research and development will be depleted over the next
        year.
 F-18
  **SYNTHEMED,
        INC.**
 **NOTES
          TO FINANCIAL STATEMENTS**
 **(NOTE
        K) -** **Cost
        of Goods Sold: (continued)**
  The
        following table illustrates the effect on cost of goods sold and gross profit
        if
        the cost of the raw material had been included in finished goods inventory
        for
        the year ended December 31, 2006 (in thousands):
  **Year
                  Ended****December
                  31, 2006**Reported
                  Net sales
              
              $
              142
              
              
              100
              %Pro
                  forma COGS
              
              
              39
              
              
              28
              %Pro
                  forma Gross Profit
              
              $
              103
              
              
              72
              %
  **(NOTE
        L) - Subsequent Events:**
 
 Subsequent
        to December 31, 2006, the Company received gross proceeds of approximately
        $14,000 upon the exercise of 76,536 Common Stock options.
  On
        February 22, 2007 we repaid the $70,000 5-year, 5% convertible promissory
        note
        (see Note E).
 F-19