U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
D.C. 20549




Form
10-K




(Mark
      One)x
            
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended March 31, 2009o
            
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period
      from                      to







Commission
File No. 0-28034




AdvanSource
Biomaterials Corporation


(Name of
small business issuer in its charter)




Delaware
              (State
      or other jurisdiction of
              incorporation
      or organization)
            04-3186647
              (I.R.S.
      Employer Identification No.)229
      Andover Street, Wilmington, Massachusetts
              (Address
      of principal executive offices)
            01887
              (Zip
      Code)







Issuer’s
telephone number (978)
657-0075




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




Title
      of each class
              Common
      Stock, $.001 par value per share
            Name
      of each exchange on which registered
              NYSE
      Amex


€




Securities
registered pursuant to Section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes q  No x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes q  No x




Indicate
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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 q




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes q  No q (the Registrant is not
yet required to submit Interactive Data)




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this 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.  x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange
Act (Check one):




q  Large
Accelerated
Filer                                                                                                           q  Accelerated
Filer




q  Non-accelerated
Filer                                                                                                                     x  Smaller
reporting company




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




As of
June 15, 2009, 21,128,707 shares of the registrant’s Common Stock were
outstanding.  As of September 30, 2008, the aggregate market value of
the registrant’s Common Stock held by non-affiliates of the registrant (without
admitting that such person whose shares are not included in such calculation is
an affiliate) was $9,285,000 based on the last sale price as reported by the
NYSE Amex on such date.







ADVANSOURCE BIOMATERIALS
CORPORATION


FORM
10-K


FOR
THE YEAR ENDED MARCH 31, 2009





INDEX





PART IItem
      1.
            
            Description
      of Business
            
            3Item
      1A.
            
            Risk
      Factors
            
            11Item
      1B.
            
            Unresolved
      Staff Comments
            
            22Item
      2.
            
            Description
      of Properties
            
            22Item
      3.
            
            Legal
      Proceedings
            
            22Item
      4.
            
            Submission
      of Matters to a Vote of Security Holders
            
            22PART IIItem
      5.
            
            Market
      Information for Registrant’s Common Equity, Related Stockholder
      Matters
              and
      Issuer Purchases of Equity Securities
            
            23Item
      6.
            
            Selected
      Consolidated Financial Data
            
            24Item
      7.
            
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            25Item
      8.
            
            Financial
      Statements and Supplementary Data
            
            31Item
      9.
            
            Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
            
            31Item
      9A.
            
            Controls
      and Procedures
            
            31Item
      9B.
            
            Other
      Information
            
            32PART IIIItem
      10.
            
            Directors,
      Executive Officers and Corporate Governance
            
            33Item
      11.
            
            Executive
      Compensation
            
            36Item
      12.
            
            Security
      Ownership of Certain Beneficial Owners and Management
              and
      Related Stockholder Matters
            
            42Item
      13.
            
            Certain
      Relationships and Related Transactions, and Director
      Independence
            
            43Item
      14.
            
            Principal
      Accounting Fees and Services
            
            44PART IVItem
      15.
            
            Exhibits,
      Financial Statement Schedules
            
            45









-2-


PART I




Item 1.
            Description
      of Business




Cautionary
      Note Regarding Forward Looking
Statements




This
Report on Form 10-K contains certain statements that are “forward-looking”
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Litigation Reform Act”).  These forward looking statements and other
information are based on our beliefs as well as assumptions made by us using
information currently available.




The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and
similar expressions, as they relate to us, are intended to identify
forward-looking statements.  Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, intended or using other similar expressions.




In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Report on Form 10-K.  For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market our products; the market may not accept our existing and future products;
we may not be able to retain our customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business.  Certain important factors affecting the
forward-looking statements made herein also include, but are not limited to (i)
continued downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement our financial and business strategies,
meet anticipated capital expenditures and fund research and development
costs.  In addition, assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our marketing, capital expenditure or other budgets, which may in turn
affect our financial position and results of operations.  For all of
these reasons, the reader is cautioned not to place undue reliance on
forward-looking statements contained herein, which speak only as of the date
hereof.  We assume no responsibility to update any forward-looking
statements as a result of new information, future events, or otherwise except as
required by law.




General




Overview




We
develop advanced polymer materials which provide critical characteristics in the
design and development of medical devices. Our biomaterials are used in devices
that are designed for treating a broad range of anatomical sites and disease
states.  Our business model leverages our proprietary materials
science technology and manufacturing expertise in order to expand our product
sales and royalty and license fee income.




Our
leading edge technology, notably products such as ChronoFlex®, HydroMedTM, and
HydroThaneTM, has been developed to overcome a wide range of design and
functional challenges, from the need for dimensional stability, ease of
manufacturability and demanding physical properties to overcoming environmental
stress cracking and providing heightened lubricity for ease of
insertion.  Our new product extensions allow us to customize our
proprietary polymers for specific customer applications in a wide range of
device categories.




We also
have an antimicrobial extension line that complements the ChronoFlex® and
HydroMedTM product families.  Through proprietary manufacturing
techniques, we have produced materials which allow for full homogenous
dispersion throughout the polymer, thus resulting in long lasting and consistent
activity and the prevention of leaching.  The end result is a
technologically advanced antimicrobial material which reduces the potential for
foreign body patient infections and is less susceptible to bacterial growth and
bio-film formations.




In
January 2007, we began clinical trials in Europe for our CardioPassTM synthetic
coronary artery bypass graft (“SynCAB”).We developed our 4mm
and 5mm SynCAB grafts, which were used in connection with the clinical trials,
using specialized ChronoFlex polyurethane materials designed to provide improved
performance in the treatment of arterial disorders.  The grafts have
three layers, similar to natural arteries, and are designed to replicate the
physical characteristics of human blood vessels.




-3-




During
the fourth quarter of fiscal 2009 we concluded the clinical trials which we
believe demonstrated clinical success.  However, our clinical
investigators noted full patient enrollment in these clinical trials was very
slow due to limitations resulting from the large size of the 4mm and 5mm SynCAB
grafts.  Our clinical investigators have advised us there is a greater
clinical need for SynCAB grafts having an inner bore diameter of 2mm, 2-1/2mm
and 3mm.  In response to these observations, we have undertaken the
development of a SynCAB graft having smaller inner bore diameters as
recommended.  We believe this development effort will require alliance
with a technology partner capable of providing the necessary surface treatment
of the inner bore of a smaller SynCAB graft.  We have identified
certain technology partners with these capabilities, although no agreements have
been entered into for assistance with the planned
development.  Although we intend on moving forward with the
development of SynCAB grafts having smaller inner bore diameters, there can be
no assurance that we will be successful in a commercially viable SynCAB graft or
that we will be successful in entering into a development agreement with a
technology partner on terms that are acceptable to us or at all.




We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors.  We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.




History




We were
founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”).  In
June 1996, PMI distributed all of the shares of CardioTech International, Inc.’s
(“CardioTech”) common stock, par value $0.01 per share, which PMI owned, to PMI
stockholders of record.  Our materials science technology is
principally based upon the ChronoFlexTM
proprietary polymers which represent our core technology.




In July
1999, we acquired the assets of Tyndale-Plains-Hunter (“TPH”), a manufacturer of
specialty hydrophilic polyurethanes.




In July
1999, Dermaphylyx International, Inc. (“Dermaphylyx”) was formed by certain of
our affiliates to develop advanced wound healing
products.  Dermaphylyx was merged with and into us, effective March
2004, as a wholly-owned subsidiary.  In June 2006, our Board of
Directors decided to cease the operations of Dermaphylyx.  We
considered the net assets of Dermaphylyx to be immaterial.




In April
2001, we acquired Catheter and Disposables Technology, Inc.
(“CDT”).  CDT, located in Minnesota, is an original equipment
manufacturer and supplier of private-label advanced disposable medical devices
from concept to finished packaged and sterilized products, providing engineering
services and contract manufacturing.  In the development of our
business model, we reviewed the strategic fit of our various business operations
and determined that CDT did not fit our strategic direction.  CDT was
sold in March 2008 (See Note J to Financial Statements).




In April
2003, we acquired Gish Biomedical, Inc. (“Gish”).  Gish is located in
southern California and manufacturers single use cardiopulmonary bypass products
that have a disposable component.  In the development of our business
model, we reviewed the strategic fit of our various business operations and
determined that Gish did not fit our strategic direction.  Gish was
sold in July 2007 (See Note J to Notes to Financial Statements).




In March
2004, we joined with Implant Sciences Corporation (“Implant”) to participate in
the funding of CorNova.  CorNova was initially formed to develop a
novel coronary drug eluting stent using the combined capabilities and technology
of CorNova, Implant Sciences and CardioTech.  We currently have a 13%
equity interest in the issued and outstanding common stock of CorNova, based on
the assumed conversion of all outstanding CorNova preferred stock into common
stock.  Although CorNova is expected to incur future operating losses,
we have no obligation to fund CorNova.




At our
2007 Annual Meeting, our stockholders approved our reincorporation from
Massachusetts to Delaware.  Our Articles of Charter Surrender in
Massachusetts and Certificate of Incorporation and Certificate of Conversion in
Delaware were effective as of October 26, 2007.




In June
2008, we reorganized our product line as part of our re-branding effort and
launched a new website at www.advbiomaterials.com.  The information
available on or through our website is not a part of this report on Form
10-K.  At our 2008 annual meeting of stockholders on October 15, 2008,
our stockholders approved the change of our name from CardioTech International,
Inc. to AdvanSource Biomaterials Corporation to better reflect our strategic
plan.  Our Certificate of Amendment to our Certificate of
Incorporation filed with the Secretary of State of the State of Delaware
effecting this name change was effective October 15, 2008.




-4-


Sale
of Gish and CDT




On July
6, 2007, we completed the sale of Gish Biomedical, Inc.(“Gish”), our former
wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007.  The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash.  The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.




Pursuant
to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price
was placed in escrow as a reserve for any indemnity claims by Medos under the
Gish Purchase Agreement, as described above.Under the
terms of the escrow agreement, our right to receive the escrow funds was
contingent upon the realization of the Gish accounts receivable and inventory
that were transferred to Medos for one year from the sale
date.  The $1.0 million of proceeds paid into escrow is not
included in the calculation of the loss on sale of Gish of $1.2
million.




As we
previously reported, in late 2007 we were advised by Medos that Medos might
assert certain indemnity claims against us relating to certain representations
and warranties up to the full amount of the $1.0 million escrow balance
established under the Gish Purchase Agreement.  In addition, Medos
advised us that it might seek a purchase price adjustment for the period March
31, 2007 through July 6, 2007, as provided in the Gish Purchase
Agreement.  We advised Medos that we believed any such claims, if
made, would be without merit.




On June
30, 2008, Medos formally notified us of its claims in accordance with the
procedure set forth in the Gish Purchase Agreement.  Medos’ claims
aggregate approximately $4.3 million and include allegations that (i) we
breached certain representations and warranties in the Gish Purchase Agreement,
including certain representations and warranties concerning the financial
condition of Gish as of March 31, 2007, (ii) we are liable for the severance
obligations related to two key Gish employees terminated by Medos subsequent to
the acquisition date, and (iii) Medos is entitled to a purchase price adjustment
for the period between March 31, 2007 and July 6, 2007.




We have
refuted the claims asserted by Medos and the facts and circumstances upon which
they are based and intend to vigorously pursue the disposition of those
claims.  In that regard, on July 25, 2008, as provided in the Gish
Purchase Agreement, we initiated an arbitration proceeding with the American
Arbitration Association in New York, New York, and served its arbitration demand
upon Medos that same day.  The arbitration demand seeks a declaration
that the amounts claimed by Medos are without merit and
unsupportable.  Medos has not yet responded to the demand, but has
agreed to participate in non-binding mediation in accordance with the rules of
the American Arbitration Association.  Although we deny the claims
asserted by Medos, an adverse finding of liability could have a material impact
on us.  We
have reviewed the assertions by Medos, and have concluded that a loss resulting
from these asserted claims is not probable as of March 31,
2009.




Under the
terms of the escrow agreement, our initiation of the arbitration proceeding
disputing all of Medos’ claims precluded Medos from taking further action
seeking release of the escrow funds.  Notwithstanding this contractual
prohibition, subsequent to our service of the arbitration demand on Medos on
July 25, 2008 and without our knowledge, Medos obtained the release of the $1.0
million escrow amount.  We notified Medos that its unauthorized
actions resulting in the release of the escrowed amount is in violation of the
escrow agreement.  Furthermore, we notified Medos that the failure to
return the escrowed amount to the escrow agent could result in our taking action
against Medos for this violation.




In
connection with the sale of Gish, we entered into a non-exclusive, royalty-free
license (the “License Agreement”) with Gish which provides for our use of
certain patented technology of Gish in our products and services, provided such
products and services do not compete with the cardiac bypass product development
and manufacturing businesses of Gish or Medos.  We have determined the
License Agreement has de minimus value and, accordingly, no value has been
ascribed to the license.




-5-


After transaction expenses
and certain post-closing adjustments, we realized approximately $6.1 million in
proceeds from the sale of Gish.Under the terms of the Gish
Purchase Agreement, we owe Medos $149,000 as a result of the change in
stockholder’s equity of Gish from March 31, 2007 to June 30,
2007.  This amount was recorded as a current liability as of June 30,
2007, has not been paid to Medos, and is reflected as a current liability of
discontinued operations as of March 31, 2009.  This adjustment is
included in the calculation of the loss on sale of Gish through March 31,
2008.  Under the terms of the
Gish Purchase Agreement, we retained Gish’s cash assets of approximately $2.0
million as of June 29, 2007.




On March
28, 2008, we completed the sale of Catheter and Disposables Technology, Inc.
(“CDT“), our former wholly-owned subsidiary engaged in contract manufacturing
and the provision of engineering services, pursuant to a stock purchase
agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc.
(“Tacpro”) on March 28, 2008.  The CDT Purchase Agreement provided for
the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in
cash.  The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets.  The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits.  Pursuant to the terms of the CDT Purchase
Agreement, we placed $240,000 in escrow as a reserve for our indemnification
obligations to Tacpro, if any, as described above.The $240,000
of proceeds held in escrow as of March 31, 2009 was not included in the
calculation of the loss on sale of CDT of $690,000 recognized during the year
ended March 31, 2008.




After
transaction expenses, which included a non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised us, and
certain post-closing adjustments, we realized approximately $696,000 in cash
proceeds from the sale of CDT.




In March
2009, Tacpro presented certain additional post-closing claims in the approximate
amount of $17,000 related to uncollectible accounts receivable and unused
inventory to which we were in agreement.  Net of the post-closing
claims, the remaining $224,000 of cash in the escrow account was released to us
in April 2009 and the escrow account was closed.  Upon receipt of the
escrow cash, we paid approximately $11,000 in additional transaction costs to a
former employee.  The escrow amount, net of post-closing claims and
additional transaction costs will be reported as an additional gain on the sale
of CDT in the Company’s quarterly report for the period ending June 30,
2009.




Business
      Strategy




Our
vision is to be a world-class, technology company focused on customer-driven
solutions in the medical device industry.  As a result of an in-depth
study of our strengths and weaknesses and the opportunities in the medical
device marketplace, we believe our unique materials science strengths have the
potential to be marketed to our existing customer base and to a broader range of
medical device developers.  We also believe there exists a major void
in the marketplace that could be filled with our strong materials science
capabilities to maximize the early development phase of devices that utilize
polymers.




In fiscal
2008, we sold both Gish and CDT in order to focus on our strategic plan for
materials science.




We have
expanded our development laboratory at our Massachusetts facility and launched a
new concept center.  The expansion of our development laboratory is a
key element of our plan to better combine our core polymer technology with new
product applications and expand customer access to our
capabilities.




We
conduct ongoing reviews of intellectual property held by other companies in
which our proprietary polymers are cited.  The results of these
reviews may lead to additional opportunities to exercise our strategy of seeking
license and royalty arrangements for the exclusive use of our polymers, however,
there can be no assurances that any new license and royalty arrangements will be
established as a result of these efforts.




-6-


Technology




Our
unique materials science strengths are embodied in our family of proprietary
polymers.  We manufacture and sell our custom polymers under the trade
names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, and
PolyBlend.  The ChronoFlex family of polymers has the potential to be
marketed beyond our existing customer base.  Our goal is to fulfill
the market’s need for advanced materials science capabilities, thereby enabling
customers to improve devices that utilize polymers.  Our chemists
continue to develop the ChronoFlex family of medical-grade
polymers.  Conventional polymers are susceptible to degradation
resulting in catastrophic failure of long-term implantable devices such as
pacemaker leads.  ChronoFlex and ChronoThane polymers are designed to
overcome such degradation and reduce the incidents of infections associated with
invasive devices.




Key
characteristics of our polymers are i) optional use as lubricious coatings for
smooth insertion of a device into the body, ii) antimicrobial properties that
are part of the polymer itself, and iii) mechanical properties, such as hardness
and elasticity sufficient to meet engineering requirements.  We
believe our technology has wide application in increasing biocompatibility, drug
delivery, infection control and expanding the utility of complex devices in the
hospital and clinical environment.




We also
manufacture and sell our proprietary HydroThane polymers to medical device
manufacturers that are evaluating HydroThane for use in their
products.  HydroThane is a thermoplastic, water-absorbing,
polyurethane elastomer possessing properties which we believe make it well
suited for the complex requirements of a variety of catheters.  In
addition to its physical properties, we believe HydroThane exhibits an inherent
degree of bacterial resistance, clot resistance and
biocompatibility.  When hydrated, HydroThane has elastic properties
similar to living tissue.




We also
manufacture specialty hydrophilic polyurethanes that are primarily sold to
customers as part of exclusive arrangements.  Specifically, one
customer is supplied tailored, patented hydrophilic polyurethanes in exchange
for a multi-year, royalty-bearing exclusive supply contract which generates
royalty income for the Company.




ChronoFilm
is a registered trademark of PMI.  ChronoFlex is our registered
trademark.  ChronoThane, ChronoPrene, HydroThane, and PolyBlend are
our tradenames.  CardioPass is our trademark.




Intellectual
      Property




We own or
license 4 patents relating to our vascular graft manufacturing and polymer
technology and products.  While we believe our patents secure our
exclusivity with respect to certain of our technologies, there can be no
assurance that any patents issued would not afford us adequate protection
against competitors which sell similar inventions or devices, nor can there be
any assurance that our patents will not be infringed upon or designed around by
others.  However, we intend to vigorously enforce all patents issued
to us.




In June
2007, we filed for a U.S. patent on our proprietary antimicrobial formulation
for ChronoFlex.  Current technology in the marketplace uses antibiotic
drugs.  The antimicrobial component of our polymers has been designed
to be non-leaching as a result of the polymerization process.




In
addition, PMI has granted us an exclusive, perpetual, worldwide, royalty-free
license for the use of one polyurethane patent and related technology in the
field consisting of the development, manufacture and sale of implantable medical
devices and biodurable polymer material to third parties for the use in medical
applications (the “Implantable Device and Materials Field”).  PMI also
owns, jointly with Thermedics, Inc., an unrelated company that manufactures
medical grade polyurethane, the ChronoFlex polyurethane patents relating to the
ChronoFlex technology.  PMI has granted us a non-exclusive, perpetual,
worldwide, royalty-free sublicense of these patents for use in the Implantable
Devices and Materials Field.




Manufacturing
      and Service Operations




We
manufacture polymers at our Massachusetts facility.




-7-


Product
      and Services




Materials
Science Technology




We
manufacture polymeric materials with a wide-range of physical and biological
properties.  Our polymers are available with a variety of hardness and
mechanical strengths and possess unique characteristics such as biodurability,
biocompatibility, lubricity and antimicrobial properties.  These
polymeric materials may be used as structural engineering polymers or as
coatings for metallic and polymeric surfaces and have a history of use in both
short and long-term implant applications.




We have
been provided exclusive and non-exclusive perpetual, world-wide, royalty-free
license and sublicense rights for the use of polyurethane patents and related
technology for the development, manufacture and sale of implantable medical
devices and biodurable polymer material.  As a result, we are able to
enter into license and royalty arrangements for the exclusive use of our
customized polymers.  During the years ended March 31, 2009 and 2008,
we generated revenues from license, royalty and development fees of $2,333,000
and $1,924,000, respectively.




We have
established a concept center in our Massachusetts facility which enables
customers to access technical expertise in advanced biomaterials development and
processing to help develop product ideas, refine concepts and/or solve the
technical problems to enable the customer to bring their product to
market.  The center is focused on better combining core polymer
technology with new product applications to expand customer access to our
materials sciences and product development expertise, establish new customer
relationships and deepen those with existing customers.




CardioPassTM
      Synthetic Coronary Artery Bypass Graft
  (“SynCAB”)




Overview
and Development




Blood is
pumped from the heart throughout the body via arteries.  Blood is
returned to the heart at relatively low pressure via veins, which have thinner
walls than arteries and have check valves, which force blood to move in one
direction.  Because a specific area of the body is often supplied by a
single main artery, rupture, severe narrowing or occlusion of the artery
supplying blood to that area is likely to cause an undesirable or catastrophic
medical outcome.




Vascular
grafts are used to replace or bypass occluded, damaged, dilated or severely
diseased arteries and are sometimes used to provide access to the bloodstream
for patients undergoing hemodialysis treatments.  Existing small bore
graft technologies suffer from a variety of disadvantages in the treatment of
certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term
interface with the human body.




Coronary
artery bypass graft (“CABG”) surgery is performed to treat the impairment of
blood flow to portions of the heart.  CABG surgery involves the
addition of one or more new vessels to the heart to re-route blood around
blocked coronary arteries.  As a result of a study commissioned by us, we
believe that approximately 165,000 coronary artery bypass procedures are
performed annually in Europe.  Of these procedures, we believe
approximately 35,000 procedures could be performed using a device similar to our
SynCAB graft.




We have
developed our 4mm and 5mm SynCAB grafts using specialized ChronoFlex
polyurethane materials designed to provide improved performance in the treatment
of arterial disorders.  The grafts have three layers, similar to
natural arteries, and are designed to replicate the physical characteristics of
human blood vessels.




We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors.  We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.




SynCAB
Clinical Trials




We
initiated plans in fiscal 2006 to obtain European marketing
approvals.  In May 2006, we received written acknowledgement from our
Notified Body in Europe that our clinical trial plan had been
accepted.  The planned 10 patient clinical trial protocol allows
surgeons to intraoperatively decide to use a 5mm SynCAB graft instead of
suboptimal autologous vessels.  The patient enrollment process is not
an easy one for a long-term surgical implant that is designed to improve
outcomes for very sick patients.  Prior to each surgery, our
investigators must receive patient consent for participation in the
trials.  The surgeon then decides at the time of the operation whether
or not to utilize the graft.  Patients will be followed for 90 days
and assessed for graft patency and quality of life measures.




-8-




We hired
a European-based contract research organization (“CRO”) to assist in management
of the entire clinical process.  The CRO helped us review possible
sites in the European Union for the selection of investigators to follow the
approved protocols.  Our first site was selected and a Principal
Investigator was engaged to conduct the trial and provide the necessary data for
the clinical research report.  All necessary approvals from the Ethics
Committee were also received.  Our Principal Investigator has
participated in a wide range of cardiovascular clinical
trials.  Achievement of this important milestone fits within our
planned timeline and is an important benchmark in the commencement and
completion of the clinical trial.  We have undergone a rigorous review
by the Ministry of Health and completed paperwork for an import license, and
prepared for patient selection.  In January 2007, we announced the
initiation of these clinical trials with the first patient surgically implanted
in March 2007.




In April
2008, we announced a second site for the CardioPass trial.  A second
site for the 10-patient clinical trial offers a larger potential pool of
patients to be reviewed for graft implant eligibility for the
trial.




In May 2008, we announced that a second 4mm graft size
was being made available for the trial.  Adding a second graft size
for the 10-patient clinical trial offers the surgeons an important new option
and a larger potential pool of patients to be reviewed for graft implant
eligibility for the trial.  Our two sites will have available both
CardioPassTM sizes
for use in the trial.  On May 6, 2008, we received a Certificate of
Product Export from the U.S. Food and Drug Administration to allow us to send
4mm grafts to the sites.




During
the fourth quarter of fiscal 2009 we concluded the clinical trials which we
believe demonstrated clinical success.  However, our clinical
investigators noted full patient enrollment in these clinical trials was very
slow due to limitations resulting from the large size of the 4mm and 5mm SynCAB
grafts.  Our clinical investigators have advised us there is a greater
clinical need for SynCAB grafts having an inner bore diameter of 2mm, 2-1/2mm
and 3mm.  In response to these observations, we have undertaken the
development of a SynCAB graft having smaller inner bore diameters as
recommended.  We believe this development effort will require alliance
with a technology partner capable of providing the necessary surface treatment
of the inner bore of a smaller SynCAB graft.  We have identified
certain technology partners with these capabilities, although no agreements have
been entered into for assistance with the planned
development.  Although we intend on moving forward with the
development of SynCAB grafts having smaller inner bore diameters, there can be
no assurance that we will be successful in a commercially viable SynCAB graft or
that we will be successful in entering into a development agreement with a
technology partner on terms that are acceptable to us or at all.




The
objective of the trial is to work towards obtaining European CE Marking for the
CardioPassTM.  Approval
by the Notified Body and obtaining CE Marking would allow CardioPassTM to be
marketed and sold in all European Union countries as well as other countries
worldwide that accept this approval for registration within those
countries.




Marketing
      and Sales




We sell
our polymers directly to our customers from our Massachusetts
facility.  In January 2008, we hired a Global Sales Director for
materials science.  As part of our re-branding effort launched in June
2008, we reorganized our product line.  At the same time, we launched
a new website at www.advbiomaterials.com.  The information available
on or through our website is not a part of this report on Form
10-K.




We have
not experienced, and do not expect to experience, in any material respect,
seasonality in sales of our products.




We
perform ongoing credit evaluations and maintain allowances for potential credit
losses.  As of March 31, 2009, we believe no significant
concentrations of credit risk exist.




We do not
have any facilities, property or other assets located in any geographic area
other than the United States of America.




Contracts
      and Material Relationships




LeMaitre
Vascular Products, Inc. (“LeMaitre”), a third party contractor, has manufactured
ChronoFlex-based coronary grafts for our limited use.  In October
2006, we paid LeMaitre $350,000 in cash to purchase proprietary equipment
designed for the future manufacture of our CardioPass grafts and development of
additional medical devices.  The production of our grafts depends on
the results of the ongoing SynCAB clinical trial and required equipment
validation.  The inability to successfully complete the SynCAB
clinical trial, including obtaining CE Marking, or validate the equipment could
have a material adverse affect on our business.




-9-




We own
common stock, representing a 13% equity interest on March 31, 2009, based on
outstanding preferred and common stock ownership, in CorNova, Inc., a
privately-held developer of advanced endovascular devices and
catheters.  In December 2006, CorNova GmbH, a wholly-owned German
subsidiary, received CE Marking for its bare metal ValecorTM
Coronary Stent System, CorNova’s first approved product, allowing CorNova to
market and sell this product.  We granted to CorNova an exclusive
license for the technology consisting of ChronoFlex DES polymer, or any poly
(carbonate) urethane containing derivative thereof, for use on drug-eluting
stents.  We have jointly developed coatings with CorNova that utilize
ChronoFlex’s excellent characteristics for stents to enhance long-term drug
eluting stent performance.




Revenues




Our
revenues were $3,265,000 and $3,207,000 for the years ended March 31, 2009 and
2008, respectively.




Competition




Competition
in the medical device industry in general is intense and based primarily on
scientific and technological factors, the availability of patent and other
protection for technology and products, the ability to commercialize
technological developments and the ability to obtain governmental approval for
testing, manufacturing and marketing products.




Competition
among products is based, among other things, on product efficacy, safety,
reliability, availability, price and patent position.  An important
factor is the timing of the market introduction of our products or the products
of competitors.  Accordingly, the relative speed with which we can
develop products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor.  Our competitive position depends upon
our ability to attract and retain qualified personnel, to obtain patent
protection or otherwise develop proprietary products or processes, and to secure
sufficient capital resources for the often substantial period between
technological conception and commercial sales.




Research
      and Development, Regulatory and
Engineering




Our
development decisions are based on: (i) development costs, (ii) product need,
(iii) third-party interest and funding availability, and (iv) regulatory
considerations.  Research, development and regulatory expenditures for
the years ended March 31, 2009 and 2008 were $760,000 and $999,000,
respectively, and consisted primarily of salaries and related costs (57% and 62%
in fiscal 2009 and 2008, respectively), and are expensed as
incurred.




Government
      Regulation




From time
to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the approval,
manufacturing and marketing of drug products and medical devices.





Backlog




Our
backlog in the ordinary course of business for biomaterial products is
approximately $95,000 at March 31, 2009.




Environmental
      Compliance




Our
direct expenditures for environmental compliance were not material in the two
most recent fiscal years.  However, certain costs of manufacturing
have increased due to environmental regulations placed upon suppliers of
components and services.




Employees




As of
March 31, 2009, we had 20 full-time employees at our facility in Massachusetts
of whom 8 were in production and the remaining in management, administrative,
development, marketing and sales positions.




None of
these employees are covered by a collective bargaining agreement, and management
considers its relations with its employees to be good.




-10-


Item 1A.
            Risk
      Factors




You
should carefully consider the risks and uncertainties described below and the
other information in this filing before deciding to purchase our common
stock.  If any of these risks or uncertainties occurs, our business,
financial condition or operating results could be materially
harmed.  In that case the trading price of our common stock could
decline and you could lose all or part of your investment.  The risks
and uncertainties described below are not the only ones we may
face.  We believe that this filing contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995.  Such forward-looking statements are subject to regulatory risks
and clinical uncertainties.  Such statements are based on management’s
current expectations and are subject to facts that could cause results to differ
materially from the forward-looking statements.  See Item 1.
Description of Business – “Cautionary Note Regarding Forward Looking
Statements.”




Risks
Related to Liquidity




We
have reported net losses in the last eight fiscal years and may continue to
report net losses in the future.  There can be no assurance that our
revenue will be maintained at the current level or increase in the
future.




Our
future growth may depend on our ability to raise capital for acquisitions, to
support research and development activities for modification of existing
biomaterials and development of new biomaterials, including advanced
applications for our biomaterials, and to market and sell our advanced
biomaterials.  In addition, we may require substantial funds for
further research and development for our synthetic coronary artery bypass graft,
future pre-clinical and clinical trials, regulatory approvals, establishment of
commercial-scale manufacturing capabilities, and the marketing of our
products.  Our capital requirements depend on numerous factors,
including but not limited to, our results of operations, the progress of our
research and development programs, including costs for clinical trials; the cost
of filing, prosecuting, defending and enforcing any intellectual property
rights; competing technological and market developments; changes in our
development of commercialization activities and arrangements; and the purchase
of additional facilities and capital equipment.




Risks
Related to Our Growth Strategy




If
we cannot obtain the additional capital required to fund our operations on
favorable terms or at all, we may have to delay or reconsider our growth
strategy.




Our
growth strategy may require additional capital for, among other purposes,
completing acquisitions of companies and customers’ product lines and
manufacturing assets, integrating acquired companies and assets, acquiring new
equipment and maintaining the condition of existing equipment.  If
cash generated internally is insufficient to fund capital requirements, or if we
desire to make additional acquisitions, we will require additional debt or
equity financing.  Adequate financing may not be available or, if
available, may not be available on terms satisfactory to us.  If we
raise additional capital by issuing equity or convertible debt securities, the
issuance may dilute the share ownership of the existing investors.  In
addition, we may grant future investors rights that are superior to those of our
existing investors.  If we fail to obtain sufficient additional
capital in the future, we could be forced to curtail our growth strategy by
reducing or delaying capital expenditures and acquisitions, selling assets or
restructuring or refinancing our indebtedness, or delaying plans for clinical
trials.




Adverse
economic and geopolitical conditions could have a material adverse effect on our
ability to raise capital to fund future growth and product
development.




Our
business may be affected by the ongoing volatility and illiquidity in the
financial and credit markets, the general global economic recession, and other
market or economic challenges experienced by the U.S. economy.  If
economic conditions persist or deteriorate and our licensing and product revenue
is insufficient to support our product development and growth strategies, then
reduced liquidity in the capital markets may impair our ability to access
capital on terms and conditions that we find acceptable, or at
all.  In addition, the value and liquidity of our short-term
investments and cash deposits could be reduced as a result of a deterioration of
the financial condition of the institutions that hold our cash
deposits.




Risks
Related to Our Business




We
have incurred substantial operating losses and we may never be
profitable.




Our
revenues were $3,265,000 and $3,207,000 for the years ended March 31, 2009 and
2008, respectively.  We had net losses of $2,517,000 and $6,090,000
for the years ended March 31, 2009 and 2008, respectively.  There is a
risk that we will never be profitable.  None of our synthetic coronary
artery bypass graft products and technologies have ever been utilized on a
large-scale commercial basis and it may take several years before these products
could




-11-




be
commercialized, if ever.  Our ability to generate enough revenues to
achieve profits will depend on a variety of factors, many of which are outside
our control, including:




·
            size
      of market;




·
            competition
      and other solutions;




·
            extent
      of patent and intellectual property protection afforded to our
      products;




·
            demand
      for our advanced biomaterials by existing and potential developers of
      medical devices and both the time for development of devices by medical
      device developers and their success in obtaining regulatory approvals and
      commercialization of medical devices which incorporate our advanced
      biomaterials;




·
            cost
      and availability of raw material and intermediate component
      supplies;




·
            changes
      in governmental (including foreign governmental) initiatives and
      requirements;




·
            changes
      in domestic and foreign regulatory
requirements;




·
            costs
      associated with equipment development, repair and maintenance;
      and




·
            our
      ability to manufacture and deliver products at prices that exceed our
      costs.




If
we fail to meet the expectations of securities analysts or investors, our stock
price may decrease.  Our operating results have fluctuated in the past
from quarter to quarter and are likely to fluctuate significantly in the future
due to a variety of factors, many of which are beyond our control,
including:




·
            changing
      demand for our products and
services;




·
            the
      timing of actual customer orders and requests for product shipment and the
      accuracy of our customers’ forecasts of future production
      requirements;




·
            the
      reduction, rescheduling or cancellation of product orders and development
      and design services requested by
customers;




·
            difficulties
      in forecasting demand for our products and the planning and managing of
      inventory levels;




·
            the
      introduction and market acceptance of our customers’ new products and
      changes in demand for our customers’ existing
  products;




·
            results
      of clinical trials;




·
            changes
      in the relative portion of our revenue represented by our various
      products, services and customers, including the relative mix of our
      business across our target markets;




·
            changes
      in competitive or economic conditions generally or in our customers’
      markets;




·
            competitive
      pressures on selling prices;




·
            the
      amount and timing of costs associated with product warranties and
      returns;




·
            changes
      in availability or costs of raw materials or
  supplies;




·
            fluctuations
      in manufacturing yields and yield losses and availability of production
      capacity;




·
            changes
      in our product distribution channels and the timeliness of receipt of
      distributor resale information;




·
            the
      amount and timing of investments in research and
    development;




·
            difficulties
      in integrating acquired assets and businesses into our
      operations;




·
            charges
      to earnings resulting from the application of the purchase method of
      accounting following acquisitions;
and




·
            pressure
      on our selling prices as a result of healthcare industry cost containment
      measures.




As a
result of these factors, many of which are difficult to control or predict, as
well as the other risk factors discussed in this report, we may experience
material adverse fluctuations in our future operating results on a quarterly or
annual basis.




-12-


The
medical device industry is cyclical, and an industry downturn could adversely
affect our operating results.




Business
conditions in the medical device industry have rapidly changed between periods
of strong and weak demand.  The industry is characterized
by:




·
            periods
      of overcapacity and production
shortages;




·
            cyclical
      demand for products;




·
            changes
      in product mix in response to changes in demand of
    products;




·
            variations
      in manufacturing costs and yields;




·
            rapid
      technological change and the introduction of new products by
      customers;






·
            price
      erosion; and






·
            expenditures
      for product development.




These
factors could harm our business and cause our operating results to
suffer.




The
failure to complete development of our medical technology, obtain government
approvals, including required FDA approvals, or to comply with ongoing
governmental regulations could delay or limit introduction of our proposed
products, negatively impact our operations and result in failure to achieve
revenues or maintain our ongoing business.




Our
research, development and production activities, including the manufacture and
marketing of our intended synthetic coronary artery bypass (“SynCAB”) graft
product, are subject to extensive regulation for safety, efficacy and quality by
numerous government authorities in the United States and abroad.




Before receiving FDA
approval to market our proposed SynCAB graft, we will have to demonstrate that
our grafts are safe and effective on the patient population.  While we
have done some preliminary animal trials and have seen acceptable results, there
can be no assurance that acceptable results will be obtained in human
trials.  In addition, during the fourth quarter of fiscal 2009
we concluded clinical trials in Europe which we believe demonstrated clinical
success.  However, our clinical investigators noted full patient
enrollment in these clinical trials was not achieved due to limitations
resulting from the large size of the 4mm and 5mm SynCAB grafts.  Our
clinical investigators have advised us there is a greater clinical need for
SynCAB grafts having an inner bore diameter of 2mm, 2-1/2mm and
3mm.  In response to these observations, we have undertaken the
development of a SynCAB graft having smaller inner bore diameters as
recommended.  We believe this development effort will require alliance
with a technology partner capable of providing the necessary surface treatment
of the inner bore of a smaller SynCAB graft.  We have identified
certain technology partners that could participate in these development efforts,
although no agreements have been entered into for assistance with the planned
development.  Although we intend on moving forward with the
development of SynCAB grafts having smaller inner bore diameters, there can be
no assurance that we will be successful in a commercially viable SynCAB
graft.Clinical
trials, manufacturing and marketing of medical devices are subject to the
rigorous testing and approval process of the FDA and equivalent foreign
regulatory authorities.  The Federal Food, Drug and Cosmetic Act and
other federal, state and foreign statutes and regulations govern and influence
the testing, manufacture, labeling, advertising, distribution and promotion of
drugs and medical devices.  As a result, clinical trials and
regulatory approval of the SynCAB graft can take a number of years or longer to
accomplish and require the expenditure of substantial financial, managerial and
other resources.




In order
to be commercially viable, we must successfully research, develop, obtain
regulatory approval, manufacture, market and distribute our
grafts.  For each device incorporating our artificial grafts, we must
successfully meet a number of critical developmental milestones,
including:




·
            demonstrate
      benefit from the use of our grafts in various contexts such as coronary
      artery bypass surgery;




·
            demonstrate
      through pre-clinical and clinical trials that our grafts are safe and
      effective; and




·
            establish
      a viable Good Manufacturing Process capable of potential scale
      up.




The time
frame necessary to achieve these developmental milestones may be long and
uncertain, and we may not successfully complete these milestones for any of our
intended products in development.




In order
to conduct clinical trials that are necessary to obtain approval by the FDA to
market a product, it is necessary to receive clearance from the FDA to conduct
such clinical trials.  The FDA can halt clinical trials at any time
for safety reasons or because we or our clinical investigators do not follow the
FDA’s requirements for




-13-




conducting
clinical trials.  If we are unable to receive clearance to conduct
clinical trials or the trials are halted by the FDA, we would not be able to
achieve any revenue from such product as it is illegal to sell any medical
device for human consumption without FDA approval.




More
generally, the manufacture and sale of medical devices, including products
currently sold by us and our other potential products, are subject to extensive
regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state agencies, such as the
CDHS.  In order for us to market our products for clinical use in the
United States, we must obtain clearance from the FDA of a 510(k) pre-market
notification or PMA application.  In addition, certain material
changes to medical devices also are subject to FDA review and clearance or
approval.  The process of obtaining FDA and other required regulatory
clearances and approvals is lengthy, expensive and uncertain, frequently
requiring from one to several years from the date of FDA submission if
pre-market clearance or approval is obtained at all.  Securing FDA
clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA.




Sales of
medical devices outside of the United States are subject to international
regulatory requirements that vary from country to country.  The time
required to obtain approval for sales internationally may be longer or shorter
than that required for FDA clearance or approval, and the requirements may
differ.  We have entered into distribution agreements for the foreign
distribution of our products.  These agreements generally require that
the foreign distributor is responsible for obtaining all necessary regulatory
approvals in order to allow sales of our products in a particular
country.  There can be no assurance that our foreign distributors will
be able to obtain approval in a particular country for any of our future
products.




Regulatory
clearances or approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed.  In addition, to
obtain such clearances or approvals, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical device
manufacturers must comply.




FDA
enforcement policy strictly prohibits the marketing of cleared or approved
medical devices for uncleared or unapproved uses.  In addition,
product clearances or approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.  We will be required to adhere to applicable FDA GMP
regulations and similar regulations in other countries, which include testing,
control, and documentation requirements.  Ongoing compliance with GMP
and other applicable regulatory requirements, including marketing products for
unapproved uses, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or pre-market approval for devices, withdrawal of clearances or
approvals and criminal prosecution.  Changes in existing regulations
or adoption of new governmental regulations or policies could prevent or delay
regulatory approval of our products.




There can
be no assurance that we will be able to obtain FDA 510(k) clearance or PMA for
our products under development or other necessary regulatory approvals or
clearances on a timely basis or at all.  Delays in receipt of or
failure to receive U.S. or foreign clearances or approvals, the loss of
previously obtained clearance or approvals, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on our
business, financial condition and results of operations.




The
failure of our customers and potential customers, who utilize our advanced
biomaterials in their medical devices, to complete development of their medical
technology, obtain government approvals, including required FDA approvals, or to
comply with ongoing governmental regulations could delay or limit introduction
of their proposed products, thereby negatively impacting our ability to generate
future revenues from product sales and royalty and development
fees.




Research,
development and production activities undertaken by our customers and potential
customers engaged in the development of medical devices which utilize our
advanced biomaterials, are subject to extensive regulation for safety, efficacy
and quality by numerous government authorities in the United States and
abroad.




-14-


Before
receiving FDA approval to market their medical devices utilizing our advanced
biomaterials, our customers and potential customers will have to demonstrate
that their medical devices are safe and effective on the patient
population.  Clinical trials, manufacturing and marketing of medical
devices are subject to the rigorous testing and approval process of the FDA and
equivalent foreign regulatory authorities.  The Federal Food, Drug and
Cosmetic Act and other federal, state and foreign statutes and regulations
govern and influence the testing, manufacture, labeling, advertising,
distribution and promotion of drugs and medical devices.  As a result,
clinical trials and regulatory approval of medical devices can take a number of
years or longer to accomplish and require the expenditure of substantial
financial, managerial and other resources.




In order
to be commercially viable, our customers and potential customers must
successfully research, develop, obtain regulatory approval, manufacture, market
and distribute their medical devices.  For each medical device
incorporating our advanced biomaterials, our customers and potential customers
must successfully meet a number of critical developmental milestones,
including:




·
            demonstrate
      benefit from the use of their medical devices in various
      contexts;




·
            demonstrate
      through pre-clinical and clinical trials that their medical devices are
      safe and effective; and




·
            establish
      a viable Good Manufacturing Process capable of potential scale
      up.




The time
frame necessary to achieve these developmental milestones may be long and
uncertain, and our customers and potential customers may not successfully
complete these milestones for any of their intended products in
development.




In order
to conduct clinical trials that are necessary to obtain approval by the FDA to
market a product, it is necessary to receive clearance from the FDA to conduct
such clinical trials.  The FDA can halt clinical trials at any time
for safety reasons or because clinical investigators do not follow the FDA’s
requirements for conducting clinical trials.  If our customers or
potential customers are unable to receive clearance to conduct clinical trials
or the trials are halted by the FDA, we would not be able to achieve any revenue
from the sale of biomaterials or royalty and development fees from our
customers’ or potential customers’ products as it is illegal to sell any medical
device for human consumption without FDA approval.




More
generally, the manufacture and sale of medical devices, including products
currently sold by our customers or potential customers and their other potential
products, are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding state
agencies, such as the CDHS.  In order for them to market their
products for clinical use in the United States, they must obtain clearance from
the FDA of a 510(k) pre-market notification or PMA application.  In
addition, certain material changes to medical devices also are subject to FDA
review and clearance or approval.  The process of obtaining FDA and
other required regulatory clearances and approvals is lengthy, expensive and
uncertain, frequently requiring from one to several years from the date of FDA
submission if pre-market clearance or approval is obtained at
all.  Securing FDA clearances and approvals may require the submission
of extensive clinical data and supporting information to the FDA.




Sales of
medical devices outside of the United States are subject to international
regulatory requirements that vary from country to country.  The time
required to obtain approval for sales internationally may be longer or shorter
than that required for FDA clearance or approval, and the requirements may
differ.  There can be no assurance that our customers or potential
customers will be able to obtain approval in a particular country for any of
their future products.




Regulatory
clearances or approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed.  In addition, to
obtain such clearances or approvals, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical device
manufacturers must comply.




FDA
enforcement policy strictly prohibits the marketing of cleared or approved
medical devices for uncleared or unapproved uses.  In addition,
product clearances or approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.  Our customers and potential customers will be required to
adhere to applicable FDA GMP regulations and similar regulations in other
countries, which include testing, control, and documentation
requirements.  Ongoing compliance with GMP and other applicable
regulatory requirements, including marketing products for unapproved uses, could
result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant pre-market clearance or
pre-market approval for devices,




-15-




withdrawal
of clearances or approvals and criminal prosecution.  Changes in
existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of their products.




There can
be no assurance that our customers or potential customers will be able to obtain
FDA 510(k) clearance or PMA for their products under development or other
necessary regulatory approvals or clearances on a timely basis or at
all.  Delays in receipt of or failure to receive U.S. or foreign
clearances or approvals, the loss of previously obtained clearance or approvals,
or failure to comply with existing or future regulatory requirements would have
a material adverse effect on our business with respect of our ability to
generate revenues from product sales to and royalty and development fees from
our customers and potential customers utilizing our advanced biomaterials in
their medical devices.




Our
markets are subject to technological change and our success depends on our
ability to modify existing advanced biomaterials and develop and introduce new
advanced biomaterials for use by customers and potential customers in their
medical devices.




The
medical device market for our products is characterized by:




·
            changing
      technologies;




·
            changing
      customer needs;




·
            frequent
      new product introductions and
enhancements;




·
            increased
      integration with other functions;
and




·
            product
      obsolescence.




Our
success is dependent in part on the modification of existing advanced
biomaterials and the design and development of new advanced biomaterials for use
in the medical device industry.  To modify existing advanced
biomaterials and develop new advanced biomaterials and designs for the medical
device market, we must develop, gain access to and use leading technologies in a
cost effective and timely manner and continue to expand our technical and design
expertise.  The product development process is time-consuming and
costly, and there can be no assurance that product development will be
successfully completed, that necessary regulatory clearances or approvals will
be granted by the FDA on a timely basis, or at all, or that the potential
products will achieve market acceptance.  Our failure to modify
existing advanced biomaterials, develop new advanced biomaterials, or
successfully market existing and potential new advanced biomaterials; and the
failure of our customers and potential customers in obtaining necessary
regulatory clearances or approvals for medical devices using our advanced
biomaterials, could have a material adverse effect on our business, financial
condition and results of operations.




The
number of patients undergoing bypass surgery may continue to decline, resulting
in a reduction of our market potential for our synthetic coronary artery bypass
graft under development.




Over the
past several years, the total number of patients undergoing bypass surgery has
decreased as a result of new, less invasive therapies such as pharmacotherapy,
angioplasty and stenting.  There can be no assurances that that the
number of patients will not continue to decline as further medical advances are
introduced.  Any future decline in the total number of patients
undergoing bypass surgery could result in lost revenue and therefore could have
a material adverse effect on our business, financial condition and results of
operations.




We
have limited manufacturing experience and if our synthetic coronary artery
bypass graft is approved, we may not be able to manufacture sufficient
quantities at an acceptable cost.




We remain
in the research and development phase of our synthetic coronary artery bypass
graft.  Accordingly, if our product is approved for commercial sale,
we will need to establish the capability to commercially manufacture our product
in accordance with FDA and other regulatory requirements.  We have
limited experience in establishing, supervising and conducting commercial
manufacturing.  If we fail to adequately establish, supervise and
conduct all aspects of the manufacturing processes, we may not be able to
commercialize our products.  We do not presently own manufacturing
facilities necessary to provide clinical or commercial quantities of our
intended graft.  We may not be able to obtain such facilities at an
economically feasible cost, or at all.




-16-


We
depend on outside suppliers and subcontractors, and our production and
reputation could be harmed if they are unable to meet our volume and quality
requirements and alternative sources are not available.




We have
various “sole source” suppliers who supply key components for our
products.  Our outside suppliers may fail to develop and supply us
with products and components on a timely basis, or may supply us with products
and components that do not meet our quality, quantity or cost
requirements.  If any of these problems occur, we may be unable to
obtain substitute sources of these products and components on a timely basis or
on terms acceptable to us, which could harm our ability to:  i)
manufacture our own products and components profitably or on time, and ii) ship
products to customers on time and generate revenues.  In addition, if
the processes that our suppliers use to manufacture products and components are
proprietary, we may be unable to obtain comparable components from alternative
suppliers.




A
significant portion of our royalty and development fee sales comes from one
large customer, and any loss, cancellation or delay in sales to this customer
could harm our operating results.




A limited
number of customers have, historically, accounted for a significant portion of
our revenues.  For the fiscal year ended March 31, 2008, two customers
represented 65% and 16% of revenues, respectively.  For the fiscal
year ended March 31, 2009, one customer represented 81% of our
revenue.  Although we are working to expand our customer base, the
medical device industry is concentrated, with relatively few companies
accounting for a large percentage of sales in the surgical, interventional and
cardiovascular markets that are targeted by our disposable medical device and
contract manufacturing operations.  Accordingly, our revenue and
profitability are dependent on our relationships with a limited number of large
medical device companies, and we expect that the majority of our revenues will
continue to depend on sales of our products to a limited number of customers for
the foreseeable future, particularly if there is further consolidation within
the medical device industry.  We cannot assure you that there will not
be a loss or reduction in business from our existing significant
customer.  In addition, we cannot assure you that revenues from our
customers that have accounted for significant revenues in the past, either
individually or as a group, will reach or exceed historical levels in any future
period.  We may not be able to offset any decline in revenues from our
existing major customer with revenues from new customers or
other existing customers.  Because of our reliance on alimited number of customers, any decrease in revenues from, or
loss of, one or more of these customers without a corresponding increase in
revenues from other customers would harm our business, operating results and
financial condition.  In addition, any negative developments in the
business of our existing significant customer could result in significantly
decreased sales to this customer, which could seriously harm our business,
operating results and financial condition.




Our
ability to grow and sustain growth levels may be adversely affected by slowdowns
in the U.S. economy.




Due to
the recent decrease in corporate profits, capital spending and consumer
confidence, we have experienced weakness in certain of our end
markets.  We are primarily susceptible when customers stop placing
orders for us to supply advanced biomaterials or when customers experience
reduced sales of their medical devices for which we receive royalties on product
sales.  The medical commercial markets, including bio-medical research
and development and medical device manufacturing, could be affected by the past
and present slowdown in the U.S. economy.  If the economic slowdown
persists and capital spending for research and development from our customers
decreases, our business, financial condition and results of operations may be
adversely affected.




We
could be harmed by litigation involving patents and other intellectual property
rights.




None of
our patents or other intellectual property rights has been successfully
challenged to date.  However, in the future, we could be accused of
infringing the intellectual property rights of other third
parties.  We also have certain indemnification obligations to
customers with respect to the infringement of third party intellectual property
rights by our products.  No assurance can be provided that any future
infringement claims by third parties or claims for indemnification by customers
or end users of our products resulting from infringement claims will not be
asserted or that assertions of infringement, if proven to be true, will not harm
our business.




In the
event of any adverse ruling in any intellectual property litigation, we could be
required to pay substantial damages, cease the manufacturing, use and sale of
infringing products, discontinue the use of certain processes or obtain a
license from the third party claiming infringement with royalty payment
obligations by us.




Any
litigation relating to the intellectual property rights of third parties,
whether or not determined in our favor or settled by us, is costly and may
divert the efforts and attention of our management and technical
personnel.




-17-


We
may not be able to protect our intellectual property rights
adequately.




Our
ability to compete is affected by our ability to protect our intellectual
property rights.  We rely on a combination of patents, trademarks,
copyrights, trade secrets, confidentiality procedures and non-disclosure and
licensing arrangements to protect our intellectual property
rights.  Despite these efforts, we cannot be certain that the steps we
take to protect our proprietary information will be adequate to prevent
misappropriation of our technology, or that our competitors will not
independently develop technology that is substantially similar or superior to
our technology.  More specifically, we cannot assure you that any
future applications will be approved, or that any issued patents will provide us
with competitive advantages or will not be challenged by third
parties.  Nor can we assure you that, if challenged, our patents will
be found to be valid or enforceable, or that the patents of others will not have
an adverse effect on our ability to do business.  Furthermore, others
may independently develop similar products or processes, duplicate our products
or processes or design their products around any patents that may be issued to
us.




Our
future success depends on the continued service of management, engineering and
sales personnel and our ability to identify, hire and retain additional
personnel.




Our
success depends, to a significant extent, upon the efforts and abilities of
members of senior management.  The loss of the services of one or more
of our senior management or other key employees could adversely affect our
business.  We do not maintain key person life insurance on any of our
officers, employees or consultants.




There is
intense competition for qualified employees in the medical industry,
particularly for highly skilled design, applications, engineering and sales
people.  We may not be able to continue to attract and retain
technologists, managers, or other qualified personnel necessary for the
development of our business or to replace qualified individuals who could leave
us at any time in the future.  Our anticipated growth is expected to
place increased demands on our resources, and will likely require the addition
of new management and engineering staff as well as the development of additional
expertise by existing management employees.  If we lose the services
of or fail to recruit engineers or other technical and management personnel, our
business could be harmed.




Periods
of rapid growth and expansion could place a significant strain on our resources,
including our employee base.




To manage
our possible future growth effectively, we will be required to continue to
improve our operational, financial and management systems.  In doing
so, we will periodically implement new software and other systems that will
affect our internal operations regionally or globally.




Future
growth will also require us to successfully hire, train, motivate and manage our
employees.  In addition, our continued growth and the evolution of our
business plan will require significant additional management, technical and
administrative resources.  We may not be able to effectively manage
the growth and evolution of our current business.




We
are exposed to product liability and clinical and pre-clinical liability risks
which could place a substantial financial burden on us, if we are
sued.  Although we have 5 million dollars in product liability
insurance coverage, that amount may not be sufficient to cover all potential
claims made against us.  Additionally, we face the risk of financial
exposure to product liability claims alleging that the use of devices that
incorporate our products resulted in adverse effects.




While we
are not aware of any claim at this time, our business exposes us to potential
product liability, recalls and other liability risks that are inherent in the
testing, manufacturing and marketing of medical products.  We cannot
assure you that such potential claims will not be asserted against
us.  In addition, the use in our clinical trials of medical products
that our potential collaborators may develop and the subsequent sale of these
products by us or our potential collaborators may cause us to bear a portion of
or all product liability risks.  A successful liability claim or
series of claims brought against us could have a material adverse effect on our
business, financial condition and results of operations.




-18-


We cannot
assure you that we will be able to obtain or maintain adequate product liability
insurance on acceptable terms, if at all, or that such insurance will provide
adequate coverage against our potential liabilities.  Furthermore, our
current and potential partners with whom we have collaborative agreements or our
future licensees may not be willing to indemnify us against these types of
liabilities and may not themselves be sufficiently insured or have a net worth
sufficient to satisfy any product liability claims.  Claims or losses
in excess of any product liability insurance coverage that may be obtained by us
could have a material adverse effect on our business, financial condition and
results of operations.  We do not currently carry recall insurance and
we may be subject to significant recall costs in the event of a
recall.




We
may be affected by environmental laws and regulations.




We are
subject to a variety of laws, rules and regulations in the United States related
to the use, storage, handling, discharge and disposal of certain chemical
materials such as isocyanates, alcohols, dimethylacetamide, and glycols used in
our research and manufacturing process.  Any of those regulations
could require us to acquire expensive equipment or to incur substantial other
expenses to comply with them.  If we incur substantial additional
expenses, product costs could significantly increase.  Our failure to
comply with present or future environmental laws, rules and regulations could
result in fines, suspension of production or cessation of
operations.




If
we are unable to complete our assessments as to the adequacy of our internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of
our common stock.




As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to include a report
of management on the company’s internal control over financial reporting in
their annual reports on Form 10-K.  This report is required to contain
an assessment by management of the effectiveness of such company’s internal
controls over financial reporting.  In addition, the public accounting
firm auditing a public company’s financial statements must attest to and report
on management’s assessment of the effectiveness of the company’s internal
controls over financial reporting.  While we are expending significant
resources in developing the necessary documentation and testing procedures
required by Section 404 and our management has concluded that our internal
control over financial reporting was effective as of March 31, 2009, there is a
risk that as we continue to implement our internal controls that we may identify
previously unknown deficiencies or weaknesses in our internal
controls.  If we fail to implement required new or improved controls,
we may be unable to comply with the requirements of Section 404 in a timely
manner.  This could result in an adverse reaction in the financial
markets due to a loss of confidence in the reliability of our financial
statements, which could cause the market price of our common stock to decline
and make it more difficult for us to finance our operations.




Under
current rules, we are required to report on the effectiveness of our internal
controls for the year ended March 31, 2009.  In the fiscal year ending
March 31, 2010, our independent registered public accounting firm will be
required to report on the effectiveness of our internal controls.




Risks
Related to Competition




The
medical device industry, in general, is intensely competitive and characterized
by rapid innovation and technological advances.  Product
differentiation and performance, client service, reliability, cost and ease of
use are important competitive considerations in the medical device
industry.  We expect the current high levels of competition and
technological change in the medical device industry in general.  Most
of our competitors have longer operating histories and significantly greater
financial, technical, research, marketing, sales, distribution and other
resources.  In addition, our competitors may have greater name
recognition than us and frequently offer discounts as a competitive
tactic.  There can be no assurance that our current competitors or
potential future competitors will not succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than those that have been and are being developed by us or that would render our
technologies and products obsolete or noncompetitive, or that such companies
will not succeed in obtaining regulatory approval for, introducing or
commercializing any such products prior to us.  Any of the above
competitive developments could have a material adverse effect on our business,
financial condition and results of operations.




-19-


Risks
Related to Pricing Pressure




We face
aggressive cost-containment pressures from governmental agencies and third party
payors.  There can be no assurances that we will be able to maintain
current prices in the face of continuing pricing pressures.  Over
time, the average price for our products may decline as the markets for these
products become more competitive.  Any material reduction in product
prices could negatively affect our gross margin, necessitating a corresponding
increase in unit sales to maintain net sales.




Risks
Related to Our Securities




Our
stock price is volatile.




The
market price of our common stock has fluctuated significantly to
date.  In the past fiscal year, our stock price ranged from $0.11 to
$0.94.  The future market price of our common stock may also fluctuate
significantly due to:




·
            variations
      in our actual or expected quarterly operating
  results;




·
            announcements
      or introductions of new products;




·
            results
      of clinical trials;




·
            technological
      innovations by our competitors or development setbacks by
    us;




·
            the
      commencement or adverse outcome of
litigation;




·
            changes
      in analysts’ estimates of our performance or changes in analysts’
      forecasts regarding our industry, competitors or
  customers;




·
            announcements
      of acquisition or acquisition transactions;
or




·
            general
      economic and market conditions.




In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have affected the market prices of many medical and
biotechnology companies.  These fluctuations have often been unrelated
or disproportionate to the operating performance of companies in our industry,
and could harm the market price of our common stock.




Additional
authorized shares of our common stock and preferred stock available for issuance
may adversely affect the market.




We are
authorized to issue 50,000,000 shares of our common stock.  As of
March 31, 2009, there were 21,205,399 shares of common stock issued and
21,128,707 shares of common stock outstanding.  As of March 31, 2009,
there were 76,692 shares of treasury stock acquired through open market
purchases during the fiscal year ended March 31, 2009.  The total
number of shares of our common stock issued and outstanding does not include
shares reserved in anticipation of the exercise of options and
warrants.  As of March 31, 2009, we had outstanding stock options and
warrants to purchase approximately 3,058,729 shares of our common stock, the
exercise price of which range between $0.16 per share to $5.40 per share, and we
have reserved shares of our common stock for issuance in connection with the
potential exercise thereof.  To the extent such options, warrants or
additional investment rights are exercised; the holders of our common stock will
experience further dilution.  Stockholders will also experience
dilution upon the exercise of options granted under our stock option
plans.  In addition, in the event that any future financing or
consideration for a future acquisition should be in the form of, be convertible
into or exchangeable for, equity securities investors will experience additional
dilution.




The
exercise of the outstanding derivative securities will reduce the percentage of
common stock held by our current stockholders.  Further, the terms on
which we could obtain additional capital during the life of the derivative
securities may be adversely affected, and it should be expected that the holders
of the derivative securities would exercise them at a time when we would be able
to obtain equity capital on terms more favorable than those provided for by such
derivative securities.  As a result, any issuance of additional shares
of common stock may cause our current stockholders to suffer significant
dilution which may adversely affect the market.  In addition to the
above referenced shares of common stock which may be issued without stockholder
approval, we have 5,000,000 shares of authorized preferred stock, the terms of
which may be fixed by our Board, of which 500,000 preferred shares were
previously issued, but none are currently outstanding.  While we have
no present plans to issue any additional shares of preferred stock, our Board
has the authority, without stockholder approval, to create and issue one or more
series of such preferred stock and to determine the voting, dividend and other
rights of holders of such preferred stock.  The issuance of any of
such series of preferred stock may have an adverse effect on the holders of
common stock.




-20-




Shares
eligible for future sale may adversely affect the market.




From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations.  In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
one year holding period may, under certain circumstances, sell within any three
month period a number of securities which does not exceed the greater of 1% of
the then outstanding shares of common stock or the average weekly trading volume
of the class during the four calendar weeks prior to such sale.  Rule
144 also permits, under certain circumstances, the sale of securities, without
any limitation, by our stockholders that are non-affiliates that have satisfied
a two year holding period.  Any substantial sale of our common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have material
adverse effect on the market price of our securities.




There
is a limitation on director and officer liability.




As
permitted by Delaware law, our Restated Articles of Organization limit the
liability of our directors for monetary damages for breach of a director’s
fiduciary duty except for liability in certain instances.  As a result
of our charter provision and Delaware law, stockholders may have limited rights
to recover against directors for breach of fiduciary duty.  In
addition, our bylaws provide that we shall indemnify our directors, officers,
employees and agents if such persons acted in good faith and reasoned that their
conduct was in our best interest.




The
anti-takeover provisions of our Restated Articles of Organization, the Delaware
corporation law and our Stockholder Rights Plan may delay, defer or prevent a
change of control.




Our board
of directors has the authority to issue up to 4,500,000 shares of preferred
stock and to determine the price, rights, preferences and privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our stockholders.  The rights of the holders of common
stock will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future.  The
issuance of preferred stock may delay, defer or prevent a change in control
because the terms of any issued preferred stock could potentially prohibit our
consummation of any acquisition, reorganization, sale of substantially all of
our assets, liquidation or other extraordinary corporate transaction, without
the approval of the holders of the outstanding shares of preferred
stock.  In addition, the issuance of preferred stock could have a
dilutive effect on our stockholders.




Our
stockholders must give substantial advance notice prior to the relevant meeting
to nominate a candidate for director or present a proposal to our stockholders
at a meeting.  These notice requirements could inhibit a takeover by
delaying stockholder action.  In addition, our bylaws and Delaware law
provide for staggered board members with each member elected for three
years.  In addition, directors may be removed by stockholders only for
cause and by a vote of 80% of the stock.




In
addition, we have adopted a stockholder rights plan that may discourage any
potential acquirer from acquiring more than fifteen percent (15%) of our
outstanding common stock since, upon this type of acquisition without approval
of our board of directors, all other common stockholders will have the right to
purchase a specified amount of common stock at a substantial discount from
market price.




Risk
of Market Withdrawal or Product Recall




There can
be no assurance that we will be able to successfully take corrective actions if
required, nor can there be any assurance that any such corrective actions will
not force us to incur significant costs.  In addition, there can be no
assurance any future recalls will not cause us to face increasing scrutiny from
its customers, which could cause us to lose market share or incur substantial
costs in order to maintain existing market share.  We do not currently
carry recall insurance and we may be subject to significant recall costs in the
event of a recall.




Risks
Associated with Healthcare Reform Proposals




Political,
economical and regulatory influences are subjecting the healthcare industry in
the United States to fundamental change.  Potential reforms proposed
over the last several years have included mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups and fundamental changes in the healthcare
delivery system.  In addition, some states in which we operate are
also considering various healthcare reform proposals.  We anticipate
that federal and state governments will continue to review and assess
alternative healthcare delivery systems and payment methodologies and public
debate of these issues will likely continue in the future.  Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, we cannot predict which, if any, of such reform
proposals will be adopted, when they may be




-21-




adopted
or what impact they may have on us, and there can be no assurance that the
adoption of reform proposals will not have a material adverse effect on our
business, operating results or financial condition.  In addition, the
actual announcement of reform proposals and the investment community’s reaction
to such proposals, as well as announcements by competitors and third-party
payors of their strategies to respond to such initiatives, could produce
volatility in the trading and market price of our common stock.




Item
      1B.
            Unresolved
      Staff Comments




None.




Item
      2.
            Description
      of Properties




Our
corporate headquarters, polymer development and manufacturing operations, are
located in an approximate 22,700 square foot building, which we own, is located
at 229 Andover Street, Wilmington, MA, and was purchased for $1,750,000 in
cash.






Item 3.
            Legal
      Proceedings




As
previously reported by us, in late 2007 we were advised by Medos that Medos
might assert certain indemnity claims against us relating to certain
representations and warranties up to the full amount of the $1.0 million escrow
balance established under the Gish Purchase Agreement.  In addition,
Medos advised us that it might seek a purchase price adjustment for the period
March 31, 2007 through July 6, 2007, as provided in the Gish Purchase
Agreement.  We advised Medos that it believed any such claims, if
made, would be without merit.




On June
30, 2008, Medos formally notified us of its claims in accordance with the
procedure set forth in the Gish Purchase Agreement.  Medos’ claims
aggregate approximately $4.3 million and include allegations that (i) we
breached certain representations and warranties in the Gish Purchase Agreement,
including certain representations and warranties concerning the financial
condition of Gish as of March 31, 2007, (ii) we are liable for the severance
obligations related to two key Gish employees terminated by Medos subsequent to
the acquisition date, and (iii) Medos is entitled to a purchase price adjustment
for the period between March 31, 2007 and July 6, 2007.




We have
refuted the claims asserted by Medos and the facts and circumstances upon which
they are based and intend to vigorously pursue the disposition of those
claims.  In that regard, on July 25, 2008, as provided in the Gish
Purchase Agreement, we initiated an arbitration proceeding with the American
Arbitration Association in New York, New York, and served its arbitration demand
upon Medos that same day.  The arbitration demand seeks a declaration
that the amounts claimed by Medos are without merit and
unsupportable.  Medos has not yet responded to the demand, but has
agreed to participate in non-binding mediation in accordance with the rules of
the American Arbitration Association.  Although we deny the claims
asserted by Medos, an adverse finding of liability could have a material impact
on us.  We have reviewed the assertions by Medos, and have concluded
that a loss resulting from these asserted claims is not probable as of March 31,
2009.




Under the
terms of the escrow agreement, our initiation of the arbitration proceeding
disputing all of Medos’ claims precluded Medos from taking further action
seeking release of the escrow funds.  Notwithstanding this contractual
prohibition, subsequent to our service of the arbitration demand on Medos on
July 25, 2008 and without our knowledge, Medos obtained the release of the $1.0
million escrow amount.  We notified Medos that its unauthorized
actions resulting in the release of the escrowed amount is in violation of the
escrow agreement.  Furthermore, we notified Medos that the failure to
return the escrowed amount to the escrow agent could result in our taking action
against Medos for this violation.




We are
not a party to any other legal proceedings, other than ordinary routine
litigation incidental to our business, which we believe will not have a material
affect on our financial position or results of operations.




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




None.




-22-


PART II




Item 5.
            Market
      Information for Registrant’s Common Equity, Related Stockholder Matters
      and Issuer Purchases of Equity
Securities




Our
common stock trades on the NYSE Amex under the symbol “ASB.”  The
following table sets forth the high and low sales prices of the common stock for
each of the last two fiscal years, as reported on the NYSE
Amex.


Fiscal
      Year 2009High
              
              
              Low4th
      Quarter
              
              $
              0.40
              
              
              $
              0.113rd
      Quarter
              
              
              0.50
              
              
              
              0.192nd
      Quarter
              
              
              0.80
              
              
              
              0.371st
      Quarter
              
              
              0.94
              
              
              
              0.47Fiscal
      Year 2008High
              
              
              Low4th
      Quarter
              
              $
              1.10
              
              
              $
              0.523rd
      Quarter
              
              
              1.44
              
              
              
              0.672nd
      Quarter
              
              
              1.59
              
              
              
              1.101st
      Quarter
              
              
              1.65
              
              
              
              1.21


As of
June 15, 2009, there were approximately 368 stockholders of
record.  The last sale price as reported by the NYSE Amex on June 15,
2009, was $0.40.  We have never paid a cash dividend on our common
stock and do not anticipate the payment of cash dividends in the foreseeable
future.  We submitted an unqualified 2008 Corporate Governance
Certification to the American Stock Exchange in connection with our fiscal year
2008.




Securities Authorized for Issuance
under Equity Compensation Plans as of the End of Fiscal


2009
Equity Compensation Plan Information


Plan
      Category
              
              Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
              
              
              Weighted
      average exercise price of outstanding options, warrants and
      rights
              
              
              Number
      of securities remaining available for future issuanceEquity
      compensation plans approved by stockholders
              
              
              2,952,521
              
              
              (1
              )
              
              $
              2.07
              
              
              
              3,067,312Equity
      compensation plans not approved by stockholders
              
              
              360,000
              
              
              
              
              
              $
              2.43
              
              
              
              -3,312,521
              
              
              
              
              
              
              
              
              
              
              3,067,312


_______________




(1)
            This
      total includes shares to be issued upon exercise of outstanding options
      under the equity compensation plans that have been approved by our
      stockholders (i.e., the 1996 Plan and the 2003
  Plan).




-23-


Recent
      Sales of Unregistered Securities:




None.




Stock
      Repurchase Plan




In June
2001, the Board of Directors adopted a share repurchase program authorizing the
repurchase by the Company of up to 250,000 of its shares of common
stock.  In June 2004, the Board of Directors authorized the purchase
of an additional 500,000 shares of common stock.  On December 17,
2008, in light of the current market conditions, the Board of Directors
authorized the repurchase of up to $30,000 of common stock from the shares
available for repurchase under the program.  In January 2009, the
Company repurchased 76,692 shares of its common stock at an approximate cost of
$30,000.  Since June 2001, a total of 251,379 shares have been
repurchased by the Company under the share repurchase program, leaving 498,621
shares remaining to purchase under the share repurchase program.  No
repurchases were made during the year ended March 31, 2008.  The share
repurchase program authorizes repurchases from time to time in open market
transactions, through privately negotiated transactions, block transactions or
otherwise, at times and prices deemed appropriate by management, is not subject
to an expiration date.


Issuer
      Purchases of Equity SecuritiesPeriod
              
              Total
      Number of Shares Purchased
              
              Average
      Price Paid per Share
              
              Total
      Number of Shares Purchased as Part of Publicly Announced
    Plan
              
              Maximum
      Number of Shares that May Yet Be Purchased Under the PlanJanuary
      1 - January 31, 2009
              
              
              76,692
              
              
              $
              0.39
              
              
              
              76,692February
      1 - February 28, 2009
              
              
              -
              
              
              $
              -
              
              
              
              -March
      1 - March 31, 2009
              
              
              -
              
              
              $
              -
              
              
              
              -Total
              
              
              76,692
              
              
              $
              0.39
              
              
              
              76,692
              
              
              
              498,621


Stockholder
Rights Plan




The
Company’s board of directors approved the adoption of a stockholder rights plan
(the “Rights Plan”) under which all stockholders of record as of February 8,
2008 will receive rights to purchase shares of a new series of preferred stock
(the “Rights”).  The Rights will be distributed as a
dividend.  Initially, the Rights will attach to, and trade with, the
Company’s common stock.  Subject to the terms, conditions and
limitations of the Rights Plan, the Rights will become exercisable if (among
other things) a person or group acquires 15% or more of the Company’s common
stock.  Upon such an event, and payment of the purchase price, each
Right (except those held by the acquiring person or group) will entitle the
holder to acquire shares of the Company’s common stock (or the economic
equivalent thereof) having a value equal to twice the purchase
price.  The Company’s board of directors may redeem the Rights prior
to the time they are triggered.  In the event of an unsolicited
attempt to acquire the Company, the Rights Plan is intended to facilitate the
full realization of stockholder value in the Company and the fair and equal
treatment of all Company stockholders.  The Rights Plan will not
prevent a takeover attempt.  Rather, it is intended to guard against
abusive takeover tactics and encourage anyone seeking to acquire the Company to
negotiate with the board of directors.  The Company did not adopt the
Rights Plan in response to any particular proposal.




Item 6.
            Selected
      Consolidated Financial Data




Not
Applicable.




-24-


Item
      7.
            Management’s
      Discussion and Analysis or Plan of
Operation




Forward-Looking
Statements




This
Report on Form 10-K contains certain statements that are “forward-looking”
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Litigation Reform Act”).  These forward looking statements and other
information are based on our beliefs as well as assumptions made by us using
information currently available.




The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and
similar expressions, as they relate to us, are intended to identify
forward-looking statements.  Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, intended or using other similar expressions.




In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Report on Form 10-K.  For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market our products; the market may not accept our existing and future products;
we may not be able to retain our customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business.  Certain important factors affecting the
forward-looking statements made herein also include, but are not limited to (i)
continued downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement our financial and business strategies,
meet anticipated capital expenditures and fund research and development
costs.  In addition, assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our marketing, capital expenditure or other budgets, which may in turn
affect our financial position and results of operations.  For all of
these reasons, the reader is cautioned not to place undue reliance on
forward-looking statements contained herein, which speak only as of the date
hereof.  We assume no responsibility to update any forward-looking
statements as a result of new information, future events, or otherwise except as
required by law.




Overview




We
develop advanced polymer biomaterials which provide critical characteristics in
the design and development of medical devices.  Our biomaterials are
used in devices that are designed for treating a broad range of anatomical sites
and disease states.  Our business model leverages our proprietary
materials science technology and manufacturing expertise in order to expand our
product sales and royalty and license fee income.




Fiscal
Year




Our
fiscal year ends on March 31.  Reference in this annual report on Form
10-K to a fiscal year is reference to the fiscal year ended March
31.  For example, references to “fiscal 2009” or our “2009 fiscal
year” refer to the fiscal year ended March 31, 2009.




Critical
      Accounting Policies




Our
significant accounting policies are summarized in Note A to our consolidated
financial statements.  However, certain of our accounting policies
require the application of significant judgment by our management, and such
judgments are reflected in the amounts reported in our consolidated financial
statements.  In applying these policies, our management uses its
judgment to determine the appropriate assumptions to be used in the
determination of estimates.  Those estimates are based on our
historical experience, terms of existing contracts, our observance of market
trends, information provided by our strategic partners and information available
from other outside sources, as appropriate.  Actual results may differ
significantly from the estimates contained in our consolidated financial
statements.  Our critical accounting policies are as
follows:




·
            Revenue
      Recognition.We
      recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No.
      104, “Revenue Recognition in
      Financial Statements.”  We recognize revenue from product
      sales upon shipment, provided that a purchase order has been received or a
      contract has been executed, there are no uncertainties regarding customer
      acceptance, the sales price is fixed or determinable and collection is
      deemed reasonably assured.  If uncertainties regarding customer
      acceptance exist, we recognize revenue when those uncertainties are
      resolved and title has been transferred to the
      customer.  Amounts collected or billed prior to satisfying the
      above revenue recognition criteria are recorded as deferred
      revenue.  We also receive license, royalty and development fees
      for the use of our proprietary biomaterials.  We recognize these
      fees as revenue in accordance with the terms of the
    contracts.




-25-




·
            Accounts Receivable
      Valuation.We perform various analyses to evaluate
      accounts receivable balances and record an allowance for bad debts based
      on the estimated collectibility of the accounts such that the amounts
      reflect estimated net realizable value.  If actual uncollectible
      amounts significantly exceed the estimated allowance, the Company’s
      operating results would be significantly and adversely
      affected.






·
            Inventory
      Valuation.We value our inventory at the lower of our
      actual cost or the current estimated market value.  We regularly
      review inventory quantities on hand and inventory commitments with
      suppliers and record a provision for excess and obsolete inventory based
      primarily on our historical usage for the prior twelve to twenty-four
      month period.  Although we make every effort to ensure the
      accuracy of our forecasts of future product demand, any significant
      unanticipated change in demand or technological developments could have a
      significant impact on the value of our inventory and our reported
      operating results.




·
            Goodwill.At March 31,
      2008, we had $487,000 of goodwill, which was attributable to our only
      reporting unit.  Under the provisions of SFAS No. 142, we
      evaluate recorded goodwill for impairment on at least an annual basis, or
      more frequently if indicators of impairment exist.  During the
      quarter ended December 31, 2008, our market capitalization fell below the
      reporting unit’s carrying value.  Due to the significance of the
      deficit between market capitalization and carrying value and the length of
      time for which the deficit existed, management determined during the
      quarter ended December 31, 2008 that an indicator of impairment existed
      and that an interim impairment test was required.  After
      completing the interim impairment test, we determined that the goodwill
      balance of $487,000 was impaired in its entirety.  The fair
      value of our reporting unit was estimated using the expected present value
      of future cash flows.  Accordingly, as of March 31, 2009 we have
      no remaining goodwill recorded.
              
              Pursuant
      to SFAS No. 144, we evaluated our long-lived assets, which include
      property and equipment, for impairment as events and circumstances
      indicate that the carrying amount may not be recoverable.  We
      evaluated the realizability of our long-lived assets based on
      profitability and undiscounted cash flow expectations, reviews of results
      of sales of similar assets and independent appraisals.  As a
      result of the indicators of impairment described above, we evaluated the
      recoverability of our property and equipment as of March 31 2009 and
      determined that no impairment
existed.




·
            Stock-Based Compensation. 
      Effective April 1, 2006, we adopted Statement of Financial Accounting
      Standard No. 123R (SFAS 123R), "Share-Based
      Payment," which requires the expense recognition of the estimated
      fair value of all stock-based payments issued to employees.  Prior to
      the adoption of SFAS 123R, the estimated fair value associated with such
      awards was not recorded as an expense, but rather was disclosed in a
      footnote to our financial statements.
              
              The valuation of employee stock options is an inherently
      subjective process, since market values are generally not available for
      long-term, non-transferrable employee stock options.  Accordingly, an
      option pricing model is utilized to derive an estimated fair value. 
      In calculating the estimated fair value of our stock options we use the
      Black-Scholes pricing model, which requires the consideration of the
      following six variables for purposes of estimating fair
    value:




·
            the
      stock option exercise price;




·
            the
      expected term of the option;




·
            the
      grant price of our common stock, which is issuable upon exercise of the
      option;




·
            the
      expected volatility of our common
stock;




·
            the
      expected dividends on our common stock (we do not anticipate paying
      dividends in the foreseeable future);
and




·
            the
      risk free interest rate for the expected option
  term.




-26-




Stock Option Exercise Price
and Grant Date Price of our Common Stock.  Stock option
exercise price is typically the closing market price of our common stock on the
date of grant.




Expected
Term.  For options granted subsequent to the adoption of SFAS
123R, the expected life of stock options granted is based on the simplified
method prescribed under SAB 107, “Share-Based
Payment.”  Accordingly, the expected term is presumed to be the
midpoint between the vesting date and the end of the contractual
term.




Expected
Volatility.  The expected volatility is a measure of the amount
by which our stock price is expected to fluctuate during the expected term of
options granted.  We determine the expected volatility solely based
upon the historical volatility of our common stock over a period commensurate
with the option’s expected term.  We do not believe that the future
volatility of our common stock over an option’s expected term is likely to
differ significantly from the past.




Expected
Dividends.  We have never declared or paid any cash dividends
on any of our capital stock and do not expect to do so in the foreseeable
future.  Accordingly, we use an expected dividend yield of zero to
calculate the grant-date fair value of a stock option.




Risk-Free Interest
Rate.  The risk-free interest rate is the implied yield
available on U.S. Treasury zero-coupon issues with a remaining term equal to the
option’s expected term on the grant date.




Of the
variables above, the selection of an expected term and expected stock price
volatility are the most subjective.  The majority of the stock option
expense recorded in the fiscal years ended March 31, 2009 and 2008 relates to
the vesting of stock options granted subsequent to April 1, 2006, as the
majority of our outstanding options were fully vested on the date of
adoption.




In
accordance with SFAS 123R, we were also required to estimate the level of award
forfeitures expected to occur and record compensation expense only for those
awards that are ultimately expected to vest.  This requirement applies
to all awards that are not yet vested, including awards granted prior to April
1, 2006.  Due to the limited number of unvested options outstanding,
the majority of which are held by executives and members of the Company’s Board
of Directors, the Company has estimated a zero forfeiture rate.  The
Company will revisit this assumption periodically and as changes in the
composition of our option pool dictate.




Changes
in the inputs and assumptions, as described above, can materially affect the
measure of estimated fair value of our share-based compensation.  The
Company anticipates the amount of stock-based compensation to increase in the
future as additional options are granted.  As of March 31, 2009, there
was approximately $174,000 of unrecognized compensation cost related to stock
option awards that is expected to be recognized as expense over a weighted
average period of 1.55 years.




Results
of Operations




Fiscal Year Ended March 31,
2009 vs. March 31, 2008




Revenues




Total
revenues for the fiscal year ended March 31, 2009 were $3,265,000 as compared
with $3,207,000 for the comparable prior year period, an increase of $58,000, or
1.8%.




Product
sales of our biomaterials for the fiscal year ended March 31, 2009 were $932,000
as compared with $1,283,000 for the comparable prior year period, a decrease of
$351,000, or 27.4%.  Product sales decreased primarily due to i) a
decrease in shipments of our biomaterials to our existing customer base during
the third and fourth quarter of fiscal 2009, and ii) and the deferral of a
shipment into our fiscal 2010 by a significant customer representing
approximately $112,000 of sales.  For the year ended March 31, 2009,
one customer represented 81% of our revenues.  For the year ended
March 31, 2008, two customers represented 65% and 16% of revenues,
respectively.




Royalties
and development fees for the fiscal year ended March 31, 2009 were $2,333,000 as
compared with $1,924,000 for the comparable prior year period, an increase of
$409,000 or 21.3%.  We have agreements to license our proprietary
biomaterial technology to medical device manufacturers.  Royalties are
earned when these manufacturers sell medical devices which use our biomaterials;
accordingly, the increase in royalties during the fiscal year ended March 31,
2009 is a result of increased shipments of such products by one manufacturer to
its customers.




-27-




Gross
Profit




Gross
profit on total revenues for the fiscal year ended March 31, 2009 was
$1,915,000, or 58.7% of total revenues, compared with $1,950,000, or 60.8% of
total revenues, for the comparable prior year period.  The decrease in
gross profit dollars is primarily due to lower revenues from product sales
during the fiscal year ended March 31, 2009, which was offset by increased
license, royalty and development fees.  The decrease in gross profit
as a percentage of total revenues for the fiscal year ended March 31, 2009 was
primarily due to i) an increase in cost of sales on declining product sales and
ii) the adverse affect on cost resulting from lower sales in a high fixed cost
production environment.




Gross
profit on product sales for the fiscal year ended March 31, 2009 was a loss of
($418,000), or (44.8%) of product sales, compared with a profit of $26,000, or
2.0% of product sales, for the comparable prior year period.  The
decrease in gross profit on product sales and gross profit as a percentage of
product sales is primarily due to cost of additional personnel, ISO compliance
costs and other manufacturing-related costs incurred during the fiscal year
ended March 31, 2009.




Research,
Development and Regulatory Expenses




Research
and development expenses for the fiscal year ended March 31, 2009 were $760,000
as compared with $999,000 for the comparable prior year period, a decrease of
$239,000 or 23.9%.  Our research and development efforts are focused
on developing new applications for our biomaterials.  Research and
development expenditures consisted primarily of the salaries of full time
employees and related expenses, and are expensed as incurred.  These
individuals work on a variety of projects, including production
support.  During the fiscal year ended March 31, 2008, research,
development and regulatory expenses included approximately $122,000 of salary
related to the former Chairman and CEO of the Company who was providing services
as a special science advisor through August 2007.  In addition, during
the fiscal year ended March 31, 2008, we incurred a higher level of fees in
connection with the CardioPass clinical trial.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses for the fiscal year ended March 31, 2009
were $3,233,000 as compared with $3,408,000 for the comparable prior year
period, a decrease of $175,000 or 5.1%.  The decrease is primarily
attributable to i) an approximate $268,000 decrease in consulting fees related
primarily to Sarbanes-Oxley compliance implementation incurred in fiscal 2008
and ii) an approximate $228,000 decrease in stock-based compensation expense
related to director and executive stock options granted in fiscal 2008 which had
immediate vesting.  These decreases were offset by an approximate
$219,000 increase in payroll costs related to the resignation of our former
chief financial officer.




Impairment
of Goodwill




At March
31, 2008, we had $487,000 of goodwill, which was attributable to our only
reporting unit.  Under the provisions of SFAS No. 142, we evaluate
recorded goodwill for impairment on at least an annual basis, or more frequently
if indicators of impairment exist.  During the quarter ended December
31, 2008, our market capitalization fell below the reporting unit’s carrying
value.  Due to the significance of the deficit between market
capitalization and carrying value and the length of time for which the deficit
existed, management determined during the quarter ended December 31, 2008 that
an indicator of impairment existed and that an interim impairment test was
required.  After completing the interim impairment test, we determined
that the goodwill balance of $487,000 was impaired in its
entirety.  The fair value of our reporting unit was estimated using
the expected present value of future cash flows.  Accordingly, as of
March 31, 2009 we have no remaining goodwill recorded.




Interest
and Other Income and Expense




Interest
and other income and expense, net for the fiscal year ended March 31, 2009 was
$48,000 as compared with $215,000 for the comparable prior year period, a
decrease of $167,000 or 77.7%.  The decrease is primarily due to a
decrease in interest income for the fiscal year ended March 31, 2009 as a result
of lower average cash and cash equivalent balances in fiscal 2009 and reduction
in effective interest rates on our investments.




Net
Loss from Discontinued Operations




Net loss
from discontinued operations is comprised of two components.  Loss
from discontinued operations for the fiscal year ended March 31, 2008 was
$1,985,000, comprised of approximately $319,000 and $1,666,000 from Gish and
CDT, respectively.  Loss on sale of Gish and CDT for the fiscal year
ended March 31, 2008 was approximately $1,173,000 and $690,000,
respectively.




-28-




Income
Taxes




We did
not record a tax provision in either of the years ended March 31, 2009 and
2008.




As of
March 31, 2009, we had federal and state net operating loss carry forwards
available to offset future taxable income of approximately $17,743,000, expiring
between 2010 and 2029, and $7,912,000, expiring between 2010 and 2014,
respectively.  As of March 31, 2009, we had a capital loss carry
forward available to offset future taxable income of approximately $8,750,000,
expiring in 2013.  As of March 31, 2009, we had federal and state
investment and research tax credit carryforwards available to offset future
taxable income of approximately $86,000, expiring between 2010 and 2029, and
$161,000, expiring between 2010 and 2014, respectively,




Liquidity
and Capital Resources




On July
6, 2007, we completed the sale of Gish Biomedical, Inc. (“Gish”), our former
wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007.  The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash.  The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.




Pursuant
to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price
was placed in escrow as a reserve for any indemnity claims by Medos under the
Gish Purchase Agreement, as described above.  Under the terms of the
escrow agreement, our right to receive the escrow funds was contingent upon the
realization of the Gish accounts receivable and inventory that were transferred
to Medos for one year from the sale date.  The $1.0 million of
proceeds paid into escrow is not included in the calculation of the loss on sale
of Gish of $1.2 million.




As we
previously reported, in late 2007 we were advised by Medos that Medos might
assert certain indemnity claims against us relating to certain representations
and warranties up to the full amount of the $1.0 million escrow balance
established under the Gish Purchase Agreement.  In addition, Medos
advised us that it might seek a purchase price adjustment for the period March
31, 2007 through July 6, 2007, as provided in the Gish Purchase
Agreement.  We advised Medos that we believed any such claims, if
made, would be without merit.




On June
30, 2008, Medos formally notified us of its claims in accordance with the
procedure set forth in the Gish Purchase Agreement.  Medos’ claims
aggregate approximately $4.3 million and include allegations that (i) we
breached certain representations and warranties in the Gish Purchase Agreement,
including certain representations and warranties concerning the financial
condition of Gish as of March 31, 2007, (ii) we are liable for the severance
obligations related to two key Gish employees terminated by Medos subsequent to
the acquisition date, and (iii) Medos is entitled to a purchase price adjustment
for the period between March 31, 2007 and July 6, 2007.




We have
refuted the claims asserted by Medos and the facts and circumstances upon which
they are based and intend to vigorously pursue the disposition of those
claims.  In that regard, on July 25, 2008, as provided in the Gish
Purchase Agreement, we initiated an arbitration proceeding with the American
Arbitration Association in New York, New York, and served its arbitration demand
upon Medos that same day.  The arbitration demand seeks a declaration
that the amounts claimed by Medos are without merit and
unsupportable.  Medos has not yet responded to the demand, but has
agreed to participate in non-binding mediation in accordance with the rules of
the American Arbitration Association.  Although we deny the claims
asserted by Medos, an adverse finding of liability could have a material impact
on us.  We have reviewed the assertions by Medos, and have concluded
that a loss resulting from these asserted claims is not probable as of March 31,
2009.




Under the
terms of the escrow agreement, our initiation of the arbitration proceeding
disputing all of Medos’ claims precluded Medos from taking further action
seeking release of the escrow funds.  Notwithstanding this contractual
prohibition, subsequent to our service of the arbitration demand on Medos on
July 25, 2008 and without our knowledge, Medos obtained the release of the $1.0
million escrow amount and the escrow agent.  We notified Medos that
its unauthorized actions resulting in the release of the escrowed amount is in
violation of the escrow agreement.  Furthermore, we notified Medos
that the failure to return the escrowed amount to the escrow agent could result
in our taking action against Medos for this violation.




-29-




In
connection with the sale of Gish, we entered into a non-exclusive, royalty-free
license (the “License Agreement”) with Gish which provides for our use of
certain patented technology of Gish in our products and services, provided such
products and services do not compete with the cardiac bypass product development
and manufacturing businesses of Gish or Medos.  We have determined the
License Agreement has de minimus value and, accordingly, no value has been
ascribed to the license.




After
transaction expenses and certain post-closing adjustments, we realized
approximately $6.1 million in proceeds from the sale of Gish.  Under
the terms of the Gish Purchase Agreement, we owe Medos $149,000 as a result of
the change in stockholder’s equity of Gish from March 31, 2007 to June 30,
2007.  This amount was recorded as a current liability as of June 30,
2007, has not been paid to Medos, and is reflected as a current liability of
discontinued operations as of March 31, 2009.  This adjustment is
included in the calculation of the loss on sale of Gish through March 31,
2008.  Under the terms of the Gish Purchase Agreement, we retained
Gish’s cash assets of approximately $2.0 million as of June 29,
2007.




On March
28, 2008, we completed the sale of Catheter and Disposables Technology, Inc.
(“CDT“), our former wholly-owned subsidiary engaged in contract manufacturing
and the provision of engineering services, pursuant to a stock purchase
agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc.
(“Tacpro”) on March 28, 2008.  The CDT Purchase Agreement provided for
the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in
cash.  The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets.  The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits.  Pursuant to the terms of the CDT Purchase
Agreement, we placed $240,000 in escrow as a reserve for our indemnification
obligations to Tacpro if any, as described above.  The $240,000 of
proceeds held in escrow as of March 31, 2009 was not included in the calculation
of the loss on sale of CDT of $690,000 recognized during the year ended March
31, 2008.




After
transaction expenses, which included a non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised us, and
certain post-closing adjustments, we realized approximately $696,000 in cash
proceeds from the sale of CDT.




In March
2009, Tacpro presented certain additional post-closing claims in the approximate
amount of $17,000 related to uncollectible accounts receivable and unused
inventory to which we were in agreement.  Net of the post-closing
claims, the remaining $224,000 of cash in the escrow account was released to us
in April 2009 and the escrow account was closed.  Upon receipt of the
escrow cash, we paid approximately $11,000 in additional transaction costs to a
former employee.  The escrow amount, net of post-closing claims and
additional transaction costs will be reported as an additional gain on the sale
of CDT in the Company’s quarterly report for the period ending June 30,
2009.




As of
March 31, 2009, we had cash and cash equivalents of $3,873,000, a decrease of
$2,860,000 when compared with a balance of $6,733,000 as of March 31,
2008.




During
the year ended March 31, 2009, we had net cash outflows of $2,723,000 from
operating activities of continuing operations as compared to net cash outflows
of continuing operations of $739,000 for the comparable prior year
period.  The net cash outflows used in operating activities of
continuing operations during the year ended March 31, 2009 is primarily a result
of the net loss from continuing operations, increases in accounts receivable
representing royalties receivable, inventory build-up related to a pending order
for a significant customer, and a reduction in accounts payable and accrued
expenses.  These cash outflows were offset by non-cash items related
to depreciation and amortization, write-off related to impairment of goodwill
and stock-based compensation charges.




During
the year ended March 31, 2009, we had net cash outflows of $144,000 from
investing activities of continuing operations as compared to net cash inflows of
$5,745,000 for the comparable prior year period.  Net cash outflows
for the year ended March 31, 2009 is primarily a result of equipment
purchases; offset in part by the reduction of other assets, which included an
equipment deposit in the prior year.  The significant net cash inflows
for the year ended March 31, 2008 is a result of the sale of Gish and CDT which
provided cash of $6,747,000 net of transaction costs.




-30-




During
the year ended March 31, 2008, there were 1,035,663 options exercised for cash
proceeds of approximately $947,000 pursuant to the 1996 and the 2003 Option
Plans.  There were no options exercised during the year ended March
31, 2009.  We issued 138,086 shares of our common stock to employees
pursuant to our Employee Stock Purchase Plan and received cash proceeds of
approximately $37,000.  In addition, we repurchased 76,692 shares of
our common stock in an open market purchase at a cost of approximately
$30,000.




At March
31, 2009, we had no debt.  We believe our March 31, 2009 cash position
will be sufficient to fund our working capital and research and development
activities for at least the next twelve months.




Our
future growth may depend on our ability to raise capital for acquisitions, to
support research and development activities for modification of existing
biomaterials and development of new biomaterials, including advanced
applications for our biomaterials, and to market and sell our advanced
biomaterials.  In addition, we may require substantial funds for
further research and development for our synthetic coronary artery bypass graft,
future pre-clinical and clinical trials, regulatory approvals, establishment of
commercial-scale manufacturing capabilities, and the marketing of our
products.  Our capital requirements depend on numerous factors,
including but not limited to, the progress of our research and development
programs, including costs for clinical trials; the cost of filing, prosecuting,
defending and enforcing any intellectual property rights; competing
technological and market developments; changes in our development of
commercialization activities and arrangements; and the purchase of additional
facilities and capital equipment.




With
respect to the Exchange and Venture Agreement with CorNova, we have no
additional obligation to contribute assets or additional common stock nor to
assume any liabilities or to fund any losses that CorNova may
incur.




Off-Balance
Sheet Arrangements




As of
March 31, 2009, we did not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.







Item
      8.
            Financial
      Statements and Supplementary Data




The
following documents are filed as part of this report on Form 10-K




PageReport
      of Caturano and Company, P.C., Independent Registered Public Accounting
      Firm
            
            F-1Report
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm
            
            F-2Consolidated
      Balance Sheets at March 31, 2009 and 2008
            
            F-3Consolidated
      Statements of Operations for the years ended March 31, 2009 and
      2008
            
            F-4Consolidated
      Statements of Stockholders’ Equity for the years ended March 31, 2009 and
      2008
            
            F-5Consolidated
      Statements of Cash Flows for the years ended March 31, 2009 and
      2008
            
            F-6Notes
      to Consolidated Financial Statements
            
            F-7 to
      22







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




Not
Applicable.




Item 9A.
            Controls
      and Procedures




The
certificates of our Chief Executive Officer and Acting Chief Financial Officer
attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K include,
in paragraph 4 of such certifications, information concerning our disclosure
controls and procedures, and internal control over financial
reporting.  Such certifications should be read in conjunction with the
information contained in this Item 9A for a more complete understanding of the
matters covered by such certifications.




Disclosure
      Controls and Procedures.




Our
management, with the participation of our Chief Executive Officer and Acting
Chief Financial Officer, evaluated the effectiveness of our disclosure controls
and procedures as of March 31, 2009.  The term “disclosure controls
and procedures”, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”), means controls and other
procedures of a company that are designed to ensure that




-31-




information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported, within the time
periods specified in the SEC’s rules and forms.  Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its chief executive officer and chief
financial officer, as appropriate, to allow timely decisions to be made
regarding required disclosure.  It should be noted that any system of
controls and procedures, however well designed and operated, can provide only
reasonable, and not absolute, assurance that the objectives of the system are
met and that management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.  Based
on the evaluation of our disclosure controls and procedures as of March 31,
2009, our Chief Executive Officer and Acting Chief Financial Officer concluded
that, as of such date, our disclosure controls and procedures were effective at
the reasonable assurance level.




Management’s
Annual Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934).  A company’s internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.  Internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could have a
material effect on the interim or annual consolidated financial
statements.  Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.




Our
management, with the participation of our Chief Executive Officer and Acting
Chief Financial Officer, conducted an evaluation of the effectiveness of our
internal control over financial reporting as of March 31, 2009 based on the
framework in Internal Control
Integrated Frameworkissued by the Committee of Sponsoring Organizations
of the Treadway Commission.  Based on this assessment, our management
concluded that, as of March 31, 2009, our internal control over financial
reporting was effective.




This
annual report on Form 10-K does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting.  Management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.




Changes
in Internal Control Over Financial Reporting




There
were no changes to our internal control over financial reporting during the
fourth quarter ended March 31, 2009 that has materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.




Item 9B.
            Other
      Information




None.




-32-




PART III







Item 10.
            Directors,
      Executive Officers and Corporate
Governance




Our Board
of Directors is currently comprised of five directors.  Our directors
and executive officers, their ages and positions, as well as certain
biographical information of these individuals, are set forth
below.  The ages of the individuals are provided as of June 15,
2009.


Name
              
              Age
              
              PositionMichael
      F. Adams
              
              52
              
              President,
      Chief Executive Officer and DirectorDavid
      Volpe
              
              54
              
              Acting
      Chief Financial OfficerAndrew
      M. Reed, Ph.D.
              
              56
              
              Vice
      President of Science & TechnologyWilliam
      J. O'Neill, Jr.
              
              67
              
              Chairman
      of the Board of DirectorsMichael
      L. Barretti
              
              64
              
              DirectorAnthony
      J. Armini, Ph.D.
              
              71
              
              DirectorJeremiah
      E. Dorsey
              
              64
              
              Director
  There are
no family relationships between any director, executive officer, or person
nominated or chosen to become a director or executive
officer.




Mr.
Michael F. Adams has been our director since May 1999.  Mr. Adams was
appointed as our President & Chief Executive Officer on August 7,
2006.  From April 1, 2006 until August 7, 2006, Mr. Adams was the
Company’s Vice President of Regulatory Affairs and Business
Development.  Prior to April 2006, Mr. Adams was the Vice President of
PLC Systems, Inc.  Prior to joining PLC Systems in September 2000, Mr.
Adams was Vice President of Assurance Medical, Inc.  Prior to joining
Assurance Medical in June 1999, Mr. Adams was the Chief Operating Officer and
Vice President of Regulatory Affairs and Quality Assurance of CardioTech from
June 1998 to May 1999.  From November 1994 through June 1998, Mr.
Adams served as the Vice President of Cytyc Corporation.  Mr. Adams
received a BS from the University of Massachusetts.




David
Volpe was appointed as our Acting Chief Financial Officer on March 3,
2009.  Mr. Volpe has over 22 years of experience in executive level
financial management, business development, merger and acquisition, strategic
turnaround, investor relations, and private and public
financing.  From April 2003 through the date of his appointment as
Acting Chief Financial Officer, Mr. Volpe was the strategic and financial
advisor to our Chief Executive Officer and former Chief Financial Officer,
operating through Carmel Lake Ventures, LLC, Mr. Volpe’s privately-owned
consulting firm.  From July 1999 through April 2003, Mr. Volpe was our
Acting Chief Financial Officer.  In addition, Mr. Volpe held the
position of Vice President of Strategic Development from April 2003 through
December 2008 and Acting Chief Financial Officer from May 2001 through February
2003 for Implant Sciences Corporation, a publicly-held technology company
formerly listed on the NYSE Amex.  From December 2005 through March
2009, Mr. Volpe served on  the American Stock Exchange Listed Company
Advisory Council.  From 1986 through 1991, Mr. Volpe was an Audit
Manager at Price Waterhouse focusing his efforts on emerging growth,
technology-based companies.  Mr. Volpe holds BS degrees in geology and
accounting from the California State Universities at Northridge and Bakersfield,
respectively.




Dr.
Andrew M. Reed has been our Vice President of Science & Technology since
April 2006.  Prior to April 2006, Dr. Reed was Executive Vice
President of CCS Medical a direct to patient provider of diabetic, respiratory,
ostomy and wound care supplies.  From 1999 to 2005 he was Chief
Operating Officer and Vice President of Gericare Providers, Inc. a supplier of
wound care products for patient in-home use.  He was President of
Innovative Technologies (US), Inc. the US Division of a UK based private label
manufacturer of proprietary wound care products from 1997 through
1999.  From 1990 to 1997, Dr. Reed held management positions of
increasing responsibilities at PolyMedica Corporation, a direct to consumer
diabetic, pharmaceutical and wound care product manufacturer and provider,
including Vice President of Research and Development and President of PolyMedica
Wound Care Company.  Dr. Reed was responsible for research and
development and manufacturing functions.  Earlier in his career, Dr.
Reed was a Senior Research Chemist at Millipore Corporation.  Dr. Reed
is the holder of several U.S. Patents, primarily in the area of polyurethane and
wound dressing technologies, and is the co-inventor of
ChronoFlex.  Dr. Reed received his Ph.D. in Polymer Chemistry from the
University of Liverpool, UK.  He is the author and co-author of
numerous published scientific papers.




-33-


Mr.
William J. O’Neill, Jr. has been our director since May 2004 and was appointed
as Chairman on August 7, 2006.  Mr. O’Neill is currently the Dean of
the Frank Sawyer School of Management at Suffolk University in Boston,
Massachusetts.  Prior to this appointment, Mr. O’Neill spent thirty
years (1969-1999) with the Polaroid Corporation, where he held the positions of
Executive Vice President of the Corporation, President of Corporate Business
Development, and Chief Financial Officer.  He was also Senior
Financial Analyst at Ford Motor Company.  Mr. O’Neill was a Trustee at
the Dana Farber Cancer Institute, and is currently a member of the Massachusetts
Bar Association, a member of the Board of Directors of the Greater Boston
Chamber of Commerce, and serves on the Board of Directors of Concord Camera and
EDGAR Online, Inc..  He earned a BA at Boston College in mathematics,
a MBA in finance from Wayne State University, and a JD from Suffolk University
Law School.




Mr.
Michael L. Barretti has been our director since January 1998.  Mr.
Barretti is the executive in residence and professor of marketing at Suffolk
University in Boston.  Mr. Barretti has been the President of Cool
Laser Optics, Inc., a company which commercializes optical technology specific
to the medical laser industry, since July 1996.  From September 1994
to July 1996, Mr. Barretti was Vice President of Marketing for Cynosure, Inc., a
manufacturer of medical and scientific lasers.  From June 1987 to
September 1994, Mr. Barretti was a principal and served as Chief Executive
Officer of NorthFleet Management Group, a marketing management firm serving the
international medical device industry.  From January 1991 to May 1994,
Mr. Barretti also acted as President of Derma-Lase, Inc., the U.S. subsidiary of
a Glasgow, Scotland supplier of solid-state laser technologies to the medical
field.  Mr. Barretti received his BA from St. Johns University and an
MBA from Suffolk University.




Dr.
Anthony J. Armini has been our director since August 2000.  Dr. Armini
was the President, Chief Executive Officer, and Chairman of the Board of
Directors of Implant Science Corporation from 1984 through 2007.  From
1972 to 1984, prior to founding Implant Sciences, Dr. Armini was Executive Vice
President at Spire Corporation.  From 1967 to 1972, Dr. Armini was a
Senior Scientist at McDonnell Douglas Corporation.  Dr. Armini
received his Ph.D. in nuclear physics from the University of California, Los
Angeles in 1967.  Dr. Armini is the author of eleven patents, fifteen
patents pending and fourteen publications in the field of implant
technology.  Dr. Armini has over thirty years of experience working
with cyclotrons and linear accelerators, the production and characterization of
radioisotopes, and fifteen years experience with ion implantation in the medical
and semiconductor fields.




Mr.
Jeremiah E. Dorsey has been our director since May, 2004.  Mr. Dorsey
retired in 2002.  From 1992 to 2002, Mr. Dorsey was President and
Chief Operating Officer of The West Company (Lionville, PA), a leading supplier
of components to the pharmaceutical, medical device and dental
businesses.  From 1990 to 1992, Mr. Dorsey was President and Chief
Executive Officer of Foster Medical (Waltham, MA), a supplier of hospital
equipment.  From 1988 to 1990, he was President of Towles Housewares
Company (Newburyport, MA), and Vice President and Board Member of J&J Dental
Products Company (East Windsor, NJ), a world leader in composite materials,
dental amalgams, cleaning and polishing products.  Mr. Dorsey received
a BA from Assumption College and an MBA from Fairleigh Dickinson
University.




Section
16(a) Beneficial Ownership Reporting Compliance




Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers,
directors and persons who beneficially own more than 10% of a registered class
of our securities to file reports of ownership and changes in ownership with the
SEC.  Based solely on a review of copies of such forms submitted to
us, we believe that all persons subject to the requirements of Section 16(a)
filed such reports on a timely basis in fiscal 2009.




Code
of Conduct and Ethics




We have
adopted a code of ethics that applies to its chief executive officer and acting
chief financial officer.  The code of ethics is posted on our website
at www.advbiomaterials.com.  We
intend to include on our website any amendments to, or waivers from, a provision
of our code of ethics that applies to our chief executive officer or acting
chief financial officer that relates to any element of the code of ethics
definition enumerated in Item 406 of Regulation S-K.




Stockholder
Communications with the Board of Directors




Pursuant
to procedures set forth in our bylaws, our nominating committee will consider
stockholder nominations for directors if we receive timely written notice, in
proper form, of the intent to make a nomination at a meeting of
stockholders.  To be timely, the notice must be received within the
time frame identified in our bylaws, discussed below.  To be in proper
form, the notice must, among other matters, include each nominee’s written
consent to serve as a director if elected, a description of all arrangements or
understandings between the nominating stockholder and each nominee and
information about the nominating stockholder and each
nominee.  These




-34-




requirements
are detailed in our bylaws, which were attached as an exhibit to our Report on
Form 10 filed on May 10, 1996.  A copy of our bylaws will be provided
upon written request.




Stockholder
proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) for inclusion in our proxy materials for
the 2010 Annual Meeting of Stockholders must be received by the Clerk of the
Company at our principal offices no later than May 5, 2010.  We have
received no stockholder nominations or proposals for the 2009 Annual
Meeting.




Our
bylaws require advance notice of any proposal by a stockholder intended to be
presented at an annual meeting that is not included in our notice of annual
meeting and proxy statement because it was not timely submitted under the
preceding paragraph, or made by or at the direction of any member of the board
of directors, including any proposal for the nomination for election as a
director.  To be considered for such presentation at the annual
meeting of our stockholders to be held on or about October 17, 2010, any such
stockholder proposal must be received by us no earlier than July 19, 2010 and no
later than August 18, 2010, and discretionary authority may be used if untimely
submitted.




The Board
will give appropriate attention to written communications that are submitted by
stockholders, and will respond if and as appropriate.  Stockholders
who wish to send communications on any topic to the Board should address such
communications to Board of Directors c/o Acting Chief Financial Officer,
AdvanSource Biomaterials Corporation, 229 Andover Street, Wilmington, MA
01887.




Audit
Committee




The Audit
Committee was established in accordance with Section 3(a)(58)(A) of the Exchange
Act.  The Board has designated from among its members Mr. William J.
O’Neill, Jr., Dr. Anthony J. Armini, and Mr. Jeremiah E. Dorsey as the members
of the Audit Committee.  The primary functions of the Audit Committee
are to represent and assist the Board of Directors with the oversight
of:




·
            appointing,
      approving the compensation of, and assessing the independence of our
      independent auditors;




·
            overseeing
      the work of our independent auditors, including through the receipt and
      consideration of certain reports from the independent
      auditors;




·
            reviewing
      and discussing with management and the independent auditors our annual and
      quarterly financial statements and related
  disclosures;




·
            coordinating
      the Board of Director’s oversight of our internal control over financial
      reporting, disclosure controls and procedures and code of conduct and
      ethics;




·
            establishing
      procedures for the receipt and retention of accounting related complaints
      and concerns;




·
            meeting
      independently with our internal auditing staff, independent auditors and
      management; and




·
            preparing
      the audit committee report required by SEC
  rules.




The Board
of Directors has determined that Mr. O’Neill is an “audit committee financial
expert” as defined in Item 407(d)(5)(ii) of Regulation S-K and is independent
under Section 121A and 121B of the NYSE Amex Listing Guide.  Mr.
O’Neill also acts as the Chairman of the Audit Committee.




During
the fiscal year ended March 31, 2009, the Audit Committee met five (5)
times.  The responsibilities of the Audit Committee are set forth in
its written charter, which is posted on our website at www.advbiomaterials.com
under the “Investors – Corporate Governance” section.




Compensation
Committee




The
Compensation Committee consists of Michael L. Barretti, chairman, Jeremiah E.
Dorsey and Anthony J. Armini.  The Compensation Committee is
responsible for implementing our compensation philosophies and objectives,
establishing remuneration levels for our executive officers and implementing our
incentive programs, including our equity compensation plans.  The
Board of Directors has determined that each of the members of the Compensation
Committee is an “independent” director within the meaning of the NYSE Amex
listing standards and meets the independence requirements of Section 162(m) of
the Internal Revenue Code, as amended.  The Compensation Committee met
one time in fiscal 2009.




-35-




Compensation
is paid to our executive officers in both fixed and discretionary amounts which
are established by the Board of Directors based on existing contractual
agreements and the determinations of the Compensation
Committee.  Pursuant to its charter, the responsibilities of the
Compensation Committee are (i) to assist the Board of Directors in discharging
its responsibilities in respect of compensation of our senior executive
officers; (ii) review and analyze the appropriateness and adequacy of our
annual, periodic or long-term incentive compensation programs and other benefit
plans and administer those compensation programs and benefit plans; and (iii)
review and recommend compensation for directors, consultants and
advisors.  Except for the delegation of authority to the Chief
Executive Officer to grant certain de minimus equity compensation awards to our
non-executive employees, the Compensation Committee has not delegated any of its
responsibilities to any other person.




Item 11.
            Executive
      Compensation




Summary
Compensation Table




The
following table provides information concerning compensation for services
rendered to us in all capacities for the fiscal years ended March 31, 2009 and
2008 by our Chief Executive Officer, our other most highly compensated
executive officer, and a former executive officer whose total compensation
exceeded $100,000 in fiscal 2009.


Name
      and Principal Position
              
              Fiscal
      Year
              
              Salary($)
              
              
              Bonus($)
              
              
              Option
      Awards($)
                (1)
              
              
              All
      Other Compensation($)
                (2)
              
              
              Total($)Named
      Executive OfficersMichael
      F. Adams
                President & CEO
              
              2009
              
              $
              292,000
              
              
              $
              36,000
              
              
              $
              -
              
              
              $
              17,000
              
              
              (3
              )
              
              $
              345,0002008
              
              $
              279,000
              
              
              $
              -
              
              
              $
              109,000
              
              
              $
              17,000
              
              
              (3
              )
              
              $
              405,000Andrew
      M. Reed, Ph.D.
                Vice President of Science &
    Technology
              
              2009
              
              $
              183,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              2,000
              
              
              
              
              
              $
              185,0002008
              
              $
              172,000
              
              
              $
              -
              
              
              $
              13,000
              
              
              $
              2,000
              
              
              
              
              
              $
              187,000Former
      Executive OfficerEric
      G. Walters (4)
                Former Vice President & CFO
              
              2009
              
              $
              196,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              14,000
              
              
              (5
              )
              
              $
              210,0002008
              
              $
              190,000
              
              
              $
              -
              
              
              $
              19,000
              
              
              $
              15,000
              
              
              (5
              )
              
              $
              224,000


(1)
            The
      amount reported in this column for the Named Executive Officer represents
      the dollar amount recognized for financial statement reporting purposes in
      fiscal 2008, determined in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Compensation.”  See Note A of Notes to Consolidated
      Financial Statements set forth in our Annual Report on Form 10-K for
      fiscal year 2008 for the assumptions used in determining the value of such
      awards.




(2)
            All
      other compensation includes, but is not limited to, premiums paid by us
      for disability and group term life insurance for all named executive
      officers and a former executive officer, and consulting fees paid to our
      Acting Chief Financial Officer.




(3)
            All
      other compensation of Mr. Adams is composed of approximately $2,000 in
      premiums paid by us for disability and group term insurance and personal
      use of leased vehicles in the approximate amount of $15,000 for each of
      the years ended March 31, 2009 and 2008,
  respectively.




(4)
            All
      other compensation of Mr. Walters is composed of $2,000 and $3,000 in
      premiums paid by us for disability and group term insurance and personal
      use of leased vehicles in the approximate amount of $12,000 for each of
      the years ended March 31, 2009 and 2008,
  respectively.




(5)
            We
      entered into a Separation Agreement and General Release (the “Separation
      Agreement”) with Mr. Walters, our former Vice President and Chief
      Financial Officer, on February 28, 2009 (the “Separation
      Date”).  Under the terms of the Separation Agreement, which
      supersedes the previous employment agreement entered into on April 3,
      2006, and amended on July 10, 2007, and beginning on the Separation Date,
      Mr. Walters will: (i) receive a severance payment of approximately
      $129,000 to be paid over 34 weeks on our regularly scheduled paydays, and
      (ii) be eligible for COBRA health benefits, which premiums will be paid by
      Mr. Walters and us for a period of 34 weeks in accordance with our health
      benefit contribution policies.




-36-




Employment
Agreements; Change in Control and Severance Provisions




Terms
of Employment Agreement with Named Executive Officer




We
entered into an employment agreement with Michael F. Adams on September 13,
2006, effective August 7, 2006 (the “Adams Agreement”).




The Adams
Agreement provides for Mr. Adams to serve as our President & Chief Executive
Officer.  Pursuant to the terms of the Adams Agreement, as amended on
July 10, 2007, Mr. Adams is to receive an annual base salary of $290,000,
effective April 1, 2007.  Mr. Adams’ salary will be reviewed annually
by the Board.  Additionally, Mr. Adams may also be entitled to receive
an annual bonus payment in an amount, if any, to be determined by the
Compensation Committee of the Board.




The term
of the Adams Agreement is set to expire on August 6, 2008.  After such
time, the term of the Adams Agreement will be deemed to continue on a
month-to-month basis if not expressly extended while Mr. Adams remains employed
by us.  We and Mr. Adams each have the right to terminate the Adams
Agreement at any time, with or without cause, as defined below, upon thirty (30)
days prior written notice.  In the event that we terminate the
applicable Adams Agreement without cause, or Mr. Adams terminates his employment
for good reason following a change in control, as defined below, or we fail to
renew the Adams Agreement within two (2) years following the occurrence of a
change in control, Mr. Adams will be entitled to receive severance equal to 2.0
times his annual base salary at termination.  In such event, Mr. Adams
will be bound by a non-compete covenant for one (1) year following termination
of his employment.




Terms
of Separation Agreement with Former Executive Officer




We
entered into a Separation Agreement and General Release (the “Separation
Agreement”) with Mr. Walters, our former Vice President and Chief Financial
Officer, on February 28, 2009 (the “Separation Date”).  Under the
terms of the Separation Agreement and beginning on the Separation Date, Mr.
Walters will: (i) receive a severance payment of approximately $129,000 to be
paid over 34 weeks on our regularly scheduled paydays, and (ii) be eligible for
COBRA health benefits, which premiums will be paid by Mr. Walters and us for a
period of 34 weeks in accordance with our health benefit contribution
policies.  All other terms and conditions of Mr. Walters’ previous
agreements with us were terminated and/or superseded by the Separation
Agreement.




Employment
Agreement Definitions




Good Reason.“Good
Reason” shall mean, during the nine (9) month period following a Change in
Control, (1) a good faith determination by the named executive officer that as a
result of such Change in Control he is not able to discharge his duties
effectively or (2) without the named executive officer’s express written
consent, the occurrence of any of the following circumstances: (a) the
assignment to the named executive officer of any duties inconsistent (except in
the nature of a promotion) with the position in the Company that he held
immediately prior to the Change in Control or a substantial adverse alteration
in the nature or status of his position or responsibilities or the conditions of
his employment from those in effect immediately prior to the Change in Control;
(b) a reduction by the Company in the Base Salary as in effect on the date of
the Change in Control; (c) the Company’s requiring the named executive officer
to be based more than twenty-five (25) miles from the Company’s offices at which
he was principally employed immediately prior to the date of the Change in
Control except for required travel on the Company’s business to an extent
substantially consistent with his present business travel obligations; or (d)
the failure by the Company to continue in effect any material compensation or
benefit plan in which the named executive officer participates immediately prior
to the Change in Control unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the named executive officer’s participation
therein (or in such substitute or alterative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided and the level
of his participation relative to other participants, than existed at the time of
the Change in Control.  The named executive officer’s continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.




-37-




Change in
Control.  A “Change in Control” shall occur or be deemed to
have occurred only if any of the following events occur: (i) any “person,” as
such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), (other than any majority owned subsidiary
thereof, the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any trustee or other fiduciary of a trust
treated for federal income tax purposes as a grantor trust of which the Company
is the grantor, or any corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company) is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company’s then outstanding securities on any matter which could come
before its stockholders for approval; (ii) individuals who, as of the date
hereof, constitute the Board (the “Incumbent Board”) cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company’s stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; (iii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
“person” (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company’s then outstanding securities; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company’s assets.




Cause.  “Cause”
shall mean any of the following:




·
            misconduct
      of the named executive officer during the course of his employment which
      is materially injurious to the Company and which is brought to the
      attention of the named executive officer promptly after discovery by the
      Company, including but not limited to, theft or embezzlement from the
      Company, the intentional provision of services to competitors of the
      Company, or improper disclosure of proprietary information, but not
      including any act or failure to act by the named executive officer that he
      believed in good faith to be proper conduct not adverse to his duties
      hereunder;




·
            willful
      disregard or neglect by the named executive officer of his duties or of
      the Company’s interests that continues after being brought to the
      attention of the named executive
officer;




·
            unavailability,
      except as provided for in Section 3.5 of the Employment Agreement
      (Disability or Death), of the named executive officer to substantially
      perform the duties provided for
herein;




·
            conviction
      of a fraud or felony or any criminal offense involving dishonesty, breach
      of trust or moral turpitude during the named executive officer’s
      employment;




·
            the
      named executive officer’s breach of any of the material terms of the
      Employment Agreement (including the failure of the named executive officer
      to discharge his duties in a highly competent manner) or any other
      agreements executed in connection with the Employment
      Agreement.




-38-


Potential
Payments Upon Termination or Change in Control




The
following table describes the estimated incremental compensation upon (i)
termination by us of the Named Executive Officer without Cause, (ii) termination
for Good Reason by the Named Executive Officer following a Change in Control, or
(iii) failure by us to renew the Employment Agreement within two (2) years
following the occurrence of a Change in Control.  The estimated
incremental compensation assumes the triggering event had occurred on March 31,
2009.  Benefits generally available to all employees are not included
in the table.  The actual amount of compensation can only be
determined at the time of termination or change in control.


Named
      Executive Officer
              
              Base
      Salary Continuation
              
              
              COBRA
                Premiums
      (2)
              
              Life
      Insurance Premiums (3)
              
              OtherMichael
      F. Adams
              
              $
              580,000
              
              (1
              )
              
              $
              -
              
              
              $
              1,176
              
              
              $
              -


(1)
            Lump-sum
      payment equal to 2.0 times Mr. Adams’ base salary of $290,000 per annum,
      the base salary then in effect as of March 31,
  2009.




(2)
            Represents
      estimated out-of-pocket COBRA health insurance premium expenses incurred
      by the Named Executive Officer over the six (6) month period following
      termination to be reimbursed by us.  Currently, Mr. Adams does
      not subscribe to health benefits provided by
us.




(3)
            Represents
      estimated life insurance premiums to be paid by us on behalf of the Named
      Executive Officer after termination.  We shall continue in full
      force and effect, at our expense, the life insurance benefits provided in
      the Employment Agreement for a period of 12 months after termination of
      the Named Executive Officer’s employment or until the Named Executive
      Officer becomes employed, whichever occurs
  first.




-39-


Outstanding
Equity Awards at 2009 Fiscal Year-End




The
following table provides information regarding outstanding stock options held by
each Named Executive Officer as of the fiscal year ended March 31,
2009.




Named
      Executive Officers
            
            Number
      of Securities Underlying Unexercised Options Exercisable
            
            
            Number
      of Securities Underlying Unexercised Options Unexercisable
            
            
            Option
      Exercise Price ($)
            
            Option
      Expiration DateMichael
      F. Adams
            
            
            14,444
            
            
            
            -
            
            
            
            
            
            $
            0.75
            
            7/29/200975,000
            
            
            
            -
            
            
            
            
            
            
            0.50
            
            1/3/20109,500
            
            
            
            -
            
            
            
            
            
            
            0.50
            
            1/3/201019,625
            
            
            
            -
            
            
            
            
            
            
            2.06
            
            10/26/201025,000
            
            
            
            -
            
            
            
            
            
            
            1.10
            
            4/30/201125,522
            
            
            
            -
            
            
            
            
            
            
            1.61
            
            10/1/201127,373
            
            
            
            -
            
            
            
            
            
            
            1.59
            
            10/28/201210,000
            
            
            
            -
            
            
            
            
            
            
            5.40
            
            12/31/20132,500
            
            
            
            -
            
            
            
            
            
            
            5.40
            
            12/31/201330,000
            
            
            
            -
            
            
            
            
            
            
            2.60
            
            2/14/2015100,000
            
            
            
            -
            
            
            (1
            )
            
            
            1.23
            
            10/16/201750,000
            
            
            
            50,000
            
            
            (2
            )
            
            
            1.23
            
            10/16/2017388,964
            
            
            
            50,000Andrew
      M. Reed, Ph.D.
            
            
            40,000
            
            
            
            -
            
            
            
            
            
            
            1.10
            
            4/30/2011160,000
            
            
            
            -
            
            
            
            
            
            
            2.57
            
            3/20/201625,000
            
            
            
            25,000
            
            
            (2
            )
            
            
            1.23
            
            10/16/2017225,000
            
            
            
            25,000613,964
            
            
            
            75,000


(1)
            Options
      vested 100% on October 16, 2007, the date of
  grant.




(2)
            Options
      will vest at the rate of 25% on October 16, 2007, the date of grant, and
      25% on each annual anniversary thereafter ending on October 16,
      2010.




-40-


The
following table provides information regarding outstanding stock options held by
the Former Executive Officer as of the fiscal year ended March 31,
2009.




Former Executive
      Officers
              
              Number
      of Securities Underlying Unexercised Options Exercisable
              
              
              Number
      of Securities Underlying Unexercised Options Unexercisable
              
              
              Option
      Exercise Price ($)
              
              Option
      Expiration DateEric
      G. Walters
              
              
              200,000
              
              
              
              -
              
              (2
              )
              
              $
              2.32
              
              5/29/200937,500
              
              
              
              -
              
              (1)(2
              )
              
              $
              1.23
              
              5/29/2009237,500
              
              
              
              -


(1)
            Option
      will vest at the rate of 25% on October 16, 2007, the date of grant, and
      25% on each annual anniversary thereafter ending on October 16,
      2010.




(2)
            As
      a result of Mr. Walters’ separation as of February 28, 2009, all unvested
      options as of that date expired and all options unexercised and
      exercisable expire on May 29, 2009 if not earlier
    exercised.




2009
Option Exercises and Stock Vested




During
the year ended March 31, 2009, there were no exercises of option awards by any
of the Named Executive Officers.




Directors’
Compensation




The
following table sets forth the annual compensation of our non-employee directors
for fiscal 2009, which consisted of annual cash retainers, including amounts
associated with serving as Chairman of the Board and the chair and member of
Board committees, and equity awards in the form of options pursuant to the 2003
Stock Option Plan.  Employee directors do not receive any separate
compensation for their service on the Board.


Name
              
              Fees
      Earned or
                Paid
      in Cash($)
              
              
              Option
      Awards($)
                (1)
              
              
              All
      Other Compensation($)
              
              
              Total($)William
      J. O'Neill, Jr.
              
              $
              25,000
              
              
              $
              -
              
              
              
              
              
              $
              -
              
              
              $
              25,000Michael
      L. Barretti (2)
              
              
              15,000
              
              
              
              -
              
              
              
              
              
              
              50,000
              
              
              
              65,000Anthony
      J. Armini, Ph.D.
              
              
              20,000
              
              
              
              -
              
              
              
              
              
              
              -
              
              
              
              20,000Jeremiah
      E. Dorsey
              
              
              -
              
              
              
              4,000
              
              
              
              (3
              )
              
              
              -
              
              
              
              4,000


(1)
            The
      amount reported in this column for the non-employee director represents
      the dollar amount recognized for financial statement reporting purposes in
      fiscal 2008, determined in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Compensation.”  See Note A of Notes to Consolidated
      Financial Statements set forth in the Company’s Annual Report on Form 10-K
      for fiscal year 2008 for the assumptions used in determining the value of
      such awards.




(2)
            During
      fiscal 2007, the Company entered into a consulting agreement with Mr.
      Barretti for an annualized fee of $50,000.  During the fiscal
      year ended March 31, 2009, the Company recognized $50,000 of expense
      related to services incurred under this consulting
    agreement.




(3)
            Mr.
      Dorsey received 11,250 option awards pursuant to our 2003 Stock Option
      Plan between the dates of May 28, 2008 and August 7, 2008.  The
      option awards were valued using the Black-Scholes model with the following
      assumptions:  volatility 68.3% to 70.0%; risk-free interest rate
      of 3.1% to 3.7%; expected life of 5.3 to 5.4 years; and expected dividend
      yield of 0.00%.




-41-


Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters




Information
related to securities authorized for issuance under equity compensation plans as
of the end of fiscal 2009 is included in Item 5 of Part II of the Company’s
Annual Report of Form 10-K for the year ended March 31, 2009.




The
following table sets forth the beneficial ownership of shares of our common
stock, as of June 15, 2009, of (i) each person known by us to beneficially own
five percent (5%) or more of such shares; (ii) each of our directors and
executive officers named in the Summary Compensation Table; and (iii) all of our
current executive officers, directors, and significant employees as a
group.  Except as otherwise indicated, all shares are beneficially
owned, and the persons named as owners hold investment and voting
power.




Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934.  Under this rule, certain shares may be deemed
to be beneficially owned by more than one person, if, for example, persons share
the power to vote or the power to dispose of the shares.  In addition,
shares are deemed to be beneficially owned by a person if the person has the
right to acquire shares, for example, upon exercise of an option or warrant,
within sixty (60) days of June 15, 2009.  In computing the percentage
ownership of any person, the amount of shares is deemed to include the amount of
shares beneficially owned by such person, and only such person, by reason of
such acquisition rights.  As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person’s actual voting power at any particular date.




Name
      and Address of Beneficial Owner (1)
              
              Amount
      and Nature of Beneficial Ownership
              
              
              Percentage
      of Class (2)Executive
      Officers and DirectorsMichael
      F. Adams (3)
              
              
              389,347
              
              
              
              1.8
              %Michael
      L. Barretti (4)
              
              
              223,129
              
              
              
              1.1
              %Anthony
      J. Armini, Ph.D. (5)
              
              
              168,520
              
              
              
              *William
      J. O'Neill, Jr. (6)
              
              
              105,000
              
              
              
              *Jeremiah
      E. Dorsey (7)
              
              
              136,874
              
              
              
              *Andrew
      M. Reed, Ph.D. (8)
              
              
              225,000
              
              
              
              1.1
              %All
      executive officers and directors as a group (6 persons)
(9)
              
              
              1,247,870
              
              
              
              5.9
              %


*      Less
than 1%




(1)
            Unless
      otherwise indicated, the business address of the stockholders named in the
      table above is AdvanSource Biomaterials Corporation, Inc. 229 Andover
      Street, Wilmington, MA 01887.




(2)
            Based
      on 21,128,647 outstanding shares as of June 15,
  2009.




(3)
            Includes
      388,964 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(4)
            Includes
      206,964 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(5)
            Includes
      162,520 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(6)
            Includes
      105,000 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(7)
            Includes
      136,874 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(8)
            Includes
      225,000 shares of common stock, which may be purchased within sixty (60)
      days of June 15, 2009 upon the exercise of stock
  options.




(9)
            See
      footnotes (3) through (8).




-42-


Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence




During
fiscal 2007, we entered into a consulting agreement with Michael L. Barretti, a
member of the Board and Chairman of the Compensation Committee, for an
annualized fee of $50,000.  During each of the fiscal years ended
March 31, 2009 and 2008, we recognized $50,000 of expense related to services
incurred under this consulting agreement, which was recorded as selling, general
and administrative expense.




Transactions
with related parties, including, but not limited to, members of the Board of
Directors, are reviewed and approved by all members of the Board of
Directors.  In the event a transaction with a member of the Board is
contemplated, the Director having a beneficial interest in the transaction is
not allowed to participate in the decision-making and approval
process.  The policies and procedures surrounding the review, approval
or ratification of related party transactions are not in writing, nevertheless,
such reviews, approvals and ratifications of related party transactions are
documented in the minutes of the meetings of the Board of Directors and any such
transactions are committed to writing between the related party and us in an
executed engagement agreement.




Independence
of the Board of Directors




The Board
of Directors has adopted director independence guidelines that are consistent
with the definitions of “independence” as set forth in Section 301 of the
Sarbanes-Oxley Act of 2002, Rule 10A-3 under the Securities Exchange Act of 1934
and NYSE Amex listing standards.  In accordance with these guidelines,
the Board of Directors has reviewed and considered facts and circumstances
relevant to the independence of each of our directors and director nominees and
has determined that, each of our non-management directors qualifies as
“independent” under NYSE Amex listing standards.




The Board
of Directors has an Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee.  The membership of each, as
of June 15, 2009, is indicated in the table below.




Directors
              
              Audit
              
              
              Compensation
              
              
              Nominating/
                Corporate
      GovernanceWilliam
      J. O'Neill, Jr.
              
              ChairMichael
      L. Barretti
              
              
              
              
              Chair
              
              
              ChairAnthony
      J. Armini
              
              X
              
              
              XJeremiah
      E. Dorsey
              
              X
              
              
              X
              
              
              X
  The Board
of Directors has determined that all of the members of each committee are
independent as defined under the NYSE Amex rules, including, in the case of all
members of the Audit Committee, the independence requirements contemplated by
Rule 10A-3 under the Exchange Act.  In addition, all of the members of
the Audit Committee are independent as defined by the NYSE Amex rules that apply
to us until the date of the Annual Meeting and otherwise satisfy the NYSE Amex
eligibility requirements for Audit Committee membership.




-43-


Item
      14.
            Principal
      Accounting Fees and Services




The following is a summary of the
fees billed to us by Caturano and Company, P.C., our independent registered
public accounting firm; and Ernst & Young LLP, our predecessor independent
registered public accounting firm, for professional services rendered for the
fiscal years ended March 31, 2009 and 2008.  The Audit Committee
considered and discussed with Ernst & Young LLP the provision of non-audit
services to us and the compatibility of providing such services with maintaining
its independence as our auditor.




Fee
      Category
              
              Years
      Ended March 31,(in
      thousands)
              
              2009
              
              
              2008Audit
      fees - Ernst & Young LLP
              
              $
              126
              
              
              $
              245Audit
      fees - Caturano and Company, P.C.
              
              
              65
              
              
              
              -Audit-related
      fees
              
              
              -
              
              
              
              -Tax
      fees
              
              
              -
              
              
              
              -All
      other fees
              
              
              -
              
              
              
              -Total
      fees
              
              $
              191
              
              
              $
              245


Audit Fees.This
category consists of fees billed for professional services rendered for the
audit of our annual financial statements and review of financial statements
included in our quarterly reports and other professional services provided in
connection with regulatory filings.




Audit-Related
Fees.This category consists of fees billed for assurance and
related services that related to the performance of the audit or review of our
financial statements and are not otherwise reported under “Audit
Fees”.




Tax Fees.This
category consists of fees billed for professional services for tax compliance,
tax advice and tax planning.  These services include assistance
regarding federal and state tax compliance and acquisitions.




Pre-Approval Policies and
Procedures.  The Audit Committee has the authority to approve
all audit and non-audit services that are to be performed by our independent
registered public accounting firm.  Generally, we may not engage our
independent registered public accounting firm to render audit or non-audit
services unless the service is specifically approved in advance by the Audit
Committee (or a properly delegated subcommittee thereof).




All Other
Fees.  This category consists of fees billed for professional
services other than those fees described above.









-44-


PART
IV




Item 15.
            Exhibits,
      Financial Statement Schedules




The
      following are filed as part of this Form
10-K:




(1)
            Financial
      Statments:  For a list of financial statements which are filed as
      part of this Form 10-K, see page 31.(2)
            Exhibits




Exhibit
              Number:
            
            Exhibit
      Title:2.1
            
            Agreement
      and plan of merger and reorganization by and among the Company, Gish
      Acquisition Corp. and Gish Biomedical, Inc., incorporated by reference to
      Annex A of the Company’s Registration Statement on Form S-4 filed on
      December 23, 2002.2.2
            
            Amendment
      No. 1 to Agreement and Plan of Merger and Reorganization by and among the
      Company, Gish Acquisition Corp. and Gish Biomedical Inc., incorporated by
      reference to Exhibit 2.2 to the Company’s Registration Statement on Form
      S-4 filed on January 16, 2003.3.1
            
            Certificate
      of Incorporation of the Company, filed with the Secretary of State of the
      State of Delaware on October 25, 2007 and effective as of October 26, 2007
      (Filed as Appendix C to the Company’s definitive proxy statement on
      Schedule 14A, filed on August 30, 2007, and incorporated herein by
      reference).3.2**
            
            Amendment
      No. 1 to Certificate of Incorporation of the Company, filed with the
      Secretary of State for the State of Delaware on October 15,
      2008.3.3
            
            Bylaws
      of the Company (Filed as Appendix D to the Company’s definitive proxy
      statement on Schedule 14A, filed on August 30, 2007, and incorporated
      herein by reference).3.4
            
            Amendment
      No. 1 to the Bylaws of the Company (Filed as exhibit 3.1 to the Company’s
      Current Report on Form 8-K, filed on December 21, 2007, and incorporated
      herein by reference).3.5
            
            Certificate
      of Designation of Series A Junior Participating Preferred Stock (Filed as
      exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on January
      29, 2008, and incorporated herein by reference).4.1
            
            Form
      of Warrant incorporated by reference to Exhibit 4.1 to the Company’s Form
      8-K filed on December 23, 2004.4.2
            
            Form
      of Placement Agent Warrant incorporated by reference to Exhibit 4.2 to the
      Company’s Form 8-K filed on December 23, 2004.4.3
            
            Form
      of Additional Investment Right incorporated by reference to Exhibit 4.3 to
      the Company’s Form 8-K filed on December 23, 2004.4.4
            
            Rights
      Agreement dated January 28, 2008 by and between the Company and American
      Stock Transfer & Trust Company (Filed as exhibit 4.1 to the Company’s
      Current Report on Form 8-K, filed on January 29, 2008, and incorporated
      herein by reference).4.5
            
            Form
      of Rights Certificate (Filed as exhibit 4.2 to the Company’s Current
      Report on Form 8-K, filed on January 29, 2008, and incorporated herein by
      reference).10.1
            
            Tax
      Matters Agreement between PMI and the Company, dated May 13, 1996, was
      filed as Exhibit 10.2 of the Form 10 and is incorporated herein by
      reference.10.2
            
            Amended
      and Restated License Agreement between PMI and the Company, dated May 13,
      1996, was filed as Exhibit 10.4 of the Form 10 and is incorporated herein
      by reference.10.3
            
            The
      Company’s 1996 Employee, Director and Consultant Stock Option Plan, as
      amended, was filed as Exhibit 10.4 to the Company’s Form 10-K for the year
      ended March 31, 1998, filed on June 29, 1998, and in incorporated herein
      by reference.




-45-




Exhibit
              Number:
            
            Exhibit
      Title:10.4
            
            Employee
      Stock Purchase Plan of the Company (Filed as Appendix A to the Company’s
      Definitive Proxy Statement on Schedule 14A filed on August 30, 2007, and
      incorporated herein by reference).10.5
            
            First
      Amendment to the Employee Stock Purchase Plan of the Company (Filed as
      exhibit 10.2 to the Company Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2008, and incorporated herein by
      reference).10.6
            
            Second
      Amendment to the Employee Stock Purchase Plan of the Company (Filed as
      exhibit 10.3 to the Company Quarterly Report on Form 10-Q for the quarter
      ended September 30, 2008, and incorporated herein by
      reference).10.7
            
            Development,
      Supply and License Agreement between PMI and Bard Access Systems, dated
      November 11, 1992 (Filed as Exhibit 10.10 to the Company’s registration
      statement on Form 10, and incorporated herein by
    reference).10.8**
            
            Amendment,
      dated as of February 25, 2009, to Development, Supply and License
      Agreement between the Company and Bard Access Systems, Inc.
      dated November 11, 1992.10.9
            
            Lease
      Agreement between the Company and Cummings Properties Management, Inc.,
      dated June 26, 1998, was filed as Exhibit 10.11 to the Company’s Form 10-K
      for the year ended March 31, 1998, filed on June 29, 1998, and in
      incorporated herein by reference.10.10
            
            Note
      Purchase Agreement dated as of March 31, 1998 between the Company and
      Dresdner Kleinwort Benson Private Equity Partners, LP (“Kleinwort Benson”)
      was filed as Exhibit 99.1 to the Company’s Form 8-K filed with the
      Securities and Exchange Commission (the “Commission”) on April 15, 1998
      and is incorporated herein by reference.10.11
            
            Amendment,
      dated as of November 12, 1998, to Note Purchase Agreement and Registration
      Rights Agreement was filed as Exhibit 10.1 to the Company’s Form 10-Q for
      the quarter ended September 30, 1998, filed on November 16, 1998 and is
      incorporated herein by reference.10.12
            
            Form
      of Unit Purchase Agreement between the Company and certain individuals was
      filed as Exhibit 99.1 to the Company’s Form S-3, filed with the Securities
      and Exchange Commission on February 12, 1999, and is incorporated herein
      by reference.10.13
            
            Form
      of Warrant to Purchase Shares of Common Stock of the Company issued to
      certain individuals was filed as Exhibit 99.2 to the Company’s
      registration statement on  Form S-3, filed with the Securities
      and Exchange Commission on February 12, 1999, and is incorporated herein
      by reference.10.14
            
            First
      Amendment Between Duke Realty Limited Partnership and CDT Dated May 1,
      2004 Filed as an Exhibit to the Company’s Form 10-K for the year ended
      March 31, 2004.10.15
            
            Exchange
      and Venture Agreement by and among the Company, Implant Sciences, Inc. and
      CorNova, Inc. dated March 5, 2004 filed as an exhibit to the Company’s
      Form 10-KSB for the fiscal year ended March 31, 2004.10.16
            
            Plan
      and Agreement of Merger and Reorganization dated March 12, 2004 between
      the Company and DermaPhylyx, Inc., filed as an exhibit to the Company’s
      Form 10-KSB for the year ended March 31, 2004.10.17
            
            Asset
      Purchase Agreement, dated as of November 19, 2004 by and among the
      Company, CarTika Medical, Inc., Thomas C. Carlson and Sheila A. Carlson,
      incorporated by reference to Exhibit 99 to the Company’s Form 8-K filed on
      November 22, 2004.10.18
            
            Securities
      Purchase Agreement between Gryphon Master Fund, L.P., GSSF Master Fund,
      LP, Truk Opportunity Fund, LLC, Truk International Fund, LP, Meadowbrook
      Opportunity Fund LLC, Capital Ventures International, Iroquois Capital,
      L.P. and the Company dated as of December 21, 2004 and incorporated herein
      by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December
      23, 2004.




-46-




Exhibit
              Number:
            
            Exhibit
      Title:10.19
            
            Registration
      Rights Agreement between Gryphon Master Fund, L.P., GSSF Master Fund, LP,
      Truk Opportunity Fund, LLC, Truk International Fund, LP, Meadowbrook
      Opportunity Fund LLC, Capital Ventures International, Iroquois Capital,
      L.P. and the Company dated as of December 21, 2004 and incorporated herein
      by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December
      23, 2004.10.20
            
            Lock-Up
      Agreement between the Company and certain of its officers and directors
      dated as of December 21, 2004 and incorporated herein by reference to
      Exhibit 10.3 to the Company’s Form 8-K filed on December 23,
      2004.10.21
            
            Employment
      Agreement of Michael F. Adams, dated September 13, 2006, was filed as
      Exhibit 10.28 to the Company’s Form 8-K/A, filed on September 15, 2006,
      and incorporated herein by reference.10.22
            
            Letter
      of agreement by and between the Company and Michael F. Adams dated July
      10, 2007 (Filed as exhibit 10.1 to the Company’s Current Report on Form
      8-K , filed on July 13, 2007, and incorporated herein by
      reference).10.23
            
            Employment
      Agreement of Eric G. Walters, dated April 3, 2006, was filed as Exhibit
      10.27 to the Company’s Form 8-K/A, filed on April 4, 2006, and
      incorporated herein by reference.10.24
            
            CardioTech
      International, Inc. Nonqualified Stock Option Agreement by and between
      the
      Company and Eric G. Walters dated October 3, 2005  (Filed
      as exhibit 10.1 to the Company’s
      Registration Statement on Form S-8, File No. 333-149343, and incorporated
      herein by reference).10.25
            
            Letter
      of agreement by and between the Company and Eric G. Walters dated July 10,
      2007 (Filed as exhibit 10.2 to the Company’s Current Report on Form 8-K,
      filed on July 13, 2007, and incorporated herein by
    reference).10.26
            
            Separation
      Agreement and General Release between Eric Walters and the Company dated
      February 28, 2009 (Filed as exhibit 10.1 to the Company’s Current Report
      on Form 8-K, filed on March 4, 2009, and incorporated herein by
      reference).10.27
            
            CardioTech
      International, Inc. Nonqualified Stock Option Agreement by and between
      the
      Company and Dr. Andrew M. Reed dated March 20, 2006 (Filed as
      exhibit 10.1 to the Company’s
      Registration Statement on Form S-8, File No. 333-149342, and incorporated
      herein by reference).10.28
            
            Employment
      Agreement of Philip A. Beck, dated October 23, 2006 (Filed as exhibit
      10.32 to the Company’s Annual Report on Form 10-K for the year ended March
      31, 2008 and incorporated herein by reference)..10.29
            
            Letter Agreement
      betweenthe Companyand Philip A. Beck
      dated January 7, 2008(Filed as exhibit 10.33 to the Company’s
      Annual Report on Form 10-K for the year ended March 31, 2008 and
      incorporated herein by reference).10.30
            
            Stock
      Purchase Agreement by and between the Company
      and Medos Medizintechnik AG effective as of June 30, 2007 (Filed as
      exhibit 10.1 to the Company’s
      Current Report on Form 8-K , filed on July 10, 2007, and incorporated
      herein by reference).10.31
            
            License
      Agreement by and between the Company
      and Gish Biomedical, Inc. effective as of June 30, 2007 (Filed as exhibit
      10.2 to the
      Company’s Current Report on Form 8-K , filed on July 10, 2007, and
      incorporated herein by reference).10.32
            
            Stock Purchase
      Agreement dated March 28, 2008 by and amongthe Company, Catheter and
      Disposal Technology, Inc. and TACPRO, Inc(Filed as exhibit 10.38
      to the Company’s Annual Report on Form 10-K for the year ended March 31,
      2008 and incorporated herein by reference)..21**
            
            Subsidiaries
      of the Company23.1**
            
            Consent
      of Caturano and Company, P.C., Independent Registered Public Accounting
      Firm23.2**
            
            Consent
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm




-47-




Exhibit
              Number:
            
            Exhibit
      Title:31.1**
            
            Certification
      of Chief Executive Officer pursuant to Section 302 Sarbanes-Oxley Act of
      200231.2**
            
            Certification
      of Chief Financial Officer pursuant to Section 302 Sarbanes-Oxley Act of
      200232.1**
            
            Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2**
            
            Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
            
            Charter
      of the Compensation Committee of the Board of Directors, effective June 6,
      2006


________________




**
            Filed
      herewith




-48-


Report of
Independent Registered Public Accounting Firm









The Board
of Directors and Stockholders of AdvanSource Biomaterials
Corporation:




We have
audited the accompanying consolidated balance sheet of AdvanSource Biomaterials
Corporation as of March 31, 2009, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year ended March 31,
2009.  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 audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  The
Company is not required nor were we engaged to perform an audit of the
Company’s internal control over financial reporting.  Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over  financial
reporting.  Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audit provides
a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AdvanSource
Biomaterials Corporation as of March 31, 2009 and the consolidated results of
their operations and their cash flows for the year ended March 31, 2009, in
conformity with accounting principles generally accepted in the United States of
America.









/s/
      Caturano and Company, P.C.







Boston,
Massachusetts


June 30,
2009





F-1


Report of
Independent Registered Public Accounting Firm









The Board
of Directors and Stockholders of AdvanSource Biomaterials
Corporation:




We have
audited the accompanying consolidated balance sheets of AdvanSource Biomaterials
Corporation as of March 31, 2008, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the year ended March 31,
2008.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company’s internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control
over  financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.




In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of AdvanSource
Biomaterials Corporation at March 31, 2008 and the consolidated results of its
operations and its cash flows for the year ended March 31, 2008, in conformity
with U.S. generally accepted accounting principles.









/s/
      Ernst & Young LLP







Boston,
Massachusetts


June 24,
2008















































F-2





AdvanSource
      Biomaterials CorporationConsolidated
      Balance Sheets(In
      thousands, except share and per share amounts)March
      31,2009
              
              
              2008ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              3,873
              
              
              $
              6,733Accounts
      receivable-trade, net of allowance of $5 and
                $6
      as of March 31, 2009 and 2008, respectively
              
              
              37
              
              
              
              46Accounts
      receivable-other
              
              
              997
              
              
              
              480Inventories,
      net
              
              
              390
              
              
              
              149Prepaid
      expenses and other current assets
              
              
              108
              
              
              
              149Total
      current assets
              
              
              5,405
              
              
              
              7,557Property,
      plant and equipment, net
              
              
              3,295
              
              
              
              3,339Goodwill
              
              
              -
              
              
              
              487Other
      assets
              
              
              6
              
              
              
              178Total
      assets
              
              $
              8,706
              
              
              $
              11,561LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              124
              
              
              $
              370Accrued
      expenses
              
              
              470
              
              
              
              698Deferred
      revenue
              
              
              136
              
              
              
              148Current
      liabilities of discontinued operations
              
              
              149
              
              
              
              149Total
      current liabilities
              
              
              879
              
              
              
              1,365Commitments
      and contingencies:Stockholders'
      equity:Preferred
      stock; $.001 par value; 5,000,000 shares authorized;
                500,000
      shares issued and none outstanding as of
                March
      31, 2009 and 2008, respectively
              
              
              -
              
              
              
              -Common
      stock; $.001 par value; 50,000,000 shares authorized;
                21,205,399
      and 21,067,313 shares issued and 21,128,707 and
                21,067,313
      outstanding as of March 31, 2009 and 2008, respectively
              
              
              21
              
              
              
              21Additional
      paid-in capital
              
              
              38,744
              
              
              
              38,566Accumulated
      deficit
              
              
              (30,908
              )
              
              
              (28,391
              )7,857
              
              
              
              10,196Less:
      treasury stock, 76,692 shares at cost at March 31, 2009
              
              
              (30
              )
              
              
              -Total
      stockholders' equity
              
              
              7,827
              
              
              
              10,196Total
      liabilities and stockholders' equity
              
              $
              8,706
              
              
              $
              11,561





The
accompanying notes are an integral part of these consolidated financial
statements.


F-3


AdvanSource
      Biomaterials CorporationConsolidated
      Statements of Operations(In
      thousands, except per share amounts)For
      The Years Ended March 31,2009
              
              
              2008Revenues:Product
      sales
              
              $
              932
              
              
              $
              1,283License,
      royalty and development fees
              
              
              2,333
              
              
              
              1,9243,265
              
              
              
              3,207Cost
      of sales
              
              
              1,350
              
              
              
              1,257Gross
      profit
              
              
              1,915
              
              
              
              1,950Operating
      expenses:Research,
      development and regulatory
              
              
              760
              
              
              
              999Selling,
      general and administrative
              
              
              3,233
              
              
              
              3,408Impairment
      of goodwill
              
              
              487
              
              
              
              -4,480
              
              
              
              4,407Loss
      from operations
              
              
              (2,565
              )
              
              
              (2,457
              )Interest
      and other income and expense:Interest
      income
              
              
              48
              
              
              
              215Other
      income, net
              
              
              48
              
              
              
              215Net
      loss from continuing operations
              
              
              (2,517
              )
              
              
              (2,242
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (1,985
              )Loss
      on sale of Gish and CDT
              
              
              -
              
              
              
              (1,863
              )Net
      loss from discontinued operations
              
              
              -
              
              
              
              (3,848
              )Net
      loss
              
              $
              (2,517
              )
              
              $
              (6,090
              )Net
      loss per common share, basic and diluted:Net
      loss per share, continuing operations
              
              $
              (0.12
              )
              
              $
              (0.11
              )Net
      loss per share, discontinued operations
              
              
              -
              
              
              
              (0.19
              )Net
      loss per common share, basic and diluted
              
              $
              (0.12
              )
              
              $
              (0.30
              )Shares
      used in computing net loss per common
                share,
      basic and diluted
              
              
              21,093
              
              
              
              20,459









The
      accompanying notes are an integral part of these consolidated financial
      statements.




F-4


AdvanSource
      Biomaterials CorporationConsolidated
      Statements of Stockholders' EquityFor
      the Years Ended March 31, 2008 and 2009(In
      thousands)Common
      StockNumber
      of Shares
              
              Amount
              
              
              Additional Paid-
                in
      Capital
              
              
              Accumulated
                Deficit
              
              
              Treasury
      Stock
              
              
              Total
                Stockholders'
                EquityBalance
      at March 31, 2007
              
              
              20,031
              
              
              $
              20
              
              
              $
              37,128
              
              
              $
              (22,301
              )
              
              $
              -
              
              
              $
              14,847Issuance
      of common stock in connection with
                exercise
      of stock options
              
              
              1,036
              
              
              
              1
              
              
              
              946
              
              
              
              -
              
              
              
              -
              
              
              
              947Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              416
              
              
              
              -
              
              
              
              -
              
              
              
              416Fair
      value of warrants issued
              
              
              -
              
              
              
              -
              
              
              
              76
              
              
              
              -
              
              
              
              -
              
              
              
              76Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,090
              )
              
              
              -
              
              
              
              (6,090
              )Balance
      at March 31, 2008
              
              
              21,067
              
              
              
              21
              
              
              
              38,566
              
              
              
              (28,391
              )
              
              
              -
              
              
              
              10,196Issuance
      of common stock in connection with
                employee
      stock purchase plan
              
              
              138
              
              
              
              -
              
              
              
              37
              
              
              
              -
              
              
              
              -
              
              
              
              37Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              141
              
              
              
              -
              
              
              
              -
              
              
              
              141Purchase
      of common stock, at cost
              
              
              (76
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (30
              )
              
              
              (30
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,517
              )
              
              
              -
              
              
              
              (2,517
              )Balance
      at March 31, 2009
              
              
              21,129
              
              
              $
              21
              
              
              $
              38,744
              
              
              $
              (30,908
              )
              
              $
              (30
              )
              
              $
              7,827













































































The
accompanying notes are an integral part of these consolidated financial
statements.





F-5


AdvanSource
      Biomaterials CorporationConsolidated
      Statements of Cash Flows(In
      thousands)For
      The Years Ended March 31,2009
              
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (2,517
              )
              
              
              $
              (6,090
              )Less:  Net
      loss from discontinued operations
              
              
              -
              
              
              
              
              3,848Net
      loss from continuing operations
              
              
              (2,517
              )
              
              
              
              (2,242
              )Adjustments
      to reconcile net loss from continuing operations to net cash
      flows
                used
      in operating activities:Depreciation
      and amortization
              
              
              360
              
              
              
              
              340Provision
      for doubtful accounts
              
              
              -
              
              
              
              
              1Impairment
      of goodwill
              
              
              487
              
              
              
              
              -Fair
      value of warrants issued
              
              
              -
              
              
              
              
              76Stock-based
      compensation
              
              
              141
              
              
              
              
              391Changes
      in assets and liabilities:Accounts
      receivable-trade
              
              
              9
              
              
              
              
              95Accounts
      receivable-other
              
              
              (517
              )
              
              
              
              73Inventories
              
              
              (241
              )
              
              
              
              (40
              )Prepaid
      expenses and other current assets
              
              
              41
              
              
              
              
              (36
              )Accounts
      payable
              
              
              (246
              )
              
              
              
              117Accrued
      expenses
              
              
              (228
              )
              
              
              
              496Deferred
      revenue
              
              
              (12
              )
              
              
              
              (10
              )Net
      cash flows used in operating activities of continuing
      operations
              
              
              (2,723
              )
              
              
              
              (739
              )Net
      cash flows used in operating activities of discontinued
      operations
              
              
              -
              
              
              
              
              (2,913
              )Net
      cash flows used in operating activities
              
              
              (2,723
              )
              
              
              
              (3,652
              )Cash
      flows from investing activities:Purchases
      of property, plant and equipment
              
              
              (316
              )
              
              
              
              (825
              )Proceeds
      from sale of Gish and CDT, net of transaction costs
              
              
              -
              
              
              
              
              6,747Other
      assets
              
              
              172
              
              
              
              
              (177
              )Net
      cash flows provided by (used in) investing activities of continuing
      operations
              
              
              (144
              )
              
              
              
              5,745Net
      cash flows used in investing activities of discontinued
      operations
              
              
              -
              
              
              
              
              (373
              )Net
      cash flows provided by (used in) investing activities
              
              
              (144
              )
              
              
              
              5,372Cash
      flows from financing activities:Net
      proceeds from issuance of common stock
              
              
              37
              
              
              
              
              947Purchase
      of common stock
              
              
              (30
              )
              
              
              
              -Net
      cash flows provided by financing activities of continuing
      operations
              
              
              7
              
              
              
              
              947Net
      change in cash and cash equivalents
              
              
              (2,860
              )
              
              
              
              2,667Cash
      and cash equivalents at beginning of period
              
              
              6,733
              
              
              
              
              4,066Cash
      and cash equivalents at end of period
              
              $
              3,873
              
              
              
              $
              6,733Supplemental
      Disclosure of Cash Flow Information:Interest
      paid
              
              $
              -
              
              
              
              $
              4








The
accompanying notes are an integral part of these consolidated financial
statements.


F-6
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


A.
            Nature of
  Business




AdvanSource
Biomaterials Corporation, formerly CardioTech International, Inc. (“AdvanSource”
or the “Company”) develops advanced polymer materials which provide critical
characteristics in the design and development of medical devices.  The
Company’s biomaterials are used in devices that are designed for treating a
broad range of anatomical sites and disease states.  The Company’s
business model leverages its proprietary materials science technology and
manufacturing expertise in order to expand product sales and royalty and license
fee income.




The
Company’s technology, notably products such as ChronoFlex®, HydroMedTM, and
HydroThaneTM, which have been developed to overcome a wide range of design and
functional challenges such as the need for dimensional stability, ease of
manufacture and demanding physical properties to overcoming environmental stress
cracking and providing heightened lubricity for ease of
insertion.  The Company’s new product extensions customize proprietary
polymers for specific customer applications in a wide range of device
categories.




In June
2008, the Company reorganized its product line as part
of its re-branding effort and launched a new
website.  At the Company's 2008 annual meeting of
stockholders on October 15, 2008, the stockholders approved the change
of the Company's name from CardioTech International, Inc. to
AdvanSource Biomaterials Corporation to better reflect the
Company's strategic plan.  The Company filed a Certificate
of Amendment to the Certificate of Incorporation with the Secretary of
State of the State of Delaware effecting this name change effective October 15,
2008.




The
Company’s corporate, development and manufacturing operations are located in
Wilmington, Massachusetts.




Fiscal
Year




The
Company’s fiscal year ends on March 31.  References herein to fiscal
2009 and fiscal 2008 refer to the year ended March 31, 2009 and 2008,
respectively.




Liquidity




The
Company has experienced negative operating margins and negative cash flows from
operations and expects to continue to incur net losses in the foreseeable
future.  However, the Company had no debt as of March 31,
2009.  The Company believes that it has the resources to fund
projected operating requirements at least through the next twelve
months.  Future capital requirements will depend on many factors,
including the availability of credit, rate of revenue growth, the expansion of
selling and marketing and research and development activities, and the timing of
new product introductions and enhancements to existing products.  Any
potential future sale of equity or debt securities may result in dilution to the
Company’s stockholders, and the Company cannot be certain that additional public
or private financing will be available in amounts or on terms acceptable to the
Company, or at all.  If the Company is required to raise additional
financing, but are unable to obtain such financing, the Company may be required
to delay, reduce the scope of, or eliminate one or more aspects of our
operations or business development activities.




Sale
of Gish




On July
6, 2007, the Company completed the sale of Gish Biomedical, Inc.(“Gish”), its
former wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007.  The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash.  The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.




F-7
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Pursuant
to the terms of the Gish Purchase Agreement, $1.0 million of the purchase price
was placed in escrow as a reserve for any indemnity claims by Medos under the
Gish Purchase Agreement, as described above.  Under the terms of the
escrow agreement, the Company’s right to receive the escrow funds was contingent
upon the realization of the Gish accounts receivable and inventory that were
transferred to Medos for one year from the sale date.  The $1.0
million of proceeds paid into escrow is not included in the calculation of the
loss on sale of Gish of $1.2 million.




As the
Company previously reported, in late calendar 2007 we were advised by Medos that
Medos might assert certain indemnity claims against the Company relating to
certain representations and warranties up to the full amount of the $1.0 million
escrow balance established under the Gish Purchase Agreement.  In
addition, Medos advised the Company that it might seek a purchase price
adjustment for the period March 31, 2007 through July 6, 2007, as provided in
the Gish Purchase Agreement.  The Company advised Medos that it
believed any such claims, if made, would be without merit.




On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement.  Medos’ claims
aggregate approximately $4.3 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish employees terminated by Medos
subsequent to the acquisition date, and (iii) Medos is entitled to a purchase
price adjustment for the period between March 31, 2007 and July 6,
2007.




The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intend to vigorously pursue the disposition of
those claims.  In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day.  The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable.  Medos has not yet responded to the demand, but has
agreed to participate in non-binding mediation in accordance with the rules of
the American Arbitration Association.  Although the Company denies the
claims asserted by Medos, an adverse finding of liability could have a material
impact on the Company.  The Company has reviewed the assertions by
Medos, and has concluded that a loss resulting from these asserted claims is not
probable as of March 31, 2009.




Under the
terms of the escrow agreement, the Company’s initiation of the arbitration
proceeding disputing all of Medos’ claims precluded Medos from taking further
action seeking release of the escrow funds.  Notwithstanding this
contractual prohibition, subsequent to the Company’s service of the arbitration
demand on Medos on July 25, 2008 and without the Company’s knowledge, Medos
obtainedthe release
of the $1.0 million escrow amount.  The Company notified Medos that
its unauthorized actions resulting in the release of the escrowed amount is in
violation of the escrow agreement.  Furthermore, the Company notified
Medos that its failure to return the escrowed amount to the escrow agent could
result in the Company taking action against Medos for this
violation.




In
connection with the sale of Gish, the Company entered into a non-exclusive,
royalty-free license (the “License Agreement”) with Gish which provides for the
Company’s use of certain patented technology of Gish in the Company’s products
and services, provided such products and services do not compete with the
cardiac bypass product development and manufacturing businesses of Gish or
Medos.  The Company has determined the License Agreement has de
minimus value and, accordingly, no value has been ascribed to the
license.




After
transaction expenses and certain post-closing adjustments, the Company realized
approximately $6.1 million in proceeds from the sale of Gish.  Under
the terms of the Gish Purchase Agreement, the Company owes Medos $149,000 as a
result of the change in stockholder’s equity of Gish from March 31, 2007 to June
30, 2007.  This amount was recorded as a current liability as of June
30, 2007, has not been paid to Medos, and is reflected as a current liability of
discontinued operations as of March 31, 2009 and 2008.  This
adjustment is included in the calculation of the loss on sale of Gish recognized
during the year ended March 31, 2008.  Under the terms of the Gish
Purchase Agreement, the Company retained Gish’s cash assets of approximately
$2.0 million as of June 29, 2007.




F-8
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


Sale
of CDT




On March
28, 2008, the Company completed the sale of Catheter and Disposables Technology,
Inc. (“CDT“), the Company’s former wholly-owned subsidiary engaged in contract
manufacturing and the provision of engineering services, pursuant to a stock
purchase agreement (the “CDT Purchase Agreement”) entered into with TACPRO, Inc.
(“Tacpro”) on March 28, 2008.  The CDT Purchase Agreement provided for
the sale of CDT to Tacpro for a purchase price of approximately $1.2 million in
cash.  The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets.  The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits.  Pursuant to the terms of the CDT Purchase
Agreement, the Company placed $240,000 in escrow as a reserve for our
indemnification obligations to Tacpro if any, as described above.  The
$240,000 of proceeds held in escrow as of March 31, 2009 was not included in the
calculation of the loss on sale of CDT of $690,000 recognized during the year
ended March 31, 2008.




After
transaction expenses, which included a non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised the Company,
and certain post-closing adjustments, the Company realized approximately
$696,000 in cash proceeds from the sale of CDT.




In March
2009, Tacpro presented certain additional post-closing claims in the approximate
amount of $17,000 related to uncollectible accounts receivable and unused
inventory to which the Company was in agreement.  Net of the
post-closing claims, the remaining $224,000 of cash in the escrow account was
released to us in April 2009 and the escrow account was closed.  Upon
receipt of the escrow cash, we paid approximately $11,000 in additional
transaction costs to a former employee.  The escrow amount, net of
post-closing claims and additional transaction costs will be reported as an
additional gain on the sale of CDT in the Company’s quarterly report for the
period ending June 30, 2009.




CorNova




AdvanSource
has partnered with CorNova, Inc. (“CorNova”), a privately-held, development
stage company focused on the development of a next-generation drug-eluting
stent.  As of March 31, 2009, the Company owns common stock in CorNova
and has an approximate 13% ownership interest in the outstanding common and
preferred stock of CorNova (See Note M).




Summary
of Significant Accounting Policies:




The
accompanying consolidated financial statements include the accounts of the
Company reflecting its operations in Massachusetts.  As a result of
the July 6, 2007 sale of Gish and March 28, 2008 sale of CDT pursuant to the
respective purchase agreements, the Company’s financial statements reflect the
statement of operations of Gish and CDT as discontinued operations for the year
ended March 31, 2008.  Additionally, the following notes to the
consolidated financial statements include disclosures related to the Company’s
continuing operations unless specifically identified as disclosures related to
discontinued operations.




Accounting
Principles




The
consolidated financial statements and accompanying notes are prepared in
accordance with U.S. generally accepted accounting principles.




Basis
of Consolidation




The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary, CardioTech Realty, LLC.




F-9
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Use
of Accounting Estimates




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




Uncertainties




The
Company is subject to risks common to companies in the medical device industry
including, but not limited to, development of new technology innovations by
competitors of the Company, dependence on key personnel, protection of
proprietary technology, and compliance with FDA regulations.




Cash
and Cash Equivalents




Cash and
cash equivalents include cash on hand and short-term investments with maturities
of three months or less when acquired.  Cash and cash equivalents are
deposited at one area bank and exceed federally insured limits.




Revenue
Recognition




The
Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition
in Financial Statements.”  The Company recognizes revenue from
product sales upon shipment, provided that a purchase order has been received or
a contract has been executed, there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable and collection is deemed
reasonably assured.  If uncertainties regarding customer acceptance
exist, the Company recognizes revenue when those uncertainties are resolved and
title has been transferred to the customer.  Amounts collected or
billed prior to satisfying the above revenue recognition criteria are recorded
as deferred revenue.  The Company also receives license, royalty and
development fees for the use of its proprietary
biomaterials.  AdvanSource recognizes these fees as revenue in
accordance with the terms of the contracts.




Generally,
the customer specifies the delivery method and is responsible for delivery
costs.  However, in certain situations, the customer specifies the
delivery method and requests the Company pay the delivery costs and then invoice
the delivery costs to the customer or include an estimate of the delivery costs
in the price of the product.  Delivery costs billed to customers by
the Company for the years ended March 31, 2009 and 2008 of approximately $15,000
and $13,000, respectively, have been recorded as revenue, and the costs have
been recorded in cost of goods sold.




Research,
Development and Regulatory Expense




Research,
development and regulatory expenditures for the years ended March 31, 2009 and
2008 were $760,000 and $999,000, respectively, and consisted primarily of
salaries and related costs and are expensed as incurred.  The Company
has four full time research and development employees that work on a variety of
projects, including production support.


Reporting
Comprehensive Loss
  Statement
of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income
(Loss),” establishes standards for the reporting and display of
comprehensive income or loss and its components in the consolidated financial
statements.  Comprehensive income (loss) is the total of net income
(loss) and all other non owner changes in equity including such items as
unrealized holding gains (losses) on securities classified as
available-for-sale, foreign currency translation adjustments and minimum pension
liability adjustments.  For the years ended March 31, 2009 and 2008,
comprehensive loss has equaled net loss.
  F-10
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Basic
and Diluted Earnings Per Share




The
Company follows SFAS No. 128, “Earnings Per Share,” where
basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the
period.  Diluted earnings per share are based upon the weighted
average number of common shares outstanding during the period plus additional
weighted average common equivalent shares outstanding during the
period.  Common equivalent shares result from the assumed exercise of
outstanding stock options and warrants, the proceeds of which are then assumed
to have been used to repurchase outstanding common stock using the treasury
stock method.  In addition, the numerator is adjusted for any changes
in income or loss that would result from the assumed conversion of potential
shares.  At March 31, 2009 and 2008, potentially dilutive shares of
3,058,729 and 3,736,971, respectively, were excluded from the loss per share
calculations because their effect would be antidilutive.  Shares
deemed to be antidilutive include stock options and warrants.




Property
and Equipment




Property
and equipment are stated at cost.  Equipment is depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to seven years.  Building improvements are amortized using the
straight-line method over the remaining estimated life of the building at the
time the improvement is put into service.  The Company’s building is
depreciated using the straight-line method over 40
years.  Expenditures for repairs and maintenance are charged to
expense as incurred.  The Company records construction in process in
the appropriate asset category and commences depreciation upon completion and
commencement of use of the asset.


Inventories




Inventories
are stated at the lower of cost (first-in, first-out) or net realizable value
and consist of the following:




March
      31,(in
      thousands)
              
              2009
              
              
              2008Raw
      materials
              
              $
              130
              
              
              $
              74Work
      in progress
              
              
              31
              
              
              
              3Finished
      goods
              
              
              229
              
              
              
              72Total
      inventories
              
              $
              390
              
              
              $
              149


Income
Taxes




The
Company follows SFAS No. 109, “Accounting for Income Taxes,”
where deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using currently enacted tax rates.  A valuation reserve
against the net deferred assets is recorded, if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.




On April
1, 2007, the Company adopted FAS Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in
Income Taxes,” which supplements SFAS No. 109, by defining the confidence
level that a tax position must meet in order to be recognized in the financial
statements.  FIN 48 requires that the tax effect(s) of a position be
recognized only if it is “more likely than not” to be sustained based solely in
its technical merits as of a reporting date.  The “more likely than
not” threshold represents a positive assertion by management that the Company is
entitled to the economic benefits of a tax position.  If a tax
position is not considered “more likely than not” to be sustained based solely
on its technical merits, no benefits of tax position are to be
recognized.  The “more likely than not” threshold must continue to be
met in each reporting period to support continued recognition of a
benefit.  With the adoption of FIN 48, the Company is required to
adjust their financial statements to reflect only those tax positions that are
“more likely than not” to be sustained.




Investment
in CorNova




The
Company’s investment in CorNova is accounted for using the cost method of
accounting.  (See Note M).




F-11
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Goodwill
and Impairment of Long-Lived Assets




Non-amortizable
intangibles, such as goodwill, are subject to SFAS No. 142, “Goodwill and Other Intangible
Assets.”  At March 31, 2008, the Company had $487,000 of
goodwill, which was attributable to the Company’s only reporting
unit.  Under the provisions of SFAS No. 142, the Company evaluates
recorded goodwill for impairment on at least an annual basis, or more frequently
if indicators of impairment exist.  During the quarter ended December
31, 2008, the Company’s market capitalization fell below the reporting unit’s
carrying value.  Due to the significance of the deficit between market
capitalization and carrying value and the length of time for which the deficit
existed, management determined during the quarter ended December 31, 2008 that
an indicator of impairment existed and that an interim impairment test was
required.  After completing the interim impairment test, the Company
determined that the goodwill balance of $487,000 was impaired in its
entirety.  The fair value of the Company’s reporting unit was
estimated using the expected present value of future cash
flows.  Accordingly, as of March 31, 2009 there is no remaining
goodwill recorded.




The
Company evaluates its long-lived assets, which include property and equipment,
for impairment as events and circumstances indicate that the carrying amount may
not be recoverable and at a minimum at each balance sheet date.  The
Company evaluates the realizability of its long-lived assets based on
profitability and undiscounted cash flow expectations for the related
asset.  Property and equipment and amortizable intangibles are subject
to SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.”  As a
result of the indicators of impairment described above, the Company evaluated
the recoverability of its property and equipment as of March 31, 2009 and
determined that no impairment existed.




Stock-Based
Compensation




In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, Share-Based Payment—An
Amendment of FASB Statements No. 123 and 95 (“SFAS No. 123R”), which
requires all companies to measure compensation cost for all share-based
payments, including employee stock options, based on their fair
value.  Pro forma disclosure is no longer an
alternative.  In March 2005, the SEC issued Staff Accounting Bulletin
(“SAB”) No. 107 (“SAB No. 107”), which expressed the views of the SEC regarding
the interaction between SFAS No. 123R and certain rules and regulations of the
SEC. SAB No. 107 provides guidance related to the valuation of share-based
payment arrangements for public companies, including assumptions such as
expected volatility and expected term.




Prior to
April 1, 2006, the Company applied the pro forma disclosure requirements under
SFAS No. 123 and accounted for its stock-based employee compensation plans using
the intrinsic value method under the recognition and measurement provisions of
APB No. 25, Accounting for
Stock Issued to Employees and related interpretations.




Effective
April 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123R, using the modified prospective transition method.  Under
this transition method, compensation cost recognized in the statement of
operations includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS No. 123; and
(b) compensation cost for all share-based payments granted, modified or settled
subsequent to April 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of SFAS 123R on a straight-line basis over the
requisite service period.




For the
fiscal years ended March 31, 2009 and 2008, the Company recorded stock-based
compensation expense for options that vested of approximately $134,000 and
$391,000, respectively.  As of March 31, 2009, the Company has
approximately $174,000 of unrecognized compensation cost related to stock
options that is expected to be recognized as expense over a weighted average
period of 1.55 years.




F-12
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
valuation of employee stock options is an inherently subjective process, since
market values are generally not available for long-term, non-transferable
employee stock options.  Accordingly, the Black-Scholes option pricing
model is utilized to derive an estimated fair value.  The
Black-Scholes pricing model requires the consideration of the following six
variables for purposes of estimating fair value:




·
            the
      stock option exercise price;




·
            the
      expected term of the option;




·
            the
      grant price of the Company’s common stock, which is issuable upon exercise
      of the option;




·
            the
      expected volatility of the Company’s common
  stock;




·
            the
      expected dividends on the Company’s common stock (the Company does not
      anticipate paying dividends in the foreseeable future);
  and




·
            the
      risk free interest rate for the expected option
  term.




The fair
value of each option granted during fiscal years 2009 and 2008 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:


Years
      Ended March 31,2009
              
              2008Dividend
      yield
              
              None
              
              NoneExpected
      volatility
              
              68.3%
      to 88.1%
              
              70.0%Risk-free
      interest rate
              
              1.72%
      to 3.68%
              
              3.01%
      to 5.01%Expected
      life
              
              5.3
      to 5.7 years
              
              6.5
      yearsFair
      value of options granted
              
              $0.11
      to $0.40
              
              $0.80


Expected
Dividends.  The Company has never declared or paid any cash
dividends on any of its capital stock and does not expect to do so in the
foreseeable future.  Accordingly, the Company uses an expected
dividend yield of zero to calculate the grant-date fair value of a stock
option.




Expected
Volatility.  The expected volatility is a measure of the amount
by which the Company’s stock price is expected to fluctuate during the expected
term of options granted.  The Company determines the expected
volatility solely based upon the historical volatility of its common stock over
a period commensurate with the option’s expected term.  The Company
does not believe that the future volatility of its common stock over an option’s
expected term is likely to differ significantly from the past.




Risk-Free Interest
Rate.  The risk-free interest rate is the implied yield
available on U.S. Treasury zero-coupon issues with a remaining term equal to the
option’s expected term on the grant date.




Expected
Term.  For option grants subsequent to the adoption of SFAS
123R, the expected life of stock options granted is based on the simplified
method prescribed under SAB 110, “Share-Based
Payment.”  Accordingly, the expected term is presumed to be the
midpoint between the vesting date and the end of the contractual
term.




Stock Option Exercise Price
and Grant Date Price of Common Stock.  The closing market price
of the Company’s common stock on the date of grant.




In
accordance with SFAS 123R, the Company is required to estimate the level of
award forfeitures expected to occur and record compensation expense only for
those awards that are ultimately expected to vest.  This requirement
applies to all awards that are not yet vested.  Due to the limited
number of unvested options outstanding, the majority of which are held by
executives and members of the Company’s Board of Directors, the Company has
estimated a zero forfeiture rate.  The Company will revisit this
assumption periodically and as changes in the composition of the option pool
dictate.




F-13
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Changes
in the inputs and assumptions as described above can materially affect the
measure of estimated fair value of share-based compensation.  The
Company anticipates the amount of stock-based compensation will increase in the
future as additional options are granted.




Fair
Value of Financial Instruments




The
Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157,
“Fair Value Measurement,”on April 1, 2008.  SFAS No. 157 defines and establishes a
framework for measuring fair value and expands disclosure about fair value
measurements.  The standard creates a fair value hierarchy which
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in
active markets for identical assets or liabilities; Level 2 inputs are inputs
other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly; and Level 3 inputs are
unobservable inputs that reflect the Company’s own assumptions about the
assumptions market participants would use in pricing the asset or
liability.




FASB
Staff Position No. FAS 157-2, “Effective Date of FASB Statement No.
157,” delays the effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis (that is, at
least annually).  The deferral applies to nonfinancial long-lived
assets measured at fair value for an impairment assessment under SFAS No. 144,
“Accounting for the Impairment
or Disposal of Long-Lived Assets,” reporting units measured at fair value
in the first step of a goodwill impairment test as described in paragraph 10 of
SFAS No. 142, “Goodwill and
Other Intangible Assets,” and nonfinancial assets and nonfinancial
liabilities measured at fair value in the second step of a goodwill impairment
test as described in paragraphs 20 and 21 of SFAS No. 142.  For items
within its scope, the FSP defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim periods within those fiscal
years.




Recent
Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.”  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations” and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interests in the acquiree and the
goodwill acquired.  Some of the key changes under SFAS No. 141(R) will
change the accounting treatment for certain specific acquisition related items
including: (1) accounting for acquired in process research and development as an
indefinite-lived intangible asset until approved or discontinued rather than as
an immediate expense; (2) expensing acquisition costs rather than adding them to
the cost of an acquisition; (3) expensing restructuring costs in connection with
an acquisition rather than adding them to the cost of an acquisition; (4)
including the fair value of contingent consideration at the date of an
acquisition in the cost of an acquisition; and (5) recording at the date of an
acquisition the fair value of contingent liabilities that are more likely than
not to occur.  SFAS No. 141(R) also includes a substantial number of
new disclosure requirements.  SFAS No. 141(R) is effective
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Early adoption of SFAS No. 141(R) is
prohibited.  The Company expects to adopt SFAS No. 141(R) on April 1,
2009.  In the event an acquisition were contemplated and transacted,
the Company believes the adoption of SFAS No. 141(R) could have a material
impact on how the Company would identify, negotiate, and value future
acquisitions and a material impact on how an acquisition would affect the
Company’s condensed consolidated financial statements.




In June
2008, the Emerging Issues Task Force (EITF) reached a consensus in Issue No.
07-5, “Determining Whether an
Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”
(“EITF 07-5”).  This Issue addresses the determination of whether an
instrument (or an embedded feature) is indexed to an entity’s own stock, which
is the first part of the scope exception in paragraph 11(a) of SFAS No. 133,
“Accounting for Derivative
Instruments and Hedging Activities.”  EITF 07-5 is effective
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years.  Early application is not permitted.  We
do not expect the adoption of this accounting guidance to impact our results of
operations or financial position.




F-14
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




B.
            Related Party
      Transactions




On
January 1, 2007, the Company entered into a consulting agreement with Michael L.
Barretti, a member of its Board of Directors, for an annualized fee of
$50,000.  During the each of the fiscal years ended March 31, 2009 and
2008, the Company recognized $50,000 of expense related to services incurred
under this agreement, which was recorded as selling, general and administrative
expense.




C.
            License
      Agreements




PolyMedica
Corporation granted to AdvanSource an exclusive, perpetual, worldwide,
royalty-free license for AdvanSource to use all of the necessary patent and
other intellectual property owned by PLMD in the implantable devices and
materials field (collectively, “Licensed Technology”).  AdvanSource,
at its own expense, will file patents or other applications for the protection
of all new inventions formulated, made, or conceived by AdvanSource during the
term of the license that related to Licensed Technology and all such inventions
shall be exclusively licensed to PolyMedica for use by PolyMedica in fields
other than the implantable devices and materials field.  There are no
financial commitments of AdvanSource related to this license.




D.
            Property, Plant and
      Equipment




Property,
plant and equipment consist of the following:




March
      31,(in
      thousands)
              
              2009
              
              
              2008Land
              
              $
              500
              
              
              $
              500Building
              
              
              2,705
              
              
              
              2,652Machinery,
      equipment and tooling
              
              
              1,431
              
              
              
              1,180Furniture,
      fixtures and office equipment
              
              
              280
              
              
              
              2684,916
              
              
              
              4,600Less:  accumulated
      depreciation
              
              
              (1,621
              )
              
              
              (1,261
              )$
              3,295
              
              
              $
              3,339


Depreciation
expense for the fiscal years ended March 31, 2009 and 2008 was approximately
$360,000 and $340,000, respectively.




E.
            Income
      Taxes




The Company adopted the provisions of Financial
Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes,” an interpretation of SFAS No. 109, “Accounting for Income Taxes,”
on April 1, 2007.  FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109 and prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. At the adoption date and as of March 31,
2009, the Company had no material unrecognized tax benefits and no adjustments
to liabilities or operations were required.




The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions.  The Company recognizes interest and penalties related
to uncertain tax positions in income tax expense.  No interest and
penalties have been recognized by the Company to date.




Tax years
2006 through 2009 are subject to examination by the federal and state taxing
authorities.  There are no income tax examinations currently in
process.




F-15
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Reconciliation
between the Company’s effective tax rate and the United States statutory rate is
as follows:


For
      The Years Ended March 31,2009
              
              2008Expected
      federal tax rate
              
              
              34.0
              %
              
              
              34.0
              %State
      income taxes, net of federal tax benefit
              
              
              -6.5
              %
              
              
              13.6
              %Non-deductible
      expenses
              
              
              -8.5
              %
              
              
              -2.4
              %Book
      versus tax loss on sale of subsidiaries
              
              
              0.0
              %
              
              
              45.4
              %Change
      in valuation allowance
              
              
              -19.0
              %
              
              
              -90.6
              %Effective
      tax rate
              
              
              0.0
              %
              
              
              0.0
              %


Deferred
tax assets and liabilities are determined based on the differences between the
financial statement carrying amounts and the tax basis of the assets and
liabilities using the enacted tax rate in effect in the years in which the
differences are expected to reverse.  A valuation allowance has been
recorded against the deferred tax asset as it is more likely than not, based
upon the analysis by the Company of all available evidence, that the tax benefit
of the deferred tax asset will not be realized.




The
following is a summary of the significant components of the Company’s deferred
tax assets as of March 31, 2009 and 2008:




March
      31,(in
      thousands)
              
              2009
              
              
              2008Deferred
      Tax Assets:Net
      operating loss carryforwards
              
              $
              6,529
              
              
              $
              5,669Capital
      loss carry forward
              
              
              3,524
              
              
              
              4,022Tax
      credits
              
              
              192
              
              
              
              164Inventory
      and receivable allowances
              
              
              12
              
              
              
              8Accrued
      expenses deductible when paid
              
              
              114
              
              
              
              123Depreciation
      and amortization
              
              
              10
              
              
              
              38Deferred
      tax assets
              
              
              10,381
              
              
              
              10,024Valuation
      allowance
              
              
              (10,381
              )
              
              
              (10,024
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -


A
valuation allowance has been recorded to offset all deferred tax
assets due to uncertainty of realizing the tax benefits of the underlying
operating loss and tax credit carry forwards over their carry forward
periods.  The Company had no significant deferred tax liabilities as of
March 31, 2009 and 2008.




As of
March 31, 2009, the Company has the following unused net operating loss and tax
credit carry forwards available to offset future federal and state taxable
income, both of which expire at various times as noted
below:


(in
      thousands)
              
              Net
      Operating Losses
              
              
              Investment
      & Research Credits
              
              Expiration
      DatesFederal
              
              $
              17,743
              
              
              $
              86
              
              2010
      to 2029State
              
              $
              7,912
              
              
              $
              161
              
              2010
      to 2014Capital
      loss carry forward
              
              $
              8,750
              
              
              
              
              
              2013




The
Company’s net operating loss carry forwards are subject to review and possible
adjustment by the Internal Revenue Service and state tax
authorities.




F-16
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




The
Company also has approximately $1,367,000 of net operating loss carryforwards
related to stock compensation.  The related tax benefit of
approximately $550,000 will be credited to additional paid-in capital upon
realization.




F.
            Contingencies




As the
Company previously reported, in late 2007 the Company was advised by Medos that
Medos might assert certain indemnity claims against the Company relating to
certain representations and warranties up to the full amount of the $1.0 million
escrow balance established under the Gish Purchase Agreement.  In
addition, Medos advised the Company that it might seek a purchase price
adjustment for the period March 31, 2007 through July 6, 2007, as provided in
the Gish Purchase Agreement.  The Company advised Medos that it
believed any such claims, if made, would be without merit.




On June
30, 2008, Medos formally notified the Company of its claims in accordance with
the procedure set forth in the Gish Purchase Agreement.  Medos’ claims
aggregate approximately $4.3 million and include allegations that (i) the
Company breached certain representations and warranties in the Gish Purchase
Agreement, including certain representations and warranties concerning the
financial condition of Gish as of March 31, 2007, (ii) the Company is liable for
the severance obligations related to two key Gish employees terminated by Medos
subsequent to the acquisition date, and (iii) Medos is entitled to a purchase
price adjustment for the period between March 31, 2007 and July 6,
2007.




The
Company has refuted the claims asserted by Medos and the facts and circumstances
upon which they are based and intend to vigorously pursue the disposition of
those claims.  In that regard, on July 25, 2008, as provided in the
Gish Purchase Agreement, the Company initiated an arbitration proceeding with
the American Arbitration Association in New York, New York, and served its
arbitration demand upon Medos that same day.  The arbitration demand
seeks a declaration that the amounts claimed by Medos are without merit and
unsupportable.  Medos has not yet responded to the demand, but has
agreed to participate in non-binding mediation in accordance with the rules of
the American Arbitration Association.  Although the Company denies the
claims asserted by Medos, an adverse finding of liability could have a material
impact on the Company.  The Company has reviewed the assertions by
Medos, and has concluded that a loss resulting from these asserted claims is not
probable as of March 31, 2009.




Under the terms of the
escrow agreement, the Company’s initiation of the arbitration proceeding
disputing all of Medos’ claims precluded Medos from taking further action
seeking release of the escrow funds.  Notwithstanding this contractual
prohibition, subsequent to the Company’s service of the arbitration demand on
Medos on July 25, 2008 and without the Company’s knowledge, Medos
obtained the release of the $1.0 million escrow amount and the escrow
agent released these funds to Medos.  The Company notified Medos that
its unauthorized actions resulting in the release of the escrowed amount is in
violation of the escrow agreement.  Furthermore, the Company notified
Medos that its failure to return the escrowed amount to the escrow agent could
result in the Company taking action against Medos for this
violation.




The
Company is not a party to any other legal proceedings, other than ordinary
routine litigation incidental to its business, which the Company believes will
not have a material affect on its financial position or results of
operations.




G.
            Concentration
      of Credit Risk and Major Customers




For the
year ended March 31, 2009, one customer represented 81% of our
revenues.  For the year ended March 31, 2008, two customers
represented 65% and 16% of revenues, respectively.




As of
March 31, 2009 and 2008, the Company had $997,000 and $480,000, respectively,
due from one customer related to receivables on royalties.  These
amounts are classified as accounts receivable-other in the Company’s balance
sheets.




As of
March 31, 2009 and 2008, the Company had accounts receivable-trade of $26,000,
or 62%,  and $4,000, or 8%, respectively, due from one
customer.
  F-17
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




H.
            Stockholders’
  Equity




The
Company, originally incorporated as a Massachusetts corporation at inception,
was reincorporated as a Delaware corporation, as approved by the Company’s
stockholders, in October 2007.  As a result of the reincorporation,
the par value of the Company’s common stock, which was previously $0.01 per
share, is now $0.001 per share.  Accordingly, the stockholders’ equity
section of the consolidated balance sheets presented reflects the change in par
value.




Preferred
Stock




The
Company has authorized 5,000,000 shares, $0.001 par value, Preferred Stock (the
Preferred Stock”) of which 500,000 shares have been issued but none are
outstanding.  In addition, 500,000 shares of Preferred Stock have been
designated as Series A Junior Participating Preferred Stock (the “Junior
Preferred Stock”) with the designations and the powers, preferences and rights,
and the qualifications, limitations and restrictions specified in the
Certificate of Designation of the Junior Preferred Stock filed with the Delaware
Department of State on January
28, 2008.  Such number of shares may be increased or decreased by
resolution of the Board of Directors; provided, that no decrease shall reduce
the number of shares of Junior Preferred Stock to a number less than the number
of shares then outstanding plus the number of shares reserved for issuance upon
the exercise of outstanding options, rights or warrants or upon the conversion
of any outstanding securities issued by the Company convertible into Junior
Preferred Stock.




Common
Stock Options and Warrants




On
December 22, 2004, the Company issued 1,139,586 shares of its common stock to
investors in a private placement raising gross proceeds of $2,735,000, before
transaction costs.  In connection with this private placement, the
Company issued warrants to investors to purchase 569,793 shares of common stock
at an exercise price of $3.00 per share, which are exercisable until December
22, 2009.  In addition, the placement agent was issued warrants to
purchase 113,959 shares of our common stock at an exercise price of $2.40 per
share and 56,979 shares of our common stock at an exercise price of $3.00 per
share, which are exercisable until December 22, 2009.  If the warrants
issued to the investors and placement agents, aggregating 740,731 shares, are
exercised, the Company would receive gross proceeds of approximately $2,154,000,
before transaction costs, if any.




On July
12, 2005, the Company issued warrants to a consultant for 140,000 shares of
common stock, with an exercise price of $2.40.  The warrants expired
on July 11, 2008.




On March
31, 2008, the Company issued warrants to the investment bankers who assisted in
the sale of CDT to purchase 219,298 shares of common stock at an exercise price
of $0.874 per share, which are exercisable until March 31, 2015.  The
warrants were valued at $76,000 using the Black-Scholes model and treated as
permanent equity.




The
Company issued 1,035,663 shares of common stock during the year ended March 31,
2008, as a result of the exercise of options by employees and consultants,
generating cash proceeds of approximately $947,000.  There were no
exercises of options by employees and consultants during the year ended March
31, 2009.




Employee
Stock Purchase Plan




During
the year ended March 31, 2009, the Company issued 138,086 shares of its common
stock to its employees pursuant to the terms of the Employee Stock Purchase Plan
(the “ESP Plan”) and received cash proceeds of approximately
$37,000.  The Company also recorded stock compensation of $7,000
during the fiscal year ended March 31, 2009 to reflect the effect of the benefit
received by the employees for the issuance of common stock at a 15% discount to
the fair market value of the Company’s common stock on the settlement
date.  In connection with this share issuance, the Board of Directors
approved an amendment to the ESP Plan which permanently increased the number of
shares issuable to any one employee during a semi-annual offering period to
23,000 shares.




F-18
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Treasury
Stock and Other Transactions




In June
2001, the Board of Directors adopted a share repurchase program authorizing the
repurchase by the Company of up to 250,000 of its shares of common
stock.  In June 2004, the Board of Directors authorized the purchase
of an additional 500,000 shares of common stock.  On December 17,
2008, in light of the current market conditions, the Board of Directors
authorized the repurchase of up to $30,000 of common stock from the shares
available for repurchase under to the program.  In January 2009, the
Company repurchased 76,692 shares of its common stock at an approximate cost of
$30,000.  Since June 2001, a total of 251,379 shares have been
repurchased by the Company under the share repurchase program, leaving 498,621
shares remaining to purchase under the share repurchase program.  No
repurchases were made during the year ended March 31, 2008.  The share
repurchase program authorizes repurchases from time to time in open market
transactions, through privately negotiated transactions, block transactions or
otherwise, at times and prices deemed appropriate by management, is not subject
to an expiration date.




Stockholder
Rights Plan




The
Company’s board of directors approved the adoption of a stockholder rights plan
(the “Rights Plan”) under which all stockholders of record as of February 8,
2008 will receive rights to purchase shares of the Junior Preferred Stock (the
“Rights”).  The Rights will be distributed as a
dividend.  Initially, the Rights will attach to, and trade with, the
Company’s common stock.  Subject to the terms, conditions and
limitations of the Rights Plan, the Rights will become exercisable if (among
other things) a person or group acquires 15% or more of the Company’s common
stock.  Upon such an event, and payment of the purchase price, each
Right (except those held by the acquiring person or group) will entitle the
holder to acquire shares of the Company’s common stock (or the economic
equivalent thereof) having a value equal to twice the purchase
price.  The Company’s board of directors may redeem the Rights prior
to the time they are triggered.  In the event of an unsolicited
attempt to acquire the Company, the Rights Plan is intended to facilitate the
full realization of stockholder value in the Company and the fair and equal
treatment of all Company stockholders.  The Rights Plan will not
prevent a takeover attempt.  Rather, it is intended to guard against
abusive takeover tactics and encourage anyone seeking to acquire the Company to
negotiate with the board of directors.




I.
            Stock
      Based Compensation




AdvanSource’s 1996 Employee,
Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by
AdvanSource’s Board of Directors and Stockholders in March 1996.  A
total of 7,000,000 shares have been reserved for issuance under the
Plan.  Under the terms of the Plan the exercise price of Incentive
Stock Options issued under the Plan must be equal to the fair market value of
the common stock at the date of grant.  In the event that Non
Qualified Options are granted under the Plan, the exercise price may be less
than the fair market value of the common stock at the time of the grant (but not
less than par value).  In October 2003, the Company’s shareholders
approved the AdvanSource 2003 Stock Option Plan (the “2003 Plan”), which
authorizes the issuance of 3,000,000 shares of common stock with terms similar
to the 1996 Plan.  In January 2006, the Company filed Form S-8 with
the Securities and Exchange Commission registering an additional 489,920 total
shares of common stock in the 1996 Plan and 2003 Plan.  Total shares
of common stock registered under the 1996 Plan and 2003 Plan (collectively, the
“Plans”) are 10,489,920.  Substantially all of the stock options
granted pursuant to the 1996 Plan provide for the acceleration of vesting of the
shares of Common Stock subject to such options in connection with certain
changes in control of the Company.  A similar provision is not
included in the 2003 Plan.  In February 2008, the Company filed two
Forms S-8 to register 360,000 shares of common stock in connection with
previously granted stock options to two executives who received grants of
unregistered shares under Rule 711 of AMEX.  Normally, options granted
expire ten years from the grant date.




F-19
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Activity
under the Plans for the year ended March 31, 2009 is as
follows:


Options
      Outstanding
              
              
              Weighted
      Average Exercise Price per Share
              
              
              Weighted
      Average Remaining Contractual Term in Years
              
              
              Aggregate
      Intrinsic Value
                (in
      thousands)Options
      outstanding as of April 1, 2008
              
              
              2,637,819
              
              
              $
              1.97Granted
              
              
              86,750
              
              
              
              0.40Exercised
              
              
              -
              
              
              
              -Cancelled
              
              
              (625,869
              )
              
              
              2.25Options
      outstanding as of March 31, 2009
              
              
              2,098,700
              
              
              
              1.82
              
              
              
              5.24
              
              
              $
              -Options
      exercisable as of March 31, 2009
              
              
              1,776,527
              
              
              
              1.97
              
              
              
              4.62
              
              
              $
              -Options
      vested or expected to vest as of March 31, 2009
              
              
              2,098,700
              
              
              
              1.82
              
              
              
              5.24
              
              
              $
              -


The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the closing price of the common stock on
March 31, 2009 of $0.18 and the exercise price of each in-the-money option) that
would have been received by the option holders had all option holders exercised
their options on March 31, 2009.  Total intrinsic value of stock
options exercised under the Plan for the fiscal years ended March 31, 2009 and
2008 was $0 and $363,000, respectively.  The total fair value of stock
options that vested during the fiscal years ended March 31, 2009 and 2008 were
$384,000 and $219,000, respectively.




At March
31, 2009, there were no shares remaining to be granted under the 1996 Stock
Option Plan and 3,067,312 shares were available for grant under the 2003 Stock
Option Plan.




J.
            Discontinued
      Operations




Gish
Biomedical, Inc.




In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying consolidated statements
of operations present the results of Gish as discontinued
operations.  The Company’s Board of Directors approved a plan to sell
Gish in June 2007.  The Company executed the Gish Purchase Agreement
on July 3, 2007, effective as of June 30, 2007, and closed on July 6,
2007.  The Company has (i) eliminated Gish’s financial results from
its ongoing operations, (ii) determined that Gish, which operated as a separate
subsidiary, was a separate component of its aggregated business as,
historically, management reviewed separately the Gish financial results and cash
flows apart from its ongoing continuing operations, and (iii) determined that it
will have no further continuing involvement in the operations of Gish or cash
flows from Gish after the sale.




The
current liabilities of discontinued operations of $149,000 as of March 31, 2009
and 2008 is comprised of the amounts owed to Medos due to the change in the
stockholder’s equity of Gish from March 31, 2007 through June 30, 2007 in
accordance with the terms of the Gish Purchase Agreement.




Revenues
related to Gish for fiscal 2008 were $3,849,000.  Net loss related to
Gish for fiscal 2008 was $319,000.  Loss on sale of Gish was
$1,173,000 for the fiscal year ended March 31, 2008.  Revenue and loss
from discontinued operations for Gish for fiscal 2008 include results for the
three months ended June 30, 2007 as the Company sold Gish on July 6,
2007.




F-20
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Catheter
and Disposables Technology, Inc.




In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying consolidated statements
of operations present the results of CDT as discontinued
operations.  As noted above, the Company executed the CDT Purchase
Agreement and simultaneously closed the transaction on March 28,
2008.  The Company has (i) eliminated CDT’s financial results from its
ongoing operations, (ii) determined that CDT, which operated as a separate
subsidiary, was a separate component of its aggregated business as,
historically, management reviewed separately the CDT financial results and cash
flows apart from its ongoing continuing operations, and (iii) determined that it
will have no further continuing involvement in the operations of CDT or cash
flows from CDT after the sale.




Revenues
related to CDT for fiscal 2008 were $3,646,000.  Net loss related to
CDT for fiscal 2008 was $1,666,000.  Loss on sale of CDT was $690,000
for the fiscal year ended March 31, 2008.




K.
            Valuation and Qualifying
      Accounts




(in
      thousands)
              
              Balance
      at beginning of period
              
              
              Charged
      to costs and expenses
              
              
              Other
              
              
              Write-off
              
              
              Balance
      at end of periodYear
      ended March 31, 2009:Deducted
      from assets accounts:Allowance
      for doubtful accounts
              
              $
              6
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1
              
              
              $
              5Total
              
              $
              6
              
              
              $
              -
              
              
              $
              -
              
              
              $
              1
              
              
              $
              5Year
      ended March 31, 2008:Deducted
      from assets accounts:Allowance
      for doubtful accounts
              
              $
              5
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              6Total
              
              $
              5
              
              
              $
              1
              
              
              $
              -
              
              
              $
              -
              
              
              $
              6


L.
            Benefit Plans and Employment
      Agreements of Executive
Officers




The
Company has the AdvanSource 401(k) Retirement Savings Plan established under
Section 401(k) of the Internal Revenue Code.   All full-time
employees who are twenty-one years of age are eligible to participate on the
beginning of the first month after 30 days of employment.  The
Company’s contributions are discretionary and the Company made no matching
contributions during either fiscal 2009 or 2008.




The
Company entered into an employment agreement with Eric G. Walters (the “Walters
Agreement”), pursuant to which said individual serves as Vice President and
Chief Financial Officer of the Company.  Pursuant to the terms of the
Walters Agreement, Mr. Walters is to receive an annual base salary of $195,000,
as amended.  Mr. Walters’ salary will be reviewed annually by the
Board.  Additionally, Mr. Walters may also be entitled to receive an
annual bonus payment in an amount, if any, to be determined by the Compensation
Committee of the Board.




The
Company entered into a Separation Agreement and General Release (the “Separation
Agreement”) with Mr. Walters on February 28, 2009 (the “Separation
Date”).  Under the terms of the Separation Agreement, which supersedes
the previous employment agreement entered into on April 3, 2006, and amended on
July 10, 2007, and beginning on the Separation Date, Mr. Walters will: (i)
receive a severance payment of approximately $129,000 to be paid over 34 weeks
on the Company’s regularly scheduled paydays, and (ii) be eligible for COBRA
health benefits, which premiums will be paid by Mr. Walters and the Company for
a period of 34 weeks in accordance with our health benefit contribution
policies.  As of March 31, 2009, total accrued severance for Mr. Walters
was approximately $118,000.




F-21
 ADVANSOURCE
BIOMATERIALS CORPORATION
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




On August
7, 2006, the Company appointed Michael F. Adams as Chief Executive Officer and
President of the Company. Mr. Adams has been a director of the Company since May
1999 and joined the Company as its Vice President of Regulatory Affairs and
Business Development on April 1, 2006.  The Company entered into an
employment agreement with Mr. Adams (the “Adams Agreement”) on September 13,
2006.  Under the terms of the Adams Agreement, Mr. Adams will be
employed by the Company for two years and receive an annual base salary of
$290,000, as amended, which is subject to annual review by the Company’s Board
of Directors.  During the Employment Period, as defined in the Adams
Agreement, Mr. Adams may receive an annual bonus to be determined at the sole
discretion of the Compensation Committee of the Board of
Directors.  The Company may renew the Adams Agreement at the end of
the initial term, however, lacking any express agreement between the parties at
the end of the Employment Period, the Adams Agreement shall be deemed to
continue on a month-to-month basis.  Either party has the right to
terminate the Adams Agreement upon thirty (30) days written
notice.  Mr. Adams is eligible for participation in all executive
benefit programs, including health insurance, life insurance, and stock-based
compensation.  If Mr. Adams’ employment is terminated without cause,
the Company is obligated to (i) pay Mr. Adams an amount equal to two (2) times
his annual base salary upon such termination, (ii) provide Mr. Adams with health
insurance benefits for a period of 18 months after such termination, of which
the premiums for the first six (6) months after such termination shall be paid
by the Company, and (iii) provide Mr. Adams life insurance benefits for one (1)
year after such termination at the Company’s expense.




M.
            Investment in CorNova,
      Inc.




As of
March 31, 2007, AdvanSource had a 30% ownership interest in the common stock of
CorNova and, accordingly, AdvanSource has used the equity method of accounting
in accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”, and recorded 30% of the net loss of CorNova
in its consolidated financial statements for the fiscal year ended March 31,
2007.  During the fiscal year ended March 31, 2007, the Company
recorded equity in the net loss of CorNova of $279,000, and equity in
comprehensive income of CorNova of $40,000 (related to unrealized holding gains
on securities classified as available-for-sale), which reduced the Company’s
investment in CorNova to $0.  Therefore, no additional losses were
recorded from the Company’s equity ownership in CorNova in fiscal 2009 and
2008.  As of March 31, 2009 the Company has a 13% ownership interest
in CorNova.  As a result of its decreased ownership interest, the
equity method is no longer appropriate and the Company now uses the cost
method.  The Company has no additional obligation to contribute assets or
additional common stock nor to assume any liabilities or to fund any losses that
CorNova may incur.


N.
            Subsequent
      Events




In
connection with the sale of Catheter and Disposables Technology, Inc. (“CDT”) on
March 28, 2008 (See Note A), the Company placed $240,000 in escrow as a reserve
for our indemnification obligations to TACPRO, Inc. (“Tacpro”), the buyer of
CDT, if any.  The $240,000 of proceeds held in escrow as of March 31,
2009 was not included in the calculation of the loss on sale of CDT of $690,000
recognized during the year ended March 31, 2008.




In March
2009, Tacpro presented certain additional post-closing claims in the approximate
amount of $17,000 related to uncollectible accounts receivable and unused
inventory to which the Company was in agreement.  Net of the
post-closing claims, the remaining $224,000 of cash in the escrow account was
released to us in April 2009 and the escrow account was closed.  Upon
receipt of the escrow cash, we paid approximately $11,000 in additional
transaction costs to a former employee.  The escrow amount, net of
post-closing claims and additional transaction costs will be reported as an
additional gain on the sale of CDT in the Company’s quarterly report for the
period ending June 30, 2009.



















F-22


SIGNATURES




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




Dated:
      June 30, 2009
            AdvanSource
      Biomaterials CorporationBy:
            /s/
      Michael F. AdamsMichael
      F. Adams
              Chief
      Executive Officer and President







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.




Dated:
      June 30, 2009
            
            /s/
      Michael F. AdamsMichael
      F. Adams
              Chief
      Executive Officer and President
              (Principal
      Executive Officer)Dated:
      June 30, 2009
            
            /s/
      William J. O’NeillWilliam
      J. O’Neill, Jr.
              ChairmanDated:
      June 30, 2009
            
            /s/
      Anthony J. ArminiAnthony
      J. Armini
              DirectorDated:
      June 30, 2009
            
            /s/
      Michael L. BarrettiMichael
      L. Barretti
              DirectorDated:
      June 30, 2009
            
            /s/
      David VolpeDavid
      Volpe
              Acting
      Chief Financial Officer
              (Principal
      Financial Officer and Principal Accounting Officer)