<PAGE>
 
                                                                  EXHIBIT 10.13
 
                   DATED                                1998



                     (1) CARDIOTECH INTERNATIONAL LIMITED

                                      AND

                (2)  THE ROYAL FREE HOSPITAL SCHOOL OF MEDICINE
                                        

                                        


                                   RESEARCH
                                   AGREEMENT

                                  IN RESPECT
                                      OF
                                        
                      THE DEVELOPMENT OF VASCULAR GRAFTS



                               AARON & PARTNERS
                                GROSVENOR COURT
                                FOREGATE STREET
                                    CHESTER
                                    CH1 1HG
                                REF: IV.CAR51.2
<PAGE>
 
THIS AGREEMENT is made the               day of               1998

BETWEEN:

(1)  CARDIOTECH INTERNATIONAL LIMITED (Company number 3198267) whose registered
     office is at 5/7 Grosvenor Court, Foregate Street, Chester, CH1 1HG ("the
     Company");

(2)  THE ROYAL FREE HOSPITAL SCHOOL OF MEDICINE c/o University of London,
     Rowland Hill Street, London, NW3 2PF ("the Medical School").

WHEREAS:

(A)  The Company is involved in the development and manufacture of polycarbonate
     urethane vascular grafts and has the benefit of the Patents (as defined);

(B)  The Medical School has experience of research into vascular biology and
     invitro and in-vivo evaluation of vascular grafts;

(C)  The Company and the Medical School wish to combine their expertise to
     further the development and evaluation of certain small diameter vascular
     grafts.

NOW IN CONSIDERATION OF THE MUTUAL COVENANTS ENTERED INTO BY THE PARTIES AND SET
OUT HEREIN, IT IS AGREED as follows:

1.   INTERPRETATION
     --------------

     1.1.  DEFINITIONS
           -----------
           In this Agreement save where the context otherwise requires the
           following terms and expressions shall have the following meanings:

           "Account"                 the Company's designated deposit account
                                     set up pursuant to Clause 3.3 of the Loan
                                     Agreement.

                                       1
<PAGE>
 
           "Board"                   the board of directors of the Company from
                                     time to time.

           "Budget Costings"         Appendix B to this Agreement entitled
                                     `Schedule of Budget Costings' and setting
                                     out in detail the agreed future application
                                     of the monies advanced by Freemedic in
                                     accordance with the Loan Agreement.

           "business day"            a day (other than a Saturday or a Sunday)
                                     on which banks are open for business in
                                     London.

           "Capital Equipment"       laboratory equipment and all other
                                     equipment required to carry out the
                                     Experimental Work as referred to in Clause
                                     4 of the Loan Agreement.

           "CE Mark"                 the sign of conformity with Directive
                                     93/42/EEC- Medical Devices.

           "Chronoflex"              the biomaterial manufactured under the
                                     Patents by the Company and marketed under
                                     the same name.

           "Company IPR"             all Intellectual Property Rights vested in
                                     or licensed to the Company or the Parent
                                     including but not limited to those relating
                                     to vascular grafts, where such Intellectual
                                     Property Rights:-

                                     (i)    have been developed by or on behalf
                                            of or licensed to the Company or the
                                            Parent prior to Completion
                                            (including, without limitation, the
                                            Patents and any processes in
                                            connection therewith); or

                                     (ii)   are developed by or in behalf of the
                                            Company or the Parent at any time
                                            independently and separately from
                                            the Experimental Work including any

                                       2
<PAGE>
 
                                            modifications to the Intellectual
                                            Property Rights of the Company or
                                            the Parent; or

                                     (iii)  are developed by the Company or the
                                            Parent in the course of the
                                            Experimental Work.

           "Completion"              completion of this Agreement.

           "Confidentiality          the confidentiality agreement between the
            Agreement"               Company and Freemedic dated 4th September
                                     1997.

           "Debenture"               the fixed and floating charge to be entered
                                     into by the Company pursuant to the Loan
                                     Agreement.

           "Commencement Date"       31st March 1998.

           "the Ethical Committee"   the Ethical Committee of the Medical School
                                     and the Trust.

           "Experimental Work"       the investigation and clinical trials
                                     making up Project One and the programme of
                                     research and development in respect of
                                     Project Two both as more particularly
                                     detailed in the Specification (including
                                     any clinical investigation and follow up)
                                     and intended to achieve the Purpose.

           "Expert"                  such person as may be appointed in
                                     accordance with Clause 10.2.

           "Freemedic"               Freemedic Plc (Company number 2776963)
                                     whose registered office is at The Royal
                                     Free Hospital School of Medicine,
                                     University of London, Rowland Hill Street,
                                     London, NW3 2PF.

                                       3
<PAGE>
 
           "Freemedic Letter"        the letter to be entered into by Freemedic
                                     pursuant to the terms of the Loan
                                     Agreement.

           "Intellectual Property    all patents, patent applications,
            Rights"                  continuations, continuations-in-part and
                                     divisions thereof, petty patents, utility
                                     models, supplementary protection
                                     certificates, registered designs, trade
                                     marks (whether registered or not), together
                                     with the right to apply for any of the
                                     same, copyrights, design rights, rights in
                                     confidential or technical information,
                                     rights in inventions, know-how and any
                                     similar rights existing anywhere in the
                                     world.

           "Licence"                 means the Licence agreement to be entered
                                     into by Freemedic the Parent in the form
                                     more particularly set out in Schedule 2.

           "Loan Agreement"          the loan and option agreement between
                                     Freemedic, the Company and the Parent in
                                     the agreed form set out in Schedule 1.

           "Managing Director"       the managing director of the Company who,
                                     at the Commencement Date is Alan Edwards.

           "Option"                  the put and call option exercisable
                                     pursuant to the Loan Agreement.

           "Parent"                  Cardiotech International Inc., a US
                                     corporation incorporated under the laws of
                                     the State of Massachusetts and whose
                                     principal place of business is at 11 State
                                     Street, Woburn, Massachusetts, 01801 U.S.A.

           "Parent Guarantee"        the guarantee to be entered into by the
                                     Parent pursuant to the Loan Agreement.

           "Patents"                 those patents and patent applications more

                                       4
<PAGE>
 
                                     particularly set out in Schedule 3.

           "the Products"            (i)    the Chronoflex peripheral vascular
                                            grafts investigated and clinically
                                            tested pursuant to Project One and
                                            the vascular grafts evaluated,
                                            clinically investigated or developed
                                            pursuant to Project Two; and

                                     (ii)   any kit evaluated, clinically
                                            investigated or developed pursuant
                                            to Project Two for the seeding of
                                            endothelial cells onto any such
                                            vascular grafts where such kit
                                            incorporates any such vascular
                                            graft.

           "Project One"             the project more particularly detailed in
                                     Clause 2.1.1 and the Specification.

           "Project Two"             the project more particularly detailed in
                                     Clause 2.1.2 and the Specification.

           "Project IPR"             all Intellectual Property Rights developed
                                     by the Medical School or the Trust and
                                     arising directly or indirectly from Project
                                     Two (and which are not Company IPR)
                                     including, without limitation, all
                                     improvements, developments or modifications
                                     made in the course of Project Two to any
                                     existing Intellectual Property Rights.

           "Purpose"                 to obtain Ethical Committee approval for
                                     Project One and Project Two and to obtain
                                     the CE Mark for the Products.

           "the Specification"       Appendix A to this Agreement entitled
                                     "Development of a small diameter compliant
                                     vascular graft for lower limb arterial
                                     bypass"

                                       5
<PAGE>
 
                                            and setting out the timetable for
                                            Project One and Project Two and the
                                            roles of the Company, the Medical
                                            School and the Trust in conducting
                                            the Experimental Work as may be
                                            varied or amended from time to time
                                            in accordance with this Agreement.

           "Territory"                      all countries in the world, and
                                            `country' shall be construed
                                            accordingly.

           "Trust"                          Royal Free Hampstead NHS Trust.

     
     1.2.  Clause headings shall be for convenience only and shall not affect
           interpretation.

     1.3.  Words and expressions defined in the Licence Agreement shall have the
           same meaning herein unless otherwise specifically defined.

2.   SCOPE, DURATION AND DELAYS
     --------------------------

     2.1.  Subject to and in consideration of the completion of the Loan
           Agreement in accordance with the terms set out therein and the mutual
           obligations set out below, the Company and the Medical School agree
           on the terms stated below to carry out and the Medical School agrees
           to procure that the Trust (where indicated in the Specification as
           being, or otherwise becoming the responsibility of the Trust) will
           carry out the Experimental Work with a view to completing:-

           2.1.1.  the investigation and phase 1 clinical trials in respect of
                   Chronoflex peripheral vascular grafts in accordance with the
                   Specification; and

           2.1.2.  the evaluation and clinical investigation of an endothelially
                   seeded Chronoflex peripheral vascular graft and the
                   evaluation of alternative technologies relevant to peripheral
                   arterial bypass in accordance with the Specification.

                                       6
<PAGE>
 
     2.2.  Unless otherwise agreed in writing by the parties hereto, this
           Agreement shall be deemed to commence on the Commencement Date and
           shall come to an end on the date 2 years thereafter ("the Minimum
           Period").

     2.3.  If the Experimental Work shall not have been concluded by the expiry
           of the Minimum Period, the parties hereto may agree to extend such
           period (subject to those further provisions agreed by the Committee),
           the cost of such extension being apportioned in such manner and upon
           such terms as the parties shall agree in writing.

     2.4.  Each of the Company and the Medical School will use their respective
           reasonable endeavours to complete or procure the completion of their
           respective parts, and in the case of the Medical School to procure
           the completion by the Trust of its respective part, of the
           Experimental Work in accordance with the Specification within the
           Minimum Period but if some cause which was beyond the reasonable
           control or foresight of the Company or the Medical School or the
           Trust (as appropriate) shall interrupt the progress of the
           Experimental Work by such party, then the Company or the Medical
           School (as appropriate) shall allow the other a reasonable additional
           period of time to complete or procure the completion of the relevant
           part of the Experimental Work and such additional period of time
           shall not be deemed to count towards the Minimum Period.

3.   UNDERTAKINGS
     ------------

     3.1.  The Medical School hereby warrants, represents and undertakes to the
           Company:-

           3.1.1.  that it will perform or will procure the performance of the
                   Experimental Work detailed in the Specification as being the
                   responsibility of the Medical School and/or the Trust with
                   all reasonable care and skill and to the best of its
                   abilities;

           3.1.2.  that it will use its reasonable endeavours to comply with or
                   procure the compliance by the Trust with the Specification;

                                       7
<PAGE>
 
           3.1.3.  that it will act in the utmost good faith towards the
                   Company;

           3.1.4.  that it will use its reasonable endeavours to achieve the
                   Purpose;

           3.1.5.  that it will permit only those of its staff previously
                   approved in writing by the Committee (as defined below) to
                   carry out any of the Experimental Work and/or to operate any
                   of the Capital Equipment;

           3.1.6.  that it will comply at all times with all relevant laws and
                   regulations in the United Kingdom in respect of the conduct
                   of such Experimental Work;

           3.1.7.  that it will procure the performance of and adherence to this
                   Agreement by the Trust where relevant;

           3.1.8.  that it will prepare and make available or procure that there
                   is prepared and made available to the Committee all test
                   results arising from that proportion of the Experimental Work
                   which is its responsibility or that of the Trust;

           3.1.9.  that it will immediately bring to the attention of the
                   Committee any matter arising from or in respect of the
                   Experimental Work (including the clinical investigation and
                   follow up) which would or might reasonably be expected to
                   invalidate any of the said results or which might otherwise
                   make or be likely to result in any of the Products becoming
                   hazardous or otherwise unsafe;

           3.1.10. that it will notify the Committee in writing immediately upon
                   receiving any written notice, or as soon as reasonably
                   practicable after becoming aware that the Trust has received
                   any written notice stating that the Experimental Work or any
                   part thereof or any of the Products infringes or is
                   reasonably likely to infringe any Intellectual Property
                   Rights of any third party whatsoever, but for the avoidance
                   of doubt the provisions of this 

                                       8
<PAGE>
 
                   clause 3.1.10 will not impose a positive duty upon the
                   Medical School to make specific enquiries in respect thereof.

     3.2.  The Company hereby warrants, represents and undertakes to the Medical
           School:-

           3.2.1.  that it will perform that part of the Experimental Work
                   detailed in the Specification as being the responsibility of
                   the Company, with all reasonable care and skill and to the
                   best of its abilities;

           3.2.2.  that it will use its reasonable endeavours to comply with the
                   Specification;

           3.2.3.  that it will act in the utmost good faith towards the Medical
                   School;

           3.2.4.  that it will use its reasonable endeavours to achieve the
                   Purpose;

           3.2.5.  that subject always to the provisions of clause 3.1 above, it
                   will be responsible for evaluating all results of the
                   Experimental Work, testing the Products for compliance with
                   all relevant safety regulations, requirements and standards
                   and for ensuring generally that all products supplied or used
                   by or on behalf of the Parent, the Company or any of their
                   Sub-licensees are safe and non hazardous (and neither the
                   Medical School nor the Trust nor their respective officers,
                   employees or agents will have any liability to the Company or
                   the Parent whether in contract, tort, negligence or otherwise
                   for any loss or damage arising out of or in connection with
                   the manufacture, supply, development or use of any of the
                   Products by or on behalf of the Parent, the Company or any of
                   their Sub-licensees, save as expressly provided hereby or in
                   the Licence).

4.   PROJECT MANAGEMENT COMMITTEE
     -----------------------------

     4.1.  The Company and the Medical School shall each appoint two suitably
           qualified employees or agents acceptable to the other to be members
           of a project

                                       9
<PAGE>
 
           management committee ("the Committee") which shall liaise on matters
           relating to the Experimental Work.

     4.2.  The first appointees of the Company shall be the Managing Director
           and Michael Szycher, and the first appointees of the Medical School
           shall be George Hamilton and Cengiz Tarhan.

     4.3.  During the period of this Agreement the Committee will meet formally
           at intervals of not less than 3 months to discuss the progress of the
           Experimental Work and the results obtained and to authorise
           expenditure in respect thereof.

     4.4.  Subject always to Clause 4.7 below, all decisions of the Committee
           shall be taken with the agreement of all members in attendance at
           such duly convened meetings, and any member unable to attend and vote
           at any such meeting shall be entitled to appoint another member to
           act as his proxy at such meeting, such appointment to be in writing.

     4.5.  The Committee meetings shall be convened by the Managing Director who
           shall prepare and circulate the agenda for such meeting for
           agreement, along with the notice convening the meeting no less than
           21 days before the proposed date therefor, unless otherwise decided
           by unanimous consent of the members of the Committee.

     4.6.  The first meeting of the Committee will be held on or as close as
           reasonably practicable to the date 3 months from the Commencement
           Date. All meetings will be held at the premises of the Medical School
           except as otherwise previously agreed in writing by the parties. All
           decisions and minutes of the Committee shall be duly recorded by such
           party as the Committee shall reasonably agree.

     4.7.  One of the functions of the Committee shall be to evaluate the
           progress of the Experimental Work and the compliance by the parties
           with the Specification. If there is any dispute between the parties
           as to whether either of them has complied with its obligations under
           the Specification, the Committee shall use all reasonable 

                                       10
<PAGE>
 
           endeavours to resolve such dispute amicably. If the dispute cannot be
           resolved within 14 days of it first arising, either party shall be
           entitled to refer such matter to the Expert.

     4.8.  Upon the presentation in a form reasonably acceptable to the
           Committee of an itemised invoice from the Medical School in respect
           of those proper costs incurred by it or the Trust or on their behalf
           in accordance with the Budget Costings in performing the Experimental
           Work undertaken during the previous three months in accordance with
           the Specification, the Committee shall authorise the Company to make
           payment from the Account to the Medical School or as it may direct.
           All invoices so presented shall be paid within 28 days of receipt,
           and if the Medical School does not receive payment of any of its
           costs, incurred in accordance with the Budget Costings or with the
           consent of the Committee pursuant to Clause 4.9, it having invoiced
           the Company in respect of the same, then the Medical School will be
           under no obligation, and the Medical School will be under no
           obligation to procure the Trust to continue with any of the
           Experimental Work then outstanding set out in the Specification until
           receipt of such payment.

     4.9.  The Committee may agree to vary the frequency and nature of payments
           specified in the Budget Costings and the nature of future work to be
           undertaken, in accordance with the Specification and in the event of
           a conflict or discrepancy between the decision of the Committee and
           the Budget Costings or Specification, the decision of the Committee
           shall prevail.

     4.10. The Medical School shall furnish both the Company and the Committee
           with copies of all technical reports on, and full details of the
           progress of the Experimental Work which shall be prepared at monthly
           intervals. The first of the technical reports shall be presented at
           the first meeting of the Committee. The Medical School shall, upon
           request also supply all other information and reports reasonably
           required by the Company in order to enable the Company to comply 

                                       11
<PAGE>
 
           with all statutory and other regulatory requirements necessary for or
           otherwise in connection with the Purpose.

     4.11. Upon the conclusion of the Experimental Work the Medical School shall
           provide the Committee with a final detailed report summarising the
           findings and outcome of the Experimental Work and containing such
           other information as may reasonably be required by the
           representatives of the Company.

     4.12. The parties hereto will procure that subject always to Clause 4.13
           below, the monies standing to the credit of the Account (but
           excluding any interest thereon) shall be used solely to pay those
           costs authorised by the Committee and properly incurred in accordance
           with the Budget Costings, by the Medical School or on its behalf in
           undertaking the Experimental Work in accordance with the
           Specification.

     4.13. Notwithstanding any other provision of this Agreement, any and all
           monies standing to the credit of the Account upon the termination of
           this Agreement or the cessation of the Experimental Work for whatever
           reason and not otherwise properly due to the Medical School under
           this Clause 4 shall vest absolutely in the Company, which shall be
           entitled to use such monies in such manner and for such purpose as it
           shall in its absolute discretion think fit.

5.   INTELLECTUAL PROPERTY
     ---------------------

     5.1.  The provisions of this Clause 5 shall be in addition to and not in
           substitution for those terms set out in the Licence. In the event of
           a conflict between the provisions of this Clause 5 and the terms of
           the Licence, the terms of the Licence shall prevail.

     5.2.  During the continuance hereof, the Company hereby grants to each of
           the Medical School and the Trust such non-exclusive, royalty free
           licence to use the Company IPR as may be necessary for the purpose of
           carrying out the Experimental Work in 

                                       12
<PAGE>
 
           accordance with the terms of this Agreement. All Company IPR shall at
           all times remain vested in the Company or the Parent, as appropriate.

     5.3.  The Company hereby warrants that it is the registered proprietor or
           the licensee under the Patents. The Company hereby warrants that to
           the best of its knowledge and belief but without having made any
           enquiries, investigations and searches, the Medical School and the
           Trust will not infringe the Intellectual Property Rights of any third
           party in using such Patents in the performance of the Experimental
           Work in accordance with the terms of this Agreement. Notwithstanding
           any other provision of this Agreement, the Company hereby warrants
           that it is entitled to grant the Licence of the Patents included in
           Clause 5.2 and that the consent of Thermedics Inc. or any other third
           party that owns an interest in the Patents is not required to enable
           the Medical School or the Trust to use the Patents in undertaking the
           Experimental Work or to enable Freemedic to grant the Licence.

     5.4.  All Project IPR shall vest in and be the exclusive property of
           Freemedic. The Company shall promptly notify the Medical School in
           writing of any Intellectual Property Rights of which it is or becomes
           aware to which Freemedic may be entitled by virtue of this Clause
           5.4.

     5.5.  Any Project IPR shall be subject to the Licence. In the event that
           the Parent wishes to take a licence of the Project IPR, the Company
           shall notify the Medical School in writing. Upon receipt of any such
           notice, the Medical School will procure that Freemedic shall offer to
           the Parent a licence of the Project IPR in accordance with and
           subject to the provisions of the Licence and the Company shall
           procure that the Parent shall execute the Licence on the agreed
           terms. If, for any reason, the Parent decides not to seek a licence
           of the Project IPR or refuses to enter into a licence in respect of
           the Project IPR in accordance with the terms of the Licence,
           Freemedic shall be entitled to grant a licence of the Project IPR to
           any person for the purpose envisaged in the Licence.

                                       13
<PAGE>
 
     5.6.  Save as aforesaid (or as provided in the Licence) the Company shall
           acquire no right title or interest in or to the Project IPR or to any
           other Intellectual Property Rights properly vesting in the Medical
           School, the Trust or Freemedic.

     5.7.  Neither the Medical School nor the Trust shall do or permit any act
           which might prejudice the novelty of an invention, process or
           development covered by this Clause 5.

     5.8.  Each party shall, if reasonably required by any other party thereto,
           procure that its employees, agents, or subcontractors enter into a
           corresponding undertaking as set out herein.

6.   COMMERCIAL EXPLOITATION
     -----------------------

     In the event that the Purpose has been achieved, the Company and the
     Medical School will take all practical measures and give all assistance and
     information as may be reasonably necessary to enable the Company to obtain
     those consents and fulfil those requirements at the Company's expense,
     whether statutory or otherwise which are necessary to allow the commercial
     development and exploitation of the Products by the Company and/or the
     Parent.  The Company shall for the avoidance of doubt be the sole
     beneficiary and recipient of any income arising directly or indirectly from
     the exploitation of the Products tested pursuant to Project One.  The terms
     of exploitation of any Product tested or developed pursuant to Project Two
     shall be governed by the Licence.

7.   CONFIDENTIALITY
     ---------------
     The provisions of this Clause 7 shall be in addition to and not in
     substitution for the restrictions, obligations and undertakings contained
     in the Confidentiality Agreement.

     7.1.  Each of the parties hereto shall take all reasonable practical
           measures to ensure that access to the premises where the Experimental
           Work is conducted is restricted to such individuals as are taking
           part in the Experimental Work or as otherwise reasonably require
           access to such premises, that materials use in and data obtained

                                       14
<PAGE>
 
           from the Experimental Work are kept in a secure manner and that,
           subject to the provisions of this Clause 7, data obtained from the
           Experimental Work is not made publicly available.

     7.2.  Save as expressly provided in this Clause 7, except with the other
           party's prior written agreement or as required by operation of law or
           in accordance with any other regulatory requirements in respect
           thereof, neither party shall disclose or permit the disclosure to any
           third party of any information obtained from the other party (or from
           the Parent, the Trust or Freemedic as appropriate) in any document or
           correspondence marked "Confidential" or any know how, data, technical
           trade or business information obtained from the other (or from the
           Parent, the Trust or Freemedic as appropriate) in connection with
           this Agreement including any such information obtained by either
           party during a visit to the other's (or the Trust's or the Parent's)
           place of business work offices or laboratories.

     7.3.  The Medical School will disclose to the Company all trial results,
           data and information arising exclusively from Project One. The
           Company shall be free to use and disclose any such results, data or
           information as it thinks fit, including the for purpose of obtaining
           any necessary product approvals. The Medical School will, and will
           procure that the Trust will, retain all such results, data and
           information in confidence and will not use the same other than for
           the purpose of Experimental Work or with the prior written consent of
           the Company or the Parent.

     7.4.  The Company shall at all times retain in confidence the Project IPR,
           including all data and technical information relating thereto and the
           Company and the Parent shall use the same only where licensed to do
           so by Freemedic in accordance with the terms of the Licence. The
           Medical School will and will procure that Freemedic and the Trust
           will retain all such Project IPR in confidence to the extent that the
           same applies to the Products. Notwithstanding any other provision 

                                       15
<PAGE>
 
           of this Agreement, the Medical School and the Trust shall be entitled
           to use all such Project IPR in connection with their academic
           research and the Medical School, the Trust and Freemedic shall be
           entitled to disclose any of the same to any third party or permit any
           third party to use any of the same in connection with matters
           unrelated to the development, manufacture or sale of the Products,
           subject to any such third party entering into corresponding
           obligations of confidentiality in respect of such Project IPR.

     7.5.  Either party shall be entitled to disclose all information, data or
           know-how properly disclosed to it pursuant to this Agreement to its
           employees, agents and sub-contractors, the Company shall be entitled
           to disclose all such information, data or know-how to the Parent and
           the Medical School shall be entitled to disclose all such
           information, data or know-how to the Trust and Freemedic, and each
           party shall procure that all such persons to whom all such
           information, data or know-how is disclosed keep the same confidential
           in accordance with the terms of this Clause 7 and, if so required by
           the other, the Company or the Medical School will procure that their
           employees, agents and sub-contractors or the Parent or the Trust and
           Freemedic (as appropriate) enter into a corresponding confidentiality
           undertaking with the party disclosing such information, data or know-
           how.

     7.6.  The obligation in Clauses 7.1 to 7.5 (inclusive) shall be in force
           from the Commencement Date and shall remain in force after expiry or
           termination of this Agreement without limitation in time except where
           the party seeking relief from the obligation can show that the data,
           know-how or information was public knowledge and known to that party
           at the time it was obtained from the disclosing party or that since
           the data, know-how or information was obtained it has become public
           knowledge without the fault of any other party hereto.

     7.7.  Each of the parties hereto recognises that the other may wish to
           publish in a reputable journal scientific papers containing data
           obtained from the Experimental 

                                       16
<PAGE>
 
           Work. Accordingly the parties hereto shall have the right to publish
           such papers provided that before they submit any such paper to such
           journal, the relevant party shall submit the paper to the Committee
           which shall scrutinise the paper to ensure that no information is
           disclosed in the paper which would prejudice the commercial interest
           of the other party in the data or the novelty of any invention to
           which such party is entitled under this Agreement. The Committee
           shall give its decision within 1 month of the date on which the paper
           is submitted to it for scrutiny. Where the Parent or the Trust wish
           to publish any such papers, they shall be so entitled subject to the
           Company or the Medical School submitting any such papers to the
           Committee for scrutiny in accordance with this Clause 7.7.

8.   ENTRY AND INSPECTION
     --------------------

     Subject always to Clause 7, the parties hereto permit (or procure that
     there is permitted) on request any duly authorised representative of the
     other party to enter at all reasonable times and upon reasonable notice
     into and upon that party's premises where any of the Experimental Work or
     any research and development in respect thereof is being carried out for
     the purpose of ascertaining that the provisions of this Agreement and the
     Specification are being complied with by such party.

9.   TERMINATION
     -----------

     9.1.  This Agreement may be terminated at any time by the Company giving
           written notice to the Medical School specifying the relevant breach
           if the Medical School shall have committed a material breach of any
           obligation or duty owed under this Agreement to the Company and (if
           such breach is capable of rectification) shall have failed to rectify
           the breach within 30 days of the written notice requiring the
           rectification.

     9.2.  This Agreement may be terminated at any time by the Medical School
           giving written notice to the Company specifying the relevant breach
           if the Company shall have committed a material breach of any
           obligation or duty owed under this 

                                       17
<PAGE>
 
           Agreement to the Medical School and (if such breach is capable of
           rectification) shall have failed to rectify the breach within 30 days
           of the written notice requiring the rectification.

     9.3.  In addition, this Agreement may be terminated at any time by the
           Medical School giving written notice specifying the event to the
           Company if the Company shall have committed an Event of Default under
           the Loan Agreement or an event has occurred which under the terms of
           the Debenture confers on Freemedic the right to enforce the
           Debenture.

     9.4.  This Agreement may be terminated by the Company forthwith if either
           Freemedic or the Medical School goes into liquidation either
           compulsory or voluntary (except for the purpose of reconstruction or
           amalgamation) or passes a resolution for winding up or if a receiver,
           administrative receiver or administrator is appointed in respect of
           the whole or any part of its assets or if either party makes an
           assignment for the benefit of or composition with its creditors
           generally or threatens to do any of these things or any similar
           occurrence under any jurisdiction which affects such party.

     9.5.  This Agreement maybe terminated by the Medical School forthwith if
           either the Company or the Parent goes into liquidation either
           compulsory or voluntarily (except for the purpose of reconstruction
           or amalgamation) or passes a resolution for winding up or if a
           receiver, administrative receiver or administrator is appointed in
           respect of the whole or any part of its assets or if either party
           makes an assignment for the benefit of or composition with its
           creditors generally or threatens to do any of these things or any
           similar occurrence under any jurisdiction which affects such party.

     9.6.  In the event that this Agreement is terminated by reason of the
           default or insolvency of either Freemedic or the Medical School in
           accordance with this Clause 9, then notwithstanding any other term of
           this Agreement, no monies shall become repayable to Freemedic under
           the Loan Agreement whether in 

                                       18
<PAGE>
 
           respect of capital or interest until the first business day following
           the second anniversary of the completion of such Loan Agreement. All
           monies then owed by the Company to Freemedic pursuant to such
           Agreement will be paid forthwith to Freemedic by the Company in
           accordance with the relevant terms set out in Clause 15 of the Loan
           Agreement.

     9.7.  In the event that this Agreement is terminated by reason of the
           default or insolvency of either the Company or the Parent in
           accordance with this Clause 9, then all monies then owed by the
           Company or the Parent to Freemedic pursuant to the Loan Agreement
           will be paid forthwith to Freemedic by the Company or the Parent as
           the case may be in accordance with the terms set out in Clause
           15 thereof.

     9.8.  Provided that the proposed merger of the Medical School and
           University College London (or any other organisation in the
           University of London) shall not, for the avoidance of doubt in itself
           confer a right of termination on any of the parties hereto.

     9.9.  In the event that this Agreement is terminated by the Company
           pursuant to 9.1 or 9.4 above, then without prejudice to any rights it
           may have in respect of such breach the Company shall be entitled to
           require Freemedic to enter (and the Medical School will procure that
           Freemedic so enters) into the Licence in respect of such of the
           Project IPR which exists as at the date of such termination.

     9.10. Save as otherwise agreed in writing by the parties, or as expressly
           provided herein, this Agreement will automatically terminate on the
           expiry of the Minimum Period.

     9.11. Upon termination or expiry of this Agreement, all rights and
           obligations of either of the parties shall automatically terminate,
           save that termination or expiry of this Agreement shall not affect
           the accrued rights of either party and the following provisions shall
           stay in full force and effect:- Clause 1, 3.2.5, 4.8, 5.3, 5.5, 5.6,
           7, 9.6, 9.7, 9.9, 9.11, 10 and 11.

                                       19
<PAGE>
 
10.  DISPUTES, PROPER LAW AND JURISDICTION
     -------------------------------------

     10.1. The parties hereto shall strive to resolve on an amicable basis any
           dispute that may arise between them relating to the terms of this
           Agreement.

     10.2. In the event that the parties cannot settle any dispute between them
           arising pursuant to the matters referred to in Clause 4.7, either
           party shall be entitled to refer the matter to the Expert who shall
           be an independent third party scientific expert appointed by the
           parties or, in the absence of the agreement, by the President for the
           time being of the Royal College of Surgeons. The Expert shall act as
           an expert and not as an arbitrator and his or her decision in respect
           of any matter referred to him or her shall be final and binding on
           the parties. All costs incurred by the Expert in resolving any
           dispute shall be borne in such proportions as the Expert shall
           determine. The parties shall comply with such directions as the
           Expert may give in respect of such dispute.

     10.3. This Agreement shall be governed by the laws of England, save as
           provided in Clause 10.2, the parties hereby submit to the exclusive
           jurisdiction of the English courts.

11.  MISCELLANEOUS
     -------------

     11.1. Save as expressly permitted pursuant to the terms of this Agreement,
           no announcement, advert or other circular in respect of the subject
           matter of this Agreement or the result(s) of the Experimental Work
           may be made or issued either directly or indirectly by any party
           hereto without the nature, extent and content thereof being given the
           prior written consent of the other party hereto, such consent not to
           be unreasonably withheld or delayed.

     11.2. This Agreement is personal to the parties hereto, neither of whom may
           assign its rights or obligations under it in whole or in part without
           the other party's prior written agreement except that the Medical
           School shall be entitled, with the Company's prior written agreement,
           such agreement not to be unreasonably

                                       20
<PAGE>
 
           withheld or delayed, to assign the rights and benefits under this
           Agreement to University College London (or any other organisation in
           the University of London) or any company owned by University College
           London (or such other organisation) in connection with the proposed
           merger of the Medical School with University College London (or any
           such other organisation), provided that in the event of any such
           merger, save where statutorily inappropriate, the Medical School, the
           Company and University College, London (or any such other
           organisation) will enter into an agreement novating the obligations
           of the Medical School hereunder to University College, London (or
           such other organisation).

     11.3. Neither party shall be bound by any variation or amendment of or
           addition to this Agreement except where that party has agreed
           expressly in writing to be so bound.

     11.4. This Agreement shall not constitute a partnership between the
           parties.

     11.5. Any notice given under this Agreement shall be in writing either
           delivered personally at or posted in the case of notice served on the
           Company, to its registered office or in the case of notice served by
           the Company, to the registered office or place of business of the
           Medical School sent (if posted) by recorded delivery or registered
           first-class post. If such notice is served personally it shall be
           deemed to have been received at the time of delivery. If such notice
           is sent by post it shall be deemed to have been received 48 hours
           after being correctly addressed, stamped and posted.

     11.6. Each of the parties hereto undertakes that it is fully empowered to
           enter into this Agreement and to become bound in accordance with its
           terms.

     11.7. No failure by either party to exercise and no delay in exercising any
           right power or privilege under this Agreement shall operate as a
           waiver nor shall any single or partial exercise of any right power or
           privilege preclude any further exercise of it or the exercise of any
           other right power or privilege. The rights and remedies 

                                       21
<PAGE>
 
           provided in this Agreement are cumulative and not exclusive of any
           rights or remedies provided by law.

     11.8. If any term of this Agreement or its application is judicially or
           otherwise held invalid or unenforceable or if the parties mutually
           agree in writing to any variation or revision of this Agreement the
           remainder of this Agreement and its application shall not be affected
           and this Agreement shall remain in full force and effect.

     11.9. This Agreement, the Confidentiality Agreement, the Debenture, the
           Loan Agreement, the Parent Guarantee and the Freemedic Letter
           constitute the entire agreement between the parties hereto, and each
           party hereby confirms that it has not relied upon any representation,
           warranty or undertaking other than those expressly set out herein.
           Without prejudice to the foregoing, the parties waive any right they
           may have to any damages or rescission for any misrepresentation which
           is not contained in these Agreements, or for breach of any warranty
           not contained in these Agreements, unless and to the extent such
           misrepresentation or warranty was made fraudulently.

AS WITNESS the hands of the parties hereto the day and year first above written.


EXECUTED by a duly authorised       )
representative of CARDIOTECH        )
INTERNATIONAL LIMITED               )
in the presence of                  )



EXECUTED by a duly authorised       )
representative of THE ROYAL FREE    )
HOSPITAL SCHOOL OF MEDICINE         )
in the presence of                  )

                                       22
<PAGE>
 
                                  SCHEDULE 1
                                  ----------
                                LOAN AGREEMENT
                                --------------

                                       23
<PAGE>
 
                                  SCHEDULE 2
                                  ----------
                                    LICENCE
                                    -------

                                       24
<PAGE>
 
                                  SCHEDULE 3
                                  ----------
                        PATENTS AND PATENT APPLICATIONS
                        -------------------------------

1.   Patent Applications
     ---------------------

     (i)    European Patent Application 973032626

            (Publication No. 0 807 425) "Making an Access Graft"

            Priority : GB 9610273.6, 16/th/ May 1996

            Filed:     13/th/ May 1997

            Published: 19/th/ November 1997 (with search report)

     (ii)   US Patent Application No. 08/655317

            "Method of Making an Access Graft and a Vascular Prosthesis"

            Priority:  GB 91165639  1st August 1991

            Filed:     1/st/ February 1994 (continuation of Serial No. 
                       08/182,156)

2.   Patents
     -------

     (i)    Belgium  (EP)                0 286 220
            Switzerland (EP)             0 286 220-7
            Germany                      3 879 741-0                 
            Austria (EP)                 0 286 220                 
            Denmark                      168359                 
            Spain (EP)                   0 286 220                 
            France (EP)                  0 286 220                 
            Great Britain (EIP)          0 286 220                 
            Greece                       3008 181                 
            Ireland                      63267                 
            Italy (EP)                   0 286 220                 

                                       25
<PAGE>
 
            Japan                        1813534                  
            Luxembourg (EP)              0 286 220
            Netherlands (EP)             0 286 220
            Portugal                     88710
            Sweden                       88301722-0
            USA                          5132066

     (ii)   Germany                      69024658-7
            France (EP)                  0495 869
            Great Britain (EP)           0 495 869
            USA                          5549860

     (iii)  US Patent                    5,254,662
            Biostable Polyurethane
            Product Co-owned and
            Cross Licensed with Thermedics Inc

     (iv)   US Patent Application        08/920-662
            Hydrolytically and Proteolytically
            Stable Polycarbonate Polyurethane
            Silicone Copolymers
     (v)    US Patent Applicant - Biocompatable Devices

                                       26
<PAGE>
 
                                  APPENDIX A
                                  ----------
                                SPECIFICATIONS
                                --------------

                                       27
<PAGE>
 
                                  APPENDIX B
                                  ----------
                                BUDGET COSTINGS
                                ---------------
                                        

                                       28
<PAGE>
 
                                                                   EXHIBIT 10.13


                                                                       EXHIBIT A
                                                                       ---------
                                                                                
                                                                                
                                        

                      THE DEVELOPMENT OF A SMALL DIAMETER
                    COMPLIANT VASCULAR GRAFT FOR LOWER LIMB
                                ARTERIAL BYPASS



                   MR. G HAMILTON, MB, CHB, D.OBS RCOG, FRCS
                    CONSULTANT GENERAL AND VASCULAR SURGEON
                       UNIVERSITY DEPARTMENT OF SURGERY
                              ROYAL FREE HOSPITAL



                                 ALAN EDWARDS
                               MANAGING DIRECTOR
                         CARDIOTECH INTERNATIONAL LTD.
<PAGE>
 
EXECUTIVE SUMMARY

This is an application to support the investigation of a small diameter
compliant vascular prosthesis.  The application would be in patients presenting
with critical limb ischemia (threatened limb loss due to poor circulation) which
affects 1 in 2,500 of the population.

The best material for this procedure is autologous saphenous vein.  However, in
30% of patients the vein cannot be used and an alternative conduit must be
sought.

The market is worth some (Pounds)100 million per annum. It is dominated by
American-manufactured products utilizing expanded P.T.F.E., the use of which is
limited by the diameter of the grafts being more than or equal to 6 mm, with
poor results in critical applications. There is therefore a need for a 4-5 mm
internal diameter prosthetic vascular graft for this type of distal arterial
reconstruction.

The programme will bring together the commercial, technical and development
resources of the commercial partner with the research, scientific and surgical
resources of the department of vascular surgery at The Royal Free Hospital
Medical School who have considerable specialist experience and international
recognition in this field.

The development process will encompass a new approach to the design of vascular
grafts in that we intend to address the main reasons for graft failure by
utilising technologies to overcome the failure modes.  For example, the graft
will have anti-thrombogenic flow lining which could be provided  by a layer of
endothelial cells or alternative technologies.  The graft will also be compliant
to match the physical and mechanical characteristics of a native blood vessel
enabling the transmission of pulsatile blood flow.

The project will last two years and is divided into a series of tasks.  These
tasks take the programme from investigation of a polycarbonate urethane vascular
graft developed by CardioTech for haemodialysis access through a series of steps
to pilot clinical evaluation by the University partner for peripheral vascular
bypass.  Additional methods or technologies which could potentially enhance
graft performance will be investigated.

                                       2
<PAGE>
 
SECTION 1

THE NEED

The United Kingdom Vascular Society recently reported on the prevalence of
patients presenting to vascular surgeons with critical limb ischaemia
(threatened limb loss due to poor circulation) to be 1 in 2,500 of the
population.  The peak occurrence is between 70 and 79 years of age.  This burden
on the NHS is expected to increase as the population ages.  To avoid 
amputation, peripheral arterial bypass surgery is required, usually to a small
artery in the calf or foot.  Successful revascularisation has been clearly shown
to be considerably less expensive than amputation and subsequent rehabilitation.
The best material for this procedure is autologous saphenous vein.  However, in
30% of patients the vein cannot be used and an alternative conduit must be
sought.  There is therefore a need for a 4-5 mm internal diameter prosthetic
vascular graft for this type of distal arterial reconstruction.

THE PROBLEM

Below knee prosthetic grafting is currently restricted by unacceptably poor
patency rates achieved with existing products.

The principal causes of graft failure are:

 .  Early thrombosis at less than one month due to the inherent
   thrombogenicity of current prosthetic materials.
 .  Diameter mismatch between artery and graft.
 .  Low compliance and major compliance mismatch of current prosthetic
   materials resulting in inadequate flow rates.
 .  Neo-intimal hyperplasia between one and twelve months.
 .  Disease progression usually beyond the distal anastomosis.
 .  Inadequate inflow.

                                       3
<PAGE>
 
THE SOLUTION

To develop a small diameter synthetic vascular graft with the potential for
improved clinical performance by bringing together several technologies and a
multidisciplinary team who have the relevant background and skills to undertake
and complete the project.

This is a new approach to the research and design of vascular grafts.
Historically, the development of vascular grafts has been directed at one
factor, such as material characteristics, kink resistance or thrombogenicity,
etc.  Graft failure is however a multifactorial issue.  Performance and clinical
outcome will not be substantially improved without addressing the major issues
which contribute to graft failure in combination with novel technologies which
can improve performance.

An antithrombotic surface to inhibit thrombus formation and form an interface
with blood flowing through the graft can be enabled by endothelial cell lining
of the graft surface. This is  considered a likely successful route to achieving
such an interface.  However, several new technologies are available to modify
the flow surface of the graft and achieve a low thrombotic flow lining without
the need for biological materials to be introduced.

Neo-intimal hyperplasia, which causes later graft failure, tends to occur when
the endothelium is damaged, although this can be inhibited by restoration of the
cell monolayer by cell seeding.  An alternative route would be in bonding
certain pharmaceutical or biotechnology products onto the graft surface which
could minimise the potential for hyperplasia development.

Arteries display a characteristic known as compliance which in lay terms can
best be expressed as elasticity (but not in the scientific sense).  This
property gives the artery elastic recoil which takes place after each arterial
pulse has passed, and thus enhances blood flow.  This property is particularly
marked in low blood pressure states, thus enhancing blood flow even further.
All prosthetic grafts to date have very low compliance, i.e. they are rigid and
non-elastic.  Enhancing the compliance of a small calibre prosthetic graft would
be expected to improve the low flow often seen in this situation.  Furthermore a
compliance prosthetic graft would reduce the mismatch in compliance between
graft and native artery.  Low graft compliance and compliance mismatch are
recognized as important factors in failure of small calibre prosthetic grafts.
Design and development of a compliant vascular graft should remove this cause of
graft failure.

The design criteria will be to mimic the mechanical and physical properties of a
natural artery allowing the maintenance of pulsatile flow and compliance in
combination with an antithrombotic flow lining.  This will allow patency to be
maintained in smaller diameters even with low blood flow.

                                       4
<PAGE>
 
THE BENEFITS

PATIENT

For the patient, successful bypass allows resumption of a normal lifestyle,
relief from pain, ulceration and/or gangrene, and avoidance of amputation.
Improved graft performance would reduce the rates of secondary reconstructions
and amputation, with their attendant risks for the generally elderly population.

NHS

For the NHS, it has been clearly shown that limb salvage, at an estimated
(Pounds)7,500 per patient, with its attendant patient benefits, is significantly
less expensive than amputation and the subsequent support requirements,
conservatively estimated at (Pounds)25,000 per patient.  This would offer a
potential saving of around (Pounds)66 million per annum even if only 25% of
patients are able to benefit. Reduction in expensive revisional surgery, a
reduction in the burden of community care services, and an increase in the case
load throughput and bed occupancy rates are among the major benefits.

COMMERCIAL

The development of a successful small bore vascular graft could bring several
diverse benefits

 .  major capital investment and job creation in a high technology manufacturing
   company
 .  improved performance by the UK health care sector in international markets
 .  international recognition that collaborative medical implant programmes can
   be successfully completed in the UK

                                       5
<PAGE>
 
SECTION 2

PARTICIPANTS

The project is proposed by CardioTech International Ltd, the only UK based
company manufacturing polycarbonate urethane vascular access grafts, and the
University Department of Vascular Surgery at the Royal Free Hospital School of
Medicine, London.


CARDIOTECH

COMPANY STRUCTURE

CardioTech was created in May of 1996 as a spin-off from PolyMedica Industries
Inc. into a stand-alone company. The company comprises CardioTech International
Inc. which is quoted on the American Stock Exchange and specialises in the
development, production and marketing of advanced polymer biomaterials for the
medical device industry, and CardioTech International Ltd which is undertaking a
programme of small diameter vascular graft development which is a continuation
of the work undertaken over the last three years by  PolyMedica Industrioe.

Our vascular graft programme is principally based in the UK.  Research,
development, testing and production of vascular grafts is being carried out at
our premises near Chester.

COMPETENCIES

Staff employed by CardioTech (previously at Polymedica) have already developed a
polycarbonate Vascular Access Graft used for haemodialysis.  We have therefore
carried out a considerable programme of process development, in vitro and in
vivo research into the biodurability of our material ChronoFlex and the
ChronoFlex vascular access graft which has enter clinical trials in both Holland
and France.  The information generated by CardioTech during graft development
will be used to support an application to the Ethics Committee to commence
limited clinical evaluation.

MATERIALS

ChronoFlex will be used to produce the new graft. It is a biodurable
polycarbonate based polyurethane which comprises the following components:

 .  polycarbonate polyol
 .  methylene diisocyanate
 .  ethylene diamaine
 .  1,3 diaminocyclohexane

                                       6
<PAGE>
 
CardioTech holds USA patent 6254662 for ChronoFlex.  The inventor of
ChronoFlex, Dr. M. Szycher, is Chairman of the company and Chief Technical
Officer.  CardioTech holds a perpetual worldwide license from PolyMedica to
manufacture and use ChronoFlex for medical applications.

VASCULAR GRAFT PRODUCTION

Our patented process involved what we term "low temperature cast coagulation".
In this system we gently extrude polymer solution onto the smooth surface of a
mandrel. The polymer solution comprises a solution grade ChronoFlex, a water
soluble filler of between 10 and 60% by weight and a surfactant in an amount
between 1 and 10% by weight. The mandrel and extrusion head rotate in
synchronization, minimising shear and residual stress, whilst a pair of 2.5
metre long mandrels are drawn through the twin extrusion heads into a coagulant
maintained at 40 degrees C. During phased coagulation the fillers prevent
collapse of the structure as the solvent disperses and the filler dissolves into
the coagulant, resulting in a single layer uniform microporous structure which
avoids the danger of delamination and subsequent loss of strength, maintaining
cross section.

By manipulating the process conditions, it is possible for grafts to be produced
with different physical and mechanical characteristics; an example would be a
very porous graft allowing rapid cellular ingrowth which could be suited to
venous applications.

CardioTech owns European patent 0286220, USA patent 5132066 and Japanese patent
1813534 covering aspects of graft production.

ROUTE TO MARKET

When the graft is ready for introduction, the Medical Device Directives will be
mandatory.  The peripheral graft will obviously require a CE mark and as a class
11b implant able device it will require clinical data to comply with the
essential requirements.  This information is expected to come from limited
clinical investigations carried out by the academic partner.

DISTRIBUTION

There are three possible methods:

1.  Direct via staff employed by CardioTech
2.  Indirect via distributors engaged by CardioTech
3.  Creating a strategic alliance to access an existing international marketing
    and sales network with a major health care company

It is too early to decide which option will be favoured. However, by mid 1997
our vascular access graft will become a commercial product and we will have a
distribution in place which may be suitable for the peripheral graft.

                                       7
<PAGE>
 
OPPORTUNITY

The UK market is estimated at (Pounds)1.5 million per annum, the total EU market
at (Pounds)40 million and the global business (Pounds)125 million per annum.
The market is growing at 10% per annum and is dominated by American-manufactured
products.  The EU has suspended import duty on certain categories of vascular g
rafts because there is no EU manufacturer.

THE UNIVERSITY DEPARTMENT OF SURGERY AT THE ROYAL FREE HOSPITAL

The Department is recognised for its research into several aspects of vascular
biology, in particular the role of compliance in vascular grafting.  Vascular
biological research here has also focused on neo-intimal hyperplasia and
endothelial cell graft seeding. The head of Department has been involved in
compliance research initially at Harvard and over the last seven years at the
Royal Free Hospital School of Medicine.  The Department has a Principal
Biophysicist, a specialist in vascular flow dynamics and measurement who has
developed a highly accurate method of compliance measurement using digital x-ray
angiographic techniques.  For the first time this method allows accurate
compliance measurement of implanted grafts and native arteries in patients.  In
addition there is an experienced cell culture technician and a vascular fellow
of two years experience of research into compliance and vascular flow
measurement.  The department is set up with a vascular Haemodynamic laboratory
for in vitro and in vivo vascular graft studies.  This department has great
expertise in the field of compliance in vascular surgery.

The methodologies of immunohistochemistry, autoradiography and electron
microscopy are in routine use in this Department.  The methodology of in vitro
study of prosthetic grafts over the long term (i.e. longer than 24 hours) under
physiological conditions is well developed.  There are superb facilities for
large animal studies focused on the pig with established prosthetic graft
evaluation within this context.

The IRC of Biomaterials Research headed by Professor Dennis Chapman is housed
within the University Department of Surgery.  In collaboration there has been
research into the use of non-thrombogenic biomaterials in lining prosthetic
graft materials both in vitro and using a carotid interposition model in sheep.

                                       8
<PAGE>
 
SECTION 3

PROJECT PLAN OUTLINE

Research and experimental work will be carried out by the Department of Vascular
Surgery at The Royal Free Hospital Medical School.  CardiTech will manufacture
polycarbonate urethane grafts for the project at its facilities near Chester.

The present polycarbonate graft which has been developed for vascular access by
CardioTech will be studied in vitro by the academic partner to ascertain its
suitability to meet the more demanding requirements in peripheral vascular
bypass grafting.

The results from evaluation will be combined with study results and other
development information from CardioTech International Ltd to allow an
application to be made to an Ethics Committee leading to a pilot clinical
investigation with the objective of determining the short term clinical
performance of the grafts, providing the clinical information required to comply
with the essential requirements of the EU Medical Devices Directive.  The
clinical investigation will commence no later than May 1998.

In parallel to this work evaluation of alternative adjunctive technologies will
be instigated.  In particular endothelial cell seeding of the ChronoFlex will be
undertaken to reduce the thrombogenicity of the graft surface.

Grafts will go through a selection process of physical and mechanical testing by
CardioTech (ISO/DS 7198 Tubular Vascular Grafts) and in vitro and in vivo
research at the laboratories of the academic partner leading to clinical
evaluation.

The project will consist of a series of tasks which are described in outline as
follows:

                                       9
<PAGE>
 
--------------------------------------------------------------------------------
PROJECT 1            IN VITRO INVESTIGATION OF POLYCARBONATE URETHANE GRAFT FOR
TASKS 1.1 - 1.4      LOWER LIMB ARTERIAL BYPASS
--------------------------------------------------------------------------------
 
Objective:                      Research the compliance and pulsatile flow
                                characteristics

Responsible:                    Royal Free Hospital, dept. of vascular surgery

Description of Work:            Peripheral arterial bypass grafts have to pass
                                over the knee joint and there is concern for
                                possible kinking of the graft at flexion points.
                                CardioTech will add to the existing access graft
                                an external supporting layer to improve the 
                                anti-kinking properties of the graft for 
                                peripheral use. The reinforced peripheral 
                                graft will be made in both 4 and 5 mm internal 
                                diameters to provide a closer match to the 
                                natural vessels.
                                           
                                        Grafts will be manufactured by CTI for
                                        evaluation of the compliance
                                        characteristics of the polycarbonate
                                        urethane grafts in vitro by using
                                        oohotracker and angiographic methods,
                                        obtaining compliance, diameter and
                                        pressure curves for a range of
                                        physiological flow rates.

                                        Initially research the compliance and
                                        shear stress characteristics of human
                                        artery in vivo and in vitro at
                                        physiological flow conditions by
                                        echotracker and angiographic methods.
                                        This will establish the physical
                                        characteristics of a blood voocol and
                                        generate a range of compliance and
                                        pressure curves at different pulsatile
                                        blood flow waveforms for human artery
                                        and compliant graft.

Objective:                      Research the ability of the graft to tolerate
                                low blood flow.

Description of Work:            Grafts are placed in a pulsatile flow circuit to
                                simulate human femoral artery conditions. Flow
                                and pressure rates are modified to establish
                                conditions prevalent in a range of diseased
                                femoral artery conditions and by gross and
                                microscopic methods to investigate the ability
                                of surface to tolerate low blood flow. This
                                would be assessed over one week at sterillised
                                conditions. The aim is to access the physical
                                characteristics over time in a condition similar
                                to in vivo.

Deliverable:                    An analysis of the peripheral vascular graft to
                                provide the

                                       10
<PAGE>
 
                                justification required to commence experimental
                                implants.

                                       11
<PAGE>
 
--------------------------------------------------------------------------------
PROJECT 1                IN VIVO RESEARCH AND EVALUATION OF POLYCARBONATE GRAFT
TASKS 1.5, 1.8           FOR LOWER LIMB ARTERIAL BYPASS
--------------------------------------------------------------------------------
 
Objective:                      Research into the effect of anastomotic
                                technique and materials on compliance.

Responsible:                    Royal Free Hospital, dept. of surgery.

Description of Work:            In vivo acute studies of anastomotic compliance
                                will be performed to research the effects of
                                commonly used suture materials, i.e. proline and
                                novafil sutures (this is a more elastic or
                                compliant suture material provided by Davis &
                                Geck) and suture technique, i.e. continuous and
                                interrupted on the in situ rentention of
                                compliance.

                                The haemodynamic effect of anastomotic angle
                                will also be studied (including the
                                configuration used in clinical practice).
                                Measurements at the anastomosis will include
                                shear stress, shear rate and turbulence.

Objective:                      Long term in vivo compliance and performance
                                study.

                                        Having identified the best anastomotic
                                        methodology and materials by actue in
                                        vivo experimental investigation we will
                                        begin research into the acute and
                                        chronic in vivo compliance of the graft.
                                        This will be done by implanting grafts
                                        into a porcine model. Compliance will be
                                        measured at implant and at predetermined
                                        intervals using an angiographic
                                        technique.

                                        At explant, in addition to compliance
                                        and performance measurements, the grafts
                                        will be perfused-fixed and studied by
                                        autoradiograpy, and
                                        immunohistochemistry, and electron
                                        microscopy. Redial tensile strength and
                                        molecular weight determination are also
                                        undertaken on the explants to
                                        demonstrate biodurability.

Deliverable:                    Analysis of biological response to the implant,
                                retention of compliance characteristics, and
                                performance information needed to justify
                                limited clinical evaluation and recommendations
                                for implantation technique.

                                       12
<PAGE>
 
--------------------------------------------------------------------------------
PROJECT 1           CLINICAL INVESTIGATION OF POLYCARBONATE URETHANE GRAFT FOR
TASKS 1.7 - 1.9     LOWER LIMB ARTERIAL BYPASS
--------------------------------------------------------------------------------
 
Objective:                      Investigate the short term clinical performance
                                of the peripheral vascular graft.

Responsible:                    Clinical investigation - Royal Free Hospital,
                                dept. of vascular surgery and other
                                investigators to be determined Regulatory -
                                CardioTech International Ltd.

Objective:                      Twenty patients requiring lower limb arterial
                                bypass in whom saphenous vein is not available
                                will be recruited into the study Graft patency
                                to be assessed non-invasively using Duplex
                                scanning at regular intervals.
                                
                                In addition, ultrasound measurements of the
                                graft lumen will be performed at operation and
                                at regular intervals to monitor the compliance
                                characteristics.

Description of Work:            Design clinical evaluation to EN540.

                                Prepare clinical investigation documentation.

                                Obtain ethical committee approval.

                                Obtain approval from the Competent Authority

Deliverable:                    Justification to enable extended pre-marketing
                                clinical evaluation to take place at other
                                hospitals and clinical information required to
                                complete CE marking process.

                                       13
<PAGE>
 
--------------------------------------------------------------------------------
PROJECT 2                EVALUATION OF GRAFT SEEDED WITH ANDOTHOLICAL CELLS
TASKS 2.1 - 2.9
--------------------------------------------------------------------------------
 
Objective                       Investigate possibility of creating a non-
                                thrombogenic luminal surface, by seeding the
                                graft with endothelial cells.

Responsible                     Royal Free hospital, department of surgery.

Description of Work             a.   Assessment of endothelial cell attachment
                                     beyond 24 hours: Grafts will be seeded to
                                     confluence with micro vascular endothelial
                                     cells will be placed onto the circuit of an
                                     Acusyct R., Endotronics this system allows
                                     perfusion at 37C for up to one week with
                                     physiological solutions appropriately
                                     oxygenated, and buffered, with viscosity
                                     similar to that of human blood. This system
                                     is already established in this laboratory.

                                a.i  Segments of grafts seeded to confluences
                                     will be perfused for two days, four days
                                     and seven days respectively. Human
                                     platelets labelled with 111 Indium-oxine
                                     will be injected at the end of the
                                     perfusion period and circulated for sixty
                                     minutes. Endothelial cell covering will be
                                     assesssed using this method of
                                     thrombogenicity assessment (thrombogenicity
                                     index). At the end of the study the graft
                                     will be removed and endothelial coverage
                                     assessed in addition by scanning electron
                                     microscopy.

                                a.ii Compliance measurement of endothelialised
                                     grafts: Compliance profiles using the
                                     echotracker will be generated from each of
                                     the graft segments after two, four and
                                     seven days of perfusion in this system.

                                b.   Long term in vivo study on graft
                                     compliance: Endothelial five centimetre
                                     segments of grafts will be inserted into
                                     the carotid circulation of 5 large white
                                     pigs and compliance measured immediately
                                     after implantation. Compliance studies
                                     using the angiographic technique will be
                                     performed at implant and at pre-determined
                                     intervals. This group will form a cohort
                                     for long term study for a minimum period of
                                     one year and ideally for eighteen months in
                                     order to assess any long-term effects.

                                b.i  At explanation in addition to compliance
                                     measurements the grafts will be perfused-
                                     fixed,

                                       14
<PAGE>
 
                                     studied by immunohistochemistry,
                                     autoradiography and E.M.

                                       15
<PAGE>
 
--------------------------------------------------------------------------------
PROJECT 2              EVALUATION OF ALTERNATIVE TECHNOLOGIES RELEVANT TO
                       peripheral arterial bypass
--------------------------------------------------------------------------------
 
Objective:                      Investigate available surface modification
                                treatments and or other technologies that could
                                enhance the properties of the graft and
                                potentially contribute to improved performance
                                and/or convenience of use of the graft

Responsible                     Royal Free Hospital, dept of surgery and
                                CardioTech Ltd.

Description of Work             This would start as mostly desk research via
                                literature searches, patent databases or
                                commercial contacts, evaluation of information
                                available from vendors.

                                Select the most promising alternative
                                technologies and obtain grafts treated or
                                modified by selected treatments and research the
                                improvements/benefits brought by the modified
                                surface using steps described in Task 1.

Deliverable:                    Provide initial justification to adopt a
                                particular treatment for additional evaluation
                                and comparison against existing peripheral
                                graft.

                                       16
<PAGE>
 
--------------------------------------------------------------------------------
Project 1 + 2               Regulatory Matters
--------------------------------------------------------------------------------
 
Objective                       Establishment and maintaining of regulatory
                                files required for CE (European) marking and
                                (USA) F.D.A. application.

Responsible                     CardioTech Internationa Ltd.

Description of Work             D____ compliance with ISO 719 Tubular Vascular
                                Grafts
                                
                                Generate quality system documentation

                                Document compliance with essential requirements

                                Undertake risk analysis

                                Set up technical file

                                Contact and negotiations with notified body and
                                competent authority

                                Clinical investigation protocol and
                                documentation to EN540

                                Application to USA F.D.A. for Investigational
                                Device Status

Deliverable                     Regulatory files and development records in
                                place throughout the programme.

                                       17
<PAGE>
 
ROYAL FREE HOSPITAL & SCHOOL OF MEDICINE
UNIVERSITY OF LONDON
Vascular Unit
----------------------------------------
University Department of Surgery
The Royal Free Hospital, Pond Street, London NW3 2QG, U.K.

Tel:  0171 794 0500
Fax: 0171 431 4528


STAFF
1.   Vascular Surgical Fellow (Mr. Alberto Giudiceandrea) is a fully qualified
     surgeon. He will work on experimental and clinical side of the project.
2.   Biophysicist (need to be appointed). The Diaphysicist will work on
     compliance and cell seeding of vascular graft in vitro and in vivo.
3.   Research Fellow (Mr. Nigel Tai) will set up and maintain the cell bank,
     investigate human endothelial cell recovery rates from fat. He will work
     experimental and clinical side of project.

Management of the project will be by Mr. George Hamilton and Dr. Alexander
Seifalian, University Department of Surgery, RFH&SM.

ON MANAGEMENT

Overall management of the project will be provided by a quarterly meeting of the
RFH&SM (Mr. Cengiz Tarhan, Mr. George Hamilton & Dr. Alexander Seifalian) and
CTI (Mr. Alan Edwards and Dr. Michael Szycher).  A summary report will be
produced for each quarterly meeting, and this will be made available on demand
to Freemedic and CTI.

Research and Development management of the project will be provided by a monthly
meeting of the Mr. G. Hamilton and Dr. A. Seifalian and three researchers.  A
summary report will be produced by the researchers in preparation for each
monthly meeting.

Informal gatherings between members of the group in the department will be held
at least once a week.

          Mr. G. Hamilton               Dr. A. M. Seifalian

                                       18
<PAGE>
 
                                                                       EXHIBIT B
                                                                       ---------
ROYAL FREE HOSPITAL & SCHOOL OF MEDICINE
University of London
Vascular Unit
----------------------------------------
University Department of Surgery
The Royal Free Hospital, Pond Street, London NW3 2QG, U.K.

Tel:  0171 794 0500
Fax:  0171 431 4528

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
COST                                                      YEAR 1                YEAR 2
------------------------------------------------------------------------------------------------------------------------
CAPITAL COST
------------------------------------------------------------------------------------------------------------------------
<S>               <C>                    <C>              <C>                   <C>                  <C>
                  LDA                                     (Pounds)8,000
------------------------------------------------------------------------------------------------------------------------
                  Intravascular                           (Pounds)41,000
                  ultrasound
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
STAFF             Vascular Surgeon
------------------------------------------------------------------------------------------------------------------------
                  Salary               (Pounds)20,710
------------------------------------------------------------------------------------------------------------------------
                  LW                   (Pounds)1,448
------------------------------------------------------------------------------------------------------------------------
                  Total                (Pounds)25,158
------------------------------------------------------------------------------------------------------------------------
                  10.5% NI             (Pounds)2,642
------------------------------------------------------------------------------------------------------------------------
                  Total cost           (Pounds)27,800     (Pounds)27,800
------------------------------------------------------------------------------------------------------------------------
                  Biophysicist
------------------------------------------------------------------------------------------------------------------------
                  Salary               (Pounds)17,000
------------------------------------------------------------------------------------------------------------------------
                  LW                   (Pounds)1,448
------------------------------------------------------------------------------------------------------------------------
                  Total                (Pounds)18,448
------------------------------------------------------------------------------------------------------------------------
                  10.5%NI              (Pounds)1,937
------------------------------------------------------------------------------------------------------------------------
                  Total Cost           (Pounds)20,385     (Pounds)20,385        (Pounds)21,404
------------------------------------------------------------------------------------------------------------------------
                  Research Fellow
------------------------------------------------------------------------------------------------------------------------
                  Salary               (Pounds)17,000
------------------------------------------------------------------------------------------------------------------------
                  LW                   (Pounds)1,448
------------------------------------------------------------------------------------------------------------------------
                  Total                (Pounds)18,448
------------------------------------------------------------------------------------------------------------------------
                  10.6%NI              (Pounds)1,937
------------------------------------------------------------------------------------------------------------------------
                  Total Cost           (Pounds)20,385     (Pounds)20,385        (Pounds)21,404
------------------------------------------------------------------------------------------------------------------------
OVERHEADS AT                                              (Pounds)27,428        (Pounds)17,123
40%
------------------------------------------------------------------------------------------------------------------------
ADMINISTRATION    Administration       (Pounds)7,120      (Pounds)7,120         (Pounds)7,120
------------------------------------------------------------------------------------------------------------------------
TRAVEL            Travelling to                           (Pounds)1,000         (Pounds)1,000
                    company
------------------------------------------------------------------------------------------------------------------------
CONSUMMABLE                                               (Pounds)23,200        (Pounds)17,072
------------------------------------------------------------------------------------------------------------------------
CTI LEGAL                                                 (Pounds)12,500
------------------------------------------------------------------------------------------------------------------------
TOTAL                                                     (Pounds)188,818       (Pounds)85,124
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Grand Total                                                                                          (Pounds)273,942
------------------------------------------------------------------------------------------------------------------------
</TABLE>

                  Mr. G. Hamilton                            Dr. A. M. Seifalian

                                       19
<PAGE>
 
<TABLE> 
<CAPTION>
                       RFH&SM-CTI DEVELOPMENT PROGRAMME
-----------------------------------------------------------------------------------------------------------------------------------
ID    Task Name                                                                           Year 1                             
------------------------------------------------------------------------------------------------------------------------------------
-->   PROJECT 1                                          1     2     3     4     5     6     7     8     9    10    11    12     1
------------------------------------------------------------------------------------------------------------------------------------
<S>   <C>                                               <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C> 
1.1   Review CTI data                                   --    --    --    
------------------------------------------------------------------------------------------------------------------------------------
1.2   In vitro investigation of CPU grafts              --    --    --    --    --    --    --    --    --    --    --    --    
------------------------------------------------------------------------------------------------------------------------------------
1.3   Delivery of analysis of the in vitro                                                              --    --    --    --    -- 
      experimental  work on CPU graft                                                                                              
------------------------------------------------------------------------------------------------------------------------------------
1.4   Preparation of in vivo application                      --    --    -- 
      and submission                                                         
------------------------------------------------------------------------------------------------------------------------------------
1.5   In vivo, animal implants of CPU grafts                              --    --    --    --    --    --
------------------------------------------------------------------------------------------------------------------------------------
1.6   Delivery analysis of biological response to the                                                   --    --    --    --    
      implant, retention of compliance characteristics                                                                             
------------------------------------------------------------------------------------------------------------------------------------
1.7   Preparation of Ethical Committee applications                                   --    --    --    --    --               
------------------------------------------------------------------------------------------------------------------------------------
1.8   Clinical study reinforced CPU graft (subject                                                                  --    --    -- 
      to ethical approval)                                                                                                         
------------------------------------------------------------------------------------------------------------------------------------
1.9   Report and follow up on clinical study                                                                                      
-----------------------------------------------------------------------------------------------------------------------------------
-->   PROJECT 2
------------------------------------------------------------------------------------------------------------------------------------
2.1   Review literature                                 --    --    --                                                           
------------------------------------------------------------------------------------------------------------------------------------
2.2   Set up call bank from porcine cells                     --    --    --    --  
------------------------------------------------------------------------------------------------------------------------------------
2.3   Evaluation of Graft seeded with endothellal                         --    --    --    --    --    --    --    --    --    --
      cells in vitro                         
------------------------------------------------------------------------------------------------------------------------------------

2.4   in vivo animal implants CPU seeded grafts                                                   --    --    --    --  
------------------------------------------------------------------------------------------------------------------------------------
2.5   Delivery analysis of biological response to                                                                   --    --    --
      the implant of seeded grafts
------------------------------------------------------------------------------------------------------------------------------------
2.6   Human endothellal Cell harvesting                       --    --    --    --    --    --    --    --    --    --    --    --
------------------------------------------------------------------------------------------------------------------------------------
2.7   Preparation of Ehtical Committee application                                                            --    --    --    
------------------------------------------------------------------------------------------------------------------------------------
2.8   Clinical study of CPU seeded graft 
      (subject to ethical approval)
------------------------------------------------------------------------------------------------------------------------------------

2.9   Report and followup on clinical study
------------------------------------------------------------------------------------------------------------------------------------

<CAPTION> 
-------------------------------------------------------------------------------------------------------------------------        
ID    Task Name                                                                           Year 2                                 
-------------------------------------------------------------------------------------------------------------------------        
-->   PROJECT 1                                          2     3     4     5     6     7     8     9    10    11    12           
-------------------------------------------------------------------------------------------------------------------------        
<S>   <C>                                               <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>   <C>          
1.1   Review CTI data                                   
-------------------------------------------------------------------------------------------------------------------------        
1.2   In vitro investigation of CPU grafts              -- 
-------------------------------------------------------------------------------------------------------------------------        
1.3   Delivery of analysis of the in vitro                                                                                       
      experimental  work on CPU graft                      
-------------------------------------------------------------------------------------------------------------------------        
1.4   Preparation of in vivo application                                                                                         
      and submission                                       
-------------------------------------------------------------------------------------------------------------------------        
1.5   In vivo, animal implants of CPU grafts               
-------------------------------------------------------------------------------------------------------------------------        
1.6   Delivery analysis of biological response to the                                                                            
      implant, retention of compliance characteristics     
-------------------------------------------------------------------------------------------------------------------------        
1.7   Preparation of Ethical Committee applications        
-------------------------------------------------------------------------------------------------------------------------        
1.8   Clinical study reinforced CPU graft (subject      --    --    --    --    --    --    --    --    --    --   
      to ethical approval)                                           
-------------------------------------------------------------------------------------------------------------------------        
1.9   Report and follow up on clinical study                              --    --    --    --    --    --    --                 
-------------------------------------------------------------------------------------------------------------------------        
-->   PROJECT 2                                                                                                                  
-------------------------------------------------------------------------------------------------------------------------        
2.1   Review literature                               
-------------------------------------------------------------------------------------------------------------------------        
2.2   Set up call bank from porcine cells             
-------------------------------------------------------------------------------------------------------------------------        
2.3   Evaluation of Graft seeded with endothellal       --    --    -- 
      cells in vitro                                                                                                             
-------------------------------------------------------------------------------------------------------------------------        
2.4   in vivo animal implants CPU seeded grafts              
-------------------------------------------------------------------------------------------------------------------------        
2.5   Delivery analysis of biological response to            
      the implant of seeded grafts                                                                                               
-------------------------------------------------------------------------------------------------------------------------        
2.6   Human endothellal Cell harvesting                 --    --    --    --    --    --    --    --    
-------------------------------------------------------------------------------------------------------------------------        
2.7   Preparation of Ehtical Committee application                                                      
-------------------------------------------------------------------------------------------------------------------------        
2.8   Clinical study of CPU seeded graft                                  --    --    --    --    --    --    --    
      (subject to ethical approval)                                                                                              
-------------------------------------------------------------------------------------------------------------------------        
2.9   Report and followup on clinical study                                                             --    --                 
-------------------------------------------------------------------------------------------------------------------------        
</TABLE> 

       1.  Project 1 is the experimental and clinical investigation of the 
           ChronoFlex vascular graft.
       2.  Project 2 is development and experimental and clinical investigation 
           of cell seeded ChronoFlex vascular Graft.

                                       20