**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, 2007**




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





**For
      the transition period from __________** **to** __________




**Commission
      file number: 0-20580**




**SYNTHEMED,
      INC** .


**(Name
      of small business issuer in its charter)**


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


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





**(732)
      404-1117**


**(Issuer’s
      telephone number** )





**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 is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o




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 xNO
o




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B, 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. o




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES oNO x





The
      issuer’s revenue for its fiscal year ended December 31, 2007 was
      $133,650.





The
      aggregate market value of the common equity held by non-affiliates of the
      registrant as of March 6, 2008 was approximately $33.2 million.





As
      of
      March 6, 2008, 87,621,108 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 2008 Annual
      Meeting of Stockholders are incorporated by reference into Part III of this
      Form
      10-KSB.





Transitional
      Small Business Disclosure Format (Check one): YES oNO x












**PART
      I**




**Item
      1. Business**





**General**





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





In
      September 2006, we reported positive efficacy results from a multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. We incorporated the results
      of
      the trial into a Premarket Approval (“PMA”) application for United States Food
      and Drug Administration (“FDA”) approval to market REPEL-CV in the United States
      for use in all cardiothoracic surgical procedures. The PMA application was
      formally accepted for review by the FDA in March 2007.





In
      September 2007, a Circulatory System Devices Advisory Panel of the FDA
      recommended approval of REPEL-CV Adhesion Barrier for use in pediatric patients
      (21 and younger) who are likely to need secondary open heart surgery. The Panel
      also recommended the development of additional clinical data as a basis for
      expanding the indicated use to include adult patients. In November 2007, we
      received an “Approvable Letter” from the FDA stating that REPEL-CV would be
      approved for the Panel-recommended indication, subject to completion and
      satisfactory review by the FDA of the results of its field inspections of the
      contract manufacturing sites used in the production of REPEL-CV. In January
      2008, we received a request from the FDA for additional information pertaining
      to certain aspects of the manufacturing and sterilization processes for
      REPEL-CV. We have responded to the inquiries and are maintaining a dialogue
      with
      the FDA which we are hopeful will lead to approval of the PMA application for
      the pediatric indication in mid-2008, as well as clarification of the additional
      data requirements to support approval of a PMA application for use in adults.
      In
      February 2008, we received a Warning Letter from the FDA identifying certain
      protocol violations observed during the REPEL-CV pivotal clinical trial; we
      have
      submitted to the FDA the corrective actions taken to avoid reoccurrence in
      future clinical studies. The
      timing and scope of any FDA approval of the PMA application, as well as the
      nature and extent of additional data required to expand any approved indication,
      remain uncertain and will materially impact our plan of operations during the
      next twelve months. Subject to obtaining FDA marketing approval, we intend
      to
      market and sell REPEL-CV in the United States through a field sales effort
      comprised of both our own sales representatives complemented by independent
      sales representatives.





In
      September 2006, following receipt of CE Mark approval, we launched REPEL-CV
      for
      sale in the European Union (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. We have filed for regulatory
      approval to market REPEL-CV in Canada.





We
      are
      also assessing opportunities to leverage our polymer film technology used in
      REPEL-CV in other anatomic sites where the presence of a temporary barrier
      at
      the surgical site may provide clinical benefit at the point of a subsequent
      surgery and/or reduce post-operative complications. Examples include the use
      of
      our technology to limit risks of soft tissue injury associated with anterior
      vertebral revision surgery, a spinal surgery technique that has become more
      prevalent with the advent of artificial replacement discs, and to limit sinus
      blockages associated with sinus surgery. We are
      exploring whether we can obtainFDA approval for such surgical
      indications through the 510(k) review process which typically does not involve
      the clinical studies required for a PMA approval.





**Post-Operative
      Adhesions**




Adhesions
        are fibrous structures that connect tissues or organ surfaces that are not
        normally joined. They are an undesirable side effect of the body's normal
        healing process following damage to tissue. Adhesions can cause significant
        complications such as bowel obstruction following abdominal surgery, infertility
        following gynecologic surgery, serious complications during secondary
        cardiovascular surgical procedures, restricted limb motion following orthopedic
        surgery, and pain following any surgery. Moreover, adhesions that form as
        a
        result of surgery can increase the complexity, duration and risk of subsequent
        surgery. Based on secondary market research, surgeons in the United States
        perform an estimated 500,000 abdominal operations annually to remove adhesions. In
        the
        absence of an efficacious means of intervention, the formation of adhesions
        becomes a virtually unavoidable byproduct of the trauma caused to internal
        tissue surfaces during the surgical procedure. Numerous clinical studies
        substantiate the observation that performing such procedures laparoscopically
        (less-invasively) rather than in the traditional open manner, in fact, may
        lead
        to the formation of more extensive and problematic adhesions.




1





Adhesion
        formation after open-heart surgical procedures is a significant complication
        at
        the point of performing a secondary procedure. We estimate that secondary
        procedures (re-do’s) account for 15-20% of the approximately 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.




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**




*REPEL-CV* *®
      Adhesion Barrier*





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





Pivotal
      Trial





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


2





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.





Regulatory





We
      have
      incorporated the results of these clinical studies into the PMA application
      as a
      basis for obtaining FDA approval to market REPEL-CV in the United States for
      use
      in all cardiothoracic surgical procedures. The PMA was formally accepted for
      review by the FDA in March 2007.





In
      September 2007, a Circulatory System Devices Advisory Panel of the FDA
      recommended approval of REPEL-CV Adhesion Barrier for use in pediatric patients
      (21 and younger) who are likely to need secondary open heart surgery. The Panel
      also recommended the development of additional clinical data as a basis for
      expanding the indicated use to include adult patients. In November 2007, we
      received an “Approvable Letter” from the FDA stating that REPEL-CV would be
      approved for the Panel-recommended indication, subject to completion and
      satisfactory review by the FDA of the results of its field inspections of the
      contract manufacturing sites used in the production of REPEL-CV. In January
      2008, we received a request from the FDA for additional information pertaining
      to certain aspects of the manufacturing and sterilization processes for
      REPEL-CV. We have responded to the inquiries and are maintaining a dialogue
      with
      the FDA which we are hopeful will lead to approval of the PMA application for
      the pediatric indication in mid-2008, as well as clarification of the additional
      data requirements to support approval of a PMA application for use in adults.
      In
      February 2008, we received a Warning Letter from the FDA identifying certain
      protocol violations observed during the REPEL-CV pivotal clinical trial; we
      have
      submitted to the FDA the corrective actions taken to avoid reoccurrence in
      future clinical studies.The
      timing and scope of any FDA approval of the PMA application, as well as the
      nature and extent of additional data required to expand any approved indication,
      remain uncertain and will materially impact our plan of operations during the
      next twelve months. Subject to obtaining FDA marketing approval, we intend
      to
      market and sell REPEL-CV in the United States through a field sales effort
      comprised of both our own sales representatives complemented by independent
      sales representatives.




In
        August, 2006 we received CE Mark approval to market REPEL-CV for use in cardiac
        surgery within the European Union (EU) and in other international markets.
        We
        have filed for regulatory approval to market REPEL-CV in Canada. Subject
        to FDA
        approval of the PMA, we intend to pursue regulatory approval and registration
        in
        other countries, such as Japan, South Korea and China, where local regulatory
        approval is conditioned, in part, upon US regulatory
        approval.





Marketing
      and Sales





Subject
      to FDA approval of the PMA application, we intend to market REPEL-CV in the
      United States through a sales force comprised of our own sales representatives
      complemented by independent sales representatives. All of the field sales
      personnel will have experience selling cardiac device products into hospitals
      and will focus their efforts on promoting the features and benefits of REPEL-CV
      to both cardiovascular surgeons as well as the hospital administrative
      customers. The initial sales emphasis will be targeted at pediatric surgical
      centers as well as major hospitals where both pediatric and adult cardiothoracic
      surgical procedures are performed. A multi-faceted advertising and sales
      promotion program has been developed to support the field sales efforts. It
      is
      anticipated that upon receipt of FDA approval, REPEL-CV will be the first and
      only product approved for the reduction in the severity of adhesions in
      pediatric patients who are likely to need secondary open heart surgery. Our
      sales efforts will be intended to address this unmet clinical need and
      capitalize on this exclusive market opportunity.




3





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. The
      penetration of these markets has not met our expectations due to both the poor
      performance of certain distributors and the slower than anticipated pace of
      obtaining administrative and government approvals required to allow product
      stocking and usage. We are continuing to upgrade our distribution relationships
      as needed to increase the penetration of these markets. We are also assisting
      our distributors in obtaining government reimbursement approvals and by
      providing business plan templates and other support tools to assist surgeons
      in
      gaining hospital approval to stock and use REPEL-CV.





*Other
      Film-based Product Opportunities*





We
        are
        also assessing opportunities to leverage our polymer film technology used
        in
        REPEL-CV in other anatomic sites where the presence of a temporary barrier
        at
        the surgical site may provide clinical benefit at the point of a subsequent
        surgery and/or help to avoid post-operative complications. One such example
        is
        in anterior vertebral revision surgery. With the advent of artificial
        replacement discs, the technique for placement of these discs in the lumbar
        region of the spine involves an anterior entry in which the spine is accessed
        through an incision in the abdominal cavity. In the event that the implantation
        of the artificial disc has to be revised through a second procedure, access
        to
        the spine becomes challenging due to the attachment of the aorta and other
        structures to the spine. The placement of our polymer film on the spine during
        the initial procedure may provide the surgeon a clearer plane of dissection
        and
        thus reduce the related risks during the revision procedure. We are conducting
        preclinical studies to evaluate the performance of our polymer film in spine
        procedures. We are exploring whether we can obtain FDA approval for this
        surgical indication through the 510(k) review process which typically does
        not
        involve the clinical studies required for a PMA approval.
 
 Another
        potential application for our polymer film technology is in Ear, Nose &
Throat (“ENT”) surgery. There are approximately two million surgical procedures
        performed in the United States each year involving the sinuses. Invariably,
        as a
        result of the trauma and bleeding which occurs during these procedures, the
        sinus passages become blocked resulting in the need for a subsequent surgical
        procedure to clear the blockage. Surgeons will often use silicone and other
        non-resorbable tubes to maintain clear openings of the sinus passages during
        the
        post-operative healing period; however, these tubes must be removed which
        unavoidably causes additional trauma and bleeding. We plan to evaluate the
        use
        of a coil of our polymer film to perform the same post-operative task as
        the
        silicone tubing but without the need to subsequently remove the material.
        Receipt of PMA approval for REPEL-CV will provide us the latitude to consider
        evaluating this material in these surgical procedures and, if efficacy is
        demonstrated, we would then attempt to obtain FDA approval through the same
        510(k) process as previously referenced.


Should
      these initiatives provide positive outcomes, we would plan to commercialize
      any
      such products through licensing/distribution arrangements with companies
      currently marketing other surgical devices to the spine and ENT surgical
      communities .





*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.
      These preclinical studies have been suspended pending resolution of the REPEL-CV
      PMA application and the raise of additional financing.




4




*RESOLVE*





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





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





In
      previous preclinical studies, a number of formulations of these instillate
      materials had been evaluated 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. Although progress with these preclinical studies was made during 2007,
      this development program was recently put on hold pending resolution of the
      REPEL-CV PMA application and the raise of additional financing.





*RELIEVE*





Gels
      of
      higher viscosities may also be beneficial in addressing adhesion formation
      in
      articulating joints subsequent to orthopedic surgical procedures and involving
      the spinal canal after spinal surgery. The RELIEVE category of viscous gel
      products 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. This development program was put on hold pending
      resolution of the REPEL-CV PMA application and the raise of additional
      financing.





**Our
      Polymer Technology**




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




We
      incurred expenses of $2,180,000 in 2007 and $2,163,000 in 2006 on
      company-sponsored research and development activities. Our research and
      development activities are currently conducted through arrangements with various
      consultants, companies and institutions in the United States, Europe and Israel.





*Yissum
      Agreement*




Our
      principal polymer technology was developed at the Hebrew University of
      Jerusalem. We entered into an agreement with Yissum Research Development Company
      of the Hebrew University of Jerusalem (“Yissum”) dated June 14, 1991, as amended
      (the “Yissum Agreement”), pursuant to which we agreed to finance research and
      development conducted at the Hebrew University of Jerusalem in the field of
      biomedical polymers. Pursuant to the Yissum Agreement, Yissum assigned to us
      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.




5





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





The
      Yissum Agreement continues until the later of the last date upon which the
      patents covering the products governed by the Yissum Agreement expire or the
      end
      of a period of 15 years from the date of the first commercial sale of products
      under the assigned technology. Yissum
      has the right in its sole discretion to terminate the Yissum Agreement and/or
      enter into contracts with others in order to grant them a license for the
      development, manufacture and marketing of a product and the other rights
      detailed in the Yissum Agreement if, among other things, (i) we stop
      manufacturing and/or marketing the product for a period of more than 12 months;
      or (ii) we breach 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, $100,000 for each of performance years 2005 and 2006, and $150,000 for
      each of performance years 2007 and 2008, which protects our rights to the
      technology through fiscal year 2009. 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 thresholds, the previously referenced minimum
      royalty payments have been 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 assigned by Yissum
      to us will revert in full to Yissum.





*Phairson
      Technology*





In
      March
      2003, we
      completed the purchase of the polymer technology assets of a private medical
      technology company based in the United Kingdom, Phairson Medical Limited (and
      an
      affiliated entity; collectively, “Phairson”), in exchange for the issuance of
      6,895,561 shares of our restricted Common Stock. The assets comprise a series
      of
      United 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
      enhanced our broad-based, proprietary technology platform from which
      post-operative adhesion prevention products may be derived. In connection with
      the acquisition, we granted an option, exercisable for seven years, to purchase
      up to 100,000 shares of Common Stock at $.09 per share to Dr. Gere S. diZerega,
      who has served as a medical consultant to both companies and who assisted in
      identifying the acquisition opportunity. Dr. diZerega had previously served
      as a
      director of our Company.





**Government
      Regulation**




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




6





*US
      Food and Drug Administration*





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





In
      order
      to obtain FDA approval of a new drug, a biologic or device, companies must
      submit proof of safety and efficacy. In most cases such proof entails extensive
      clinical and preclinical laboratory tests. The testing and preparation of
      necessary applications and processing of those applications by the FDA is
      expensive and may take several years to complete. There is no assurance that
      the
      FDA will act favorably or in a timely manner in reviewing submitted
      applications, and 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 post-marketing testing
      and
      surveillance of approved products, or place other conditions on the
      approvals.




The
        FDA
        categorizes devices into three regulatory classifications subject to varying
        degrees of regulatory control. In general, Class I devices require compliance
        with labeling and record keeping regulations, GMPs, 510(k) pre-market
        notification, and are subject to other general controls. Class II devices
        may be
        subject to additional regulatory controls, including performance standards
        and
        other special controls, such as guidelines and post-market surveillance.
        Class
        III devices, which are typically invasive or life-sustaining products, or
        new
        products never before marketed, require clinical testing to assure safety
        and
        effectiveness and FDA approval prior to marketing and distribution. The FDA
        also
        has the authority to require clinical testing of Class I and Class II devices.
        REPEL-CV and other products currently under development as anti-adhesion
        products utilizing our polymer technology are classified as Class III devices,
        requiring a PreMarket Approval (“PMA”) application review process prior to
        commercial distribution in the United States. In surgical applications where
        we
        are not pursuing an anti-adhesion clinical indication, such as in spine surgery
        and ENT surgery, we plan to explore whether we can obtain FDA approval through
        the 510(k) pre-market notification process.




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




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




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




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




7





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





*Foreign
      Regulation*





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





*Third
      Party Reimbursement*





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





We
      have
      been pursing a reimbursement strategy to support the sale of REPEL-CV in the
      United States. We have identified a ICD-9-CM reimbursement code which hospitals
      can use, which may result in the receipt of additional reimbursement for the
      use
      of REPEL-CV in open heart surgical procedures once a pattern of product usage
      has been established. Subject to FDA approval of the REPEL-CV PMA application,
      we plan to initiate a lobbying campaign on the part of surgeons requesting
      the
      Centers for Medicare & Medicaid Services to establish a CPT code for
      additional physician fee payment to reflect the incremental effort on the part
      of the surgeon on the placement of REPEL-CV during the surgical procedure.





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.





We
      are
      actively pursuing listing of REPEL-CV on formulary in France and Belgium which
      would allow for specific reimbursement in public hospitals. Our distributors
      have been successful in establishing tenders at individual hospitals in Spain
      and Italy which allows for the product to be purchased at set prices over a
      certain term.





**Patents
      and Proprietary Rights**





In
      connection with the polymer technology relating to the Yissum Agreement, 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.




8




These
      patents are scheduled to expire on various dates from July 2008 through June
      2023. The expiration date of the first patent relevant to REPEL-CV and other
      bioresorbable polymer products under development is in 2016.





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





**Competition**





Our
      adhesion prevention products are expected to compete with various currently
      marketed products such as Interceed ® ,
      a
      product of Johnson & Johnson, Seprafilm ® ,
      a
      product of Genzyme, Adhibit®, a product of Angiotech Pharmaceuticals, Inc.,
      CardioWrap®, a product of Mast Surgical, Adept®, a product of ML Labs Ltd. and
      Preclude ® ,
      a
      product of WL Gore. Several other companies including, Anika Therapeutics,
      Inc.,
      Alliance Pharmaceuticals, Corp., 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. These competitive products are not supported
      by controlled clinical studies of the type that have been conducted for REPEL-CV
      through the FDA regulatory process, which, we believe, has contributed to their
      achieving very limited use. In the United States, although there are currently
      no anti-adhesion products approved by the FDA for use in open heart surgery,
      products like CardioWrap and Preclude are being used off label to reduce
      adhesions particularly in staged procedures performed on neonates.





**Manufacturing**




We
      do not
      have our own manufacturing facilities and do not currently intend to undertake
      the direct manufacture of our products. REPEL-CV is manufactured by a series
      of
      three independent contract manufacturers with whom we have established validated
      manufacturing procedures and formal supply agreements for the production of
      the
      polymer resin, polymer sheet stock and finished product, respectively. The
      contract manufacturers are responsible to procure, test and inspect all
      component materials used in the production of our 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**





Subject
      to FDA approval of the REPEL-CV PMA, in the United States we intend to market
      REPEL-CV through a direct sales effort comprised of both our own sales
      representatives complemented by independent sales representatives. All of the
      field sales personnel will have experience selling cardiac device products
      into
      hospitals and will focus their efforts on promoting the features and benefits
      of
      REPEL-CV to both cardiovascular surgeons as well as the administrative
      customers. The initial sales emphasis will be targeted at pediatric surgical
      centers as well as major hospitals where both pediatric and adult cardiothoracic
      surgical procedures are performed.





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




9





A
      multi-faceted advertising and sales promotion program has been developed to
      support the field sales efforts. It is anticipated that, upon receipt of FDA
      approval, REPEL-CV will be the first and only product with FDA approval for
      the
      reduction in the severity of adhesions in pediatric patients who are likely
      to
      need secondary open heart surgery. Our sales efforts are intended to address
      this unmet clinical need and capitalize on this exclusive market
      opportunity.





In
      September 2006, we launched REPEL-CV for sale in certain EU countries and
      several Southeast Asian markets through a network of independent distributors,
      all of whom are experienced at selling devices and medical equipment to cardiac
      surgeons. We are continuing to upgrade our distribution relationships as needed
      to increase the penetration of these markets. Subject to FDA approval of the
      PMA, we intend to pursue regulatory approval and registration in other
      countries, such as Japan, South Korea and China, where local regulatory approval
      is conditioned in part upon US regulatory approval. We are currently in
      discussion with prospective distributor partners in many of these
      markets.





**Human
      Resources**





As
      of
      February 2008, we employed five full-time employees and one part-time employee.
      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 2008 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
              
              62
              
              President,
                  CEO & CFOEli
                  Pines, Ph.D
              
              62
              
              Vice
                  President and Chief Scientific OfficerMarc
                  Sportsman
              
              53
              
              Vice
                  President of Sales




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





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





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





10




**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 Reproductive
                Endocrinology and Infertility. He has long-standing involvement in
                animal
                and clinical trials assessing postoperative adhesion development.  **Gere S. diZerega,
              M.D.**
            Dr.
                Gere S. diZerega is Professor, Department of Obstetrics and Gynecology
                at
                Women’s’ Hospital, University of Southern California Medical Center. Dr.
                diZerega’s areas of research include post-operative adhesions, peritoneal
                healing and post-surgical wound repair.  **Steven R. Gundry,
              M.D.**
            Dr. Steven R. Gundry is Director
                of the
                International Heart Institute at the Dessert Regional Medical Center,
                Palm
                Springs, CA and Professor, Departments of Surgery and Pediatrics
                at Loma
                Linda University School of Medicine. Dr. Gundry is a Board certified
                cardiothoracic surgeon with research interests in myocardial protection,
                minimally invasive surgery, robotics and cardiovascular
                surgery.  **Mehmet C. Oz,
              M.D.**
            Dr. Mehmet C. Oz is Irving Assistant
                Professor of Surgery at Columbia University College of Physicians
                and
                Surgeons, New York and Director of The Assist Device Program and
                attending
                surgeon of the Division of Cardiothoracic Surgery at New 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 Montefiore
                Medical Center, New York. His research interests include hypoplastic
                left
                heart syndrome, Marfan’s disease and cryoablation in Fontan revision
                procedures.





11





**Risks
      Related to Our Business**




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




We
      have
      incurred significant net losses since inception. We had net losses of $3,895,000
      in 2006 and $4,623,000 in 2007. At December 31, 2007, we had an accumulated
      deficit of $52,768,000. We currently have no products approved for sale in
      the
      United States. Although we obtained CE Mark approval in August 2006 to sell
      our
      lead product, REPEL-CV, and subsequently launched it through independent
      distributors in certain EU and Southeast Asian markets, we have not achieved
      significant levels of overseas sales for this product. 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 products or product candidates in a commercialization
      stage of development. All of our products and product candidates require
      regulatory approval prior to commercial use, and many of our product candidates
      will require significant further research, development and testing, including
      potentially extensive clinical testing, prior to regulatory approval and
      commercial use. Sale of REPEL-CV in the United States is contingent upon
      obtaining FDA approval, which we anticipate to occur in mid-2008, though the
      timing, scope and certainty of any such approval is unknown and subject to
      numerous factors beyond our control. 2007 marked the first full year of REPEL-CV
      sales overseas, and we have not achieved significant levels of overseas sales.
      Our ability to generate meaningful revenue from REPEL-CV will be dependent
      on a
      variety of factors, many of which are beyond our control. These
      include:




·
            Obtaining necessary FDA and foreign regulatory
              approvals;  ·
            Maintaining
                satisfactory manufacturing, marketing and distribution
                arrangements;  ·
            Degree of market acceptance;  ·
            Level of reimbursement by government and third party
              payers; and  ·
            Competition.




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.




12




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. We have incorporated
      the results of these clinical studies into the PMA application as a basis for
      obtaining FDA approval to market REPEL-CV in the United States for use in all
      cardiothoracic surgical procedures. The PMA application was formally accepted
      for review by the FDA in March 2007.





In
      September 2007, a Circulatory System Devices Advisory Panel of the FDA
      recommended approval of REPEL-CV Adhesion Barrier for use in pediatric patients
      (21 and younger) who are likely to need secondary open heart surgery. The Panel
      also recommended the development of additional clinical data as a basis for
      expanding the indicated use to include adult patients. In November 2007, we
      received an “Approvable Letter” from the FDA stating that REPEL-CV would be
      approved for the Panel-recommended indication, subject to completion and
      satisfactory review by the FDA of the results of its field inspections of the
      contract manufacturing sites used in the production of REPEL-CV. In January
      2008, we received a request from the FDA for additional information pertaining
      to certain aspects of the manufacturing and sterilization processes for
      REPEL-CV. We have responded to the inquiries and are maintaining a dialogue
      with
      the FDA which we are hopeful will lead to approval of the PMA application for
      the pediatric indication in mid-2008, as well as clarification of the additional
      data requirements to support approval of a PMA application for use in adults.
      The timing and scope of any FDA approval of the PMA application, as well as
      the
      nature and extent of additional data required to expand any approved indication,
      remain uncertain and will materially impact our plan of operations during the
      next twelve months. Subject to obtaining FDA marketing approval, we intend
      to
      market and sell REPEL-CV in the United States through a field sales effort
      comprised of both our own sales representatives complemented by independent
      sales representatives.





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





European
      Union and Other International Markets




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




13




*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 twelve months. As a result, the report of our
      independent auditors relating to our 2007 financial statements indicates that
      there is substantial doubt about our ability to continue as a going concern.
      We
      anticipate seeking to raise additional capital, most likely through equity-based
      financing, in the 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. In
      connection with the polymer technology relating to the Yissum Agreement, 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.  In
      connection with the polymer technology acquired from Phairson, we currently
      hold
      two United States patents with claims for the treatment of trauma with a
      composition comprising a polyanionic polymer and for a composition comprising
      hydrolytically susceptible polyanionic polymer.





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




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




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




14




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




Our
      future growth and profitability will depend, in large part, on the
      acceptance by the medical community of REPEL-CV and our 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
      rely
      on a series of suppliers in the production of REPEL-CV, each of whom
      performs a key role in production, and have not yet established supply
      redundancies. Any delays or failures of the manufacturing or packaging
      process at any of these suppliers, which to a large extent may be beyond our
      control, could cause inventory problems or product shortages. To be
      successful, however, we must be capable of manufacturing or contracting for
      the manufacture of REPEL-CV and our products in commercial quantities, in
      compliance with regulatory requirements and at acceptable costs. We may
      manufacture certain products directly at such time, if ever, that such
      products are successfully developed. We have no experience with the direct
      manufacture of these proposed products. The manufacture of these proposed
      products is complex and difficult, and will require us to attract and
      retain experienced manufacturing personnel and to obtain the use of a
      manufacturing facility in compliance with FDA and other
      regulatory requirements. We may not be able to attract or retain
      experienced personnel, and we may not be able to obtain the financing
      necessary, to manufacture these products directly.




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




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





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




15




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




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




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




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




·
            research
                and development expertise;


·
            experience
                in conducting clinical trials;


·
            experience
                in regulatory matters;


·
            manufacturing
                efficiency;


·
            name
                recognition;


·
            sales
                and marketing expertise;


·
            established
                distribution changes; and


·
            established
                relationships with health care providers and
                payers.




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




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




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




·
            the
                imposition of governmental
                controls;


·
            logistical
                difficulties in managing international operations;
                and


·
            fluctuations
                in foreign currency exchange rates.





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





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




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




16




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




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




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




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




*We
      May Be Exposed to Large Product Liability Claims*




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




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




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





**Risks
      Related to Our Stock**




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




The
      sale
      or availability for sale of substantial amounts of our Common Stock,
      including shares issuable upon exercise of outstanding stock options and
      warrants, in the public market could adversely affect the market price of our
      Common Stock. As of March 6, 2008, we had 87,621,108 shares of Common Stock
      issued and outstanding and the following shares of Common Stock were
      reserved for issuance:




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





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





·
            12,872,000
                shares upon exercise of outstanding options, exercisable at prices
                ranging
                from $0.09 to $2.00 per share and expiring from June 6, 2008 to May
                15,
                2017.





Substantially
      all of our outstanding shares of Common Stock are presently saleable in the
      public market without restriction. Exercise of all of our outstanding options
      and resale of the shares underlying all of our outstanding warrants, is
      presently covered by effective registration statements, which include a resale
      prospectus for our “affiliates” (as that term is defined in the rules under the
      Securities Act of 1933). As such, holders of these options and warrants are
      presently free to sell the underlying shares in the public market without
      restriction. 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 Common Stock issued or issuable
      in
      connection with such financing **.**




17




*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 may be subject to Delaware General
      Corporation Law provisions that may have the effect of discouraging persons
      from pursuing a non-negotiated takeover of our company and preventing
      certain changes of control.




**Certain
      Historical Activities**





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.




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




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





**Item
      3. Legal Proceedings**





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




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





None.




18




**PART
      II**





**Item
      5.**  **Market
      for the Registrant’s Common Equity and Related Stockholder Matters and Small
      Business Issuer Purchases of Equity Securities.**





**Market
      Information**




Our
      Common Stock is quoted on the OTC Bulletin Board under the trading symbol
“SYMD.”. The following sets forth the quarterly high and low bid 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
              
              LowFiscal
                  Year Ended December 31, 2006First
                  Quarter
              
              
              0.90
              
              
              0.40Second
                  Quarter
              
              
              0.85
              
              
              0.56Third
                  Quarter
              
              
              1.23
              
              
              0.65Fourth
                  Quarter
              
              
              1.20
              
              
              0.84Fiscal
                  Year Ended December 31, 2007First
                  Quarter
              
              
              1.02
              
              
              0.70Second
                  Quarter
              
              
              1.02
              
              
              0.80Third
                  Quarter
              
              
              1.32
              
              
              0.68Fourth
                  Quarter
              
              
              0.75
              
              
              0.45




**Approximate
      Number of Equity Securities Holders**





As
      of
      March 6, 2008, the number of holders of record of our Common Stock was 328.
      We
      believe that there are in excess of 1,450 beneficial holders of our Common
      Stock.





**Dividends**





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





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





*Certain
      statements in this Report under this Item 6 and elsewhere constitute
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995, including, without limitation, statements
      regarding future cash requirements, the success of any pending or proposed
      clinical trial, the timing and ability to achieve necessary regulatory approvals
      and market launch of any of our products or product candidates including
      REPEL-CV. Such forward-looking statements involve known and unknown risks,
      uncertainties and other factors that may cause the actual results, performance
      or achievements of our company, or industry results, to be materially different
      from any future results, performance, or achievements expressed or implied
      by
      such forward-looking statements. Such risks and uncertainties include but are
      not limited to (i) potential adverse developments regarding our efforts to
      obtain required FDA and other regulatory approvals; (ii) potential inability
      to
      secure funding as and when needed to support our activities and (iii)
      unanticipated delays associated with manufacturing and marketing activities.
      See
      Item 1. Business - Risks Related to our Business” and “Risks Related to Our
      Stock” for a description of these as well as other risks and uncertainties.
      Without limiting the foregoing, the words “anticipates”, “plans”, “intends”,
“expects” and similar expressions are intended to identify such forward-looking
      statements. These statements speak only as of the date of this Report or such
      earlier date to which the statement may expressly refer. We undertake no
      obligation to publicly release the results of any revisions to these
      forward-looking statements that may be made to reflect events or circumstances
      after the date hereof or to reflect the occurrence of unanticipated
      events.*




19





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





**Overview**





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





In
      September 2006, we reported positive efficacy results from a multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. We incorporated the results
      of
      the trial into a Premarket Approval (“PMA”) application [this convention is
      consistent with the Regulatory section; sorry for the change again] for United
      States Food and Drug Administration (“FDA”) approval to market REPEL-CV in the
      United States for use in all cardiothoracic surgical procedures. The PMA
      application was formally accepted for review by the FDA in March 2007.





In
        September 2007, a Circulatory System Devices Advisory Panel of the FDA
        recommended approval of REPEL-CV Adhesion Barrier for use in pediatric patients
        (21 and younger) who are likely to need secondary open heart surgery. The
        Panel
        also recommended the development of additional clinical data as a basis for
        expanding the indicated use to include adult patients. In November 2007,
        we
        received an “Approvable Letter” from the FDA stating that REPEL-CV would be
        approved for the Panel-recommended indication, subject to completion and
        satisfactory review by the FDA of the results of its field inspections of
        the
        contract manufacturing sites used in the production of REPEL-CV. In January
        2008, we received a request from the FDA for additional information pertaining
        to certain aspects of the manufacturing and sterilization processes for
        REPEL-CV. We have responded to the inquiries and are maintaining a dialogue
        with
        the FDA which we are hopeful will lead to approval of the PMA application
        for
        the pediatric indication in mid-2008, as well as clarification of the additional
        data requirements to support approval of a PMA application for use in adults. In
        February 2008, we received a Warning Letter from the FDA identifying certain
        protocol violations observed during the REPEL-CV pivotal clinical trial;
        we have
        submitted to the FDA the corrective actions taken to avoid reoccurrence in
        future clinical studies. The
        timing and scope of any FDA approval of the PMA application, as well as the
        nature and extent of additional data required to expand any approved indication,
        remain uncertain and will materially impact our plan of operations during
        the
        next twelve months. Subject to obtaining FDA marketing approval, we intend
        to
        market and sell REPEL-CV in the United States through a field sales effort
        comprised of both our own sales representatives complemented by independent
        sales representatives.


In
      September 2006, following receipt of CE Mark approval, we launched REPEL-CV
      for
      sale in the European Union (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. We have filed for regulatory
      approval to market REPEL-CV in Canada.





We
      are
      also assessing opportunities to leverage our polymer film technology used in
      REPEL-CV in other anatomic sites where the presence of a temporary barrier
      at
      the surgical site may provide clinical benefit at the point of a subsequent
      surgery and/or reduce post-operative complications. Examples include the use
      of
      our technology to limit risks of soft tissue injury associated with anterior
      vertebral revision surgery, a spinal surgery technique that has become more
      prevalent with the advent of artificial replacement discs, and to limit sinus
      blockages associated with sinus surgery. We intend to seek FDA approval for
      such
      surgical indications through the 510(k) review process which typically does
      not
      involve the clinical studies required for a PMA approval.




20





**New
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) 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. We adopted FIN 48 effective January 1, 2007. The adoption of
      FIN 48 did not have a material impact on our results of operations and
      financial position.





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. .
      However, the FASB has issued FASB Staff Position No. FAS 157-2, delaying
      the effective date for all nonfinanical assets and nonfinancial liabilities,
      except those items recognized or disclosed at fair value on a recurring basis
      until fiscal years beginning after November 15, 2008. We
      concluded the impact of the adoption of SFAS No. 157 will not have a material
      effect 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 have concluded the impact of SFAS No.
      159
      will not have a material effect on our financial position and results of
      operations.


In
        December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
        Combinations”, which replaces FASB Statement No. 141. SFAS 141(R)
        establishes principles and requirements for how an acquirer recognizes and
        measures in its financial statements the identifiable assets acquired, the
        liabilities assumed, any non controlling interest in the acquiree and the
        goodwill acquired. The Statement also establishes disclosure requirements
        which
        will enable users to evaluate the nature and financial effects of the business
        combination. SFAS 141(R) is effective as of the beginning of an entity’s
        fiscal year that begins after December 15, 2008, which corresponds to our
        year beginning January 1, 2009. We are assessing the impact of the adoption
        of
        SFAS No. 141(R) will have on our financial position and results of
        operations.





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





**Results
      of Operations** ****




Revenues
      were $134,000 for 2007, compared to $142,000 for 2006, a decrease of 5.6% or
      $8,000. Revenue is attributable to product sales of REPEL-CV in the European
      Union and in other international markets. 2006 revenue reflects less than a
      full
      year of sales, as REPEL-CV was first launched for sale in September 2006 after
      receiving CE Mark approval. Revenue for 2007, as compared to the prior year,
      decreased as a result of higher initial customer unit purchases required to
      fill
      the product pipeline during the prior year. The penetration of these markets
      has
      not met our expectations due to both the poor performance of certain
      distributors and the slower than anticipated pace of obtaining administrative
      approvals required to allowing product stocking and usage. Should the FDA
      approve the PMA application for the Advisory Panel-recommended indication of
      use
      in pediatric patients, we anticipate achieving increased revenue in future
      periods, though, given the more limited market, at lower levels than had the
      approval included use in the broader adult population.




21




Cost
      of
      goods sold was $29,000 for 2007, compared to $21,000 for 2006, an increase
      of
      38% or $8,000. Cost of goods sold reflects costs to process and package REPEL-CV
      into saleable form. The cost of the raw material is not included as part of
      the
      cost of goods sold or finished goods inventory cost as this was previously
      expensed as research and development expense in prior periods. Had raw material
      costs been included in cost of goods sold, cost of goods sold for 2007 would
      have been $45,000, compared to $39,000 for 2006. Cost of goods sold will include
      raw material costs in periods commencing after December 31, 2007, as the amount
      previously expensed as research and development expense has been fully depleted
      as of that date. The increase in cost of goods sold is mainly attributable
      to
      the establishment of a Reserve for Excess and Obsolete Inventory of $5,000
      in
      2007. No such reserve was recorded in 2006. (See Note B [4] and Note K of Notes
      to Financial Statements)




Research
      and development expenses totaled $2,180,000 for 2007, compared to $2,163,000
      for
      2006, an increase of 0.8% or $17,000. The increase is primarily attributable
      to
      higher regulatory costs associated with the PMA application submission and
      new
      product development costs for products that leverage our polymer technology
      of
      $564,000 and higher non-cash stock-based compensation charges of $130,000,
      partially offset by lower manufacturing development and clinical trial costs
      for
      REPEL-CV of $673,000. We anticipate that research and development expenses
      will
      continue to increase as we pursue our Post Approval Study (“PAS”) and additional
      studies relating to REPEL-CV and expand our other product development
      activities.




General
      and administrative expenses totaled $2,139,000 for 2007, compared to $2,173,000
      for 2006, a decrease of 1.6% or $34,000. The decrease is primarily attributable
      to a decrease in non-cash, stock-based compensation charges of $358,000,
      partially offset by increases in other compensation expense, professional fees,
      insurance and investor relations expenses associated with the continued
      expansion of the company’s operations.




Sales
      and
      marketing expenses totaled
      $1,131,000 for 2007, compared to $320,000 for 2006, an increase of 253.4% or
      $811,000. These
      expenses are primarily comprised of sales and marketing activities associated
      with REPEL- CV . The
      increase is primarily attributable to increased sales compensation cost of
      $208,000, non-cash, stock-based compensation expense of $97,000, consulting
      costs of $329,000 associated with REPEL- CV post-launch marketing in the
      European Union and other international markets and pre-launch marketing in
      the
      US, meetings and travel related expenses of $96,000 and increased royalty
      expense of $50,000. The increase in compensation costs, including non-cash
      compensation costs, is primarily attributable to our hiring a Vice President
      of
      Sales in May 2007. We
      anticipate an increased level of sales and marketing expense as we continue
      to
      prepare for a US launch of REPEL-CV. The level and rate of increase will depend
      on a number of factors including the timing of and other developments related
      to
      the FDA’s PMA approval process.





**** Interest
      income totaled $105,000 for
      2007 ,
      compared to $119,000 for 2006 ,
      a
      decrease of 11.8% or $14,000. The
      decrease is primarily attributable to lower average cash balances and lower
      interest rates.





No
      gain
      on settlement of debt was recorded during 2007, compared to $22,000 during
      2006 in
      connection with the settlement of outstanding trade payables.





Interest
      expense totaled $1,000 for
      2007, compared
      to $5,000 for 2006. The
      decrease was attributable to the repayment of an interest bearing convertible
      promissory note in the principal amount of $70,000 on February 22,
      2007.





We
      realized other income from the reversal of liabilities of $136,000 in 2007,
      compared to $47,000 in 2006. The reversal of liabilities in both years related
      to trade and other payables which had been due and payable for at least six
      years as of the date of reversal. The reversals were made due to the passage
      of
      time and our belief 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 $482,000 in 2007, compared to $456,000 in
      2006. 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 $4,623,000 for 2007, compared to a $3,895,000 for 2006,
      an increase of 18.7% or $728,000. The increase is attributable to the factors
      described above, primarily the increase in sales and marketing expenses. We
      expect to incur losses in the foreseeable future.




22




**Liquidity
      and Capital Resources**





At
      December 31, 2007 we had cash and cash equivalents of $2,991,000, compared
      to
      $3,722,000 at December 31, 2006. The primary use of these funds was for research
      and development expenditures related to anti-adhesion products and other
      surgical implants, general and administrative expenses, and sales and marketing
      expenses for the commercialization of REPEL-CV .





At
      December 31, 2007 we had working capital of $2,661,000, compared to $3,072,000
      at December 31, 2006.





Net
      cash
      used in operating activities during 2007 was $3,582,000, compared to $2,669,000
      during 2006. Net cash used in operating activities during 2007 was primarily
      attributable to a net loss of $4,623,000 partially offset by the impact of
      $1,291,000 in non-cash expenses which was mainly comprised of stock-based
      compensation expenses, which were partially offset by a net decrease of $226,000
      in accounts payable and accrued expenses including reversal of liabilities
      and
      net increases of $24,000 in accounts receivable, inventory and prepaid expenses.
      Net cash used in operating activities during 2006 was primarily attributable
      to
      a net loss of $3,895,000 partially offset by the impact of $1,398,000 in
      non-cash expenses mainly comprised of stock-based compensation expenses,
      including the modification of options which extended the exercise period by
      one
      year, which were partially offset by a net reduction of $65,000 in accounts
      payable and accrued expenses and increases of $107,000 in accounts receivable,
      inventory and prepaid expenses.





Net
      cash
      used in investing activities during 2007 was $25,000, compared to $94,000 during
      2006. Net
      cash
      used in investing activities was associated with the acquisition of computer
      equipment and office furniture during both years.





Net
      cash
      provided from financing activities during 2007 was $2,876,000, compared to
      $5,750,000 during 2006. The 2007 amount is comprised of $2,697,000 of net
      proceeds from the sale of common stock and $249,000 from the exercise of
      outstanding options and warrants, offset by the repayment of a $70,000
      convertible promissory note that matured in February
      2007 .
      The
      2006 amount is 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.





In
      August
      and September 2007, we sold an aggregate of 3,000,000 shares of common stock
      at
      a purchase price of $1.00 per share in a private placement, resulting in net
      cash proceeds of $2,697,000. In December 2007, we received $482,000 from the
      sale of certain New Jersey state tax losses.





The
      balance of cash and cash equivalents as of December 31, 2007 is not sufficient
      to meet our anticipated cash requirements through 2008, based on our present
      plan of operation. As a result, we are seeking to raise additional 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, 2007, we had employment agreements with five individuals that
      expire as follows: two in September 2008, one in March 2009, one in May 2009
      and
      one in May 2010. Pursuant to these agreements, our commitment regarding cash
      severance benefits aggregates $624,000 at December 31, 2007. We have also
      entered into change of control agreements with our three executive officers
      pursuant to which, upon the occurrence of events described therein, we could
      become obligated, in addition to certain other benefits, to pay either 150%
      or
      200%, depending on the executive, of such executives’ annual base salaries plus
      the greater of the prior year’s cash bonus or current year’s target bonus. Any
      severance payments under the employment agreements would offset amounts required
      to be paid under the change of control agreements.





**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.




23





**Item
      8A(T).**  **Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





Our
      Chief
      Executive Officer who is also our Chief Financial Officer, after evaluating
      the
      effectiveness of our "disclosure controls and procedures" (as defined in the
      Securities Exchange Act of 1934 Rule 13a-15(e); collectively, “Disclosure
      Controls”) as of the end of the period covered by this annual report (the
      "Evaluation Date") has concluded that as of the Evaluation Date, our Disclosure
      Controls 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 our Chief
      Executive Officer and Chief Financial Officer, particularly during the period
      when our periodic reports are being prepared to allow timely decisions regarding
      required disclosure.





**Annual
      Report on Internal Control Over Financial Reporting**




**** Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
      Under the supervision and with the participation of our management, including
      our Chief Executive Officer and Chief Financial Officer, we conducted an
      evaluation of the effectiveness of our internal control over financial reporting
      based on the criteria in Internal Control - Integrated Framework issued by
      the
      Committee of Sponsoring Organizations of the Treadway Commission. Based on
      our
      evaluation, management has concluded that our internal control over financial
      reporting was effective as of December 31, 2007.  This annual report
      does not include an attestation report of our independent registered public
      accounting firm regarding internal control over financial reporting pursuant
      to
      temporary rules of the Securities and Exchange Commission.





**Changes
      in Internal Control Over Financial Reporting**




In
      connection with the evaluation referred to in the foregoing paragraph, we have
      identified no change in our internal control over financial reporting that
      occurred during the fourth quarter of 2007 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.





**Item
      8B. Other Information.**





Effective
      February 2007, we amended the Yissum Agreement to, among other things, extend
      for an additional two years the period during which Yissum is prohibited from
      terminating the Yissum Agreement provided we pay Yissum minimum annual
      royalties. As amended, the Yissum Agreement is described under “Item 1. Business
      - Our Polymer Technology - Yissum Agreement.”




24


**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
      2008 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
      2008 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
      2008 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
      2008 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.
                (21)




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)





10.29
            Amendment
                No. 5 dated as of February 16, 2007 to the Agreement between the
                Registrant and Yissum *





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)





25


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)





10.40
            Employment
                Agreement dated May 1, 2007 between the Registrant and Marc Sportsman.
                (8)
                (20)





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
            Change
                of Control Agreement dated May 1, 2007 between the Registrant and
                Marc
                Sportsman. (8) (20)





10.55
            Form
                of ISO and Non-Qualified Stock Option Agreements under the Registrant’s
                2006 Stock Option Plan.(21)





10.56
            Stock
                Option Amendment Agreement, dated as of April 27, 2007, in favor
                of Robert
                P. Hickey. (20)





10.57
            Stock
                Option Amendment Agreement, dated as of April 27, 2007, in favor
                of Eli
                Pines, PhD. (20)





10.58
            Form
                of Subscription Agreement for August 2007 equity placement.
                (20)





10.59
            Form
                of Investor Rights Agreement for August 2007 equity placement.
                (20)





10.60
            Agency
                Agreement for August 2007 equity placement.
                (20)





10.61
            Form
                of Broker Warrant issued to Agent's designees covering an aggregate
                of
                210,000 shares.(20)





10.62
            Supply
                Agreement, dated as of June 12, 2007, between our company and Diagnostic
                Chemicals Limited,doing
                business as BioVectra (portions of this exhibit have been redacted
                and
                filed separately with the SECpursuant
                to a request for confidential treatment).
                (20)





10.63
            Supply
                Agreement, dated as of March 29, 2007, between our company and Chem
                Development Inc. (portions of
                this exhibit have been omitted  and filed separately with the SEC
                pursuant to a request for confidential treatment).(19)





26


10.64
            Supply
                Agreement, dated as of March 9, 2007, between our company and Surgical
                Technologies Inc. (portionsof
                this exhibit have been omitted  and filed separately with the SEC
                pursuant to a request for confidential treatment).
                (19)




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.




(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 its 2006 annual meeting of
                stockholders.





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





(19)
            Incorporated
                by reference to the Registrant’s report on Form 10-QSB for the quarter
                ended March 31, 2007.





(20)
            Incorporated
                by reference to the Registrant’s report on Form 10-QSB for the quarter
                ended June 30, 2007.





(21)
            Incorporated
                by reference to the Registrant’s report on Form 10-KSB for the year ended
                December 31, 2006.




**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
      2008 annual meeting of stockholders.




27





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)Dated:
                March 21, 2008
            By:
            /s/ Robert
              P.
              HickeyRobert
                P. Hickey
                President,
                  CEO and CFO
                  (principal
                    executive, financial and accounting
                    officer)







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.
                **Richard
                  L. Franklin, M.D.**
              
              Chairman
                of the Board
              
              March
                21, 2008/s/
                Robert P. Hickey
                **Robert
                  P. Hickey**
              
              Director,
                  President, CEO and CFO(principal executive, financial and accounting
                  officer)
              
              March
                21, 2008/s/
                David G. P. Allan
                **David
                  G. P. Allan**
              
              Director
              
              March
                21, 2008/s/
                Joerg Gruber
                **Joerg
                  Gruber**
              
              Director
              
              March
                21, 2008/s/
                Barry R. Frankel
                **Barry
                  R. Frankel**
              
              Director
              
              March
                21, 2008/s/
                Walter R. Maupay
                **Walter
                  R. Maupay**
              
              Director
              
              March
                21, 2008




28


**INDEX
      TO FINANCIAL STATEMENTS**





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





F-1


**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors and Stockholders


SyntheMed,
      Inc.




We
      have
      audited the accompanying balance sheets of SyntheMed, Inc. (the “Company”) as of
      December 31, 2006 and 2007 and the related statements of operations,
      changes in stockholders’ equity and cash flows for each of the years in the
      two-year period ended December 31, 2007. 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. We were not engaged to perform
      an
      audit of the Company's internal control over financial reporting. Our audits
      include consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company's internal control over financial reporting. Accordingly, we express
      no
      such opinion. An audit includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of SyntheMed, Inc. as of
      December 31, 2006 and 2007, and the results of its operations and its cash
      flows for each of the years in the two-year period ended December 31, 2007,
      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.





/s/
      EISNER LLP




New
      York,
      New York


March
      21,
      2008




F-2




**SYNTHEMED,
      INC.**





**BALANCE
      SHEETS**





**(In
      thousands, except per share data)**





**December
                31,**
            
            **December
                31,****2006**
            
            **2007****ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            3,722
            
            $
            2,991Accounts
                receivable
            
            
            5
            
            
            19Inventory,
                net
            
            
            38
            
            
            115Prepaid
                expenses and deposits
            
            
            158
            
            
            91Total
                current assets
            
            
            3,923
            
            
            3,216Acquired
                technology, less accumulated amortization
            
            
            89
            
            
            21Machinery,
                equipment and software, less accumulated depreciation
            
            
            166
            
            
            135TOTAL
            
            $
            4,178
            
            $
            3,372**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities:**Accounts
                payable
            
            $
            138
            
            $
            245Accrued
                expenses
            
            
            643
            
            
            310Convertible
                note payable
            
            
            70Total
                current liabilities
            
            
            851
            
            
            555**Stockholders'
                equity:**Preferred
                stock, $.01 par value; shares authorized - 5,000;issued
                and outstanding - noneCommon
                stock, $.001 par value; shares authorized - 150,000issued
                and outstanding - 82,945 and 87,621
            
            
            83
            
            
            88Additional
                paid-in capital
            
            
            51,389
            
            
            55,497Accumulated
                deficit
            
            
            (48,145
            )
            
            (52,768
            )Total
                stockholders' equity
            
            
            3,327
            
            
            2,816TOTAL
            
            $
            4,178
            
            $
            3,372





See
      accompanying notes to financial statements.





F-3




**SYNTHEMED,
      INC.**





**STATEMENTS
      OF OPERATIONS**


**(In
      thousands, except per share data)**





**Year
                Ended December 31,****2006**
            
            **2007**Revenue:Product
                sales
            
            $
            142
            
            $
            134Revenue
            
            
            142
            
            
            134Cost
                of goods sold
            
            
            21
            
            
            29Gross
                profit
            
            
            121
            
            
            105Operating
                expenses:Research
                and development
            
            
            2,163
            
            
            2,180General
                and administrative
            
            
            2,173
            
            
            2,139Sales
                and marketing
            
            
            320
            
            
            1,131Operating
                expenses
            
            
            4,656
            
            
            5,450Loss
                from operations before other income / (expense)
            
            
            (4,535
            )
            
            (5,345
            )Other
                income/(expense):Interest
                income
            
            
            119
            
            
            105Other
                income
            
            
            1Gain
                on settlement of debt
            
            
            22Interest
                expense
            
            
            (5
            )
            
            (1
            )Reversal
                of liabilities
            
            
            47
            
            
            136Loss
                before income tax benefit..
            
            
            (4,351
            )
            
            (5,105
            )Income
                tax benefit
            
            
            456
            
            
            482Net
                loss
            
            $
            (3,895
            )
            $
            (4,623
            )Net
                loss per common share - basic and diluted
            
            $
            (0.05
            )
            $
            (0.05
            )Weighted
                average shares outstanding - basic and diluted
            
            
            78,725
            
            
            85,114





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, 2006
            
            
            66,596
            
            $
            66
            
            $
            44,318
            
            
            
            
            
            ($44,250
            )
            $
            134Exercise
                of options
            
            
            224
            
            
            1
            
            
            24
            
            
            
            
            
            
            
            
            25Shares
                issued in connectionwith
                private placement, net of offering costs
            
            
            16,125
            
            
            16
            
            
            5,749
            
            
            
            
            
            
            
            
            5,765Stock-based
                compensationrelating
                to options
            
            
            
            
            
            
            
            
            1,298
            
            
            
            
            
            
            
            
            1,298Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            (3,895
            )
            
            (3,895
            )
            
            (3,895
            )Balance
                December 31, 2006
            
            
            82,945
            
            
            83
            
            
            51,389
            
            
            
            
            
            (48,145
            )
            
            3,327Exercise
                of options
            
            
            1,082
            
            
            1
            
            
            177
            
            
            
            
            
            
            
            
            178Exercise
                of Series C warrants
            
            
            594
            
            
            1
            
            
            71
            
            
            
            
            
            
            
            
            71Shares
                issued in connectionwith
                private placement, net of offering costs
            
            
            3,000
            
            
            3
            
            
            2,694
            
            
            
            
            
            
            
            
            2,697Stock-based
                compensationrelating
                to options
            
            
            
            
            
            
            
            
            1,166
            
            
            
            
            
            
            
            
            1,166Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            (4,623
            )
            
            (4,623
            )
            
            (4,623
            )Balance
                December 31, 2007
            
            
            87,621
            
            $
            88
            
            $
            55,497
            
            
            
            
            
            ($52,768
            )
            $
            2,816





See
      accompanying notes to financial statements.





F-5




**SYNTHEMED,
      INC.**





**STATEMENTS
      OF CASH FLOWS**


**(In
      thousands)**




**Year
                Ended December 31,****2006**
            
            **2007**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,895
            )
            $
            (4,623
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            32
            
            
            57Stock-based
                compensation
            
            
            1,298
            
            
            1,166Amortization
                of acquired technology
            
            
            68
            
            
            68Reversal
                of liabilities
            
            
            (47
            )
            
            (136
            )Gain
                on settlement of debt
            
            
            (22
            )Changes
                in operating assets and liabilities:(Increase)
                in accounts receivable
            
            
            (5
            )
            
            (14
            )(Increase)
                in inventory
            
            
            (38
            )
            
            (77
            )(Increase)/
                decrease in prepaid expenses
            
            
            (64
            )
            
            67(Decrease)/
                increase in accounts payable
            
            
            (152
            )
            
            243Increase
                / (decrease) in accrued expenses
            
            
            156
            
            
            (333
            )Net
                cash used in operating activities
            
            
            (2,669
            )
            
            (3,582
            )Cash
                flows from investing activities:Purchase
                of equipment
            
            
            (94
            
            
            (25
            )Cash
                flows from financing activities:Repayment
                of convertible note payable
            
            
            (40
            )
            
            (70
            )Net
                proceeds from issuance of common stock
            
            
            5,765
            
            
            2,697Proceeds
                from exercise of options and warrants
            
            
            25
            
            
            249Net
                cash provided by financing activities
            
            
            5,750
            
            
            2,876Net
                increase/(decrease) in cash and cash equivalents
            
            
            2,987
            
            
            (731
            )Cash
                and cash equivalents at beginning of year
            
            
            735
            
            
            3,722Cash
                and cash equivalents at end of year
            
            $
            3,722
            
            $
            2,991Supplementary
                cash flow information:Interest
                paid
            
            $
            5
            
            $
            1Income
                taxes paid
            
            
            1
            
            
            5




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. We changed our name
      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.





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





In
      September 2006, we reported positive efficacy results from a multi-center,
      randomized, masked pivotal clinical trial of REPEL-CV in neonatal patients
      who
      underwent staged, open-heart surgical procedures. We incorporated the results
      of
      the trial into a Premarket Approval (“PMA”) application for United States Food
      and Drug Administration (“FDA”) approval to market REPEL-CV in the United States
      for use in all cardiothoracic surgical procedures. The PMA application was
      formally accepted for review by the FDA in March 2007.





In
      September 2007, a Circulatory System Devices Advisory Panel of the FDA
      recommended approval of REPEL-CV Adhesion Barrier for use in pediatric patients
      (21 and younger) who are likely to need secondary open heart surgery. The Panel
      also recommended the development of additional clinical data as a basis for
      expanding the indicated use to include adult patients. In November 2007, we
      received an “Approvable Letter” from the FDA stating that REPEL-CV would be
      approved for the Panel-recommended indication, subject to completion and
      satisfactory review by the FDA of the results of its field inspections of the
      contract manufacturing sites used in the production of REPEL-CV.





In
      September 2006, following receipt of CE Mark approval, we launched REPEL-CV
      for
      sale in the European Union (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.





The
      accompanying financial statements have been prepared on a going concern basis
      which contemplates continuity of operations, realization of assets and
      satisfaction of liabilities in the ordinary course of business. As shown in
      the
      accompanying financial statements, we have limited revenues, have experienced
      negative cash flows from operating activities and have experienced substantial
      net losses during the years ended December 31, 2006 and 2007. As a result,
      we
      have limited resources available to pursue our business operations and
      substantial doubt exists about our ability to continue as a going concern.
      Our
      continuation as a going concern is dependent upon obtaining sufficient financing
      to fund our operations and ultimately to generate cash flows from operations,
      which is dependent on successfully completing the development of our products
      and proposed products, obtaining required regulatory approvals and manufacturing
      and selling our products and proposed products. We intend to pursue additional
      equity financings. There is no assurance that initiatives to raise additional
      capital will be successful or that other financing arrangements will be
      available on terms acceptable to us or that we will achieve or generate positive
      cash flows from operations. The financial statements do not include any
      adjustments relating to the recoverability and classification of the carrying
      amount of recorded assets or the amount and classification of liabilities that
      might be necessary if we are unable to continue as a going concern.




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





[1] **** Revenue
      recognition policy:





We
      recognize revenue when the amounts become fixed and determinable,when product
      is
      shipped to customers and collectibility is reasonably assured. Terms of sale
      are
“f.o.b. shipping point” with the customer covering all costs of shipment and
      insurance. All sales are final with no right of return except for defective
      product. All sales were outside the United States of America.





F-7


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**
  **(NOTE
        B) - Summary of Significant Accounting Policies: (continued)**





[2]
      Cash
      and cash equivalents:





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





[3]
      Accounts Receivable:





Accounts
      receivable are stated at estimated net realizable value. We evaluate our need
      for an allowance for doubtful accounts based on a combination of historical
      experience, aging analysis and information on specific accounts. Account
      balances are written off when collection efforts have been exhausted and the
      potential for recovery is considered remote. We have not recorded an allowance
      against receivables based upon management’s estimate and past historical cash
      collection experience.





[4]
      Inventory *:*





Inventory
      is stated at the lower of cost or market, as determined by the first-in,
      first-out method. We maintain an allowance for potentially excess and obsolete
      inventories. We review on-hand inventory for potential excess and obsolete
      exposure and adjust the level of inventory reserve accordingly. Our allowance
      for excess and obsolete inventories includes an allowance for on-hand finished
      goods inventory with a date of manufacture of greater than one year old.




**December
                31,**
            
            **December
                31,****2006**
            
            **2007**Raw
                materials
            
            $
            -
            
            $
            28,000Work
                in process
            
            
            35,000
            
            
            47,000Finished
                goods
            
            
            3,000
            
            
            45,00038,000
            
            
            120,000Excess
                and obsolete inventories
            
            
            0
            
            
            (5,000
            )$
            38,000
            
            $
            115,000




The
      production of our inventory is outsourced and it is located at third party
      facilities in Ohio, Minnesota and Prince Edward Island, Canada.





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





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





[6]
      Research and development:




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





[7]
      Patent costs:





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




F-8


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**


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





[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]
      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, 2006 and 2007 excludes the effect
      of
      the potential exercise or conversion of securities which would result in the
      issuance of incremental shares of common stock because the effect would be
      anti-dilutive.





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





**December
                31,****2006**
            
            **2007**Convertible
                promissory notes
            
            
            70,000
            
            
            0Options
            
            
            13,437,000
            
            
            12,872,000Warrants
            
            
            2,069,000
            
            
            1,685,00015,576,000
            
            
            14,557,000





[10]
      Impairment of Intangible Assets:





Intangible
      assets with finite lives are reviewed for impairment whenever events or changes
      in circumstances indicate that the related carrying amount may not be
      recoverable over the remaining useful life. Management is also required to
      evaluate the useful lives each reporting period. When intangible assets with
      finite useful lives are tested for impairment, management uses the estimated
      future cash flows directly associated with, and that are expected to arise
      as a
      direct result of, the use of the assets. If the carrying amount exceeds the
      estimated undiscounted cash flows, an impairment may be indicated. The carrying
      amount is then compared to the estimated discounted cash flows, and if there
      is
      an excess, such amount is recorded as an impairment. Based on the best
      information available to management, we have evaluated the estimated future
      cash
      flows of the asset and concluded that such amount exceeds the carrying value
      of
      the asset and that there is no impairment.





[11]
      Stock-based compensation:





Prior
      to
      January 1, 2006, the Company’s stock-based compensation plans were accounted for
      in accordance with Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees.” Under APB Opinion No. 25, no
      compensation expense was recognized for a stock option grant if the exercise
      price of the stock option at measurement date was equal to or greater than
      the
      fair market value of the common stock on the date of grant. The Company also
      applied SFAS No. 123, “Accounting for Stock-Based Compensation”, for disclosure
      purposes only.  SFAS No. 123 disclosures include pro forma net income
      and earnings per share as if the fair value-based method of accounting had
      been
      used.




F-9


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**


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





[11]
      Stock-based compensation: (continued)





Effective
        January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
        Payment”, which requires the recognition of the expense related to the fair
        value of stock-based compensation awards within the statement of income.
        The
        Company elected the modified prospective transition method as permitted by
        SFAS
        No. 123(R), and accordingly, results from prior periods have not been restated.
        Under this transition method, stock-based compensation expense for the year
        ended December 31, 2007 and 2006 includes compensation expense for unvested
        stock-based compensation awards that were outstanding as of January 1, 2006,
        respectively, for which the requisite service was rendered during the
        year.  The stock-based compensation costs for these awards granted
        prior to January 1, 2006 were based on the grant date fair value estimated
        in
        accordance with the original provisions of SFAS No. 123. Compensation expense
        for all stock-based compensation awards granted subsequent to January 1,
        2006 is
        based on the grant date fair value estimated in accordance with the provisions
        of SFAS No. 123(R) recorded on the straight-line basis over the requisite
        service period.




[12]
      Recently issued accounting pronouncements:





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) 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. We adopted FIN 48 effective January 1, 2007. The adoption of
      FIN 48 did not have a material impact on our results of operations and
      financial position. We
      recognize interest and penalties related to uncertain tax positions in general
      and administrative expense. As of December 31, 2007, we have not recorded any
      provisions for accrued interest and penalties related to uncertain tax
      positions.





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. .
      However, the FASB has issued FASB Staff Position No. FAS 157-2, delaying
      the effective date for all nonfinanical assets and nonfinancial liabilities
      except those items recognized or disclosed at fair value on a recurring basis
      until fiscal years beginning after November 15, 2008. We
      concluded the impact of the adoption of SFAS No. 157 will not have a material
      effect 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 have concluded
      the impact of SFAS No. 159 will not have a material effect on our financial
      position and results of operations.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations”, which replaces FASB Statement No. 141. SFAS 141(R)
      establishes principles and requirements for how an acquirer recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, any non controlling interest in the acquiree and the
      goodwill acquired. The Statement also establishes disclosure requirements which
      will enable users to evaluate the nature and financial effects of the business
      combination. SFAS 141(R) is effective as of the beginning of an entity’s
      fiscal year that begins after December 15, 2008, which corresponds to our
      year beginning January 1, 2009. We are assessing the impact of the adoption
      of
      SFAS No. 141(R) will have on our financial position and results of
      operations.





In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
      in Consolidated Financial Statement—amendments of ARB No. 51 (SFAS 160).”
SFAS 160 states that accounting and reporting for minority interests will be
      recharacterized as noncontrolling interests and classified as a component of
      equity.  The Statement also establishes reporting requirements that provide
      sufficient disclosures that clearly identify and distinguish between the
      interests of the parent and the interests of the noncontrolling owners. FAS
      160
      applies to all entities that prepare consolidated financial statements, except
      not-for-profit organizations, but will affect only those entities that have
      an
      outstanding noncontrolling interest in one or more subsidiaries or that
      deconsolidate a subsidiary.  This statement is effective as of the
      beginning of an entity’s first fiscal
      year beginning after December 15, 2008, which corresponds to our year
      beginning January 1, 2009. We are assessing the impact of the adoption of SFAS
      No. 160 will have 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 based upon the approximate $0.0478 value per share paid by
      investors in the contemporaneous private placement of Series C Convertible
      Preferred Stock and related warrants; (ii) $11,000 in transaction-related costs
      and (iii) $3,000 representing the fair value of the options issued as a finder’s
      fee. In
      connection with the acquisition, we granted an option, exercisable for seven
      years, to purchase up to 100,000 shares of Common Stock at $.09 per share to
      Dr.
      Gere S. diZerega, who has served as a medical consultant to both companies
      and
      who assisted in identifying the acquisition opportunity. Dr. diZerega had
      previously served as a director of our Company. Certain stockholders of Phairson
      have participated in previous financings of our Company and Richard Franklin,
      our Company’s Chairman, is a stockholder in and has served as CEO of Phairson. The
      fair
      value of the options to purchase 100,000 shares of Common Stock issued as a
      finder’s fee was determined to be $3,000 at the time of the transaction using
      the Black Scholes pricing model.





A
      useful
      life of 5 years was assigned to the acquired technology considering the stage
      of
      product development, the estimated period during which patent protection could
      be enforced, which would go well beyond five years from the acquisition date,
      the development cycle time for medical devices of the type envisioned by us
      based on such technology, as well as potential technology obsolescence over
      time. For each of the years ended December 31, 2006 and 2007, we recorded
      amortization of $ 68,000. At December 31, 2007, accumulated amortization totaled
      $323,000. The remaining amortization of $21,000 will be recorded during the
      year
      ended December 31, 2008.





**(NOTE
      D) - Machinery, Equipment and Software:**





Machinery,
      equipment and software consist of the following **** at
      December 31:





**Estimated****2006**
            
            **2007**
            
            **useful
                life**Machinery
                and equipment
            
            $
            198,000
            
            $
            219,000
            
            
            5
                yearsOffice
                equipment and software
            
            
            60,000
            
            
            65,000
            
            
            3
                years258,000
            
            
            284,000Less
                accumulated depreciation
            
            
            92,000
            
            
            149,000$
            166,000
            
            $
            135,000




F-11


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**


**(NOTE
      E) - Convertible Promissory Notes:**





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





**(NOTE
      F) - Stockholders’ Equity:**




[1]
      Common stock: **




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





In
      connection with the above noted financing, we entered into subscription
      agreements and an investor rights agreement with the investors, as well as
      an
      agency agreement with the placement agent. One of our directors, Mr. Joerg
      Gruber, is chairman and a director of the placement agent. Pursuant to the
      investor rights agreement, we filed a registration statement with the United
      States Securities and Exchange Commission covering resale of the securities
      sold
      in the private placement. The registration statement has been declared
      effective.





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 also issued 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
      paid
      offering costs of $95,000 including amounts to the placement agent for certain
      financing-related expenses including legal fees.





In
      connection with the April 2006 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. The registration statement has been declared effective.





The
      fair
      value of the warrants issued to the placement agent using the Black-Scholes
      pricing on April 4, 2006 and August 14, 2007 was $807,000 and $128,000,
      respectively. The resulting charges did not have an impact on total
      Stockholders’ Equity. The assumptions utilized to determine the fair values are
      indicated in the following table:





Year
                Ended December 31,2006
            
            2007Fair
                value at date of grantfor
                warrants granted during the period
            
            $
            0.60
            
            $
            1.10Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            99
            %
            
            95.8
            %Risk
                free interest rate
            
            
            4.83
            %
            
            4.42
            %Expected
                life
            
            
            4
                years
            
            
            4
                years




[2] Warrants:





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




F-12


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**


**(NOTE
      F) - Stockholders’ Equity: (continued)**




[2]
      Warrants: (continued) **





As
      of
      December 31, 2007, the following warrants were outstanding to purchase up
      to 1,685,000 shares of our Common Stock:





1,475,000
            
            
            exercisable
                at $0.60 per share which expire on April 3, 2010210,000
            
            
            exercisable
                at $1.10 per share which expire on August 13, 20111,685,000




[3] Options:




At
      December 31, 2007, 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.





At
      December 31, 2007, options to purchase 215,000 shares of Common Stock were
      outstanding pursuant to the 2000 Plan, options to purchase 9,797,000 shares
      of
      Common Stock were outstanding pursuant to the 2001 Plan and options to purchase
      2,790,000 shares of Common Stock were outstanding pursuant to the 2006 Plan.
      In
      addition, options to purchase 70,000 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, 2007, there were 2,298,148 options available for grant under these
      plans.




A
      summary
      of the status of our stock options as of December 31, 2006 and 2007, and changes
      during the years ended on those dates is presented below (in thousands, except
      per share data):





**2006**
            
            **2007**
            
            **Weighted-****Weighted-**
            
            
            
            **Weighted-**
            
            **Average****Average**
            
            
            
            **Average**
            
            **Remaining**
            
            **Aggregate****Exercise
                Price**
            
            
            
            **Exercise
                Price**
            
            **Contractual**
            
            **Intrinsic****Shares**
            
            **Per
                Share**
            
            **Shares**
            
            **Per
                Share**
            
            **Term**
            
            **Value**Outstanding
                at beginning of year
            
            
            12,181
            
            $
            0.34
            
            
            13,437
            
            $
            0.36
            
            
            2.6
                Years
            *Granted
                (including extended)
            
            
            1,560
            
            
            0.79
            
            
            1,715
            
            
            0.84
            
            
            8.9
                YearsExercised
            
            
            (224
            )
            
            0.11
            
            
            (1,117
            )**
            
            0.16Canceled
                or expired
            
            
            (80
            )
            
            2.00
            
            
            (1,163
            )
            
            1.19Outstanding
                at end of year
            
            
            13,437
            
            
            0.39
            
            
            12,872
            
            
            0.40
            
            
            5.4
                Years
            
            $
            4,347Options
                exercisable at year-end
            
            
            12,368
            
            
            0.36
            
            
            12,014
            
            
            0.36
            
            
            5.0
                Years
            
            $
            4,318Vested
                and expected to vest after December 31, 2007
            
            
            
            
            
            
            
            
            2,079
            
            
            0.78
            
            
            8.5
                Years
            
            $
            53Weighted-average
                grant date fair value of options granted during the year
            
            
            
            
            $
            0.79
            
            
            
            
            $
            0.84





F-13






**SYNTHEMED,
      INC.**





**NOTES
      TO FINANCIAL STATEMENTS**




**(NOTE
      F) - Stockholders’ Equity: (continued)**





[3]
      Options: (continued)





*
      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.





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





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





The
      following summarizes the activity of our stock options that have not vested
      for
      the year ended December 31, 2007 (in thousands, except per share
      data):





**Shares**
            
            **Weighted
                Average Exercise Price**Nonvested
                at January 1, 2007
            
            
            1,069
            
            $
            0.75Granted
            
            
            1,715
            
            
            0.84Canceled
                or expired
            
            
            (250
            )
            
            0.80Vested
            
            
            (1,676
            )
            
            0.76Nonvested
                at December 31, 2007
            
            
            858
            
            $
            0.90




As
      of
      December 31, 2007, there was approximately $451,000 of unrecognized stock
      compensation related to unvested awards (net of estimated forfeitures) expected
      to be recognized over the next 29 months.





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





Included
      in the preceding table are 365,000 and 325,000 options granted to non-employee
      directors in 2006 and 2007, respectively. The weighted-average grant date fair
      value of such options was $0.80 and $0.85, respectively. Also included in the
      preceding table are 50,000 and 235,000 options granted to other non-employees
      in
      2006 and 2007, respectively. The weighted average grant date fair value of
      such
      options was $0.80 and $0.81, respectively and a stock-based compensation charge
      of $285,000 and $315,000 was recorded in 2006 and 2007,
      respectively.





At
      December 31, 2007, we had 305,000 options outstanding which vest upon the
      achievement of certain FDA-related milestones associated with REPEL-CV and
      other
      product development programs. These options have a term ranging from 4-10 years
      from date of grant and an exercise price range of $0.26 to $2.00. Based on
      the
      recommendation of the Circulatory System Devices Advisory Panel of the FDA
      to
      approve REPEL-CV Adhesion Barrier for use in pediatric patients (21 and younger)
      who are likely to need secondary open heart surgery and the Approvable Letter
      received from the FDA in November 2007 we have evaluated and concluded that
      120,000 options which vest upon PMA approval of REPEL-CV will likely vest,
      and
      we have recorded an estimated expense in the amount of $75,000 in research
      and
      development expense. We originally recorded an expense for the contingent
      options of $149,000 based on our estimate of probability for the quarter ended
      September 30, 2007, but reversed $74,000 in expense related to options which
      were tied to achieving the FDA approval by December 31, 2007 and were forfeited.
      Upon FDA approval, we will true up the fair value charge and record the change
      in the estimate.




F-14


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**




**(NOTE
      F) - Stockholders’ Equity: (continued)**





[3]
      Options: (continued)





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 31,2006
            
            2007Weighted
                average fair value at date of grantfor
                options granted during the period
            
            $
            0.79
            
            $
            0.84Dividend
                yield
            
            
            0
            %
            
            0
            %Expected
                volatility
            
            
            99
            %
            
            95.7
            %Risk
                free interest rate
            
            
            4.7
            %
            
            4.51%
                - 4.73
            %Expected
                life
            
            
            7
                - 10 years
            
            
            2
                - 10 years





The
      following table summarizes information for stock options outstanding at December
      31, 2007 (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$0.09
                  - 0.12
            
            
            5,300
            
            
            2
                years
            
            $
            0.12
            
            
            5,300
            
            $
            0.120.13
                - 0.98
            
            
            7,352
            
            
            6
                years
            
            
            0.57
            
            
            6,614
            
            
            0.541.00
                - 2.00
            
            
            220
            
            
            9
                years
            
            
            1.43
            
            
            100
            
            
            1.2812,872
            
            
            5
                years
            
            $
            0.40
            
            
            12,014
            
            $
            0.36





**(NOTE
      G) - Income Taxes:**





At
      December 31, 2007, we have approximately $47,257,000 of net operating loss
      carryforwards to offset future federal taxable income and approximately $846,000
      of research and development tax credit carryforwards available to offset future
      federal income tax, subject to limitations for alternative minimum tax. Our
      ability to utilize the net operating losses and
      research and development tax credit carryforwards in
      future years may be limited in accordance with the provisions of Section 382
      of
      the Internal Revenue Code, because of the changes in ownership that have
      occurred in the prior years.




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




**Research****and
                Development****Year**
            
            **Net
                Operating Loss**
            
            **Tax
                Credit**2008
            
            $
            4,044,000
            
            $
            31,0002009
            
            
            3,376,000
            
            
            11,0002010
            
            
            3,854,000
            
            
            11,0002011
                - 2027
            
            
            35,983,000
            
            
            793,000$
            47,257,000
            
            $
            846,000




F-15


**SYNTHEMED,
          INC.**
 
 **NOTES
          TO FINANCIAL STATEMENTS**


**(NOTE
      G) - Income Taxes: (continued)**





We
      have
      participated in the Tax Benefit Transfer Program administered by the State
      of
      New Jersey under which $11,582,000 in eligible loss carryforwards, covering
      the
      tax years 1999 through 2006, were sold to PSEG Services Corporation. We
      received cash payments of approximately $456,000 and $482,000 in 2006 and 2007,
      respectively. This is reflected as income tax benefits in the accompanying
      Statement of Operations. At December 31, 2007, we have net operating loss
      carryforwards for New Jersey State income tax purposes of approximately
      $6,697,000 which expire through 2022.




The
      deferred tax asset, which amounted to $17,957,000 at December 31,2007 has been
      offset by a valuation allowance against the entire benefit due to management's
      uncertainty regarding the future profitability of our Company and ability to
      utilize the benefit. The valuation allowance was increased by $1,040,000 in
      2006
      and $1,049,000 in 2007.





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,****2006**
            
            **2007**Income
                tax benefit at the federal statutory rate
            
            $
            (1,479,000
            )
            $
            (1,736,000
            )State
                and local income taxes, net of effect on federal taxes
            
            
            (261,000
            )
            
            (306,000
            )Increase
                in valuation allowance
            
            
            1,040,000
            
            
            1,049,000Sale
                of state net operating loss carryforwards
            
            
            (456,000
            )
            
            (482,000
            )Reduction
                in deferred tax asset from transfer of state net operating loss
                carryforwards
            
            
            512,000
            
            
            529,000Expired
                net operating losses
            
            
            273,000
            
            
            517,000Benefit
                of research and development credit
            
            
            (65,000
            )
            
            (61,000
            )Other
            
            
            (20,000
            )
            
            8,000$
            (456,000
            )
            $
            (482,000
            )





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





**2006**
            
            **2007**Net
                operating loss carryforward
            
            $
            14,171,000
            
            $
            14,009,000Research
                and development credit carryforward
            
            
            855,000
            
            
            846,000Stock-based
                compensation
            
            
            1,298,000
            
            
            2,464,000Other
            
            
            584,000
            
            
            638,00016,908,000
            
            
            17,957,000Valuation
                allowance
            
            
            (16,908,000
            )
            
            (17,957,000
            )$
            0
            
            $
            0




As
      a
      result of the implementation of FIN 48, we recognized no material adjustment
      to
      unrecognized tax benefits. At the adoption date of January 1, 2007, we had
      $16,908,000 of unrecognized tax benefits, all of which would affect our
      effective tax rate if recognized. At December 31, 2007 we have $ 17,957,000
      of
      unrecognized tax benefits.





We
      recognize interest and penalties related to uncertain tax positions in general
      and administrative expense. As of December 31, 2007, we have not recorded any
      provisions for accrued interest and penalties related to uncertain tax
      positions.





By
      statute, tax years 2003-2006 remain open to examination by the major taxing
      jurisdictions to which we are subject.





F-16


**SYNTHEMED,
        INC.**
 
 **NOTES
        TO FINANCIAL STATEMENTS**


**(** **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
      December 31, 2007, we have paid $1,150,000 and accrued $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 gave 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 amendment gave us similar options through 2007 for an
      annual payment, in 2004 (paid in 2005), of $50,000, in 2005 and 2006 (paid
      in
      2006 and 2007, respectively), of $100,000 and the 2007 amendment gives us
      similar options through 2009 for an annual payment in 2007 and 2008 (paid in
      2008 and to be paid in 2009, respectively), of $150,000 which
      protects our rights
      in
      the technology through fiscal year 2009. 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]
      Phairson Technology





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





**** [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
      2007,
      we incurred $1,000 in royalty expense relating to this agreement.





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




[1]
      Employment agreement:





At
      December 31, 2007 , we had
      employment agreements with five individuals that expire as follows: two in
      September 2008, one in March 2009, one in May 2009 and one in May 2010. Pursuant
      to these agreements, our commitment regarding cash severance benefits aggregates
      $624,000 at December 31, 2007. We have also entered into change of control
      agreements with our three executive officers pursuant to which, upon the
      occurrence of events described therein, we could become obligated, in addition
      to certain other benefits, to pay either 150% or 200%, depending on the
      executive, of such executives’ annual base salaries plus the greater of the
      prior year’s cash bonus or current year’s target bonus. Any severance payments
      under the employment agreements would offset amounts required to be paid under
      the change of control agreements .




F-17


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





[2]
      Supplier concentration:





In
      2007,
      we finalized contractual supplier arrangements with three contract manufacturers
      replacing Polymer Technology Group, Inc. (“PTG”) which had been our prior
      primary supplier. For the year ended December 31, 2006 and 2007, we paid our
      current suppliers $324,000 and $402,000, respectively, in connection with such
      services.





[3]
      Reversal of liabilities:





During
      2007 and 2006, we reversed liabilities of $136,000 and $47,000, respectively,
      primarily relating to trade transactions with former vendors.  The
      underlying transactions occurred during or before 2001 and 2000,
      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.





[4]
      Lease
      commitments:





We
      have a
      cancelable five year operating lease commitment for office facilities space.
      The
      lease is cancelable upon giving the landlord six 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 agreement. Rent is charged to
      operating expense on a straight-line basis over the term of lease where
      contractual increases effect rent payments. Rent expense under the operating
      lease for the year ended December 31, 2007 was $36,000.





Future
      minimum lease payments under operating leases consisted of the following at
      December 31, 2007:




**Year
                Ending**
                **December
                  31,**
            
            **Amount**2008
            
            $
            37,0002009
            
            
            38,0002010
            
            
            39,0002011
            
            
            16,000Total
                future minimum lease payments
            
            $
            130,000




**(NOTE
      J) - Related Parties:**




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




**(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. As of December 31, 2007, the raw materials cost that was
      previously expensed as research and development have been depleted.





At
      December 31, 2007, the Company established a reserve for excess and obsolescence
      inventory for on-hand finished goods inventory with a date of manufacture of
      greater than one year old.





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 materials had been included in finished goods inventory
      for
      the years ended December 31, 2006 and 2007 (in thousands):





**Year
                Ended**
            
            **Year
                Ended****December
                31, 2006**
            
            **December
                31, 2007**Reported
                Net Sales
            
            $
            142
            
            
            100
            %
            $
            134
            
            
            100
            %Pro
                forma COGS
            
            
            39
            
            
            28
            %
            
            45
            
            
            34
            %Pro
                forma Gross Profit
            
            $
            103
            
            
            72
            %
            $
            88
            
            
            66
            %





**(NOTE
      L) -** **Retirement
      Plan**





**** In
      March
      2007, we adopted a defined contribution retirement plan which qualifies under
      section 401(k) of the Internal Revenue Code. The plan allows all employees,
      upon
      commencement of employment, to voluntarily contribute amounts not exceeding
      the
      maximum allowed under the Internal Revenue Code. We are obligated to make a
      matching contribution equal to 100% of the salary deferral contributions made
      up
      to the first 4% of total compensation. During the year ended December 31, 2007,
      we made matching contributions in the amount of $32,000 to the
      plan.





**(NOTE
      M) - Subsequent Events:**





On
      January 3, 2008, we paid Yissum $150,000 in satisfaction of our 2007 royalty
      obligation. (see Note H [1])





In
      January 2008, the Company’s Board of Directors granted options to purchase
      shares of common stock under our 2006 Stock Option Plan, exercisable at $.41
      per
      share, the fair market value on the date of grant, to our executive officers:
      Mr. Hickey - options to purchase 100,000 shares, Dr. Pines - options to purchase
      60,000 shares and Mr. Sportsman- options to purchase 70,000 shares all of which
      vest over one year in two equal traunches and expire ten years from the date
      of
      grant. On the same date, options to purchase 30,000 shares were granted to
      Mr.
      Hickey in recognition of the completion of a financing in September 2007; these
      options replace an equal number of performance-based options originally granted
      to Mr. Hickey on February 16, 2007 that would have vested had the financing
      been
      completed earlier. These options are fully vested as of the grant date, are
      exercisable at $0.80 per share, the fair market value as of the original grant
      date and expire ten years from the original grant date.





In
      January 2008, based on the recommendation of the Compensation Committee of
      our
      Board of Directors, our Board of Directors approved a performance-based bonus
      arrangement for Mr. Robert Hickey, Dr. Eli Pines and Mr. Sportsman. Under the
      arrangement, Mr. Hickey would be entitled to a maximum cash bonus equal to
      $100,000, Dr. Pines would be entitled to a maximum cash bonus equal to $60,000
      and Mr. Sportsman would be entitled to a maximum cash bonus equal to $75,000
      for
      calendar year 2008, in each case subject to satisfaction of specific performance
      criteria. In February 2008, the Compensation Committee of our Board of Directors
      granted performance-vested options under our 2006 Stock Option Plan to our
      executive officers: Mr. Hickey - options to purchase an aggregate of 250,000
      shares, Dr. Pines - options to purchase an aggregate of 120,000 shares and
      Mr.
      Sportsman - options to purchase an aggregate of 130,000 shares. These options
      will vest based upon the level of satisfaction of the 2008 performance criteria
      approved by the Compensation Committee for each executive officer, are
      exercisable at $0.43 per share, the fair market value on the date the 2008
      performance criteria were approved by the Compensation Committee, and expire
      ten
      years from the date of the grant.




F-19