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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, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD TO
COMMISSION FILE NUMBER: 0-20580
LIFE MEDICAL SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 14-1745197
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

P.O. BOX 219, LITTLE SILVER, NEW JERSEY 07739
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(732) 728-1769
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

SECURITIES REGISTERED PURSUANT TO SECTION
12(b) OF THE ACT:

NONE
(TITLE OF EACH CLASS)

SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT:
COMMON STOCK--PAR VALUE $.001 PER SHARE
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 13, 2001 was approximately $ 2.3 million.

As of March 13, 2001, 10,343,342 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 June 13, 2001 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 2000, the Company postponed the
further advancement and expansion of product development programs based on its
proprietary bioresorbable polymer technology due to the lack of financial
resources to fund such activities. As a result of this cash shortfall, in July
2000, the Company terminated all but one of its remaining employees. Contingent
upon the receipt of additional funding, 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. In December 2000, the
Company received approximately $1 million through the combination a private
placement of convertible preferred stock and the sale of certain state tax
losses (See Notes A and E to the Financial Statements). The proceeds are being
used to reinitiate activities in support of the REPEL-CV pivotal clinical trial.

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-CV(TM)), gynecological and general surgical procedures
(REPEL(TM)), 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 (RESOLVE(TM)) and
orthopedic and spinal surgical procedures (RELIEVE(TM)). These products are in
various stages of development:

- ----------------------------------------------------------------------------------------------------------------
ADHESION PREVENTION PRODUCTS UNDER DEVELOPMENT

- ---------------------- ---------------------------------------- -------------------------- ---------------------
POTENTIAL EST. ANNUAL MARKET
PRODUCT THERAPEUTIC APPLICATION STATUS POTENTIAL
- ---------------------- ---------------------------------------- -------------------------- ---------------------

REPEL Preventing or reducing post-operative Completed U.S. pilot $250 Million
Barrier Film surgical adhesions in gynecological clinical trial
and general abdominal surgery.
- ---------------------- ---------------------------------------- -------------------------- ---------------------
REPEL-CV Preventing or reducing post-operative IDE submission for U.S. $250 Million
Barrier Film surgical adhesions in cardiovascular pivotal clinical trial
surgery.
- ---------------------- ---------------------------------------- -------------------------- ---------------------
RESOLVE Preventing or reducing post-operative Preclinical development $400 Million
Viscous Solution surgical adhesions in gynecological
and general abdominal surgery.
- ---------------------- ---------------------------------------- -------------------------- ---------------------
RELIEVE Preventing or reducing post-operative Preclinical development $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. However, in order
to focus resources on the bioresorbable polymer product opportunities, the
Company discontinued the manufacture and sale of CLINICEL products effective
February 29, 2000 and the intellectual property rights associated with CLINICEL
reverted to the Dimotech Ltd., a subsidiary of Technion Research and Development
Foundation Ltd.

The Company's product development strategy has been 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.

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 has been 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
has been 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-CV

REPEL-CV is a bioresorbable adhesion barrier film made from a
co-polymer formulation than which results in it being stronger and longer
lasting in the body than the original REPEL film. 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 has reinitiated development
activities in support of a U. S. pivotal clinical trial, the timing for the
start of this trial is contingent upon the FDA approval of the trial protocol
and the infusion of additional capital into the Company.

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.

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, RESOLVE proved to be efficacious in reducing the level of
adhesion formation in the abdominal cavity during a series of pre-clinical
studies. 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.

RELIEVE

Gels of higher viscosities may also be beneficial in addressing
adhesion formation in articulating joints subsequent to orthopedic surgical
procedures and involving the spinal canal after spinal surgery. The RELIEVE
category of viscous gel products have been under development through
pre-clinical studies. Candidate materials have been evaluated in a surrogate
hand tendon model and in a feasibility study in spinal surgery.

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 has had
discussions with medical device and pharmaceutical companies on the use of these
materials in drug and cell delivery, implantable medical device coatings and
other bioresorbable polymer product opportunities.

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 four 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 four
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
fourth United States

patent is a continuation in part expanding the claims of a previously issued
patent. The four United States patents will remain in effect until June 2, 2008
May 3, 2010, July 11, 2016 and July 11, 2017, 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 and, in certain instances, their use in
post-operative adhesion prevention 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., Intergel(TM), a product of
LifeCore Biomedical, Inc., Adcon-L(TM), a product of Gliatech, Inc. and
Goretex(TM), a product of WL Gore. Several other companies including 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 bases 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 recently reinitiated the production of REPEL-CV products for use in
clinical trials 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

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, 2001, the Company employed one full time employee. Research
and development activities are conducted through arrangements with various
consultants and companies in Europe, Israel and the United States. The Company
believes that it has good relations with its employee. 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 officer is as follows:

NAME AGE POSITIONS WITH THE COMPANY
---- --- --------------------------

Robert P. Hickey............... 55 Chairman, President, CEO & CFO

ROBERT P. HICKEY has served as Chairman since May 1999, President and Chief
Executive Officer since May 1996, Chief Financial Officer since March 2000 and
as a Director since August 1996. From May 1994 until joining the Company, Mr.
Hickey was founder and president of Roberts Healthcare Resources, Inc., a
company engaged in project consulting to Fortune 500 and leading edge companies
in the healthcare industry. From 1975 to 1994, Mr. Hickey served in various
positions at Johnson & Johnson. From 1992 to 1994, Mr. Hickey was Vice
President, Marketing and Director of Ethicon, Inc., a unit of Johnson & Johnson.

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:

ELI PINES, PH.D.......... ELI PINES, PH.D. previously served as a Vice President
and the Chief Scientific Officer of the Company from
June 1995 to July 2000.. 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 seventee
years by Johnson & Johnson, where his last position
was n 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.

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 extensiveclinical 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's available cash will not be sufficient to meet its
cash requirements through 2001. 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 $7,602,000, $955,000 and $437,000 for the years ended December 31,
1998, 1999 and 2000 respectively. At December 31, 2000, the Company had an
accumulated deficit of $36,825,000 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.

In February 2001, the Company was notified of a lawsuit filed against
the Company and its principal executive officer in the Magistrate Court of
Haifa, Israel by Dimotech, Ltd. for the non-payment of royalties and accrued
interest in the amount of approximately $125,000 under the terms of the Dimotech
Agreement.

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. 500,000 preferred shares have 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 10,343,342 shares of Common Stock outstanding as of March
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.

In December 2000, the Company issued 500,000 shares of Series A
Convertible Preferred Stock, each share of Preferred Stock being convertible
into 10 shares of the Company's Common Stock as of the earlier of six months
from the issuance date or the closing date of a subsequent financing. The
holders of the Series A Convertible Preferred Stock are entitled anti-dilution
protection and piggyback registration rights. Any such registration and possible
subsequent sale of the registered shares may have a negative effect on the then
prevailing market price of the Common Stock.

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) 198,667 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"), (iii) 882,139 shares of Common Stock issuable upon
exercise of options which have been granted under the Company's 2000
Non-Qualified Stock Option Plan and (iv) 2,620,021 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 offices are currently located in an aggregate of
approximately 500 square feet in Oceanport New Jersey. Although there is no
rental expense associated with this space; the Company remains bound by the
terms of a five year lease expiring in November 2001 for its prior offices. The
lease expense in 2001 is estimated at $67,000.

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

In February 2001, the Company was notified of a lawsuit filed against the
Company and its chief executive officer in the Magistrate Court of Haifa, Israel
by Dimotech, Ltd. for the non-payment of royalties and accrued interest in the
amount of $125,000 under the terms of the Dimotech Agreement for CLINICEL
products.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
18

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

(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, 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
First Quarter 1 5/8 5/16 1/100 1/100 1/100 1/100
Second Quarter 23/32 7/32 1/100 1/100 1/100 1/100
Third Quarter 9/32 3/32 1/100 1/100 1/100 1/100
Fourth Quarter 5/32 3/64 1/100 1/100 1/100 1/100

Fiscal Year Ended December 31, 2001
January 1 through March 13, 2001 33/64 14/64 2/100 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 March 21, 2002. 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. The exercise prices and number of
shares underlying these Warrants do not reflect anti-dilution adjustments in
respect to any transactions which occurred since May 1996.

In December 2000, the Company completed a private placement in which
500,000 shares of Series A Convertible Preferred Stock were sold to "accredited
investors" as defined in Rule 501 of Regulation D in consideration for cash
proceeds of $500,000. Each share of the Series A offering is convertible into
ten shares of the Company's common stock as of the earlier of six months from
the issuance date or the closing date of a subsequent financing.

(b) APPROXIMATE NUMBER OF EQUITY SECURITIES HOLDERS

As of March 13, 2001 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, 1996, 1997, 1998,1999 and 2000 have been
derived from audited financial statements of the Company. The financial
statements of the Company at December 31, 1999 and 2000 and for the years ended
December 31, 1998, 1999 and 2000, 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,
-----------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----

STATEMENT OF OPERATIONS DATA: 2000

Revenues:
Product Sales $ 1,715 $ 1,201 $ 58
Royalty Income $ 155 $ 64 55 48 43
----------- ------------ ------------ ----------- -----------
Total Revenue 155 64 1,770 1,249 101
Cost of Sales 820 556 4
----------- ----------- -----------
Gross Margin 950 693 97
Operating Expenses:
Research and development 2,779 6,721 3,584 788 316
Sales and marketing 3,142 437 20
General and administrative 1,743 2,012 1,982 1,684 759
----------- ----------- ------------ ----------- -----------
Operating expenses 4,522 8,283 8,708 2,909 1,095
----------- ----------- ------------ ----------- -----------
(Loss) from operations (4,367) (8,219) (7,758) (2,216) (998)
Interest income 540 557 161 16 11
Interest expense (3) (4) (5) (4) (1)
----------- ----------- ------------ ----------- -----------
Net (loss) before benefit for income tax and (3,830) (7,666) (7,602) (2,204) (988)
extraordinary item
Benefit for income taxes 817 468
----------- ----------- ------------ ----------- -----------
Net (loss) before extraordinary item (3,830) (7,666) (7,602) (1,387) (520)
Extraordinary Item 432 -
Net (loss) $ (3,830) $ (7,666) $ (7,602) $ (955) (520)
=========== ========== =========== =========== ===========
Net (loss) per share $ (.55) $ (.97) $ (.96) $ (.11) (.05)
=========== ========== =========== =========== ===========
Weighted average shares
Outstanding 6,976 7,919 7,923 8,715 10,155

DECEMBER 31,
------------

1996 1997 1998 1999 2000
---- ---- ---- ---- ----

BALANCE SHEET DATA:

Cash, cash equivalents and investments $ 14,278 $ 7,569 $ 485 $ 724 $ 844
Working capital (deficiency) 14,121 5,975 (1,006) (698) (613)
Total Assets 14,801 7,786 1,034 798 966
Total Liabilities. 1,007 1,621 2,312 1,789 1,765
Accumulated deficit (20,165) (27,831) (35,433) (36,388) (36,908)
Stockholders' equity (deficiency) 13,794 6,165 (1,278) (991) (799)

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 toward the development of products for the prevention and/or reduction of
post surgical adhesions.

RESULTS OF OPERATIONS

1999 VS. 2000

The Company had revenue of $101,000 for the fiscal year ended December 31,
2000 of which $58,000 was attributed to the sale of CLINICEL products and
$43,000 represented royalties on sales of the Sure-Closure System. Total revenue
for the fiscal year ended December 31, 1999 was $1,249,000, comprised of
$1,201,000 in CLINICEL sales and $48,000 in royalties on sales of the
Sure-Closure System. The decline in CLINICEL sales was due to the
discontinuation of sale of CLINICEL products in February 2000.

Cost of goods sold for the fiscal year ended December 31, 2000 was $4,000
as compared to $556,000 for the prior year. The reduction is attributable to the
reduced level of CLINICEL sales and the write-off of certain inventories in the
prior year.

Sales and marketing expenses declined to $20,000 in the fiscal year ended
December 31, 2000 from $437,000 for the comparable period in 1999. The reduction
reflected the elimination of consumer and professional advertising associated
with the discontinuation of the sale of CLINICEL products.

The Company incurred research and development expenses of $316,000 and
$788,000 for the fiscal years ended December 31, 2000 and 1999, respectively.
The reduction was primarily attributable to the scale back of expenditures on
several bioresorbable polymer-based product development programs.

General and administrative expenses totaled $759,000 for the fiscal year
ended December 31, 2000 as compared to $1,684,000 for the previous fiscal year.
The reduction was related to termination of most remaining staff members in July
2000.

Interest income declined to $11,000 for the fiscal year ended December 31,
2000 from $16,000 for the fiscal year ended December 31, 1999.

Interest expense was $1,000 and $4,000 for the fiscal years ended December
31, 2000 and 1999, respectively.

The Company recorded a benefit for income taxes of $468,000 during the
fiscal year ended December 31, 2000; compared to $817,000 in the prior year.
These amounts were attributable to the receipt of funds associated with the sale
of certain accumulated New Jersey State tax operating losses; the reduction
compared to the prior year was largely the result of lower overall funding
allocated by the State to the program.

The Company recorded an extraordinary item of $432,000 during the
fiscal year ended December 31, 1999. This extraordinary item was attributable to
a gain on the extinguishment of amounts owed to suppliers by the transfer of
title to equipment that had previously been charged to research and development
expenses.

The Company recorded a net loss of $520,000 for the fiscal year ended
December 31, 2000 as compared to a net loss of $955,000 for the prior year. The
decrease in the current period net loss is attributable to the reasons described
above.

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.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2000, the Company had cash and cash equivalents of $844,000
compared to cash and cash equivalents of $724,000 at December 31, 1999. The
primary use of these funds is to fund the Company's research and development
related to anti-adhesion products and general and administrative expenses
associated with these activities. In December 2000, the company received a
payment of $468,000 in exchange for the transfer of certain New Jersey State tax
benefits; $817,000 was received under this program in the prior year. The
Company closed on a Series A Convertible Preferred Stock financing in December
2000 which contributed $435,000 to cash flow.

At December 31, 2000, the Company had a working capital deficit of
$513,000. The current cash and cash equivalents balance as of December 31, 2000
will not be sufficient to meet the Company's cash requirements through 2001. The
Company will be required to raise substantial additional funds to continue the
clinical development and commercialization of its proposed products. 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 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.

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-15.

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.

Edward A. Celano, age 62, has served as a director of the Company
since November, 1996. Since February 2001, Mr. Celano has been Managing Director
of the Corporate Finance Group of M. R. Weiser & Co., LLP, an investment banking
firm. From May 1996 to January 2001, Mr. Celano had been an executive vice
president of Atlantic Bank of New York, a commercial bank. From November 1984 to
May 1996, Mr. Celano was a senior vice president of NatWest Bank, a commercial
bank. Mr. Celano is currently a director of the following publicly traded
companies: Entrade, Inc. and Asta Funding, Inc.

Gere S. diZerega, MD, age 51, has served as a director of the Company
since December 2000. Since January 1987, Dr. diZerega has been Professor,
Department of Obstetrics and Gynecology at Women's and Children's Hospital which
is affiliated with the University of Southern California Medical Center. Dr.
diZerega's area of research includes post-operative adhesions, peritoneal
healing and post-surgical wound repair. Since December 1995, Dr. diZerega has
been consulting with the Company in the field of post-operative adhesion
prevention.

Coy Eklund, age 85, has served as a director of the Company since
March 1994. From 1938 to 1983, Mr. Eklund served in various capacities at The
Equitable Life Assurance Society of the United States and from 1975 to 1983 was
its chief executive officer. From August 1987 through March 1996, Mr. Eklund had
served as the chairman and chief executive officer of Trivest Financial
Services, a company engaged in the television business.

Richard L. Franklin, MD, age 55, has served as a director of the
Company since December 2000. Since May 1996, Dr. Franklin has been Chief
Executive of Phairson, Ltd., medical product development company. From January
1991 to May 1996, Dr. Franklin was founder and principal of Richard Franklin &
Associates and from January 1988 to December 1990, was with Boston Capital
Group, both consulting firms to the healthcare industry. From July 1986 to
December 1987, Dr. Franklin was head of Healthcare Corporate Finance at Tucker
Anthony, an investment banking firm.

Robert P. Hickey, age 55, has served as Chairman of the Company's Board
of Directors since May 1999, Chief Financial Officer since March 2000, President
and Chief Executive Officer of the Company since May 1996 and as a director
since July 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.

Walter R. Maupay, Jr., age 62, has served as a director of the
Company since July 1996. At his retirement in 1995, Mr. Maupay was a group
executive with Bristol-Myers Squibb and president of Calgon Vestal Laboratories.
From May 1988 to January 1995, Mr. Maupay had been president of Calgon Vestal
Laboratories, a division of Merck & Co., Inc. From 1984 to 1988, Mr. Maupay
served as vice president of Calgon Vestal Laboratories. Mr. Maupay is currently
a director of the following publicly traded companies: Kinsey Nash Corporation
and Cubist Pharmaceuticals.

Irwin M. Rosenthal, age 72, is a co-founder of the Company and has
served as Secretary and Treasurer at various periods and a director of the
Company since its inception in 1990. Mr. Rosenthal is an attorney specializing
in securities law and has been a senior partner at Greenberg Traurig, LLP since
June 2000. Prior to joining Greenberg Traurig, LLP, Mr. Rosenthal was a senior
partner at Graham & James LLP from June 1998 to June 2000 and at Rubin Baum
Levin Constant & Friedman from December 1991 to June 1998. From December 1989 to
December 1991, Mr. Rosenthal was a senior partner at Baer Marks and Upham and,
from January 1983 to December 1989, he was a senior partner at Botein Hays &
Sklar. Mr. Rosenthal serves as secretary and as a director of Magar Inc., of
which he is a principal stockholder. Magar Inc. is a principal stockholder of
the Company. Mr. Rosenthal is also a director of the following publicly traded
companies: Magna-Lab Inc. and EchoCath, Inc. Mr. Rosenthal is the co-founder and
involved in the organization and development of four national health oriented
non-profit foundations.

Each director shall hold office until the Company's next meeting of its
stockholders and until such director's successor is duly elected and qualified
or until such director's earlier resignation or removal. The Series A
Convertible Preferred Stockholders have the right, until the Series A shares are
converted to the Company's Common Shares, to designate two members of the
Company's Board of Directors. The Series A directors are currently Dr. Gere S.
diZerega and Dr. Richard L. Franklin.

ITEM 11. EXECUTIVE COMPENSATION.

The following summary compensation table sets forth the
aggregate compensation paid or accrued by the Company during the fiscal years
ended December 31, 2000, 1999 and 1998 to the executive officers whose annual
compensation exceeded $100,000 in fiscal 2000 (the "Named Executive Officers").

SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- --------------------
SECURITIES OTHER
NAME AND PRINCIPAL CAPACITIES UNDERLYING COMPEN-
IN WHICH SERVED YEAR SALARY BONUS OPTIONS SATION (1)
- ---------------------------------- -------------- ------------- ------------- -------------------- -------------

Robert P. Hickey 2000 $217,604 415,313 (2) $2,043
Chairman, President and 1999 $219,663 169,448 $1,921
Chief Executive Officer 1998 $229,229 420,000 (3) $1,804

(1) Represents premium payments for term life insurance for the benefit of
the Named Executive Officer.
(2) Of the 415,313 options granted during 2000, 263,820 were granted to
replace previously granted options which were cancelled.
(3) Of the 420,000 options granted during 1998, 300,000 were granted to
replace previously granted options which were cancelled.

The following table sets forth certain information with respect to stock option
grants during the year ended December 31, 2000 to the Named Executive Officer.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS (1)
---------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES % OF TOTAL OPTIONS
UNDERLYING GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION
NAME OPTIONS GRANTED (#) IN FISCAL YEAR PRICE ($/SH) (1) DATE
- ------------------------ ------------------------------ ------------------------ -------------------------- -------------

Robert P. Hickey 23,062 5.6% $2.00 5/29/03
23,062 5.6% $2.00 5/29/04
23,063 5.6% $2.00 5/29/05
23,063 5.6% $2.00 5/29/06
23,063 5.6% $2.00 5/29/07
100,000 24.0% $0.562 5/05/06
100,000 24.0% $1.4375 3/09/07
100,000 24.0% $0.09 10/12/07

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

(1) All options were granted with an exercise price equal to or above the fair
market value of the Common Stock at the date of grant.

The following table sets forth certain information with respect to stock option
exercises by the Named Executive Officers during the year ended December 31,
2000 and the value of unexercised options at December 31, 2000.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION/SAR VALUES

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR END ($) (1)
ACQUIRED ON VALUE ----------------------------------- -------------------------------------
NAME EXERCISED(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ------------ ----------------- ---------------- ----------------- ------------------

Robert P. Hickey 839,448 $ 35,073

(1) Based upon the closing price of $1/4 per share of Common Stock on December
31, 2000, less the option exercise price.

EMPLOYMENT AGREEMENT

As of May 29, 1996, the Company entered into an employment agreement
with Mr. Hickey, pursuant to which Mr. Hickey serves as President and Chief
Executive Officer of the Company. In May 1999, Mr. Hickey was elected Chairman
of the Board of Directors and, in March 2000, was appointed Chief Financial
Officer. The term of Mr. Hickey's employment agreement is for a period of five
years. Pursuant to such agreement, Mr. Hickey currently receives an annual base
salary of $240,000 subject to adjustments for cost-of-living increases and other
increases as determined by the Board and received an option to purchase an
aggregate of 250,000 shares of Common Stock. Such options vest in twenty percent
annual increments from the date of the agreement through its fourth anniversary
and are exercisable for five years from the date of vesting and have an exercise
price of $8.125. In June 1997, the Company canceled these options and granted an
option to purchase up to 250,000 shares of Common Stock with such option having
identical terms as the canceled option except for the exercise price of $4.00
per share, which was fair market value on the date of the grant and an exercise
term of seven years from the date of vesting. In May 1998, the Company canceled
115,315 shares covered under this option and issued a new option under identical
terms as the canceled option except for the exercise price of $2.00 per share.

In March 2000, the Company granted to Mr. Hickey an option to acquire
up to 51,493 shares of Common Stock at $1.4375 per share and in October 2000,
Mr. Hickey was granted an option to acquire up to 100,000 shares at $0.09 per
share. In October 2000, the Company granted non-qualified options aggregating to
263,820 shares which replaced previously granted incentive stock option grants
at the same exercise price, vesting and exercise term as the option grants
replaced.

If Mr. Hickey dies, is terminated for cause, voluntarily resigns or is
unable to perform his duties on account of illness or other incapacity and the
agreement is terminated, he or his legal representative shall receive from the
Company the base salary which would otherwise be due to the date which
termination of employment occurred. If Mr. Hickey's employment is terminated for
any other reason by the Company during the term of the agreement, Mr. Hickey
will receive from the Company the base salary which would otherwise be due to
the date which termination of employment occurred plus severance pay equal to
six months of salary. The agreement with Mr. Hickey contains confidentiality and
post-termination non-competition provisions.

Under the foregoing employment agreement, the Company is
required to obtain life insurance coverage on the life and for the benefit of
Mr. Hickey in an amount equal to twice the amount of the base salary then in
effect. Mr. Hickey will also have the right to participate in all group
insurance, hospital, dental, major medical and disability benefits, stock option
plans and other similar benefits afforded to executives.

DIRECTOR COMPENSATION

All directors of the Company are reimbursed for reasonable expenses
incurred by them in acting as a director or as a member of any committee of the
Board. All outside directors are entitled to receive $1,000 for attendance at
each Special Meeting and $500 for participation in each teleconference meeting.

In October 2000, the Company granted to Messrs. Celano and Maupay,
options for each to acquire up to 50,000 shares of Common Stock at $0.09 per
share; to Mr. Eklund, an option to acquire up to 75,000 shares at $0.09 per
share and to Mr. Rosenthal, an option to acquire up to 100,000 shares at $0.09
per share. Such options vested immediately and are exercisable for seven years
from the grant date.

During 2000, Messrs. Eklund and Maupay were each granted various
options to purchase Common Stock in lieu of Board fees aggregating to 37,755
shares at exercise prices ranging from $0.023 to $0.36 per share; similarily,
Mr. Celano was granted various options in lieu of Board fees aggregating to
22,422 shares at exercise prices ranging from $0.025 to $0.36 per share. Such
options vested immediately and are exercisable for seven years from the date of
grant. In December 2000, the Company discontinued the granting of options in
lieu of Board fees.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

The Company believes that during 2000 all reports for the Company's
executive officers and directors that were required to be filed under Section
16(A) of the Securities Exchange Act of 1934 were timely filed.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Set forth below is information concerning the stock ownership of
all persons known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, all directors (including nominees), the
Named Executive Officers (as defined in "Executive Compensation - Summary
Compensation Table") and all directors and executive officers of the Company as
a group, as of March 13, 2001. Beneficial ownership is defined in accordance
with the rules of the Securities and Exchange Commission (the "Commission") and
generally means the power to vote and/or to dispose of the securities regardless
of any economic interest therein.

PRINCIPAL STOCKHOLDERS TABLE

SHARES OF COMMON PERCENT OF OUT-
NAME AND ADDRESS OF STOCK BENEFICIALLY STANDING COMMON STOCK
BENEFICIAL OWNER OWNED(1) BENEFICIALLY OWNED/
OR NUMBER IN GROUP -------- VOTING POWER
------------------ ------------

Marilyn Moskowitz 1,433,026(2) 10.2%/7.5%
9071 Rutledge Ave.
Boca Raton, FL 33434

Dr. Herbert Moskowitz 1,306,870(3)(4)(5) 9.3%/6.9%
9071 Rutledge Ave.
Boca Raton, FL 33434

Robert P. Hickey 902,032(7) 6.4%/4.7%
c/o Life Medical Sciences, Inc.
P.O. Box 219
Little Silver, NJ 07739

Irwin M. Rosenthal 612,644(3)(4)(6) 4.4%/3.2%
c/o Greenberg Traurig LLP
200 Park Avenue
New York, NY 10106

Walter R. Maupay 521,775(8) 3.7%/2.7%
c/o Life Medical Sciences,Inc.
P.O. Box 219
Little Silver, NJ 07739

Edward A. Celano 347,461(11) 2.5%/1.8%
c/o Life Medical Sciences,Inc.
P.O. Box 219
Little Silver, NJ 07739

Coy Eklund 263,755(10) 1.9%/1.4%
c/o Life Medical Sciences,Inc.
P.O. Box 219
Little Silver, NJ 07739

Gere S. diZerega, MD 60,000(12) */*
c/o Life Medical Sciences,Inc.
P.O. Box 219
Little Silver, NJ 07739

Richard L. Franklin, MD -0- */*
c/o Life Medical Sciences,Inc.
P.O. Box 219
Little Silver, NJ 07739

All executive officers and
directors
as a group (7 persons) 2,707,667(13) 19.3%/14.2%

* Denotes less than 1%
(1) All shares outstanding are Common Stock and are beneficially owned, and
sole voting and investment power is held by the persons named, except as
otherwise noted.
(2) Excludes 43,687 shares of Common Stock, 148,217 shares of Common Stock
issuable upon exercise of Class A Warrants and Class B Warrants and
658,262 shares of Common Stock issuable upon exercise of options which
are currently exercisable, all of which are held by Mrs. Moskowitz's
husband, as to which shares of Common Stock Mrs. Moskowitz disclaims
beneficial ownership.
(3) Dr. Moskowitz and Mr. Rosenthal are each officers, directors and
principal stockholders of Magar Inc. and own approximately 47% and
16.5%, respectively, of the outstanding stock of such corporation. As
such, these individuals may be considered to beneficially own, and to
have shared investment and voting power with respect to, all shares of
Common Stock owned by Magar Inc. Information relating to shares owned by
each of these individuals assumes that each beneficially owns all shares
owned of record by Magar Inc.
(4) Includes 406,704 shares of Common Stock of which 270,000 shares are
pledged to a bank as security for a loan to Magar Inc. Magar Inc. has
the sole right to vote such shares, unless there is an event of default
under the loan. In the event of a default by Magar Inc., the bank would
have the right to dispose of the shares.
(5) Includes shares of Common Stock issuable upon exercise of 46,110 Class
A Warrants and 46,110 Class B Warrants, and 46,110 Class B Warrants
issuable upon exercise of the Class A Warrants which may be exercised
at any time up to March 21, 2002 into an additional 148,217 shares of
Common Stock. Also includes 708,262 shares of Common Stock issuable
upon exercise of options which are currently exercisable, but excludes
1,433,026 shares of Common Stock held by Dr. Moskowitz's wife, as to
which shares of Common Stock Dr. Moskowitz disclaims beneficial
ownership.
(6) Includes 305,940 shares of Common Stock issuable upon exercise of
options which are currently exercisable. Does not include shares of
Common Stock beneficially held by attorneys associated with Greenberg
Traurig, LLP, of which Mr. Rosenthal is a partner, as to which shares
of Common Stock Mr. Rosenthal disclaims beneficial ownership. Such
shares of Common Stock do not exceed one percent of the total
outstanding shares of Common Stock of the Company.
(7) Includes 839,448 shares of Common Stock issuable upon exercise of
options which are currently exercisable and 40,584 shares owned by Mr.
Hickey's wife.
(8) Includes 300,107 shares of Common Stock issuable upon exercise of
options which are currently exercisable.
(9) Represents shares of Common Stock issuable upon exercise of options
which are currently exercisable

(10) Includes 276,877 shares of Common Stock issuable upon exercise of
options which are currently exercisable and 22,222 shares of Common
Stock owned by Walworth Financial Services, Inc., Defined Benefit Trust,
controlled by Mr. Celano.
(11) Represents shares of Common Stock issuable upon exercise of options but
excludes 40,000 shares of Common Stock issuable upon exercise of options
which are not exercisable within the next sixty days.
(12) Includes 2,046,127 shares of Common Stock issuable upon exercise of
warrants and options which are currently exercisable but excludes 40,000
shares of Common Stock issuable upon exercise of options which are not
exercisable within the next sixty days.

Set forth below is information concerning all persons known by the
Company to own shares of the Company's Series A Preferred having a number of
votes equal to at least 5% of the outstanding voting power attributable to the
Company's outstanding Common Stock and Series A Preferred. Each share of Series
A Preferred is currently entitled to 10 votes.

SHARES OF SERIES
A PREFERRED PERCENT OF OUTSTANDING
BENEFICIALLY OWNED VOTING POWER
------------------ ----------------------

Ventura, Inc. 150,000 7.9%
Regent Centre East
Freeport, Bahamas

Schweizerishe Gesellschaft fur 100,000 5.3%
Aldlenhandel und Resaarch AG
Kirchstrasse 6
Fratenbach, Switzerland

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The Company incurred expenses of approximately $103,000, $67,000,
$108,000 in the years ended December 31, 1998, 1999 and 2000, respectively, for
legal services rendered by a firm, one of the partners of which is a director
and a principal stockholder of the Company.

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)

3.1(b) Certificate of Designations, Rights and Preferences of Series A
Convertible Preferred Stock. (18)

3.2 By-Laws of Registrant. (1)

3.2(a) Amendment No. 1 to the By-Laws of Registrant. (18)

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)

10.8 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)

10.14 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)

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

10.29 Series A Preferred Stock Purchase Agreement dated December 15, 2000.
(18)

10.30 Investor Rights Agreement dated December 15, 2000. (18)

23.1 Consent of Richard A. Eisner & Company, LLP. *
* 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.
(18) Incorporated by reference to the Registrant's 8-K filed in January 2001.

(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 CFO
(principal executive, financial and
accounting officer)

Dated: March 13, 2001

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 13, 2001
------------------------------ President, CEO and CFO
ROBERT P. HICKEY (principal executive, financial and
accounting officer)

/s/ Edward A. Celano Director March 13, 2001
------------------------------
EDWARD A. CELANO

/s/ Gere S. diZerega, M.D. Director March 13, 2001
------------------------------
GERE S. DIZEREGA, M.D.

/s/ Coy Eklund Director March 13, 2001
------------------------------
COY EKLUND

/s/Richard L. Franklin, M.D. Director March 13, 2001
------------------------------
RICHARD L. FRANKLIN, M.D.

/s/ Walter R. Maupay Director March 13, 2001
------------------------------
WALTER R. MAUPAY

/s/ Irwin M. Rosenthal Director March 13, 2001
------------------------------
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.
Little Silver, New Jersey

We have audited the accompanying balance sheets of Life Medical
Sciences, Inc. as of December 31, 1999 and 2000 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, 2000. 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. Those 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, 1999 and 2000 and the results of its
operations and cash flows for each of the years in the three-year period ended
December 31, 2000 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, 2000. 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 14, 2001

F-2

LIFE MEDICAL SCIENCES, INC.

BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

DECEMBER 31
-----------------------------------------
1999 2000
---- ----

ASSETS

Current assets:
Cash and cash equivalents................................ $ 724 $ 844
Prepaid expenses.......................................... 19 110
------------ -----------
Total current assets............................. 743 954
Furniture and equipment, less accumulated depreciation 55 12
------------ -----------

TOTAL............... $ 798 $ 966
=========== ============

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

Current liabilities:
Capital lease obligation.................................... $ 9 $ 16
Accounts payable............................................ 1,084 1,120
Accrued expenses............................................ 95 162
Other liabilities........................................... 253 169
------------ ------------
Total current liabilities........................ 1,441 1,467

Capital lease obligation, less current portion.................. 9 2
Deferred royalty income........................................ 339 296
------------ -----------
Total liabilities................................ $ 1,789 $ 1,765
------------ -----------

Commitments ( Note G)

Stockholders' deficiency:
Preferred stock, $.01 par value: shares authorized - 5,000;
Series A convertible shares issued and outstanding - none and 500 5
Common stock, $.001 par value; shares authorized - 43,750;
issued and outstanding - 9,470 and 10,343.......... 10 10
Additional paid-in capital.................................. 35,387 36,094
Accumulated deficit......................................... (36,388) (36,908)
------------ -----------
Total stockholders' deficiency (991) (799)
------------ -----------
TOTAL....................... $ 798 $ 966
============ ===========

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,
---------------------------------------------
1998 1999 2000
---- ---- ----

Revenues:

Product sales ......................................... $ 1,715 $ 1,201 $ 58
Royalty income ......................................... 55 48 43
---------- ---------- ------------
1,770 1,249 101

Cost of goods sold................................... 820 556 4
---------- ---------- ------------

Gross profit......................................... 950 693 97
---------- ---------- ------------

Operating expenses:
Research and development expenses .................. 3,584 788 316
Sales and marketing....................................... 3,142 437 20
General and administrative expenses ....................... 1,982 1,684 759
---------- ---------- ------------
Operating expenses................................... 8,708 2,909 1,095
Loss from operations.......................................... (7,758) (2,216) (998)
Interest income............................................... 161 16 11
Interest expense..................................... (5) (4) (1)
---------- ---------- ------------

Loss before benefit for income tax and extraordinary gain... (7,602) (2,204) (988)
Benefit for income taxes...................................... 817 468
---------- ---------- ------------
Loss before extraordinary gain................................ (7,602) (1,387) (520)

Extraordinary gain on extinguishment of liability............. 432
---------- ---------- ------------

Net loss $ (7,602) $ (955) $ (520)
========== ========== ============

Net loss per common share - basic and diluted:
Loss before extraordinary gain $ (0.96) $ (0.16) $ (0.05)
Extraordinary gain .05
---------- ---------- ------------
Net loss per share ................................ $ (0.96) $ (0.11) $ (0.05)
========== ========== ============

Weighted average shares outstanding - basic & diluted......... 7,923 8,715 10,155

See accompanying notes to financial statements.

F-4

LIFE MEDICAL SCIENCES, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS)

PREFERRED COMMON ADDITIONAL
---------------- -------------------- PAID IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT
------ ------ ------ ------ ---------- -----------

Balance - January 1, 1998...... 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)
Common stock issued......... 873 116
Fair value of options issued
for compensation............... 156
Preferred stock issued........... 500 $ 5 435
Net (loss) for the year........... (520)
----- ------ ------ ------- ------- -----------

Balance---December 31, 2000 500 $ 5 10,343 $ 10 36,094 $ (36,908)
===== ====== ====== ======= ======= ===========

See accompanying notes to financial statements

F-5

LIFE MEDICAL SCIENCES, INC.

STATEMENTS OF CASH FLOWS
( IN THOUSANDS )

YEAR ENDED DECEMBER 31,
1998 1999 2000
---- ---- ----

Cash flows from operating activities:
Net (loss) ............................................. $(7,602) $ (955) $ (520)
Adjustments to reconcile net (loss) to net cash (used in)
operations:
Deferred royalty income .......................... (55) (47) (43)
Fair value of common stock and options issued as
compensation ....................................... 159 472 156
Depreciation ....................................... 33 30 24
Loss on sale of equipment .......................... 14
Changes in operating assets and liabilities:....
(Increase) decrease in accounts receivable.... (120) 120
(Increase) decrease in inventory.............. (264) 264
Decrease in prepaid expenses and advances.... 57 14 (91)
Decrease (increase) in deposits.............. (34) 47
Increase (decrease) in accounts payable and
accrued expenses......................... 555 (522) 103
Increase (decrease) in other liabilities 199 54 (84)
------- -------- --------
Net cash used in operating activities.. (7,072) (523) (441)
------- -------- --------

Cash flows from investing activities:
Purchase of equipment.................................... (4)
Proceeds from sale of equipment............................ 5
Proceeds from maturity of investment securities............ 4,836
------- -------- --------
Net cash provided by investing activities ................ 4,832 0 5
------- -------- --------

Cash flows from financing activities:
Proceeds from private placement 770
Proceeds from exercise of stock options 116
Proceeds from the issuance of preferred stock 440
Payment on capital lease obligation.......... (8) (8)
------- -------- --------
Net cash provided by (used in) financing activities (8) 762 556
------- -------- --------

Net (decrease) increase in cash and cash equivalents.......... (2,248) 239 120
Cash and cash equivalents at beginning of year................ 2,733 485 724
------- -------- --------
Cash and cash equivalents at end of year..................... $ 485 $ 724 $ 844
======= ======== ========

Supplementary cash flow information:
Interest paid........................................... $ 5 $ 4 $ 1

See accompanying notes to financial statements.

F-6

(NOTE A)-- THE COMPANY AND BASIS OF PRESENTATION:

Life Medical Sciences, Inc. (the "Company") is a biomaterials company
engaged in the development and commercialization of innovative and
cost-effective medical devices for therapeutic applications. During 2000, the
Company postponed the further advancement and expansion of product development
programs based on its proprietary bioresorbable polymer technology due to the
lack of financial resources to fund such activities. As a result of this cash
shortfall, in July 2000, the Company terminated all but one of its remaining
employees. Contingent upon the receipt of additional funding, 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 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 line of scar management
products. Such product line represented all of the Company's product sales
included in the accompanying statements of operations for the years ended
December 31, 1998, 1999 and 2000. In December 2000, the Company received
approximately $1 million through the combination of a private placement of
convertible preferred stock and the sale of certain state tax losses. The
proceeds are being used to reinitiate activities in support of the REPEL-CV
pivotal clinical trial.

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 and used cash in operations and has both a working
capital and stockholders' deficiency at December 31, 2000. As a result, the
Company has limited capital resources for its continuing operations, 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 2000, the
Company received $468,000 from the sale of certain New Jersey State tax net
operating losses and anticipates receiving similar funds during 2001 and future
years contingent upon approvals from the State Division of Taxation. In
addition, in December 2000, a private placement was completed in which the
Company received $500,000 in exchange for the issuance of 500,000 shares of
Series A Convertible Preferred Stock. The Company's continuation as a going
concern is dependent upon obtaining sufficient financing to fund its operations
and ultimately to achieve profitability, which in turn is dependent on
successfully completing the development of its proposed products, obtaining
required regulatory approvals and manufacturing and selling its proposed
products. There is no assurance that initiatives to raise additional capital
will be successful or that other financing arrangements will be available or
that the Company will achieve or sustain a profitable level of operations. The
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.

(NOTE B) --SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

[1] REVENUE RECOGNITION:

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.

F-7

(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

[3] ADVERTISING:

Advertising costs are charged to expense as they are incurred. Total
expenditures in 1998, 1999 and 2000 were $2,266,000, $196,000 and $21,000,
respectively.

[4] 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.

[5] RESEARCH AND DEVELOPMENT:

Substantially all research and development activities are conducted through
arrangements with specialized academic and industrial organizations (see Note
F). Research and development costs are charged to expense as incurred. Prepaid
expenses at December 31, 2000, includes $100,000 for product development and
pilot manufacturing costs in support of the REPEL-CV clinical trial which will
be charged to research and development expense in 2001.

[6] PATENT COSTS:

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

[7] 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.

[8] USE OF ESTIMATES:

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.

[9] 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

(NOTE B)--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)

[10] EARNINGS(LOSS) PER SHARE:

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 dilutive, from
the potential exercise or conversion of securities which would result in the
issuance of incremental shares of common stock. Securities and the related
number of common shares not included in the diluted computation for the year
ended December 31, 2000 that would potentially dilute basic earnings per share,
if any in the future, are as follows:

DILUTIVE POTENTIAL
COMMON SHARES
------------------'

Convertible preferred stock 5,000,000
Options 3,701,000
Warrants 4,968,059
----------

13,669,059
==========

(NOTE C) - FURNITURE AND EQUIPMENT AT DECEMBER 31,:

Furniture and equipment consists of the following:

ESTIMATED
1999 2000 USEFUL LIFE
--------- ------- -----------

Furniture and fixtures $ 72,000 $ 11,000 5 - 7 years
Office equipment 104,000 48,000 5 years
--------- -------

176,000 59,000
Less accumulated depreciation 121,000 47,000
--------- -------

$ 55,000 $12,000
========= =======

(NOTE D) -- STOCKHOLDERS' DEFICIENCY:

[1] COMMON STOCK:

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] PREFERRED STOCK:

In December 2000, the Company completed a private placement in which
500,000 shares of Series A convertible preferred stock were sold to "accredited
investors" as defined in Rule 501 of Regulation D in consideration for cash
proceeds of $500,000. Each share of Series A preferred stock is convertible into
10 shares of the Company's common stock as of the earlier of six months from the
issuance date or the closing date of a subsequent financing.

F-9

(NOTE D) -- STOCKHOLDERS' DEFICIENCY: (CONTINUED)

[3] 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.

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, 2000 there were 1,650,000 Class A Warrants and 1,150,000
Class B Warrants outstanding. The warrants'expiration date has been extended to
March 21, 2002.

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 expires in May 2001.

[4] 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 "1992 Plan") and 1,000,000 shares of Common Stock pursuant to its
2000 Non-Qualified Stock Option Plan (the "2000 Plan"). Options to purchase
shares may be granted under the 1992 Plan to person 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. Under the 2000 Plan
only non-qualified stock options may be granted to employees and directors of
the Company or agents, medical and scientific advisors, or consultants to the
Company. In the case of both the 1992 Plan and the 2000 Plan, 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.

At December 31, 2000, options to purchase 199,000 shares of Common Stock
pursuant to the 1992 Plan and 782,000 shares of Common Stock pursuant to the
2000 Plan are outstanding. In addition, options to purchase 2,720,000 shares of
Common Stock are outstanding 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. Operating expenses include $20,000 for
stock options granted in lieu of directors' fees in 2000 and $322,000 for stock
options granted to employees in 1999. In addition operating expenses include
$136,000, $150,000 and $159,000 in 2000, 1999 and 1998, respectively with
respect to options granted under consulting agreements.

F-10

(NOTE D) -- STOCKHOLDERS' DEFICIENCY: (CONTINUED)

[4] OPTIONS ( CONTINUED):

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).

1998 1999 2000
---- ---- ----

Net loss As reported $(7,602) $(955) $(520)
Pro forma $(8,992) $(1,297) $(666)
Net loss per share-
basic & diluted As reported $(0.96) $(0.11) $(0.05)
Pro forma $(1.13) $(0.15) $(0.07)

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 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; in 1999: 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; and in 2000: no
dividend yield, expected volatility of 88%, a risk-free interest rate of 5.46%
to 5.85% and an expected life of 2.5 years.

A summary of the status of the Company's stock options as of December 31,
1998, 1999 and 2000, and changes during the years ended on those dates is
presented below (in thousands, except per share data):

1998 1999 2000
--------------------------- --------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------

Outstanding at
beginning of year 1,874 $5.50 2,928 $2.13 4,465 $1.31

Granted 2,698 1.73 1,889 0.50 782 0.35

Exercised -- -- -- -- (873) 0.13

Forfeited (1,634) 5.32 (352) 3.78 (672) 2.09

Outstanding at
end of year 2,928 2.13 4,465 1.31 3,701 1.24

Options
exercisable at 2.64 4,042 1.24 3,464 1.19
year-end 1,935

Weighted-average
fair value of
options granted
during the year. 0.44 1.11 0.32

F-11

(NOTE D) -- STOCKHOLDERS' DEFICIENCY: (CONTINUED)

[3] OPTIONS ( CONTINUED):

The following table summarizes information about fixed stock options
outstanding at December 31, 2000 (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 12/31/00 Contractual Life Exercise Price At 12/31/00 Exercise Price
- --------------- ----------- ---------------- ---------------- ------------ ----------------

$0.00 - $0.99 1,506 6 years $0.21 1,506 $0.21
1.00 - 2.00 1,991 4 years $1.71 1,756 1.68
2.01 - 7.88 204 3 years $4.28 204 4.28
-------- ------- ----- ------ -----
3,701 4 years $1.24 3,464 1.19

(NOTE E)-- INCOME TAXES:

At December 31, 2000, the Company has approximately $34,295,000 of net
operating loss carryforwards and approximately $603,000 of research and
development tax credit carryforwards available to offset future federal income
tax, subject to limitations for alternative minimum tax. The net operating loss
and research and development credit carryforwards expire in various years from
2005 through 2020. Certain other limitations may apply, including the amount
that may be used annually. Future issuances of the Company's stock, may subject
the Company to additional limitations.

At December 31, 2000, after giving effect to the sales described in the
following sentence, the Company has net operating loss carryforwards for New
Jersey State income tax purposes of approximately $15,894,000 which expire
through 2007. The Company had participated in the Tax Benefit Transfer Program
administered by the State of New Jersey under which $11,002,000 and $6,257,000
in eligible loss carryforwards, covering the tax years 1992 through 1995 and a
portion of 1996, were sold to PSE&G in exchange for cash payments of
approximately $817,000 and $468,000, in 1999 and 2000 respectively. These cash
payments are shown as income tax benefits in the accompanying statements of
operations. The Company anticipates similar transactions during 2001 and beyond,
contingent upon approvals from the State Department of Taxation.

Deferred tax benefits, which amounted to $14,187,000 and $14,046,000 at December
31, 1999 and 2000 are principally attributable to net operating loss
carryforwards and have been offset by a valuation allowance against the entire
benefit due to management's uncertainty regarding the future profitability of
the Company. The valuation allowance has been increased by $3,020,000, $211,000
in 1998 and 1999, respectively and decreased by $364,000 in 2000.

The income tax benefit of $817,000 and $468,000 for the years ended December 31,
1999 and 2000 reflect the Company's participation in the Tax Benefit Transfer
Program described above. The benefit from losses generated during those years at
the federal statutory rate is offset by equivalent increases in the valuation
allowance.

F-12

(NOTE F)-- 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 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. Effective February 29,
2000, the Company discontinued the manufacture and sale of CLINICEL and the
patent rights to reverted to Dimotech. In addition, at December 31, 1999, the
Company wrote off to cost of sales the $186,000 carrying value of the Clincel
products in inventory at such date. The company no longer sells the CLINICEL
products. In February 2001, the Company was notified of a lawsuit filed in
Israel against the Company and its principal executive officers by Dimotech,
Ltd. for the non-payment of royalties and accrued interest in the amount of
$125,000. Such amount is included in other liabilities in the accompanying
balance sheets.

F-13

(NOTE F )--RESEARCH AND LICENSE AGREEMENTS: (CONTINUED)

[3] TECHNION AGREEMENTS:

During June 1991, the Company entered into an agreement with Technion
Research and Development Foundation, Ltd., in Haifa, Israel ( "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,
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.

(NOTE G)-- COMMITMENTS:

[1] LEASE:

The Company entered into an operating lease in November 1996 for its
corporate offices, which were vacated during 2000, at an annual fixed rent of
$80,000. The initial term of the lease was for five years and included one
five-year renewal option. At December 31, 2000 minimum future rental payments of
$67,000 have been accrued. The terms of the lease provides for escalation for
increases in real estate taxes and certain operating expenses. The Company's
activities are being conducted at the premises of the Company's Chief Executive
Officer on a rent-free basis. Rent expense was $84,000, $88,000 and $90,000 in
1998, 1999 and 2000, respectively.

[2] EMPLOYMENT AGREEMENT:

The Company has an employment agreement with one executive which expires in
May 2001. Pursuant to this agreement, the Company's commitment regarding early
termination benefits aggregates $120,000 at December 31, 2000.

(NOTE H)-- SURE-CLOSURE SYSTEM SALE:

In July 1994, the Company sold or assigned to MedChem Products, Inc.
substantially all of its assets related to the Sure-Closure System, a disposable
wound closure device, including rights, agreements and licenses. The terms of
the agreement provide that the Company is entitled to royalties of 10% of the
net sales (as defined in the agreement), through June 30, 2004, of the
Sure-Closure System and any line extensions or future embodiments. In connection
with this transaction, $644,000 was recorded as deferred royalty income and
through December 31,2000 has been reduced by $348,000 of royalties earned after
October 1, 1995. A number of the Company's agreements with Technion and
Dimotech, related to the Sure-Closure System, were assigned to MedChem in
connection with the sale. In connection with one such agreement, the Company may
be liable for a two percent royalty on sales of the Sure-Closure System in the
event that MedChem does not pay these royalties.

(NOTE I)-- RELATED PARTY:

The Company incurred expenses of approximately $103,000, $67,000 and
$108,000 in the years ended December 31, 1998, 1999 and 2000, respectively, for
legal services rendered by a firm, one of the partners at which is a director
and a principal stockholder of the Company. Accounts payable includes $85,000
and $93,000 at December 31, 1999 and 2000, respectively, due to such firm.

(NOTE J)---EXTRAORDINARY GAIN :

For the year ended December 31, 1999 the extraordinary gain of $432,000 is
attributable to the gain on extinguishment of amounts owed to a supplier by the
transfer of title to equipment that had previously been charged to research and
development expenses.

F-14

(NOTE K)-- QUARTERLY RESULTS (UNAUDITED):

QUARTER ENDED
----------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL YEAR
-------- ------- ------------ ----------- ----------

2000

Revenues $ 19,000 $ 62,000 $9,000 $ 11,000 $ 101,000
Net income (loss) (305,000) (290,000) (141,000) 216,000 (520,000)
Income (loss) per share -
basic and diluted (a) (0.03) (0.03) (0.01) 0.02 (0.05)

1999

Revenues $ 816,000 $ 250,000 $ 43,000 $ 140,000 $ 1,249,000
Net income (loss) 198,000 (838,000) (526,000) 211,000 (955,000)
Income (loss) per share -
basic and diluted (a) 0.03 (0.10) (0.06) 0.02 (0.11)

(a) Per common share amounts for the quarters and full year have been
calculated separately. Accordingly, quarterly amounts do not add to the
annual amount because of differences in the weighted average common shares
outstanding during each period due to the effect of the Company's issuing
shares of its common stock during the year.

F-15