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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 1999

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

For the transition period to

COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(Exact name of registrant as specified in its charter)

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

379 Thornall Street, Edison, New Jersey 08837
(Address of principal executive offices) (Zip Code)

(732) 494-0444
(Registrant's telephone number, including area code)

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

NONE
(Title of each class)

Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK--PAR VALUE $.001 PER SHARE
UNITS
REDEEMABLE CLASS A WARRANTS
REDEEMABLE CLASS B WARRANTS
(Title of class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|

The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 20, 2000 was approximately $ 4.8 million.

As of March 20, 2000, 10,225,756 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
Annual Meeting of Stockholders to be held on May 18, 2000 are incorporated by
reference into Part III of this Form 10-K.

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INTRODUCTORY NOTE

Life Medical Sciences, Inc., a Delaware corporation (the "Company"), is a
biomaterials company engaged in the development and commercialization of
innovative and cost-effective medical devices for therapeutic applications.

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

PART I Item 1. Business

General

Life Medical Sciences, Inc. is a biomaterials company engaged in the
development and commercialization of innovative and cost-effective medical
devices for therapeutic applications. During 1999, the Company focused on the
advancement and expansion of product development programs based on its
proprietary bioresorbable polymer technology. The Company intends to apply its
platform technology to the development of multiple products that address unmet
therapeutic needs or offer improved, cost-effective alternatives to current
methods of treatment. Products currently under development focus on preventing
or reducing post-operative adhesions subsequent to a broad range of surgical
procedures and are in various stages of clinical trials and preclinical studies.
In February 2000, the Company completed a pilot clinical trial for its
REPEL-CV(TM) bioresorbable adhesion barrier film, the first surgical device
approved by the FDA for human evaluation in the prevention of adhesions after
open-heart surgical procedures. In conjunction with its strategic focus on the
development of medical products based on its bioresorbable polymer technology,
the Company discontinued, effective February 29, 2000, the manufacturing and
sale of the CLINICEL(R) silicone gel-filled cushions.

The Company's bioresorbable polymer technology is based on a proprietary
group of polymers. The Company believes that these polymers display desirable
properties, which enable them to be tailored to a wide variety of applications.
These properties include bioresorbability, flexibility, strength and
biocompatibility. Potential applications for products derived from these
polymers are in medical areas such as the prevention of post-operative
adhesions, sutures, stents, implantable device coatings and drug delivery. The
Company is currently developing bioresorbable adhesion barrier films for the
prevention or reduction of post-operative surgical adhesions in cardio-vascular
surgery (REPEL-CVTM), gynecological and general surgical procedures (REPELTM),
as well as in bioresorbable adhesion barrier coatings (viscous solutions) for
the prevention or reduction of post-operative surgical adhesions in
gynecological and general abdominal surgical procedures (RESOLVETM) and
orthopedic and spinal surgical procedures (RELIEVE TM). These products are in
various stages of development:

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Adhesion Prevention Products Under Development
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Potential Est. Annual Market
Product Therapeutic Application Status Potential
- --------------------------------------------------------------------------------------------------------------

REPEL Preventing or reducing post-operative U.S. pivotal clinical $250 Million
Barrier Film surgical adhesions in gynecological trial
and general abdominal surgery.
- --------------------------------------------------------------------------------------------------------------
REPEL-CV Preventing or reducing post-operative U.S. pivotal clinical $250 Million
Barrier Film surgical adhesions in cardiovascular trial
surgery.
- --------------------------------------------------------------------------------------------------------------
RESOLVE Preventing or reducing post-operative IDE Preparation $400 Million
Viscous Solution surgical adhesions in gynecological
and general abdominal surgery.
- --------------------------------------------------------------------------------------------------------------
RELIEVE Preventing or reducing post-operative Preclinical trials $300 Million
Viscous Solution surgical adhesions in orthopedic and
spinal surgery.
- --------------------------------------------------------------------------------------------------------------

In April 1998, the Company launched its CLINICEL silicone-based device for
diminishing unsightly scars and associated discomfort. CLINICEL was marketed
through a direct to consumer marketing campaign in the United States and
internationally through a series of independent distributors. The CLINICEL
products were well received by consumers and the retail pharmacy trade reflected
in approximately $3 million in cumulative sales from launch through the end of
1999. However, the Company believes it is in the best long-term interest of its
stockholders to concentrate its financial and human resources on aggressively
pursuing bioresorbable polymer-based product opportunities. Therefore, the
manufacture and sale of CLINICEL products were discontinued effective February
29, 2000 and the intellectual property rights associated with CLINICEL reverted
to the Dimotech Ltd., a subsidiary of Technion Research and Development
Foundation Ltd.

The Company's product development strategy is to maintain a relatively
small core of scientists and researchers within the Company. The Company
currently conducts substantially all of its research and product development
through arrangements with specialized academic and industrial organizations that
broaden the development capabilities of the Company. The Company has established
contract manufacturing arrangements for its product lines.

The Company previously developed and marketed the Sure-Closure System(TM),
a disposable wound closure device. The Company, in July 1994, sold the
Sure-Closure System to MedChem Products, Inc. ("MedChem") which was subsequently
acquired by C.R. Bard, Inc. ("C.R. Bard"). In October 1997, Zimmer, Inc., a
subsidiary of Bristol - Myers Squibb ("Zimmer"), acquired the Sure - Closure
System from C.R. Bard. The Company receives a 10% royalty on all net sales of
the Sure-Closure System products through June 30, 2004.

The Company was developing three products utilizing its in-situ tissue
culturing technology: CARIEL(TM), primarily for chronic wound healing;
PILIEL(TM), for stimulating hair regrowth and reducing hair loss; and
LIPOEL(TM), for improving the success rate of fat transplantation from a donor
site to a recipient site for reconstructive or cosmetic surgery. During 1997,
the Company terminated all clinical development efforts on these products since
they did not yield the desired benefits to the intended user during clinical
evaluation.

Proprietary Platform Technologies

Polymer Technology

The Company's polymer technology is based on a proprietary group of
polymers. The Company believes that these polymers display desirable properties
which enable them to be tailored to a wide variety of applications. These
properties include bioresorbability, flexibility, strength, and
biocompatibility. Unlike many other polymer systems which may cause untoward
responses, polymers derived from the Company's polymer technology are highly
biocompatible and have not caused any undesirable tissue responses. Medical
applications include the prevention or reduction of post-operative surgical
adhesions. In addition, potential medical implantable uses include resorbable
sutures, drug delivery systems, stents, coatings for implantable devices and
drug delivery.

Utilizing its polymer technology, the Company is currently developing
REPEL, a bioresorbable barrier film, for the prevention or reduction of
post-operative adhesions in gynecological and general surgical procedures,
REPEL-CV, a bioresorbable barrier film, for the prevention or reduction of
post-operative adhesions in cardio-vascular surgical procedures, RESOLVE, a
bioresorbable barrier coating (viscous solution), for the prevention or
reduction of post-operative surgical adhesions in gynecological and general
surgical procedures and RELIEVE, a bioresorbable barrier coating (viscous
solution), for the prevention or reduction of post-operative surgical adhesions
in orthopedic and spinal surgical procedures. See "Collaborative Agreements -
Polymer Technology."

REPEL and REPEL-CV are proprietary bioresorbable post-operative adhesion
barrier films based on the Company's polymer technology. The Company is also
developing RESOLVE and RELIEVE, post-operative adhesion barrier coatings
(viscous solution). REPEL, REPEL-CV, RESOLVE and RELIEVE are intended to be used
routinely during surgeries to prevent or reduce the formation of 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 gynecological surgery, serious complications during
secondary cardiovascular surgical procedures, restricted limb motion following
orthopedic surgery, and pain following any surgery. Moreover, adhesions that
form as a result of surgery can increase the complexity, duration and risk of
subsequent surgery. According to industry sources, in the United States,
surgeons perform an estimated 440,000 abdominal operations annually to remove
adhesions, and the annual cost in the United States for the removal of such
adhesions is approximately $1.2 billion in inpatient treatment charges.

According to industry data, adhesions occur in approximately 93% of
abdominal surgeries, between 55% and 100% of gynecologic operations and are a
common occurrence following open-heart procedures. However, as it is not
possible to predict which patients will develop adhesion related complications,
the Company believes that most surgeries will benefit from routine use of its
adhesion prevention products. The Company believes that current products for the
prevention or reduction of adhesions are limited by various shortcomings
including: (i) undesirable handling characteristics in the surgical environment,
(ii) diminished efficacy in the presence of blood, (iii) inability to be used in
laproscopic procedures, and (iv) failure to be absorbed. The Company believes
that REPEL, REPEL-CV, RESOLVE and RELIEVE may not suffer from 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 break-down products as they degrade which could lead to untoward
biological effects or may actually cause adhesions. The Company believes that
REPEL, REPEL-CV, RESOLVE and RELIEVE uniformly dissolve without forming
particles and do not form break-down products, which could lead to untoward
biological effects.

REPEL

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

During 1997, a pilot clinical trial was conducted on REPEL in
gynecological surgery, at several sites in the United States. The trial was
designed to test the safety and efficacy of REPEL when applied to the anterior
and posterior surfaces of the uterus during myomectomies by laparotomy. REPEL
was rated safe and well tolerated as well as being greater than twice as
effective in reducing adhesion formation compared to the control of standard
surgical technique. The most striking result of the trial was the reduction in
the extent of adhesion formation on the posterior surface of the uterus, where
adhesions are more extensive, clinically relevant and difficult to address. On
the posterior surface, the median extent of adhesions in the REPEL patients was
less than 25 percent, whereas the control patients' median extent was greater
than 75 percent. Based on these results, FDA has granted approval to initiate
the pivotal clinical trial. The Company is in discussion with prospective
corporate partners whereby a licensing and distribution agreement would be
executed and funding for the continued clinical development of REPEL would be
secured.

REPEL-CV

REPEL-CV is a bioresorbable adhesion barrier film made from a different
co-polymer formulation than REPEL which results in it being stronger and longer
lasting in the body. The clinical significance of these enhanced characteristics
was demonstrated in a series of pre-clinical studies. These studies 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 as well as virtually preventing the formation of adhesions to the
surface of the heart.

Adhesion formation after open-heart surgical procedures is a
well-documented, significant complication at the point of performing a secondary
procedure. Secondary procedures (re-do's) account for 15-20% of the
approximately 600,000 open-heart surgeries performed annually in the United
States. Extensive adhesions form between the surface of the heart (epicardium)
and the inner surface of the sternum after virtually every open-heart surgical
procedure. These adhesions make opening the sternum and accessing the heart a
time consuming and dangerous process in the secondary procedure. There are no
FDA approved products currently available to the cardiovascular surgeon to
address post-operative adhesion formation.

In February 2000, the Company concluded a multi-center, randomized,
controlled U.S. pilot clinical trial for REPEL-CV in cardiovascular surgical
procedures. REPEL-CV is a bioresorbable film which is placed over the anterior
surface of the heart at the conclusion of the surgical procedure. In the pilot
clinical trial, REPEL-CV was rated safe and well tolerated when compared to the
control of standard surgical technique. The Company plans to initiate the U. S.
pivotal clinical trial in the third quarter of 2000 contingent upon the FDA
approval of the trial protocol and the infusion of additional capital to the
Company.

RESOLVE

Coating tissue surfaces as a means of providing broad-based versus site
specific protection against adhesion formation is the objective of the RESOLVE
viscous gel development program. This approach has particular application in
gynecological and general abdominal surgery due to the "bowl shaped" anatomical
configuration of the peritoneal cavity. RESOLVE would be poured (open
procedures) or injected (laparoscopic procedures) into the peritoneal cavity at
the conclusion of the procedure as an instillate to coat and lubricate the
tissue surfaces thereby protecting the organs from adhesion formation.

The formulation of RESOLVE was specified through a series of pre-clinical
studies during which the preferred viscosity, tissue adherence and resorption
time were determined. In addition to being determined as safe and biocompatible
throughout the pre-clinical studies, RESOLVE proved to be efficacious in
reducing the level of adhesion formation subsequent to gynecological surgical
procedures. In one pre-clinical study, approximately forty-five (45) percent of
the tissue surfaces in the RESOLVE treated group were free of adhesions,
compared to less than ten (10) percent in the control group. Manufacturing and
packaging development programs are planned in preparation for submission of the
Investigational Device Exemption (IDE) to the FDA as a basis for initiating the
pilot clinical trial. The Company is in discussions with prospective corporate
partners whereby a licensing and distribution agreement would be executed and
funding for continued clinical development of RESOLVE would be secured.

RELIEVE

Gels of higher viscosity 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 are under development through pre-clinical studies.
Candidate materials are being evaluated in a surrogate hand tendon model and in
a feasibility study in spinal surgery which is being funded by a major
manufacturer of spine surgery instruments.

DEVELOPMENT OPPORTUNITIES

The material capabilities and intellectual property portfolio for the
Company's proprietary bioresorbable polymer technology continues to broaden.
This provides opportunities to both enhance the performance characteristics of
the Company's adhesion prevention products as well as to pursue the application
of these unique materials in other medical products. The Company is engaged in
discussions with medical device and pharmaceutical companies on the use of these
materials in drug and cell delivery, implantable medical device coatings and
other bioresorbable polymer product opportunities.

Collaborative Agreements

Polymer Technology

The Company's polymer technology was developed at the Hebrew University of
Jerusalem. The Company entered into an agreement with Yissum Research
Development Company of the Hebrew University of Jerusalem ("Yissum") dated June
14, 1991, as amended in February 1994, as of January 1996 and as of October 1996
(the "Yissum Agreement"), pursuant to which the Company agreed to finance
research and development conducted at the Hebrew University of Jerusalem in the
field of

biomedical polymers. Pursuant to the Yissum Agreement, Yissum has assigned to
the Company its worldwide rights to patents, patent applications and know-how to
develop, manufacture and market products relating to this technology. Under the
terms of the Yissum Agreement, all rights in the research or products developed
are owned solely by the Company, except as set forth below. The Company is
permitted to grant licenses of its polymer technology upon certain terms and
conditions. The Company has agreed to favorably consider manufacturing in Israel
products resulting from its polymer technology and to explore opportunities to
do so.

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

The Yissum Agreement continues until the earlier 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, subject to certain exceptions set forth in the following sentences,
to terminate the Yissum Agreement and/or enter into contracts with others in
order to grant them a license for the development, manufacture and marketing of
a product and the other rights detailed in the Yissum Agreement if, among other
things, (i) the Company does not advise Yissum of the completion of development
and manufacturing work necessary to lead to the development of a product by
December 31, 2001; (ii) the Company does not advise Yissum of the first
commercial sale by December 31, 2001; (iii) the Company does not reach total net
sales of products or achieve income of $1,000,000 by December 31, 2002; (iv) the
Company stops manufacturing and/or marketing the product for a period of more
than 12 months; or (v) the Company breaches the Yissum Agreement, a receiver or
liquidator is appointed for the Company or the Company passes a resolution for
voluntary winding up, or a winding up application is made against the Company,
an attachment is made over a substantial part of the Company's assets, or
execution proceedings are taken against the Company, and the same is not
remedied or set aside within the time periods specified in the Yissum Agreement.
Notwithstanding the foregoing: (i) in the event that the Company does not advise
Yissum of the first commercial sale by December 31, 2001, Yissum shall not
terminate the Yissum Agreement during the year ended December 31, 2002 so long
as the Company pays to Yissum a minimum royalty payment of $50,000; (ii) in the
event that the Company does not (a) advise Yissum of the first commercial sale
by December 31, 2002 or (b) reach total net sales of products or achieve income
of $1,000,000 by December 31, 2002, Yissum shall not terminate the Yissum
Agreement during the year ended December 31, 2003 so long as the Company pays to
Yissum a minimum royalty payment of $50,000; and (iii) in the event that the
Company does not reach total net sales of products or achieve income of
$1,000,000 by December 31, 2003, Yissum shall not terminate the Yissum Agreement
during the year ended December 31, 2004 so long as the Company pays to Yissum a
minimum royalty payment of $50,000. The Company has agreed to indemnify Yissum
under certain circumstances. Upon the termination of the Yissum Agreement for
any reason, the patents and patent applications assigned by Yissum to the
Company will revert in full to Yissum.

In March 1996, pursuant to the Yissum Agreement, the Company paid Yissum
$60,000 for conducting research relating to the development of surgical adhesion
barriers. Effective as of October 1996, the Yissum Agreement was amended as it
relates to the Company financing research at Yissum. The amendment provides a
research term of five years from the date of the amendment and requires Yissum
personnel to enter into confidentiality and non-competition agreements with the
Company. Pursuant to the amendment, the Company paid Yissum approximately
$379,000 during the first three years of the research term.

CLINICEL

The CLINICEL product line was developed at The Bruce Rappaport Faculty of
Medicine at Technion-Israel Institute of Technology in Haifa, Israel (the
"Rappaport Faculty"). In July 1995, the Company entered into an agreement with
Dimotech subsidiary of Technion R&D Foundation Ltd. (the "Dimotech Agreement")
pursuant to which the Company agreed to finance the research and development
conducted by Dimotech with regard to CLINICEL. Pursuant to the Dimotech
Agreement, Dimotech had assigned to the Company the worldwide rights to its
patent applications, any patents which may issue and know-how to develop,
manufacture and market products relating to CLINICEL. Under the terms of the
Dimotech Agreement, all rights in the research or products developed were owned
solely by the Company. On February 29, 2000, the Dimotech agreement was
terminated and all rights therein which accrued to the Company reverted to
Dimotech and the license granted to the Company expired.

Sure-Closure System

The Sure-Closure System was invented at the Rambam Medical Center, an
affiliate of Technion-Israel Institute of Technology in Haifa, Israel. The
Company entered into an agreement with Technion dated June 28, 1992 (the
"Skin-Stretching Agreement"), pursuant to which Technion has assigned to the
Company its worldwide rights to its patents, patent applications and know-how to
develop, manufacture and market products relating to the Sure-Closure System
technology, and Technion assigned the Skin-Stretching Agreement to Dimotech. On
July 29, 1994, the Company completed the sale of its Sure-Closure System to
MedChem. The assets sold included substantially all of the Company's assets,
properties, claims, rights and interests related to the Sure-Closure System,
other than accounts receivable. The transaction provided for (i) the payment to
the Company of $4 million; (ii) the assumption of certain liabilities, in an
amount of approximately $644,000 which was recorded as deferred royalty income
and will continue to be reduced by a 10% royalty on net sales of all current and
future Sure-Closure System products to be paid to the Company through June 30,
2004. In July 1994, in connection with the sale of the Sure-Closure System,
Technion and Dimotech agreed to the assignment of all rights and duties, under
the Skin Stretching Agreement, to MedChem, relieving the Company of any
obligations under the Skin Stretching Agreement. In October 1997 the
Sure-Closure System was acquired by the Zimmer Inc. subsidiary of Bristol-Myers
Squibb.

Government Regulation

FDA and Other Regulations

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

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

The conduct of non-clinical studies must be done in conformity with the
FDA's good laboratory practice (GLP) regulations. Clinical studies must comply
with the FDA's regulations for institutional review board approval and for
informed consent and, depending on the product, Investigational New Drug (IND)
or Investigational Device Exemption (IDE) regulations. In addition, a variety of
state and local permits are required under regulations relating to the Company's
proposed laboratory activity.

The Company will also be required to register as a manufacturer with the
FDA if it manufactures drugs, biologics or devices in the United States. As
such, the Company would be inspected on a routine basis by the FDA for
compliance with the FDA's good manufacturing practices (GMP) regulations. These
regulations require that the Company manufacture its products and maintain its
documents in a prescribed manner with respect to manufacturing, testing and
control activities. Foreign

manufacturing facilities that produce products for sale in the United States are
also subject to these GMP requirements and to periodic FDA inspections. FDA
regulations also require that the Company provide information to the FDA on
deaths or serious injuries associated with the use of its products, as well as
other post-approval marketing experiences. In addition, the FDA prohibits a
company from marketing approved products for unapproved applications.

Devices

The FDA categorizes devices into three regulatory classifications subject
to varying degrees of regulatory control. In general, Class I devices require
compliance with labeling and record keeping regulations, GMPs, 510(k) pre-market
notification, and are subject to other general controls. Class II devices may be
subject to additional regulatory controls, including performance standards and
other special controls, such as guidelines and postmarket surveillance. Class
III devices, which are typically invasive or life-sustaining products, or new
products never before marketed, require clinical testing to assure safety and
effectiveness and FDA approval prior to marketing and distribution. The FDA also
has the authority to require clinical testing of Class I and Class II devices.

If a medical device manufacturer can establish that a newly developed
device is substantially equivalent to a Class I or Class II device that was
legally marketed prior to May 1976, the date on which the Medical Device
Amendments of 1976 were enacted, or to a device that was legally introduced to
the market after the FDA has found it to be substantially equivalent to a
legally marketed device, the manufacturer may seek clearance from the FDA to
market the device by filing a 510(k) pre-market notification. Substantial
equivalence also can be found for pre-1976 Class III devices for which PMAs have
not been required. The 510(k) pre-market notification may need to be supported
by appropriate data establishing the claim of substantial equivalence to the
satisfaction of the FDA. Following submission of the 510(k) pre-market
notification, the manufacturer or distributor may not place the device into
commercial distribution until an order is issued by the FDA. By regulation, the
FDA has no specific time limit by which it must respond to a 510(k) pre-market
notification. At this time, the FDA responds to the submission of a 510(k)
pre-market notification in approximately 150 days on average. The FDA order may
declare that the device is substantially equivalent to another legally marketed
device and allow the proposed device to be marketed in the United States. The
FDA may, however, determine that the proposed device is not substantially
equivalent, or require further information, such as additional test data, before
the FDA is able to make a determination regarding substantial equivalence. Such
determination or request for additional information could delay the Company's
market introduction of its products and could have a material adverse effect on
the Company.

If a manufacturer or distributor of medical devices cannot establish that
a proposed device is substantially equivalent, whether or not the FDA has made a
determination in response to a 510(k) premarket notification, the manufacturer
or distributor must seek pre-market approval of the proposed device through the
submission of a PMA application. A PMA application must be supported by
extensive data, including preclinical and human clinical trial data, as well as
extensive literature, to prove the safety and efficacy of the device. Upon
receipt, the FDA conducts a preliminary review of the PMA application. If
sufficiently complete, the submission is declared fileable by the FDA. By law,
the FDA has 180 days to review a PMA application once it is filed, although PMA
application reviews more often occur over a significantly protracted time
period, and generally take approximately two years or more from the date of
filing to complete. A number of devices for which FDA marketing clearance has
been sought have never been cleared for marketing.

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

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

Products utilizing the Company's polymer technology are likely to be
classified as Class III devices, requiring a PreMarket Approval ("PMA")
application review process prior to commercial distribution in the United
States. CLINICEL silicone gel-filled cushions are classified as Class 1 devices
for which a 510K pre-market notification for over-the-counter (OTC) marketing
has been approved by the FDA.

Third Party Reimbursement

Successful commercialization of the Company's proposed products may depend
in part on the availability of adequate reimbursement from third-party health
care payers such as Medicare, Medicaid, and private insurance plans.
Reimbursement matters include both coverage issues and payment issues. Questions
of coverage raise the issue of 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.

There are numerous governmental third-party payers. Medicare is a
federally funded health insurance for persons who are age 65 or older, who have
end stage renal disease, or who otherwise qualify by virtue of a disability.
Medicare is the largest single health insurance program in the United States.
Medicaid is a joint federal-state program to provide health services to the
indigent. The Department of Veterans Affairs provides a variety of medical
services to veterans both directly and through arrangements with private health
care providers. The Civilian Health and Medical Program for the Uniformed
Services pays for care and services furnished to dependents of members of the
armed forces. There are also numerous private health insurance plans, including
private nonprofit insurers (e.g., Blue Cross and Blue Shield plans), commercial
insurers, and various types of managed care organizations.

Patents and Proprietary Rights

In connection with the polymer technology, the Company currently holds
three issued United States patents, one Canadian patent and two Israeli patents
relating to bioresorbable polymeric compounds and polyurethane polymeric
compounds. The first United States patent claims novel bioresorbable polymeric
compounds of specified chemical structure. Also claimed are medical articles,
including sutures and prosthetic devices, made from these materials as well as
methods for making these materials. The second United States patent claims novel
polyurethane polymeric compounds of specified chemical structure. Also claimed
are medical articles, including sutures and wound and burn dressings. The third
United States patent claims novel bioresorbable polymer compounds of specified
chemical structure and their use in post-operative adhesion prevention. The
three United States patents will remain in effect until June 2, 2008 May 3, 2010
and July 11, 2016, respectively, provided that all requisite maintenance fees
are paid to the United States Patent and Trademark Office. The Company also has
numerous patent applications pertaining to various novel bioresorbable polymeric
compounds on file with the United States and international patent agencies.

Competition

REPEL, REPEL-CV, RESOLVE and RELIEVE

REPEL, REPEL-CV, RESOLVE and RELIEVE are expected to compete with various
currently marketed products such as Interceed(TM), a product of Johnson &
Johnson, Seprafilm(TM) , a product of Genzyme Corp., and Goretex(TM), a product
of WL Gore. Several other companies including LifeCore Biomedical Inc., Gliatech
Inc., Anika Therapeutics, Inc., Biomatrix Inc., Alliance Pharmaceuticals, Corp.
and Focal Inc. either are or may be pursuing the development of products for the
prevention of adhesions. The anti-adhesion market is characterized by a limited
number of products currently on the market with limited (as a percent of total
surgical procedures using such products) penetration. The Company's products are
in the developmental stage in a market where clinical efficacy and, to a lesser
extent, strength of existing product lines are the principal methods of
competition.

Manufacturing

REPEL, REPEL-CV, RESOLVE, and RELIEVE

The Company intends to rely primarily on certain manufacturers to produce
REPEL, REPEL-CV, RESOLVE, RELIEVE and other proposed products for testing and
commercial production. The manufacturer procures, tests and inspects all raw
materials used in the production of the Company's proposed products. The
manufacturer relies on various sources, approved by the Company, for its raw
materials and components. The Company believes that alternative sources for
these raw materials and components are available. The Company's products would
be manufactured in a facility in compliance with regulatory requirements. The
Company has engaged a third party to inspect the product formulated by the
manufacturer for quality assurance purposes.

As of the date of this report, the Company and its primary manufacturer
have completed various manufacturing pilot batches and scale-up studies at its
primary manufacturing partner's site. The Company's manufacturing equipment,
which was used by the manufacturer in the production process, was pledged as
collateral against amounts owed to this manufacturer during 1998. On April 12,
1999, the Company transferred the title to this equipment to the contract
manufacturer in exchange for the forgiveness of certain liabilities owed. The
Company has continued to produce pilot batches for use in clinical trials during
1999 at this manufacturer and intends to continue this manufacturing development
and optimize, validate and utilize the process, equipment and manufacturer to
produce further clinical and commercial sale products at this site.

Marketing and Sales

During 1999, the Company marketed its CLINICEL products direct to
consumers through contract telemarketing firms and through distribution in
various chain drug stores. One of the Company's largest customers (American
Stores) accounted for approximately 48% of sales in 1999. Internationally, the
CLINICEL products were marketed through a series of independent distributors.
International sales of CLINCEL were approximately $220,000 in 1999 and $35,000
in 1998.

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

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

Product Liability and Insurance

The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
Company has obtained product liability insurance for its clinical trials and
commercial sales of its products providing coverage in an aggregate amount of
$5,000,000.

Human Resources

As of March 23, 2000, the Company employed four full time employees.
Research and development activities are conducted through arrangements with
various consultants and companies in Europe, Israel and the United States. The
Company's employees are not a party to any collective bargaining agreement. The
Company believes that it has good relations with its employees. The Company
intends to increase its number of full time employees as it expands its clinical
trials and product development activities and begins to market its products.

Executive Officers of the Company

The Company's executive officers are as follows:

Name Age Positions with the Company
------------------------- --- --------------------------
Robert P. Hickey......... 54 Chairman, President, CEO
& Acting CFO

Eli Pines, Ph.D.......... 54 Vice President and Chief
Scientific Officer

Robert P. Hickey has served as Chairman since May 1999, President and
Chief Executive Officer since May 1996, Acting Chief Financial Officer since
December 1999 and as a Director since August 1996. From May 1994 until joining
the Company, Mr. Hickey was founder and president of Roberts Healthcare
Resources, Inc., a company engaged in project consulting to Fortune 500 and
leading edge companies in the healthcare industry. From 1975 to 1994 Mr. Hickey
served in various positions at Johnson & Johnson. From 1992 to 1994, Mr. Hickey
was Vice President, Marketing and Director of Ethicon, Inc., a unit of Johnson &
Johnson.

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

Consultants and Advisors

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

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

Alan H. DeCherney, M.D. ... Dr. Alan DeCherney is Professor and Chairman,
Department of Obstetrics and Gynecology at UCLA
School of Medicine. Prior to that, Dr. DeCherney
was Louis E. Phaneuf Professor and Chairman of the
Department of Obstetrics and Gynecology at Tufts
University School of Medicine, and Chief of
Obstetrics and Gynecology at the New England
Medical Center. Prior to this, Dr. DeCherney was
Director of the Division of Reproductive
Endocrinology, and was John Slade Ely Professor of
Obstetrics and Gynecology at Yale University
School of Medicine. He has been President of the
International Society of Gynecologic Endoscopy,
the Society of Assisted Reproductive Technologies,
the Society of Reproductive Surgeons, the Society
of Reproductive Endocrinologists, the American
Society of Reproductive Medicine, and the Society
of Gynecologic Investigation. Dr. DeCherney is a
member of the American Board of Obstetrics and
Gynecology, is

an Associate Editor of the New England Medical
Journal, and Editor of Assisted Reproductive
Reviews. In 1987, Dr. DeCherney was recipient of
the President's Achievement Award of the Society
of Gynecologic Investigation.

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. Dr. Diamond previously served on
the faculty at Yale University, and as Associate
Professor of Obstetrics and Gynecology, and
Director of the Division of Reproductive
Endocrinology and Infertility at Vanderbilt
University. 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 area of research include
post-operative adhesions, peritoneal healing and
post-surgical wound repair.

Gary L. Loomis, Ph.D. ...... Dr. Gary Loomis is founder, president and senior
consultant of G. L. Loomis & Associates, Inc., a
firm providing technical expertise in polymer
science to a diverse international client base.
Dr. Loomis is internationally renowned as an
expert in the preparation, modification,
evaluation and processing of polymers, especially
bioresorbable polymers for medical devices and
drug delivery applications.

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.

History

The Company is a Delaware corporation which was organized in August 1990
under the name BioMedical Polymers International, Ltd. The Company changed its
name to Life Medical Sciences, Inc. in June 1992.

Risk Factors

Risk that Technologies or Proposed Products Will Never Be Successfully Developed

The Company's polymer technology and proposed products are still under
development and are subject to the risks of failure inherent in the development
of new technologies and products based on new technologies. The Company's
polymer technology and proposed products will require significant further
research, development and testing, including extensive

clinical testing and regulatory approval, prior to commercial use. Unsuccessful
results from clinical trials of the Company's proposed products or adverse
findings with respect to these products could adversely affect some or all of
the Company's proposed products. 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. In addition, no assurance can be given that
proprietary rights of third parties will not preclude the Company from marketing
its proposed products or that third parties will not market superior or
equivalent products.

Risks Associated With Uncertainties of Clinical Trials

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

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

Capital Needs; Uncertainty of Additional Funding; Going Concern Emphasis in
Auditors Report: Loss on Sale or Merger

The Company believes that available cash will not be sufficient to meet
its cash requirements through 2000. As a result of the Company's limited capital
resources, the Company's auditors have indicated in their report that there is
substantial doubt about the Company's ability to continue as a going concern.
The Company will be required to raise substantial additional funds to fund
existing operations, continue to conduct necessary research and development,
preclinical studies and clinical trials, to commercialize its proposed products,
and to fund the growth that is expected to occur if any of its proposed products
are approved for marketing. The Company is seeking such additional funding
through collaborative arrangements with strategic partners, licensing
arrangements for certain of its proposed products, and additional public or
private financings, including equity financings. Any additional equity
financings may be dilutive to stockholders. There can be no assurance that such
arrangements or financings will be available as needed or on terms acceptable to
the Company. Insufficient funds may require the Company to delay, scale back or
eliminate some or all of its research and development programs and manufacturing
and marketing efforts, or require it to license to third parties certain
products or technologies that the Company would otherwise seek to commercialize
itself. If the Company is not able to raise additional funds as needed to
continue its research and development programs and for its intended
manufacturing and marketing efforts, it may become necessary for the Company to
attempt to be merged or sold in whole or in part with or to another entity.
There can be no assurance that such a sale or merger would be available, but if
it were, the proceeds to the Company or its stockholders from such a sale or
merger could be substantially less than the amount invested by stockholders in
the Company, resulting in significant losses to the stockholders on their
investment in the Company's securities.

Limited Operating History; History of Losses

The Company has a limited history of operations that, to date, has
consisted primarily of research, development and testing of its technologies and
the commercialization of CLINICEL(TM) and the Sure-Closure System. With the
exception of

the third quarter of 1994, when the gain on the sale of the Sure-Closure System
was realized, and the first quarter of 1999, when other income was recorded
related to the reduction of prior period debt, the Company has incurred
significant net losses from its inception. The Company experienced net losses of
$7,666,000, $7,602,000 and $955,000 for the years ended December 31, 1997, 1998
and 1999 respectively. At December 31, 1999, the Company had an accumulated
deficit of $36,388,000 which has increased since that date. Although recent
capital constraints have reduced spending levels, the Company continues to
expend financial and other resources on (i) research, development and testing of
its polymer technology and proposed products utilizing this technology and (ii)
general and administrative expenses. The Company expects to incur additional
losses as its research, development and preclinical studies and clinical trials
continue to expand. The Company's ability to achieve a profitable level of
operations is dependent on successfully completing the development of its
proposed products, obtaining required regulatory approvals, and manufacturing
and selling its proposed products. Accordingly, the extent of future losses and
the time required to achieve profitability, if ever, is uncertain. There can be
no assurance that the Company will achieve or sustain a profitable level of
operations.

Reliance on Outside Consultants and Contractors

The Company seeks to protect its trade secrets and proprietary know-how,
in part, through confidentiality agreements with its employees, consultants,
advisors, collaborators and others. There can be no assurance that these
agreements will not be violated by the other parties, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known or be independently developed by competitors. The Company
has relationships with a number of academic consultants who are employed by
organizations other than the Company. Accordingly, the Company has limited
control over their activities and can expect only limited amounts of their time
to be dedicated to the Company's activities. These persons may have consulting,
employment or advisory arrangements with other entities that may conflict or
compete with their obligations to the Company. Consultants generally sign
agreements that provide for confidentiality of the Company's proprietary
information and results of studies. There can be no assurance, however, that the
Company will, in connection with every relationship, be able to maintain the
confidentiality of the Company's technology, dissemination of which could have a
materially adverse effect on the Company's business. To the extent that the
Company's scientific consultants develop inventions or processes independently
that may be applicable to the Company's proposed products, disputes may arise as
to the ownership of the proprietary rights to such information. Such inventions
or processes will not necessarily become the property of the Company, but may
remain the property of such persons or their full-time employers. The Company
could be required to make payments to the owners of such inventions or
processes, either in the form of cash, equity or a combination thereof. In
addition, protracted and costly litigation may be necessary to enforce and
determine the scope and validity of the Company's proprietary rights.

No Assurance of Regulatory Approvals; Potential Delays

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

Whether or not FDA approval has been obtained, approval of a medical
device by comparable regulatory authorities in other countries must be obtained
prior to marketing the product in those countries. The approval process varies
by country and the time required may be longer or shorter than that required for
FDA approval. There can be no assurance that clinical testing will provide
evidence of safety and efficacy in humans or that regulatory approvals will be
granted for any of the Company's products. Manufacturers of medical devices are
required to obtain FDA approval of their manufacturing facilities and processes,
to adhere to applicable standards for manufacturing practices and to engage in
extensive recordkeeping and reporting. Failures to obtain or delays in obtaining
regulatory approvals would adversely affect the manufacturing and

marketing of the Company's products, the Company's financial position and the
Company's revenues or royalties. When and if approvals are granted, the Company,
the approved device, the manufacture of such device and the facilities in which
such device is manufactured are subject to ongoing regulatory review. Subsequent
discovery of previously unknown problems may result in restriction on a
product's use or withdrawal of the product from the market. Adverse government
regulation that might arise from future legislative or administrative action,
particularly as it relates to healthcare reform and product pricing, cannot be
predicted.

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

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

Dependence on Reimbursement

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

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

Uncertain Market Acceptance of Proposed Products

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

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

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

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

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

Dependence Upon Third Parties For Clinical Development of Proposed Products

The Company may enter into strategic alliances for the clinical
development of certain of its proposed products. There can be no assurance that
the Company will be successful in obtaining satisfactory agreements with
strategic partners. In addition, there can be no assurance that the interests
and motivations of any strategic partner would be or remain consistent with
those of the Company or that such partner would successfully perform its
obligations.

Competition and Technological Obsolescence

The Company is engaged in rapidly evolving and highly competitive fields.
Competition from biotechnology companies, medical device manufacturers,
pharmaceutical and chemical companies and other competitors is intense. Many of
these companies have substantially greater capital resources, research and
development staffs, facilities and experience in obtaining regulatory approvals
than the Company as well as substantially more experience than the Company in
the manufacturing, marketing and sale of products. Academic institutions,
hospitals, governmental agencies and other public and private research
organizations are also conducting research and seeking patent protection and may
develop competing products or technologies on their own or through joint
ventures. The Company believes that its competitive position will be

based on its ability to create and maintain scientifically advanced technology
and proprietary products, obtain required government approvals on a timely
basis, develop and manufacture its proposed products on a cost-effective basis
and successfully market its products. There can be no assurance that the
Company's current or proposed products under development will be able to compete
successfully with existing products or products under development by other
companies, universities and other institutions or that they will attain
regulatory approval in the United States or elsewhere.

Risk of Using Hazardous Materials

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

Dependence Upon Attraction and Retention of Key Personnel and Consultants

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

Risk of Product Liability Claims; Insurance

The Company's business exposes it to potential liability risks that are
inherent in the testing, manufacturing and marketing of medical products. The
use of the Company's proposed products in clinical trials may expose the Company
to product liability claims and possible adverse publicity. These risks also
exist with respect to the Company's proposed products, if any, that receive
regulatory approval for commercial sales. The Company currently has product
liability insurance coverage for the use of its proposed products in clinical
trials and for CLINICEL products. However, there can be no assurance that the
Company will be able to obtain additional insurance coverage at acceptable
costs, if at all, or be able to maintain the current level of insurance.
Further, there can be no assurance that a product liability claim would not
materially adversely affect the Company. A product liability or other judgment
against the Company in excess of the Company's insurance coverage could have a
material adverse effect upon the Company.

Risk Inherent in International Sales and Operations

The Company intends to sell its proposed products outside of the United
States, as well as domestically. A number of risks are inherent in international
transactions. International sales and operations may be limited or disrupted by
the imposition of governmental controls, regulation of medical devices and other
medical products, export license requirements, political instability, trade
restrictions, changes in tariffs, exchange rate fluctuations and difficulties in
managing international operations.

Anti-Takeover Provisions

The Company's Restated Certificate of Incorporation, as amended (the
"Restated Certificate of Incorporation") authorizes the issuance of a maximum of
5,000,000 shares of preferred stock ("Preferred Stock") on terms that may be
fixed by the Company's Board of Directors without further stockholder action.
The terms of any series of Preferred Stock could adversely affect the rights of
holders of the Common Stock. No Preferred Stock has been issued to date. The
issuance of Preferred Stock could make the possible takeover of the Company more
difficult or otherwise dilute the rights of holders of the Common Stock and the
market price of the Common Stock. In addition, the Company is subject to
Delaware General Corporation Law provisions that may have the effect of
discouraging persons from pursuing a non-negotiated takeover of the Company and
preventing certain changes of control.

Shares Eligible for Future Sale; Outstanding Warrants and Options; Registration
Rights

Of the Company's 10,225,756 shares of Common Stock outstanding as of March
20, 2000, 3,354,542 shares are "restricted securities," as defined in Rule 144
of the Securities Act, and under certain circumstances may be sold without
registration pursuant to Rule 144. The Company is unable to predict the effect
that sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock. Any substantial sale of restricted securities
pursuant to Rule 144 may have an adverse effect on the market price of the
Common Stock. The "restricted securities" are eligible for sale under Rule 144.

The Company has outstanding (i) Class A Warrants and Class B Warrants,
which could result in the issuance of 4,768,059 additional shares of Common
Stock, (ii) 695,813 shares of Common Stock issuable upon exercise of options
which have been granted under the Company's Amended and Restated 1992 Stock
Option Plan (the "Plan"), and (iii) approximately 3,769,649 shares of Common
Stock issuable upon exercise of currently outstanding options granted outside
the Plan. In connection with the public offering in May 1996, the Company sold
to the underwriter of that offering, a warrant to purchase 200,000 shares of
Common Stock. Such warrant is exercisable for a period of five years, commencing
May 3, 1997 and has an exercise price of $7.95 per share. The foregoing options
and warrants are likely to be exercised at a time when the Company might be able
to obtain additional equity capital on more favorable terms. While these options
and warrants are outstanding, they may adversely affect the terms on which the
Company could obtain additional capital. The Company cannot predict the effect,
if any, that market sales of Common Stock, the exercise of options or warrants
or the availability of such Common Stock for sale will have on the market price
prevailing from time to time. In addition, if the exercise price of options or
warrants are adjusted downward, such options or warrants may be exercised sooner
than otherwise with a resulting increase in the number of shares of Common Stock
available for sale on the market.

Possible Volatility of Stock Price

The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. In addition, the market price of the Company's Common
Stock and the Class A and Class B Warrants has been and is likely to continue to
be highly volatile. Factors such as fluctuations in the Company's operating
results, and/or ability to obtain capital, shortfalls in revenue or earnings
from levels expected by securities analysts, announcements of technological
innovations or new products by the Company or its competitors, governmental
regulations, developments with respect to patents or proprietary rights,
litigation, public concern as to the safety of products developed by the Company
or others and general market conditions may have a significant adverse effect on
the market price of the Common Stock and the Warrants.

Item 2. Properties

The Company's executive offices are located in an aggregate of
approximately 3,550 square feet of office space in Edison, New Jersey, pursuant
to an operating lease for the period of November 1996 to November 2001. The
lease provides for an annual fixed rent of approximately $80,000 per year for
the five-year term, and for the payment of certain operating expenses.

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

Item 3. Legal Proceedings

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

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

None.

PART II

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

(a) Market Information

The Company's Common Stock, Class A Warrants, and Class B Warrants have
traded separately on the National Association of Securities Dealers Automated
Quotation System ("Nasdaq") Stock Market under the symbols CHAI, CHAIW, and
CHAIZ, respectively, from September 22, 1992 to August 27, 1998. Effective
August 28, 1998, the Company's securities were delisted from the Nasdaq because
the Company failed to satisfy applicable maintenance criteria. Since delisting
from Nasdaq, the company's Common Stock, Class A Warrants, and Class B Warrants
have been quoted on the OTC Bulletin Board. The following sets forth the
quarterly high and low sales price 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.

Class A Class B
Common Stock Warrant Warrant
Sales Price Sales Price Sales Price
------------------------- ----------------------- ----------------------
High Low High Low High Low
---- --- ---- --- ---- ---

Fiscal Year Ended December 31, 1998
First Quarter 2 1/4 1 5/8 1/4 1/4 1/16
Second Quarter 2 3/32 7/8 1/4 5/8 3/16 1/16
Third Quarter 1 11/16 5/8 7/16 1/32 1/4 1/64
Fourth Quarter 1 1/4 1/16 1/48 1/32 1/96

Fiscal Year Ended December 31, 1999
First Quarter $ 1 3/32 $ 1/4 $7/64 $ 1/64 $ 1/100 $ 1/100
Second Quarter 13/16 15/32 1/16 1/32 1/100 1/100
Third Quarter 15/16 17/32 5/64 1/32 1/100 1/100
Fourth Quarter 7/8 1/4 1/32 1/64 1/100 1/100

Fiscal Year Ended December 31, 2000
January 1 through March 20, 2000 1 5/8 5/16 7/64 1/100 1/100 1/100

Each Class A Warrant entitles the holder to purchase, at an exercise price
of $8.40, subject to adjustment, 1.071474 shares of Common Stock and one Class B
Warrant, and each Class B Warrant entitles the holder to purchase, at an
exercise price of $12.60, subject to adjustment, 1.071474 shares of Common
Stock. These exercise prices were adjusted from the initial exercise prices of
$9.00 and $13.50 per share, respectively, at the time the Class A Warrants and
Class B Warrants were issued due primarily to public offerings completed in the
second half of 1993 and the first half of 1996. The Class A Warrants and the
Class B Warrants (collectively, the "Warrants"), are exercisable at any time
after issuance until September 21, 2000. The Warrants are subject to redemption
by the Company for $.05 per Warrant, upon 30 days written notice, if the average
closing bid price of the Common Stock exceeds $12.60 per share with respect to
Class A Warrants and $18.90 per share with respect to Class B Warrants (subject
to adjustment in each case) for 20 consecutive business days ending the date on
which the notice of redemption is given.

On June 28, 1999, the Company completed a private placement in which
1,505,003 shares of common stock were sold in consideration for cash proceeds of
$750,000. The proceeds have been used to fund the U. S. Pilot Clinical Trial for
REPEL-CV and for other corporate expenses. The securities issued in the private
placement were exempt from registration under Section 4(2) of the Securities Act
of 1933 and Regulation D promulgated thereunder in that the offering was
restricted to "accredited investors" as defined in Rule 501 of Regulation D and
the offering did not involve a general solicitation.

(b) Approximate Number of Equity Securities Holders

As of March 20, 2000 the number of holders of record of the Company's
Common Stock was 185. The Company believes that the number of beneficial holders
of its Common Stock on such date was in excess of 2,900.

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

Item 6. Selected Financial Data

The selected financial data presented below (in thousands, except per
share data), for the years ended December 31, 1995, 1996, 1997, 1998 and 1999
have been derived from audited financial statements of the Company. The
financial statements of the Company at December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999, together with the notes thereto
and the related report of Richard A. Eisner & Company, LLP, independent
auditors, are included elsewhere in this Form 10-K. The selected financial data
set forth below should be read in conjunction with the Financial Statements of
the Company and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.

Year Ended December 31,
-----------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------

Statement of Operations Data: 1999

Revenues:
Product Sales $ 1,715 $ 1,201
Royalty Income $ 245 $ 155 $ 64 55 48
-------- -------- -------- -------- --------
Total Revenue 245 155 64 1,770 1,249

Cost of Sales 820 556
-------- --------

Gross Margin 950 693
Operating Expenses:
Research and development 1,994 2,779 6,721 3,584 788
Sales and marketing 3,142 437
General and administrative 1,231 1,743 2,012 1,982 1,684
-------- -------- -------- -------- --------
Operating expenses 3,225 4,522 8,283 8,708 2,909
-------- -------- -------- -------- --------
(Loss) from operations (2,980) (4,367) (8,219) (7,758) (2,216)

Interest income 183 540 557 161 16

Interest expense (3) (4) (5) (4)
Net (loss) before benefit for income tax and
extraordinary item (2,797) (3,830) (7,666) (7,602) (2,204)
Benefit for income taxes 817
-------- -------- -------- -------- --------
Net (loss) before extraordinary item (2,797) (3,830) (7,666) (7,602) (1,387)

Extraordinary Item 432
-------- -------- -------- -------- --------
Net (loss) $ (2,797) $ (3,830) $ (7,666) $ (7,602) $ (955)
======== ======== ======== ======== ========
Net (loss) per share $ (.58) $ (.55) $ (.97) $ (.96) $ (.11)
======== ======== ======== ======== ========
Weighted average shares
Outstanding 4,820 6,976 7,919 7,923 8,715

December 31,
------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
Balance Sheet Data:

Cash, cash equivalents and investments $ 3,828 $ 14,278 $ 7,569 $ 485 $ 724
Working capital (deficiency) 3,657 14,121 5,975 (1,006) (698)
Total Assets 3,964 14,801 7,786 1,034 798
Total Liabilities 864 1,007 1,621 2,312 1,789
Accumulated deficit (16,335) (20,165) (27,831) (35,433) (36,388)
Stockholders' equity (deficiency) 3,100 13,794 6,165 (1,278) (991)

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

Financial Overview

Since its inception, the Company has been engaged primarily in research
and development of its technologies and proposed products, and the
commercialization of CLINICEL and the Sure-Closure System. In early 2000, in
conjunction with the discontinuation of the CLINICEL product line, the Company
refocused its strategy solely on the more significant commercial opportunities
associated with the application of its expertise in bioresorbable materials
toward the development of products for the prevention and/or reduction of post
surgical adhesions.

Results of Operations

1998 vs. 1999

The Company had revenue of $1,249,000 for the fiscal year ended December
31, 1999 of which $1,201,000 was attributed to the sale of CLINICEL products and
$48,000 represented royalties on sales of the Sure-Closure System. Total for the
fiscal year ended December 31, 1998 was $1,770,000 comprised of $1,715,000 in
CLINICEL sales and $55,000 in royalties on sales of the Sure-Closure System. The
decline in CLINICEL sales was largely related to reduced trade purchases and
lower direct-to-consumer orders associated with lower advertising expenditures.

Cost of goods sold of $556,000 for the fiscal year ended December 31, 1999
as compared to $820,000 for the prior year. The reduction is attributable to the
reduced level of CLINICEL sales.

Sales and marketing expenses declined to $437,000 in the fiscal year ended
December 31, 1999 from $3,142,000 for the comparable period in 1998. The
reduction reflected lower levels of consumer and professional advertising and
promotion expenditures in support of CLINICEL coupled with one-time start-up
costs associated with the CLINICEL market launch in 1998.

The Company incurred research and development expenses of $788,000 and
$3,584,000 for the fiscal years ended December 31, 1999 and 1998, respectively.
The reduction was primarily attributable to the scale back of expenditures on
several bioresorbable polymer-based product development programs and the
completion in 1998 of CLINICEL clinical development activities.

General and administrative expenses totaled $1,684,000 for the fiscal year
ended December 31, 1999 as compared to $1,982,000 for the previous fiscal year.
The reduction was related to fewer employees.

Interest income declined to $16,000 for the fiscal year ended December 31,
1999 to $161,000 for the fiscal year ended December 31, 1998. This decline is
primarily attributable to the lower average balance of cash and investments
during 1999 versus 1998.

Interest expense was $4,000 and $5,000 for the fiscal years ended December
31, 1999 and 1998, respectively. For both 1998 and 1999, these amounts represent
the interest on capital leases entered into during 1996 and 1997 on certain
office equipment.

The Company recorded a benefit for income taxes of $817,000 during the
fiscal year ended December 31, 1999; there was no similar entry recorded in
1998. This was attributable to the receipt of funds associated with the sale of
certain accumulated New Jersey State tax operating losses.

The Company recorded an extraordinary item of $432,000 during the fiscal
year ended December 31, 1999; there was no similar entry in 1998. This
extraordinary item was attributable to the gain on extinguishment of amounts
owed to a contract manufacturer by the transfer of title to equipment that had
previously been charged to research and development expenses.

The Company recorded a net loss of $955,000 for the fiscal year ended
December 31, 1999 as compared to a net loss of $7,602,000 for the prior year.
The decrease in the current period net loss is primarily attributable to the
previously mentioned other income coupled with lower levels of operating
expenses.

1997 vs. 1998

The Company had revenue of $1,715,000 from the sales of CLINICEL for the
fiscal year ended December 31, 1998 and revenue of $64,000 and $55,000 from
royalties on sales of the Sure-Closure System for the fiscal years ended
December 31, 1997 and 1998, respectively. The reduction in royalties from 1997
to 1998 can be attributed to the reduced sales of the Sure-Closure System.

Cost of goods sold of $820,000 in 1998 reflects introductory start up and
continuing commercial costs to produce, package and ship CLINICEL to the
Company's consumer and trade customers.

Sales and marketing expenses of $3,142,000 in 1998 were exclusively
associated with the introduction and continued promotion of CLINICEL. The major
elements of this expense category were journal advertising to both consumer and
professional audiences and contract telemarketing costs.

The Company incurred research and development expenses of $6,271,000 and
$3,584,000 for the fiscal years ended December 31, 1997 and 1998, respectively.
This decrease can be attributed primarily to the termination of the European
clinical studies of Cariel and Piliel as well as the completion of the REPEL U.
S. pilot clinical trial as of December 1997. Finally, the Company incurred
approximately $996,000 of costs for machinery and equipment utilized in research
and development charged to expense during 1997. During 1998, expenses have been
largely associated with the development and pre-clinical assessment of the
Company's expanded range of post-operative adhesion prevention products based on
its proprietary bioresorbable polymer technology.

General and administrative expenses, which consist principally of
management compensation, professional fees, investor materials and travel
expenses were $2,012,000 and $1,982,000 for the fiscal years ended December 31,
1997 and 1998, respectively.

Interest income was $557,000 and $161,000 for the fiscal years ended
December 31, 1997 and 1998, respectively. Interest income decreased primarily as
a result of a lower average cash and investments balance in 1998 as compared to
1997 due to the use of cash and investments to fund commercialization of
CLINICEL, develop the anti-adhesion products and fund general and administrative
expenses.

Interest expense was $4,000 and $5,000 for the fiscal years ended December
31, 1997 and 1998, respectively. For both 1997 and 1998, these amounts represent
the interest on capital leases entered into during 1996 and 1997 to acquire
certain office equipment.

The Company's net loss was $7,666,000 and $7,602,000 for the fiscal years
ended December 31, 1997 and 1998, respectively.

Liquidity and Capital Resources

At December 31, 1999, the Company had cash and cash equivalents of
$724,000 compared to cash and cash equivalents of $485,000 at December 31, 1998.
The primary use of these funds was to fund the Company's research and
development related to anti-adhesion products; produce, market and sell CLINICEL
products; and fund general and administrative expenses associated with these
activities. On December 23,1999, the company received a payment of $817,000 in
exchange for the transfer of certain New Jersey State tax benefits.

At December 31, 1999, the Company had a working capital deficit of
$698,000. The current cash and cash equivalents balance as of December 31, 1999
may not be sufficient to meet its cash requirements through 2000. The Company
will be required to raise substantial additional funds to continue the clinical
development and commercialization of its proposed products and to fund the
growth that is expected to occur if any of its current and proposed products are
approved for marketing. There can be no assurance that such arrangements or
financings will be available as needed or on terms acceptable to the Company.
The Company plans to seek such additional funding through collaborative
arrangements with strategic partners, licensing arrangements for certain of its
proposed products and additional equity or debt financings. The Company
continues to be in discussion with venture and private investors regarding a
private placement of new equity in amounts sufficient to support near term
operations and with its advisors regarding other public financing vehicles. Any
additional financings may be dilutive to existing stockholders. The Company is
also pursuing other initiatives, including state tax benefit transfers and
licensing/marketing agreements intended to improve its financial condition. The
company has reduced spending on certain programs as a means of preserving its
cash resources and is currently in discussions with third parties regarding the
licensing of certain technologies which it might otherwise seek to commercialize
itself.

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

The company does not invest in derivative financial instruments.

Item 8. Financial Statements and Supplementary Data

The Index to Financial Statements appears on page F-1, the Report of
Independent Auditors appears on page F-2, and the Financial Statements and Notes
to Financial Statements appear on pages F-3 to F-16.

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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information called for by this item is incorporated by reference
herein to the definitive Proxy Statement to be filed by the Company pursuant to
Regulation 14A within 120 days after the close of the 1999 fiscal year. Certain
information with regard to the executive officers of the Company is contained in
Item 1 hereof and is incorporated by reference in this Part III.

Item 11. Executive Compensation.

The information called for by this item is incorporated herein by
reference to the definitive Proxy Statement to be filed by the Company pursuant
to Regulation 14A within 120 days after the close of the 1999 fiscal year.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Item 13. Certain Relationships and Related Transactions.

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) 1. Financial Statements.

An Index to Financial Statements appears on page F-1.

2. Schedules.

None

3. 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)

3.2 By-Laws of Registrant. (1)

10 The 2000 Stock Option. Plan* (17)

10.1 Amended and Restated 1992 Stock Option Plan of Registrant. (14) (15)

10.2 Form of Non-Qualified Option Agreement granted outside of a Plan to
certain Directors and Officers.*(17)

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

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

10.5 Agreement, dated June 1991, between Registrant and the Technion
Research and Development Foundation, Ltd. (the "Technion") as
assigned by the Technion to Dimotech, Ltd. (1)

10.6 Agreement, dated as of April 14, 1992, between Registrant and Mr.
Joel Gold. (1) (15)

10.7 Assignment of rights relating to a patent on wound dressing to
Registrant by Dimotech, Ltd. (3)

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) (15)

10.10 Form of Incentive Stock Option Agreement. (4) (15)

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

10.12 Underwriting Agreement between Registrant and D.H. Blair Investment
Banking Corp. (7)

10.13 Agreement, dated as of February 3, 1994, between Registrant and
Dimotech, Ltd. (7)

10.14 Warrant Agreement among Registrant, D. H. Blair Investment Banking
Corp. and American Stock Transfer & Trust Company including forms of
Class A and Class B Warrants. (7)

10.15 Warrant Agreement between Registrant and American Stock Transfer and
Trust Company. (7)

10.16 Agreement, dated as of February 1994, between Registrant and Yissum.
(7)

10.18 Employment Agreement dated June 12, 1995 between Registrant and Eli
Pines, Ph.D. (8) (15)

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

10.20 Agreement dated July 16, 1995 between the Registrant and Dimotech,
Ltd. (2)

10.21 Amendment No. 2 dated February 11, 1996 to the Agreement between the
Registrant and Dimotech, Ltd. (2)

10.22 Assignment of rights relating to a patent for treatment of Keloid
and Hypertrophic scars to Registrant from Dimotech, Ltd. (2)

10.23 Warrant Agreement between Registrant and Wedbush Morgan Securities.
(13)

10.24 Underwriting Agreement between Registrant and Wedbush Morgan
Securities. (13)

10.25 Employment Agreement dated May 29, 1996 between Registrant and
Robert P. Hickey. (10) (15)

10.26 Lease Agreement dated August 13, 1996 between Registrant and Metro
Four Associates, LP, 8th Floor of 379 Thornall Street. (11)

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

10.28 Agreement, dated April 22, 1998, between Registrant and CP&S.(16)

23.1 Consent of Richard A. Eisner & Company, LLP. *

27. Financial Data Schedule.*

* Filed herewith.

- ----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-94008) declared effective on September 22, 1992.
(2) Incorporated by reference to Registrant's Registration Statement on Form
S-1 (File No. 333-02588) declared effective on May 3, 1996.
(3) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1992.
(4) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1993.
(5) Incorporated by reference to the Registrant's report on Form 8-K filed by
the Company on August 12, 1994.
(6) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1994.
(7) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1994.
(8) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1995.
(9) Intentionally omitted
(10) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1996.
(11) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended September 30, 1996.
(12) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (File No. 333-19195) declared effective on January 3, 1997.
(13) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1996.
(14) Incorporated by reference to the Registrant's report on Form 10-Q for the
quarter ended June 30, 1997.
(15) Includes compensatory plan and or arrangements required to be filed
pursuant to item 14 (c) of Form 10-K.
(16) Incorporated by reference to the Registrant's report on Form 10-K for the
year ended December 31, 1998.
(17) Incorporated by reference to the Registrant's S-8 filed in January 2000.

(b) Reports on Form 8-K

None

SIGNATURES

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

Life Medical Sciences, Inc.
(Registrant)

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

Dated: March 20, 2000

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

Signatures Title Date
---------- ----- ----

/s/ Robert P. Hickey Director, Chairman of the Board, March 20, 2000
- -------------------------- President, CEO and Acting CFO
Robert P. Hickey (principal executive, financial
and accounting officer)

/s/ Edward A. Celano Director March 20, 2000
- --------------------------
Edward A. Celano

/s/ Coy Eklund Director March 20, 2000
- --------------------------
Coy Eklund

/s/ Joel L. Gold Director March 20, 2000
- --------------------------
Joel L. Gold

/s/ Walter R. Maupay Director March 20, 2000
- --------------------------
Walter R. Maupay

/s/ Irwin M. Rosenthal Director March 20, 2000
- --------------------------
Irwin M. Rosenthal

INDEX TO FINANCIAL STATEMENTS

Page Number
-----------
Report of Independent Auditors ...................................... F-2
Balance Sheets ...................................................... F-3
Statements of Operations ............................................ F-4
Statements of Changes In Stockholders' Equity (Deficiency) .......... F-5
Statements of Cash Flows ............................................ F-6
Notes to Financial Statements ....................................... F-7

F-1

Independent Auditors' Report

Board of Directors and Stockholders
Life Medical Sciences, Inc.
Edison, New Jersey

We have audited the accompanying balance sheets of Life Medical Sciences,
Inc. as of December 31, 1998 and 1999 and the related statements of operations,
changes in stockholders' equity (deficiency) and cash flows for each of the
years in the three-year period ended December 31, 1999. 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 generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements enumerated above present fairly,
in all material respects, the financial position of Life Medical Sciences, Inc.
as of December 31, 1998 and 1999 and the results of its operations and cash
flows for each of the years in the three-year period ended December 31, 1999 in
conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company has sustained recurring losses from
operations, and has both a working capital and stockholders' deficiency at
December 31, 1999. As a result, the Company has limited capital resources for
its continuing operations, which raises 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.

Richard A. Eisner & Company, LLP

New York, New York
March 21, 2000

F-2

LIFE MEDICAL SCIENCES, INC.

BALANCE SHEETS

(In thousands, except per share data)

December 31
--------------------
1998 1999
-------- --------

ASSETS

Current assets:
Cash and cash equivalents ............................................................ $ 485 $ 724
Inventory (less reserve of $186 [`99]) ............................................... 264
Accounts receivable (net of allowance of $30[`98]) ................................... 120
Prepaid expenses and advances ........................................................ 33 19
-------- --------
Total current assets ...................................................... 902 743
Furniture and equipment-at cost (less depreciation of $91 and $121) ...................... 85 55
Deposits ................................................................................. 47 --
-------- --------

TOTAL ................................................ $ 1,034 $ 798
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

Current liabilities:
Capital lease obligation ............................................................. $ 8 $ 9
Accounts payable ..................................................................... 710 1,084
Accrued expenses ..................................................................... 991 95
Other liabilities .................................................................... 199 253
-------- --------
Total current liabilities ................................................. 1,908 1,441

Capital lease obligation ................................................................. 18 9
Deferred royalty income .................................................................. 386 339
-------- --------
Total liabilities ......................................................... $ 2,312 $ 1,789
-------- --------

Stockholders' equity (deficiency):
Preferred stock, $.01 par value: shares authorized - 5,000;
none issued .......................................................................
Common stock, $.001 par value; shares authorized - 23,750;
issued and outstanding - 7,923 and 9,470 ........................................... 8 10
Additional paid-in capital .......................................................... 34,147 35,387
Accumulated deficit ................................................................. (35,433) (36,388)
-------- --------
Total stockholders' equity (deficiency) ................................... (1,278) (991)
-------- --------
TOTAL ................................................ $ 1,034 $ 798
======== ========

See accompanying notes to financial statements.

F-3

LIFE MEDICAL SCIENCES, INC.

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

Year Ended December 31,
-----------------------------
1997 1998 1999
------- ------- -------

Revenues:
Product sales .............................................. $ $ 1,715 $ 1,201
Royalty income ............................................. 64 55 48
------- ------- -------
64 1,770 1,249

Cost of goods sold ............................................ 820 556
------- ------- -------

Gross profit .................................................. 64 950 693

Operating expenses:
Research and development expenses .......................... 6,271 3,584 788
Sales and marketing ........................................ 3,142 437
General and administrative expenses ........................ 2,012 1,982 1,684
------- ------- -------
Operating expenses ................................... 8,283 8,708 2,909
(Loss) from operations ........................................ (8,219) (7,758) (2,216)
Interest income ............................................... 557 161 16
Interest expense .............................................. (4) (5) (4)
------- ------- -------

Net (loss) before benefit for income tax and extraordinary item (7,666) (7,602) (2,204)

Benefit for income taxes ...................................... 817
------- ------- -------

Net (loss) before extraordinary item .......................... (7,666) (7,602) (1,387)

Extraordinary item ............................................ 432
------- ------- -------

Net (loss) .................................................... $(7,666) $(7,602) $ (955)
======= ======= =======

Net (loss) per share -basic & diluted ......................... $ (0.97) $ (0.96) $ (0.11)
======= ======= =======

Weighted average shares outstanding - basic & diluted ......... 7,919 7,923 8,715

See accompanying notes to financial statements.

F-4

LIFE MEDICAL SCIENCES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands)

Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit

Balance - January 1, 1997 .............................. 7,915 8 $ 33,951 $(20,165)
Common stock issued ............................. 8 37
Net (loss) for the year ................................ (7,666)
-------- -------- -------- --------

Balance - December 31, 1997 ............................ 7,923 8 33,988 (27,831)
Fair value of options issued for compensation ... 159
Net (loss) for the year ......................... (7,602)
-------- -------- -------- --------

Balance - December 31, 1998 ............................ 7,923 8 34,147 (35,433)
Common stock issued ............................. 1,505 2 748
Fair value of options issued for compensation ... 472
Issuance of common stock in payment of previously
established liabilities ....................... 42 20
Net (loss) for the year ......................... (955)
-------- -------- -------- --------

Balance - December 31, 1999 ............................ 9,470 10 $ 35,387 $(36,388)
======== ======== ======== ========

See accompanying notes to financial statements.

F-5

LIFE MEDICAL SCIENCES, INC.

STATEMENTS OF CASH FLOWS
( In thousands )

Year Ended December 31,
1997 1998 1999
-------- -------- --------

Cash flows from operating activities:
Net (loss) before extraordinary item .................... $ (7,666) $ (7,602) $ (1,387)
Adjustments to reconcile net (loss) to net cash (used in)
operations:
Extraordinary item ............................... 432
Deferred royalty income ........................ (64) (55) (47)
Fair value of common stock and options issued as
compensation ................................... 159 472
Depreciation ................................... 37 33 30
Changes in operating assets and liabilities:
(Increase) Decrease in accounts receivable ... (120) 120
(Increase) Decrease in inventory ............. (264) 264
Decrease in prepaid expenses and ............ 221 57 14
advances ...............................
Decrease (Increase) in deposits ............. 16 (34) 47
Increase (Decrease) in accounts payable and
accrued expenses ........................ 685 555 (522)
Increase in other liabilities ............... 199 54
-------- -------- --------
Net cash (used in) operating activities (6,771) (7,072) (523)
-------- -------- --------

Cash flows from investing activities:
Purchase of equipment ................................... (36) (4)
Disposition of equipment ................................ 68
Purchase of investment securities ....................... (9,627)
Proceeds from maturity of investment securities ......... 7,833 4,836
-------- -------- --------
Net cash provided by (used in) investing activities . (1,762) 4,832
-------- -------- --------

Cash flows from financing activities:
Proceeds from issuance of common stock, net of expenses . 37 770
Payment on capital lease obligation ..................... (7) (8) (8)
-------- -------- --------
Net cash provided by (used in) financing activities 30 (8) 762
-------- -------- --------

Net (decrease) increase in cash and cash equivalents ......... (8,503) (2,248) 239
Cash and cash equivalents at beginning of year ............... 11,236 2,733 485
-------- -------- --------
Cash and cash equivalents at end of year ..................... $ 2,733 $ 485 $ 724
======== ======== ========

Supplementary cash flow information:
Interest paid ........................................... $ 4 $ 5 $ 4

See accompanying notes to financial statements.

F-6

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS

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

Life Medical Sciences, Inc. (the "Company") was incorporated on August 1,
1990. The Company is engaged in the development of cost-effective medical
products. The Company is developing REPEL and REPEL-CV, its resorbable adhesion
barrier films used to prevent surgical adhesions; RESOLVE and RELIEVE, its
resorbable adhesion barrier coatings used to prevent surgical adhesions. In
February 2000, the Company completed a U.S. pilot clinical trial of REPEL-CV in
cardiovascular surgical procedures. During 1999, the Company marketed the
CLINICEL line of scar management products. Effective February 29, 2000, the
Company discontinued the manufacture and sale of CLINICEL and transferred the
patent rights back to Dimotech, Ltd.

The accompanying financial statements have been prepared on a going
concern basis. As shown in the accompanying financial statements, the Company
has incurred recurring losses from operations. As a result, the Company has
limited capital resources for its continuing operations and has both a working
capital and stockholders' deficiency at December 31, 1999, which raises
substantial doubt about the Company's ability to continue as a going concern.
The Company is pursuing various financing alternatives, including collaborative
arrangements with strategic partners, licensing arrangements for certain of its
proposed products and additional public or private financings including equity
financings, which management believes could result in the infusion of sufficient
capital to alleviate this concern. In December 1999, the Company received
$817,000 from the sale of certain New Jersey State tax net operating losses and
anticipates receiving similar funds during 2000 and future years contingent upon
approvals from the State Division of Taxation. There is no assurance that these
initiatives will be successful or that other financing arrangements will be
available. The financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.

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

[1] Revenue Recognition:

Revenue is recognized when product is shipped to customers.

[2] Cash equivalents:

The Company considers all highly liquid investment instruments
purchased with a maturity of three months or less to be cash equivalents.

[3] Investments:

Investments purchased with a maturity of more than three months, and
which mature less than twelve months from the balance sheet date, are classified
as short-term investments. Long-term investments are those with maturities
greater than twelve months from the balance sheet date. The Company classifies
its investments as available-for-sale as defined by Statement of Financial
Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Available-for-sale securities are carried at market
value with unrealized gains and losses reported as a separate component of
stockholders' equity. Gross realized gains and losses on the sales of investment
securities are determined on the specific identification method.

[4] Financial Instruments:

The carrying amounts of cash, investments, accounts receivable,
inventories, accounts payable, accrued expenses and capitalized lease
obligations approximate their fair values.

F-7

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

[5] Inventory:

Inventory is valued at the lower of cost or market. Cost is determined
using an average cost method.

[6] Advertising:

Advertising costs are charged to expense as they are incurred. Total
expenditures in 1998 and 1999 were $2,266,000 and $196,000, respectively.

[7] Depreciation:

Furniture and equipment are recorded at cost, and are depreciated
using the straight-line method based upon an estimated useful life of 5 years.

[8] Research and development:

Research and development costs, including those payments described
in Note G, are charged to expense as incurred.

[9] Patent costs:

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

[10] Royalty income:

Royalty income is based on the quarterly sales of the Sure-Closure
System and any line extensions or embodiments thereof. Royalties are calculated
and credited to the Company within forty-five days after the last day of each
quarter. The Company recognizes such income when the amounts earned become fixed
and determinable. Royalties earned by the Company are applied to the outstanding
deferred royalty income balance.

[11] Use of estimates in the preparation of financial statements:

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

[12] Stock based compensation:

The Company accounts for stock-based employee compensation under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees", and related interpretations. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation".

F-8

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

[13] Earnings(Loss) per share:

The Company calculates its earnings (loss) per share under the
provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual
presentation of "basic" and "diluted" earnings (loss) per share on the face of
the statements of operations. Basic earnings (loss) per share is computed by
dividing the income or loss by the weighted average number of shares of common
stock outstanding during each period. Diluted earnings (loss) per share includes
the effect, if any, from the potential exercise or conversion of securities,
such as stock options and warrants, which would result in the issuance of
incremental shares of common stock. However, such potential common shares (see
Note E) have not been included in the calculation of diluted loss per share
since the effect would be anti-dilutive.

(NOTE C)--Investments:

The Company had no short-term or long-term investments as of either
December 31, 1998 or 1999.

(NOTE D) - Accrued Expenses:

Accrued expenses is comprised of the following (in thousands):

December 31,
---------------
1998 1999
---- ----
Research agreements .............. $873 $ 56
Other ............................ 118 39
---- ----

Total ............................ $991 $ 95
==== ====

(NOTE E) -- Stockholders' Equity (Deficiency):

[1] Common stock:

In May 1996, the Company completed a public offering of 2,300,000
shares of common stock at $6.625 per share (initial offering of 2,000,000 shares
plus an additional 300,000 issued due to the exercise of the underwriters'
over-allotment option) and received net proceeds of approximately $13.4 million,
including proceeds received upon the exercise of the underwriters'
over-allotment option and after deducting underwriting discounts and commissions
and offering expenses.

On June 28, 1999, the Company completed a private placement in which
1,505,003 shares of common stock were sold to "accredited investors" as defined
in Rule 501 of Regulation D in consideration for cash proceeds of $750,000.

[2] Warrants:

In 1992, the Company consummated its initial public offering of
1,150,000 units, each unit consisting of one share of common stock and two
warrants. The warrants included in each unit consist of a redeemable Class A
Warrant and a redeemable Class B Warrant. Each Class A Warrant entitles the
holder to purchase, at an exercise price of $8.40, subject to adjustment,
1.071474 shares of Common Stock and one Class B Warrant. Each Class B Warrant
entitles the holder to purchase, at an exercise price of $12.60, subject to
adjustment, 1.071474 shares of Common Stock. The warrants are redeemable by the
Company for $.05 per warrant on 30 days written notice under certain
circumstances.

F-9

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

In 1993, the Company consummated a public offering of 500,000 units;
each unit consisting of two shares of common stock and one Class A Warrant.

At December 31, 1999 there were 1,650,000 Class A Warrants and
1,150,000 Class B Warrants outstanding. The warrants'expiration date has been
extended to September 21, 2000.

The Company sold to the underwriter of its public offering in May
1996, for nominal consideration, a warrant to purchase 200,000 shares of Common
Stock. The warrant has an exercise price of $7.95 per share and is exercisable
for a period of five years commencing May 3, 1997.

[3] Options:

The Company may issue options to purchase up to an aggregate of
1,407,500 shares of Common Stock pursuant to its 1992 Stock Option Plan, as
amended (the "Plan"). Options to purchase shares may be granted under the Plan
to persons who, in the case of incentive stock options, are employees of the
Company; or, in the case of SARs and nonstatutory stock options, are officers
and key employees of the Company, or agents, medical and scientific advisors,
directors of or consultants to the Company, whether or not otherwise employed by
the Company. The exercise price is determined by the Stock Option Committee of
the Board of Directors at the time of the granting of an option, but in the case
of an incentive stock option, the exercise price shall not be less than the fair
market value of the stock on the date of grant. Options and SARs vest over a
period not greater than five years, and expire no later than ten years from the
date of grant.

Options to purchase up to 695,813 shares of Common Stock pursuant to
the Plan are outstanding as of December 31, 1999. In addition to the shares of
Common Stock reserved for issuance pursuant to the Plan, at December 31, 1999,
the Company had reserved 3,769,649 shares of Common Stock for issuance upon
exercise of outstanding options pursuant to other agreements. These options vest
over various periods and expire no later than seven years from the date of
vesting.

The Company applies APB Opinion 25 and related Interpretations in
accounting for its options to employees. In 1999, the Company expensed
compensation of $322,000 for stock option issued in lieu of compensation. In
addition the Company has included stock based compensation costs associated with
options granted under consulting agreements, in research and development
expenses of $159,000 for 1998 and in research and development, general and
administrative and sales and marketing expenses of $96,000, $31,000 and $23,000,
respectively for 1999.

Had compensation cost for the Company's stock option grants to
employees been determined based on the fair value at the grant dates for awards
consistent with the method of FASB Statement 123, the Company's net loss and
loss per share would have been increased to the pro forma amounts indicated
below (in thousands, except per share data).

1997 1998 1999
--------- --------- ---------
Net loss As reported $ (7,666) $ (7,602) $ (955)
Pro forma $ (9,268) $ (8,992) $ (1,297)
Net loss per share-
basic & diluted As reported $ (0.97) $ (0.96) $ (0.11)
Pro forma $ (1.17) $ (1.13) $ (0.15)

F-10

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997 and 1998: no dividend yield, expected
volatility of 76%, a risk-free interest rate of 5.5% to 6.0% and an expected
life of 2.5 to 3.3 years. For 1999, these assumptions are: no dividend yield,
expected volatility of 82%, a risk-free interest rate of 5.5% to 6.3% and an
expected life of 2.5 years.

A summary of the status of the Company's stock options as of December 31,
1997, 1998 and 1999, and changes during the years ended on those dates is
presented below (in thousands, except per share data):

1997 1998 1999
----------------------- ------------------------ ------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------

Outstanding at
beginning of year 1,459 $ 6.90 1,874 $ 5.50 2,928 2.13

Granted 1,025 4.53 2,698 1.73 1,889 0.50

Exercised (8) 2.50 -- -- -- --

Forfeited (602) 7.29 (1,634) 5.32 (352) 3.78
Outstanding at
end of year 1,874 5.50 2,928 2.13 4,465 1.31
Options
exercisable at
year-end 1,299 5.64 1,935 2.64 4,042 1.24
Weighted-average
fair value of
options granted
during the year 2.13 0.44 1.11

The following table summarizes information about fixed stock options
outstanding at December 31, 1999 (in thousands, except per share data):

Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted-Average Number
Range Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------

$0.05 - 0.91 1,804 6 years $0.21 1,776 $0.20
$1.00 - 2.00 2,397 4 years $1.70 2,029 $1.66
$4.00 - 9.12 264 3 years $5.26 237 $5.40
----- ------- ----- ------ -----
4,465 4 years $1.31 4,042 $1.24

F-11

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

(NOTE F)-- Income Taxes:

At December 31, 1999, the Company has net operating loss
carryforwards for federal income tax purposes of approximately $34,484,000 and
approximately $592,000 of research and development tax credits available to
offset future federal income tax, subject to limitations for alternative minimum
tax. The net operating loss carryforwards and the research and development
credit carryover are subject to examination by the tax authorities and expire in
various years from 2005 through 2018. Certain other limitations may apply. Any
significant issuance of the Company's stock, however, may trigger Section 382
limitations on the use of net operating loss carryforwards under the Internal
Revenue Code of 1986.

Deferred tax benefits, which amounted to $13,976,000 and $14,526,000
at December 31, 1998 and 1999 are principally attributable to net operating loss
carryforwards and have been offset by a valuation allowance due to management's
uncertainty regarding the future profitability of the Company. The valuation
allowance has been increased by $3,086,000, $3,020,000 and $550,000 in 1997,
1998, and 1999, respectively.

At December 31,1999, the Company has net operating loss
carryforwards for New Jersey State income tax purposes of approximately
$24,473,000 available to offset future tax liabilities. In 1999, the Company
participated in the Tax Benefit Transfer Program administered by the State of
New Jersey under which $11,002,000 in eligible loss carryforwards covering the
tax years 1992 through 1994 and a portion of 1995 were sold to PSE&G in exchange
for a cash payment of approximately $817,000. The Company anticipates similar
transactions during 2000 and beyond contingent upon approvals from the State
Department of Taxation.

(NOTE G)-- Research and License Agreements:

[1] Yissum agreement:

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

Pursuant to the agreement, the Company is obligated to pay a royalty
of five percent of all net sales of the Company's products derived under the
agreement. The maximum amount of royalties to be paid during the term of the
agreement is $5,500,000. The agreement continues until the earlier 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

F-12

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

sole discretion to terminate the agreement if, among other things the Company
does not attain certain milestones by specified dates. The January 1996
amendment gives the Company options for three one-year extensions, through 2004,
of the periods in which certain milestones must be attained, each for a payment
of $50,000. Upon termination of the agreement for any reason, the patents,
patent applications and know-how assigned by Yissum to the Company will revert
in full to Yissum.

The October 1996 amendment provides a research term of five years
from the date of the amendment and required Yissum personnel to enter into
confidentiality and non-competition agreements with the Company.

[2] Dimotech agreement:

During July 1995, the Company entered into an agreement with
Dimotech Ltd., pursuant to which the Company financed and Dimotech conducted
research and development with regard to the scar management program. In
connection with the agreement, Dimotech has assigned to the Company its
worldwide rights to the patents and know-how to develop, manufacture and market
products relating to this technology.

Pursuant to the agreement, the Company is obligated to pay a royalty
of five percent of all net sales of the Company's products derived under this
agreement including CLINICEL. The agreement continues until the earlier 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. Dimotech has the
right in its sole discretion to terminate the agreement under certain
circumstances. Upon termination of the agreement for any reason, the patents,
license and know-how assigned by Dimotech to the Company will revert in full to
Dimotech.

In November 1999, the Company was declared to be in breach of this
agreement by Dimotech due to non-payment of royalties. The Company was
unsuccessful in its efforts to divest the CLINICEL business; therefore,
effective February 29, 2000, the Company discontinued the manufacture and sale
of CLINICEL and allowed the patent rights to revert to Dimotech. The company
does not plan on marketing the CLINICEL products subsequent to February 2000.
Accordingly, a $186,000 reserve has been set up for all the inventories on hand
at year end.

[3] Technion agreements:

During June 1991, the Company entered into an agreement with
Technion Research and Development Foundation, Ltd., in Haifa, Israel (the
"Technion"), which was assigned to its wholly-owned subsidiary Dimotech, Ltd.
("Dimotech") and was amended in February 1994 and February 1996, pursuant to
which the Company financed, and Dimotech conducted, research and development
with regard to the Company's in-situ tissue culturing technology. In connection
with the agreement, the Technion assigned to the Company its worldwide rights to
patent applications, any patents which may be issued and know-how to develop,
manufacture and market products relating to this technology. This agreement was
terminated by the Company in September 1998.

F-13

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

(NOTE H)-- Commitments and Other Matters:

[1] Leases:

The Company entered into an operating lease for its corporate
offices in November 1996 for approximately 3,550 square feet at an annual fixed
rent of $80,000. The initial term of this lease is for five years and includes
one five-year renewal option.

The lease provides for future aggregate minimum annual rentals, as
of December 31, 1999, as follows (in thousands):

2000 $80
2001 $67

The terms of the lease includes escalation for increases in real
estate taxes and certain operating expenses.

Rent expense was $84,000, $84,000 and $88,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.

[2] Employment agreements:

The Company has employment agreements with two executives which
expire at various dates from 2000 through 2001. Pursuant to such agreements, the
Company's commitments regarding termination benefits aggregates $149,000 at
December 31, 1999.

[3] Other:

In connection with an agreement with the Technion and Dimotech,
which was assigned to MedChem in July 1994, the Company must invest $50,000 per
year, for the five-year period ending December 31, 1999, in research and
development programs in Israel if MedChem does not make such investments. The
agreement also provides for a two percent royalty on sales of the Sure-Closure
System to be paid to the Chief Scientist in Israel. In the event that MedChem
does not pay these royalties the Company may be obligated to make such payments.
In addition, the agreement contains certain commitments to favorably consider
manufacture of future products in Israel, which if not met could result in the
loss of technology and future royalty income.

(NOTE I)-- Sure-Closure System Sale:

In July 1994, the Company sold or assigned to MedChem substantially
all of its assets related to the Sure-Closure System, including rights,
agreements and licenses. The terms of the asset purchase agreement provide that
the Company is entitled to royalties of 10% of the net sales (as defined in the
agreement), through June 30, 2004, of the Sure-Closure System and any line
extensions or future embodiments. In connection with this transaction, $644,000
was recorded as deferred royalty income and through December 31,1999 has been
reduced by $305,000 of royalties earned after October 1, 1995.

A number of the Company's agreements with the Technion and Dimotech,
related to the Sure-Closure System, were assigned to MedChem in connection with
the sale.

F-14

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

(NOTE J)-- Related Party:

The Company incurred expenses of approximately $189,000, $103,000
and $67,000 in the years ended December 31, 1997, 1998 and 1999, respectively,
for legal services rendered by a firm, one of the partners at which is a
director and a principal stockholder of the Company.

(NOTE K)-- 401(k) Plan:

Effective October 1992, the Company adopted a 401(k) pension plan
available to all full time eligible employees. The Company at its discretion may
make contributions to the plan. However, no such contributions have been made
through December 31, 1999.

(NOTE L)---Extraordinary Item:

Net loss for the year ended December 31, 1999 includes an
extraordinary gain of $432,000 attributable to the gain on extinguishment of
amounts owed to a contract manufacturer by the transfer of title to equipment
that had previously been charged to research and development expenses.

(NOTE M) - Benefit for Income Taxes:

The Company received $817,000 associated with the sale of certain
accumulated New Jersey State tax operating losses.

F-15

LIFE MEDICAL SCIENCES, INC.

NOTES TO FINANCIAL STATEMENTS - (Continued)

(NOTE N) - Fourth Quarter Adjustment:

In May 1999, the Chairman of the Company's Board of Directors chose not to stand
for reelection. Pursuant to the employment agreement the Company owed $ 254,000
for accrued salary and severance, which was paid by repricing and extending
existing stock options and issuing additional stock options. The Company
recorded a $254,000 charge during the fourth quarter of 1999 and increased
additional paid-in capital. The salary should have been accrued through the date
of resignation and the severance should have been accrued on the date of
resignation. The effect of such adjustment is summarized as follows:

Three-Month Period Ended
---------------------------------------------------------------
March 31, 1999 June 30,1999
--------------------------- -------------------------------
As As
Originally As Originally As
Reported Restated Reported Restated
---------- --------- ---------- ----------

Accrued salary
and severance $ 80,000 $ 174,000
========= ==========

Net Income (Loss) $ 278,000 $ 198,000 $ (664,000) $ (838,000)
========== ========= ========== ==========

Net Income (Loss) per
share - basic and diluted $ .04 $ .03 $ (.08) $ (.10)
========== ========= ========== ==========

F-16