**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**Form 10-K**

**(Amendment No. 1)**

| **(Mark One)**                                                                                                                                                             |   | ** **                                                                                |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------|
| x                                                                                                                                                                          |   | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                 |   | ** **                                                                                |
| **For the  fiscal year ended March 31, 2007**                                                                                                                              |
| ** **                                                                                                                                                                 |
| o                                                                                                                                                                          |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**   |
| ** **                                                                                                                                                                 |   | ** **                                                                                |
| **For the  transition period  from                      to** |

 

**CommissionFile No. 0-28034**

**CardioTechInternational, Inc.**

(Name of small businessissuer in its charter)

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

 

Issuer’s telephone number**(978) 657-0075**

Securities registeredunder Section 12(b) of the Exchange Act:

| Title of each class                         |   | Name of each  exchange on which registered |
|---------------------------------------------|--------|--------------------------------------------|
| **Common  Stock, $.01 par value per share** |   | **American  Stock Exchange**               |

 

**Securities registered pursuant toSection 12(g) of the Act:**None

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.
|  | Yes o | No x |
|--|-------|------|

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act.
|  | Yes o | No x |
|--|-------|------|

 

Indicate whether theregistrant (1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to 
| such filing requirements for the past 90 days. | Yes x | No o |
|------------------------------------------------|-------|------|

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Act):
| o  Large Accelerated Filer |   | o  Accelerated Filer |   | x  Non-Accelerated Filer |
|----------------------------|--------|----------------------|--------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).
|  | Yes o | No x |
|--|-------|------|

 

As of July 25, 2007, 20,031,650shares of the registrant’s Common Stock were outstanding.  As of September 30, 2006, the aggregatemarket value of the registrant’s Common Stock held by non-affiliates of theregistrant (without admitting that such person whose shares are not included insuch calculation is an affiliate) was $25,067,510 based on the last sale priceas reported by the American Stock Exchange on such date.

 

----

**EXPLANATORY PARAGRAPH**

This Amendment No.1 on Form 10-K/A (this “Amendment”) amends our Annual Report on Form 10-K forthe fiscal year ended March 31, 2007, originally filed on June 27, 2007 (the“Original Filing”).  We are filing thisAmendment to include the information required by Part III and not included inthe Original Filing as we will not file our definitive proxy statement within120 days of our fiscal year ended March 31, 2007.  In addition, in connection with the filing ofthis Amendment and pursuant to Rules 12b - 15 and 13a - 14 under the ExchangeAct, we are including with this Amendment a currently dated certification.Except as described above, no other changes have been made to the OriginalFiling.  The Original Filing continues tospeak as of the date of the Original Filing, and we have not updated thedisclosures contained therein to reflect any events which occurred at a datesubsequent to the filing of the Original Filing.

----

**CARDIOTECH INTERNATIONAL, INC.**

**FORM10-K**

**FORTHE YEAR ENDED MARCH 31, 2007**

**INDEX**
| **PART I**        |   |                                                                                                          |   |   |
|-------------------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1.           |   | Description of  Business                                                                                      |   | 3      |
| Item  1A.         |   | Risk  Factors                                                                                                 |   | 12     |
| Item 1B.          |   | Unresolved  Staff Comments                                                                                    |   | 23     |
| Item 2.           |   | Description of  Properties                                                                                    |   | 23     |
| Item 3.           |   | Legal Proceedings                                                                                             |   | 23     |
| Item 4.           |   | Submission  of Matters to a Vote of Security Holders                                                          |   | 23     |
| ** **        |   |                                                                                                          |   |   |
| **PART II**  |   |                                                                                                          |   |   |
| Item 5.           |   | Market  Information for Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |   | 24     |
| Item 6.           |   | Selected  Consolidated Financial Data                                                                         |   | 26     |
| Item 7.           |   | Management’s  Discussion and Analysis or Plan of Operation                                               |   | 27     |
| Item 7A.          |   | Quantitative  and Qualitative Disclosures About Market Risk                                                   |   | 36     |
| Item 8.           |   | Financial  Statements and Supplementary Data                                                                  |   | 36     |
| Item 9.           |   | Changes In  and Disagreements With Accountantson Accounting and Financial Disclosure                          |   | 36     |
| Item 9A.          |   | Controls and  Procedures                                                                                      |   | 36     |
| Item 9B.          |   | Other Information                                                                                             |   | 36     |
| ** **        |   |                                                                                                          |   |   |
| **PART III** |   |                                                                                                          |   |   |
| Item 10.          |   | Directors,  Executive Officers and Corporate Governance                                                       |   | 37     |
| Item 11.          |   | Executive  Compensation                                                                                       |   | 40     |
| Item 12.          |   | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters              |   | 50     |
| Item 13.          |   | Certain  Relationships and Related Transactions, and Director Independence                                    |   | 51     |
| Item 14.          |   | Principal  Accounting Fees and Services                                                                       |   | 52     |
| ** **        |   |                                                                                                          |   |   |
| **PART IV**  |   |                                                                                                          |   |   |
| Item 15.          |   | Exhibits,  Financial Statement Schedules                                                                      |   | 53     |

 

2

----

**PARTI**

**Item 1.**                       Descriptionof Business

**CautionaryNote Regarding Forward Looking Statements**

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

The words “anticipate,” “believe,”“estimate,” “expect,” “intend,” “will,” “should” and similar expressions, asthey relate to us, are intended to identify forward-looking statements.  Such statements reflect our current viewswith respect to future events and are subject to certain risks, uncertaintiesand assumptions.  Should one or more ofthese risks or uncertainties materialize, or should underlying assumptionsprove incorrect, actual results may vary materially from those described hereinas anticipated, believed, estimated, expected, intended or using other similarexpressions.

In accordance with theprovisions of the Litigation Reform Act, we are making investors aware thatsuch forward-looking statements, because they relate to future events, are bytheir very nature subject to many important factors that could cause actual resultsto differ materially from those contemplated by the forward-looking statementscontained in this Report on Form 10-K. For example, the Company mayencounter competitive, technological, financial and business challenges makingit more difficult than expected to continue to develop and market its products;the market may not accept the Company’s existing and future products; theCompany may not be able to retain its customers; the Company may be unable toretain existing key management personnel; and there may be other materialadverse changes in the Company’s operations or business.  Certain important factors affecting theforward-looking statements made herein also include, but are not limited to (i)continued downward pricing pressures in the Company’s targeted markets, (ii)the continued acquisition of the Company’s customers by certain of itscompetitors, and (iii) continued periods of net losses, which could require theCompany to find additional sources of financing to fund operations, implementits financial and business strategies, meet anticipated capital expendituresand fund research and development costs. In addition, assumptions relating to budgeting, marketing, productdevelopment and other management decisions are subjective in many respects andthus susceptible to interpretations and periodic revisions based on actualexperience and business developments, the impact of which may cause the Companyto alter its marketing, capital expenditure or other budgets, which may in turnaffect the Company’s financial position and results of operations.  For all of these reasons, the reader iscautioned not to place undue reliance on forward-looking statements containedherein, which speak only as of the date hereof. The Company assumes no responsibility to update any forward-lookingstatements as a result of new information, future events, or otherwise exceptas required by law.

**General**

*Overview*

CardioTech International, Inc. (the “Company” or “CardioTech”)is a medical device company that designs, develops, manufactures and sellsinnovative products and materials for the treatment of cardiovascular,orthopedic, oncological, urological and other diseases.  Our business model calls for leveraging ourtechnological and manufacturing expertise in order to expand our royalty,development and license fee income, develop next generation polymers andmanufacture new and complex medical devices. We are focusing on developing and marketing polymers that can be used inproducts that are designed to reduce risk, trauma, cost and surgical proceduretime.

*History*

Wewere founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”).  In June 1996, PMI distributed all of theshares of CardioTech’s common stock, par value $0.01 per share, which PMIowned, to PMI stockholders of record. Our materials science technology is principally based upon theChronoFlexTM proprietary polymers which represent our coretechnology.

InJuly 1999, we acquired the assets of Tyndale-Plains Hunter, Ltd., amanufacturer of specialty hydrophilic polyurethanes.

InJuly 1999, Dermaphylyx International, Inc. (“Dermaphylyx”) was formed bycertain of our affiliates to develop advanced wound healing products.  Dermaphylyx was merged with and into theCompany effective March 2004 as a wholly-owned subsidiary of CardioTech.  In June 2006, our Board of Directors decidedto cease the operations of Dermaphylyx. The net assets of Dermaphylyx were immaterial to the Company.

3

----

InApril 2001, we acquired Catheter and Disposables Technology, Inc. (“CDT”).  CDT is an original equipment manufacturer andsupplier of private-label advanced disposable medical devices from concept tofinished packaged and sterilized products. Our engineering services and contract manufacturing primarily operatethrough our CDT subsidiary.  Certaindevices designed, developed and manufactured for customers by CDT includesensing, balloon and drug delivery catheters; disposable endoscopes; andin-vitro diagnostic and surgical disposables.

InApril 2003, we acquired Gish Biomedical, Inc. (“Gish”).  Gish is located in southern California andmanufacturers single use cardiopulmonary bypass products that have a disposablecomponent.  In the development of ourbusiness model, we continue to review the strategic fit of our various businessoperations.  As a result, we determinedGish does not fit our strategic direction. In January 2007, we retained an investment banking firm to identifypotential purchasers of Gish and to manage its sale.  The expected sale of Gish will permit theredeployment of capital into our ongoing growth initiatives.

InMarch 2004, we joined with Implant Sciences Corporation (“Implant”) toparticipate in the funding of CorNova. CorNova was formed to develop a novel coronary drug eluting stent usingthe combined capabilities and technology of CorNova, Implant Sciences andCardioTech. We own common stock of CorNova, representing a 16% equity interest,based on the total outstanding preferred and common stock of CorNova. AlthoughCorNova is expected to incur future operating losses, we have no obligation tofund CorNova.

Weoperate as one segment, medical device manufacturing and sales.

**Business Strategy**

Ourvision is to be a world-class, technology company focused on customer drivensolutions in the medical device industry. To achieve this end, our goal is tobetter combine our proprietary core polymer technology with new productapplications and expand customers’ access to our capabilities.  In fiscal 2007, we began the process tovertically integrate our materials science technology operations, thedeveloper, manufacturer and marketer of our proprietary polymers, withengineering services and contract manufacturing primarily operating from ourMinnesota facility.  An important stepwas the hiring of a Vice President and General Manager, Product DevelopmentEngineering Director, and Regional Sales Manager at our Minnesota facility.

Duringfiscal 2007, we completed an in-depth study of our strengths and weaknesses andthe opportunities in the medical device marketplace.  This effort was designed to make us morecompetitive than in the past.  Theresearch pinpointed our unique materials science strengths that have thepotential to be marketed to our existing customer base and to a broader rangeof medical device developers.  Mostimportantly, we also discovered a major void in the marketplace we believe canbe filled with our strong materials science capabilities to maximize the earlydevelopment phase of devices that utilize polymers.

Weare now in the process of expanding our development laboratories at ourMinnesota and Massachusetts facilities. The expansion of our development laboratories is a key element of ourplan to vertically integrate our engineering services and contractmanufacturing operations in Minnesota with our materials science technologyoperations in Massachusetts.  Our goal isto better combine our core polymer technology with new product applications andexpand customer access to our capabilities.

Weare conducting ongoing reviews of intellectual property held by other companiesin which our proprietary polymers are cited. The results of these reviews may lead to additional opportunities toexercise our strategy of seeking license and royalty arrangements for theexclusive use of our polymers.

**Technology**

Our unique materials science strengths are embodied inour family of proprietary polymers.  Wemanufacture and sell our custom polymers under the trade names ChronoFilm,ChronoFlex, ChronoThane, ChronoPrene, HydroThane, and PolyBlend.  The ChronoFlex family of polymers has thepotential to be marketed beyond our existing customer base.  Our goal is to fulfill the market’s need foradvanced materials science capabilities, thereby enabling customers to improvedevices that utilize polymers.  Ourchemists continue to develop the ChronoFlex family of medical-gradepolymers.  Conventional polymers aresusceptible to degradation resulting in catastrophic failure of long-termimplantable devices such as pacemaker leads. ChronoFlex and ChronoThane polymers are designed to overcome suchdegradation and reduce the incidents of infections associated with invasivedevices.

Key characteristics of our polymers are i) optionaluse as lubricious coatings for smooth insertion of a device into the body, ii)antimicrobial properties that are part of the polymer itself, and iii)mechanical properties, such as hardness and elasticity, sufficient to meetengineering requirements.  We believe ourtechnology has wide application 

4

----

in increasingbiocompatibility, drug delivery, infection control and expanding the utility ofcomplex devices in the hospital and clinical environment.

We also manufacture and sell our proprietaryHydroThane polymers to medical device manufacturers that are evaluatingHydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing, polyurethane elastomerpossessing properties which we believe make it well suited for the complexrequirements of a variety of catheters. In addition to its physical properties, we believe HydroThane exhibitsan inherent degree of bacterial resistance, clot resistance andbiocompatibility.  When hydrated,HydroThane has elastic properties similar to living tissue.

We also manufacture specialty hydrophilicpolyurethanes that are primarily sold to customers as part of an exclusivearrangement.  Specifically, thesecustomers are supplied tailored, patented hydrophilic polyurethanes in exchangefor multi-year, royalty-bearing exclusive supply contracts.

The development and manufacture of our products aresubject to good laboratory practices (“GLP”) and quality system regulations (“QSR”)requirements prescribed by the Food and Drug Administration (“FDA”) and otherstandards prescribed by the appropriate regulatory agency in the country ofuse.  There can be no assurance that wewill be able to obtain or manufacture products in a timely fashion atacceptable quality and prices, that we or any suppliers can comply with GLP orthe QSR, as applicable, or that we or such suppliers will be able tomanufacture an adequate supply of products. Both our California and Minnesota facilities are ISO 13485 certified.

ChronoFilm is a registered trademark of PMI.  ChronoFlex is our registered trademark.  ChronoThane, ChronoPrene, HydroThane, andPolyBlend are our tradenames.  CardioPassis our trademark.

**IntellectualProperty**

We own or license 4 patents relating to our vasculargraft manufacturing and polymer technology and products.  While we believe our patents secure ourexclusivity with respect to certain of our technologies, there can be noassurance that any patents issued would afford us adequate protection againstcompetitors which sell similar inventions or devices, nor can there be anyassurance that our patents will not be infringed upon or designed around byothers.  However, we intend to vigorouslyenforce all patents issued to us.

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

In addition, PMI has granted us an exclusive,perpetual, worldwide, royalty-free license for the use of one polyurethanepatent and related technology in the field consisting of the development,manufacture and sale of implantable medical devices and biodurable polymermaterial to third parties for the use in medical applications (the “ImplantableDevice and Materials Field”).  PMI alsoowns, jointly with Thermedics, Inc., an unrelated company that manufacturesmedical grade polyurethane, the ChronoFlex polyurethane patents relating to theChronoFlex technology (“Joint Technology”). PMI has granted us a non-exclusive, perpetual, worldwide, royalty-freesublicense of these patents for use in the Implantable Devices and MaterialsField.

**Manufacturingand Service Operations**

Wemanufacture polymers at our Massachusetts facility.  We perform engineering services and contractmanufacturing at our Minnesota facility with technical support provided by ourMassachusetts operations.  Medicaldevices used in open-heart surgery procedures, including cardiovascular tubingsystems and oxygenators, are manufactured at our California facility.

Duringthe years ended March 31, 2007, 2006 and 2005, we generated approximately 89%,91% and 89%, respectively, of our product sales from manufacturing operations.

**Productand Services**

***Materials Science Technology***

***We manufacture polymeric materials with a wide-range ofphysical and biological properties.  Ourpolymers are available with a variety of mechanical strengths and possessunique characteristics such as biodurability, biocompatibility, lubricity andantimicrobial properties.  Thesepolymeric materials may be used as structural engineering polymers or ascoatings for metallic and polymeric surfaces and have a history of use in bothshort and long-term implant applications.***

5

----

***We have been provided exclusive and non-exclusive perpetual,world-wide, royalty-free license and sublicense rights for the use ofpolyurethane patents and related technology for the development, manufactureand sale of implantable medical devices and biodurable polymer material.  As a result, we are able to enter into licenseand royalty arrangements for the exclusive use of our customized polymers.  During the years ended March 31, 2007, 2006and 2005, we generated revenues from royalties of $1,558,000, $977,000, and$774,000, respectively.***

***Engineering Services***

***Innovative engineering and recognized creativity haveproduced patented product designs for many of our customers.  Engineering and manufacturing services offercustomers access to the latest technologies and innovations for developingcatheters and disposable medical products. Our engineering services team applies the latest in medical devicetechnology and polymer science to projects, tailoring services to the specificneeds of each customer.  Working closelywith each customer, our team of scientists and engineers works from conceptdevelopment through manufacturing transfer, helping make the customer’s productconcept a reality.***

***Today’s advanced medical devices often require uniquebiodurable and bioresorbable materials to optimize product performance.  Customers look to our biomaterialsscientists, chemists and experts in materials processing to develop a materialspecific to their needs.  The teamincludes experts in minimally invasive surgical devices, advanced polymerchemistry, advanced materials processing, statistical process control,continuous improvement engineering and supply chain management.***

***We have established concept centers in our Massachusetts andMinnesota facilities which enable customers to access technical experts inadvanced biomaterials development and processing to help develop product ideas,refine concepts and/or solve the technical problems to enable the customer tobring their product to market.  Thecenters are focused on better combining core polymer technology with newproduct applications to expand customer access to our materials sciences andproduct development expertise, to establish new customer relationships and todeepen those with existing customers. Beyond the development phase, we seek to extend our relationships withour customers whenever possible to the manufacturing of a device.***

***Contract Manufacturing***

***We provide seamless integration of our design, developmentand manufacturing processes, which, we believe, enables our customers to bringproducts to market more quickly than they would be able to otherwise.  High quality standards are assured throughrobust quality control systems.  From lowto high volume, from component to complete device manufacturing, we believethat we deliver quality, reliability and lower cost to our customers.  Our contract manufacturing capabilitiesenable us to serve the following markets:***

***·***                  Orthopedics – Artificial joints

***·***                  Spine – Implants

***·***                  Drug Delivery – Oncology, VascularAccess

***·***                  Cardiovascular – Stents, Grafts

***·***                  Endoscopy – Billary Stents

***·***                  Diabetes Management – Sensors,Glucose Monitors

***·***                  Neurology – Thrombectomy Catheters

***·***                  Urology – Catheter Coatings,Stents

***·***                  Gastroenterology – Feeding Tubes

***·***                  Ear/Nose/Throat – Inner Ear DrugDelivery Catheters

***·***                  Interventional Radiology –Peripheral Balloons, Infusion Catheters

***Gish Biomedical***

***During open-heart surgery, the patient’s blood is divertedfrom the heart through sterile plastic tubing and various other devices to anoxygenator device, which oxygenates the blood before it is returned to thepatient.  Gish manufactures, assemblesand sells custom tubing sets, all-inclusive operating packs, oxygenators andother medical devices used in this process within open heart operatingprocedures.  Such devices and componentsare manufactured and assembled in the Gish clean room, sterilized and thenshipped either to the hospital or to one of Gish’s specialty distributors,which service such hospitals.***

6

----

***Medical devices and components manufactured and assembledfor sale at Gish are as follows:***

***·***                  Custom Cardiovascular TubingSystems.  Custom tubing sets used to transport apatient’s blood from the heart to other devices used to oxygenate the bloodbefore it is returned to the patient. Revenues from sales of custom tubing systems sold separately equaled 12%of our consolidated revenues for each of the fiscal years ended March 31, 2007,2006 and 2005, respectively.

***·***                  Arterial Filters. The last device the blood passes through in the cardiovascular bypasscircuit as it is being returned to the patient, the arterial filter removesgaseous micro-emboli and debris from the patient’s blood, which are generatedby the oxygenation system.

***·***                  Cardiotomy Reservoirs. Cardiac suction is a technique employed in open-heart surgery to recovershed blood in the chest cavity and return it to the patient.  The use of this technique reduces therequirements for whole blood replacement from donor sources, thereby reducingthe risk of blood compatibility problems and blood-borne viral diseases such asAIDS and hepatitis.  Our cardiotomyreservoir systems consist of a polycarbonate reservoir, defoaming andfiltration cartridge, and mounting bracket. This enables the perfusion team to recover high volumes of shed blood,then defoam and filter it prior to returning it to the patient’s circulatorysystem.

***·***                  VisionTM Oxygenator.  An oxygenatorenables gas exchange of oxygen and carbon dioxide and also regulates thetemperature of the patient’s blood.  As alife sustaining device used during open-heart surgery, the oxygenator is a keycomponent of the bypass circuit.  Vision’sgas transfer performance is excellent, dependable and capable of maintainingthe oxygen demands of patients of all sizes for periods of up to sixhours.  Vision’s unique air separationchannel utilizes an arterial outlet pressure gradient and the natural buoyancyof air to minimize the passage of gaseous emboli towards the patient.  Unwanted emboli are safely purged for safeventing back to the reservoir.  Throughstudies at an independent testing facility, Vision’s air handling abilitieswere proven superior to competitive devices. The Vision oxygenator is sold separately, or with a reservoir, and alsowith a reservoir and custom tubing system. Revenue generated from sales that included an oxygenator equaled 26%,27% and 32% of our consolidated revenues for fiscal years ended March 31, 2007,2006 and 2005, respectively.

***·***                  Venous Reservoir. A venous reservoir is a device used to pool, filter and defoam bloodprior to its introduction to the oxygenator. Gish offers a variety of venous reservoirs, including some whichincorporate the capacity for autologous transfusion post surgically.  Gish also has several products thatincorporate the functions of cardiotomy, venous reservoir, post surgical bloodcollection and blood reinfusion devices. This functional bundling is usually cost effective for the hospital.

***·***                  Cardioplegia Delivery Systems. Cardioplegia encompasses several techniques employed in open-heartsurgery to preserve, protect and manage the heart tissue.  The technique typically involves the use of achilled solution that is infused into the heart through the coronary arteriesto cool the heart and reduce heart activity and metabolism.  There are many different techniques utilized,depending on the physician and patient needs. The use of these techniques significantly reduces damage to heart tissueduring surgery, enhances restoration of heart function and helps return thepatient to a normal heartbeat when the surgical procedure is complete.  Gish has developed a complete line ofcardioplegia delivery systems and device with FDA clearance and European CEMark.  Multiple systems are required forthis technique due to varying physician preferences.  The original offerings for this procedurewere a series of reservoirs with a recirculation valve and a series of coolingcoils.  Gish also offers a line ofcardioplegia systems and heat exchangers designed to utilize a blood andpotassium mixture and allow the surgeon to quickly change the temperaturedelivered to the patient.

***·***                  Oxygen Saturation Monitor. The StatSatTM is a digital blood saturationmonitor for open-heart surgery which measures the oxygen content of the patient’sblood during surgery.

***·***                  Critical Care Central VenousAccess Catheters and Ports.  Gish’s Hemed centralvenous access catheter systems have applications in hyper-alimentation,chemotherapy, and long-term vascular access. These long-term indwelling catheters are surgically implanted to providedirect access to the central venous system for high protein intravenoussolutions needed by patients having nonfunctional digestive systems and forrapid dilution and dispersion of highly concentrated drug administration inchemotherapy for cancer.  The Hemed,VasPort and VasTack are alternative vascular access products used for extendedlong-term infusion management and are designed to complement the Hemed 

7

----

***catheter lines.  TheVasPort is a device implanted entirely under the skin and consists of a smallreservoir with a diaphragm and catheter. The VasPort is accessed by the VasTack, a small patented non-coringneedle system, which penetrates the skin and the diaphragm of the VasPortreservoir.  Drugs are readily infusedthrough the VasTack, into the reservoir and then into the catheter.  When the infusion is complete the VasTack isremoved and the skin acts as a natural barrier against infection.  Single and double reservoir VasPorts areavailable.***

***·***                  Orthofuser. The patented OrthofuserTM is designedfor post-operative use in orthopedic surgeries such as hip and kneereplacements and provides for the safe recovery and transfusion of the patient’sown blood.  This product is well suitedfor orthopedic procedures, as it is portable and incorporates its own internalvacuum source.

***·***                  Gish Biocompatible SurfacesCoatings (“GBSTM”). In fiscal 2004, Gish received FDA clearance for its heparin coating tobe used in conjunction with Gish’s line of heart-lung bypass products.  The GBSÔ Coating is a heparin based, covalently boundbiocompatible coating used to cover the surfaces of disposable products.  Heparin coatings are known to inhibit bloodcoagulation, decrease the risk of Systemic Inflammatory Response Syndrome,reduce complement activation and platelet adhesion, reduce blood loss andhemolysis, provide stable antithrombotic activity and reduce thrombus formation,as well as decrease leukocyte (white blood cells) activation.  In September 2005, the Company announced thatit received FDA approval for certain heparin coated products for thecardiopulmonary bypass surgery market.

***Gish purchases components for its various products fromvendors who sell such components generally to the medical device industry.  Most components for its proprietary productsare manufactured from tooling they own. Other components are manufactured by outside suppliers in accordancewith Gish’s specifications.  Certaincomponents of Gish’s custom tubing sets are purchased from competitors.  Gish has not experienced difficulty inobtaining such components in the past and believes adequate sources of supplyfor such items are available on reasonable terms.  Membrana GmbH is one of Gish’s principalsuppliers and provides a polyester wrap thread for use in the Vision***Ô Oxygenator.

***CardioPass***TM SyntheticCoronary Artery Bypass Graft (“SynCAB”)

***Overview and Development***

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

***Vascular grafts are used to replace or bypass occluded,damaged, dilated or severely diseased arteries. Existing small bore graft technologies suffer from a variety ofdisadvantages in the treatment of certain medical conditions, depending uponthe need for biodurability, compliance (elasticity) and other characteristicsnecessary for long-term interface with the human body.***

***Coronary artery bypass graft (“CABG”) surgery is performedto treat the impairment of blood flow to portions of the heart.  CABG surgery involves the addition of one ormore new vessels to the heart to re-route blood around blocked coronaryarteries.***

***Autologous grafts (using the patient’s own saphenous vein,radial artery, or mammary artery) have been successfully used in CABGprocedures for a number of years and have shown a relatively high patency rate(80% to 90% for saphenous veins and over 90% for mammary arteries one yearafter surgery) with no risk of tissue rejection.  However, the surgical harvesting of vesselsfor autologous grafts involves significant trauma and expense.  In addition, not all patients requiring CABGsurgery have sufficient native vessels as a result of previous bypasssurgeries, or their vessels may be of inferior quality due to trauma ordisease.  Cryo-preserved saphenous veinsare available, but these veins often deteriorate due to attack by the body’simmune system.***

***According to the 2004 report of the American HeartAssociation, approximately 500,000 bypass operations were performed in the U.S.in 2003.  We estimate approximately750,000 CABG procedures were performed worldwide during the same year.  We believe approximately 20% of these CABGprocedures were performed on patients who had previously undergone bypasssurgery, and that the number of repeat procedures will continue to***

8

----

***increase as a percentage of procedures performed, eventhough the overall number of bypass procedures is declining.  Currently, approximately 70% of CABGprocedures are performed utilizing the saphenous vein.***

***We have developed our SynCAB grafts using specializedChronoFlex polyurethane materials designed to provide improved performance inthe treatment of arterial disorders.  Thegrafts have three layers, similar to natural arteries, and are designed toreplicate the physical characteristics of human blood vessels.***

***We have developed a 4mm and 5mm SynCAB graft.  We believe the SynCAB graft may be usedinitially to provide an alternative to patients with insufficient or inadequatenative vessels for use in bypass surgery as a result of repeat procedures,trauma, disease or other factors.  Webelieve, however, that the SynCAB graft may ultimately be used as a substitutefor native saphenous veins, thus avoiding the trauma and expense associatedwith the surgical harvesting of the vein.***

***SynCAB Clinical Trials***

***We initiated plans in fiscal 2006 to obtain Europeanmarketing approvals.  In May 2006, wereceived written acknowledgement from our Notified Body in Europe that ourclinical trial plan had been accepted. The planned 10 patient clinical trial protocol allows surgeons tointraoperatively decide to use the SynCAB instead of suboptimal autologousvessels.  We hired a European-basedcontract research organization (“CRO”) to assist in management of the entireclinical process. The CRO helped us review possible sites in the European Unionfor the selection of investigators to follow the approved protocols.  A site has been selected, a PrincipalInvestigator has signed a letter of agreement to conduct the trial and providethe necessary data for the clinical research report and we have receivedapproval from the Ethics Committee.  OurPrincipal Investigator has participated in a wide range of cardiovascularclinical trials.  Achievement of thisimportant milestone fits within our planned timeline and is an importantbenchmark in the commencement and completion of the clinical trial.  We have undergone a rigorous review by theMinistry of Health and completed paperwork for an import license, and preparedfor patient selection.***

Thepatient enrollment process is not an easy one for a long-term surgical implant thatis designed to improve outcomes for very sick patients.  Prior to each surgery, our investigators mustreceive patient consent for participation in the trials.  The surgeon then decides at the time of theoperation whether or not to utilize the graft. Patients will be followed for 90 days and assessed for graft patency andquality of life measures.  Following thecompleted clinical trial, we intend to submit the analyzed data to the NotifiedBody in support of our application for CE Mark. In January 2007, we announced the initiation of these clinical trialswith the first patient surgically implanted in March 2007.

**Marketing and Sales**

Wesell our polymers directly to our customers from our Massachusettsfacility.  We market and sell ourengineering services and contract manufacturing to medical device companiesthrough our direct sales force in Minnesota.

Wemarket and sell our cardiopulmonary products through a network of direct andindependent sales representatives. Internationally, cardiopulmonary products are represented by specialtymedical distributors in over 50 countries around the world.  Our sales to foreign customers are primarilyin Europe and Asia.  All internationaltransactions are conducted in U.S. dollars, thus reducing the risk from currencyfluctuations.  One of our cardiopulmonaryproduct sales representative organizations comprised 4%, 5% and 4% of ourrevenues in the fiscal years ended March 31, 2007, 2006 and 2005,respectively.  We believe the loss ofthis sales representative organization would not have a material effect on ourbusiness.

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

We perform ongoing creditevaluations and maintain allowances for potential credit losses.  As of March 31, 2007, we believe there existsno significant concentrations of credit risk.

Wedo not have any facilities, property or other assets, except salesrepresentative supplies, located in any geographic area other than the UnitedStates of America.

**Contracts and Material Relationships**

LeMaitreVascular Products, Inc. (“LeMaitre”), a third party contractor, hasmanufactured ChrononFlex-based coronary grafts for our limited use.  In October 2006, we purchased proprietaryequipment from LeMaitre for $350,000 in cash which is designed for the futuremanufacture of our CardioPass grafts, as well as for the 

9

----

developmentof additional medical devices.  While theproduction of our own grafts depends on the results of the ongoing SynCAB clinicaltrial, production may be further delayed as a result of the requirement forequipment validation and, therefore may adversely affect our business.

Beginningin fiscal 2005 and continuing into fiscal 2006, we started shipping brandedcatheter products (the “Branded Products”) on a purchase order basis to asingle customer (the “Intermediary”). The Intermediary would then perform additional manufacturing processesand ship these Branded Products to the end-user customer (the “End User”).  These Branded Products were previouslydeveloped by the End User who then transferred manufacturing to theIntermediary.  The Intermediary thenengaged us to manufacture the Branded Products. In March 2006, the End User directly sourced the Branded Products fromus.  In May 2006, the End User decided tocease using us for future production due to concerns about supply constraintsrelated to production specifications. We had initially deferred the revenuerelated to shipments to the End User due to the uncertainty regarding customeracceptance of the shipped product. As the contracted period to notify us of anydefective product passed during the second quarter of fiscal 2007 withoutfurther notification from the End User of any defective product, we determinedthat all revenue recognition criteria had been met and $397,000 of revenuerelated to shipments to the End User were recorded during the fiscal year endedMarch 31, 2007. The costs associated with this revenue were expensed during thequarters ended March 31, 2006 and June 30, 2006 because the netrealizable value of the inventory was uncertain due to the likely return andrework of the product.

Weown common stock, representing a 16% equity interest, based on outstandingpreferred and common stock ownership, in CorNova, Inc., a developer of advancedendovascular devices and catheters.  InDecember 2006, CorNova GmbH, a wholly-owned German subsidiary, received CE Markmarketing approval for its bare metal ValecorTM Coronary Stent System, CorNova’s firstapproved product.  We granted to CorNovaan exclusive license for the technology consisting of ChronoFlex DES polymer,or any poly (carbonate) urethane containing derivative thereof, for use ondrug-eluting stents.  We have jointlydeveloped coatings with CorNova that utilize ChronoFlex’s excellentcharacteristics for stents to enhance long-term drug eluting stent performance.

**ConsolidatedRevenues**

Ourrevenues were $21,151,000, $22,381,000 and $21,841,000 for the fiscal yearsended March 31, 2007, 2006 and 2005, respectively.

**Competition**

Competitionin the medical device industry, in general, is intense and based primarily onscientific and technological factors, the availability of patent and otherprotection for technology and products, the ability to commercialize technologicaldevelopments and the ability to obtain governmental approval for testing,manufacturing and marketing products.

Competitionamong products is based, among other things, on product efficacy, safety,reliability, availability, price and patent position.  An important factor is the timing of themarket introduction of our products or the products of competitors.  Accordingly, the relative speed with which wecan develop products, complete the clinical trials and approval processes andsupply commercial quantities of the products to the market is expected to be animportant competitive factor.  Ourcompetitive position depends upon our ability to attract and retain qualifiedpersonnel, to obtain patent protection or otherwise develop proprietary productsor processes, and to secure sufficient capital resources for the oftensubstantial period between technological conception and commercial sales.

Themarket for medical devices of the type we sell is extremely competitive.  We believe product differentiation andperformance, client service, reliability, cost and ease of use are importantcompetitive considerations in the markets in which we compete.  Most of our competitors are larger andpossess greater financial and other resources than us.  We have approximately four competitors withineach of the hospital markets in which we compete.  No one competitor is a dominant force in thismarket.  We believe our position in themarketplace for our present principal products has been achieved by means ofsuperior design, quality, and service. We intend to continue utilizing these means of competing.

**Researchand Development, Regulatory and Engineering**

Ourdevelopment decisions are based on: (i) development costs, (ii) product need,(iii) third-party interest and funding availability, and (iv) regulatoryconsiderations.  Research anddevelopment, regulatory and engineering expenditures for the years ended March31, 2007, 2006 and 2005 were $1,547,000, $1,385,000 and $1,258,000,respectively, and consisted primarily of salaries and related costs (69%, 57%and 60% in fiscal 2007, 2006 and 2005, respectively), and are expensed asincurred.

**GovernmentRegulation**

Our devices, as well as other medical devices that wemay develop, are subject to extensive regulation by the FDA and otherregulatory authorities in the U.S. and abroad. The Federal Food, Drug, and Cosmetic Act (the “FDC Act”) and otherfederal and state statutes and regulations govern the research, design,development, manufacturing, 

10

----

preclinicaland clinical testing, installation, storage, packaging, recordkeeping,servicing, labeling, distribution and promotion of medical devices in the U.S.

As a device manufacturer, we are required to registerwith the FDA.  As such, we are subject toinspection on a routine basis for compliance with the FDA’s Quality Systemsregulations.  These regulations requireus to manufacture our products and maintain our documents in a prescribedmanner with respect to manufacturing, testing and control activities.  Further, we are required to comply withvarious FDA requirements for reporting. The FDC Act and medical device reporting regulations require us toprovide information to the FDA on deaths or serious injuries alleged to havebeen caused or contributed to by the use of our products, as well as productmalfunctions that would likely cause or contribute to death or serious injuryif the malfunction were to recur.  TheFDA also prohibits an approved device from being marketed for unapproveduses.  Our product promotion andadvertising is subject to continuing FDA regulation.  The failure to comply with the applicableregulatory requirements may subject us to a variety of administrative orjudicially imposed sanctions, including the FDA’s refusal to approve pending orsupplemental applications, withdrawal of an approval or clearance, warningletters, product recalls, product seizures, total or partial suspension ofproduction or distribution, injunctions, fines, and civil and criminalpenalties against that company or its officers, directors or employees.  Failure to comply with regulatoryrequirements could have a material adverse effect on our business, financialcondition and results of operations.

We intend to continuously improve our products aftermarket introduction and may therefore submit future Investigational DeviceExemption, Pre-Market Notification (“510(k)”), Pre-Market Approval (“PMA”), orPMA supplement applications to the FDA. No assurance can be given that clearance or approval of such newapplications will be granted by the FDA on a timely basis, or at all.  Furthermore, we may be required to submitextensive preclinical and clinical data depending on the nature of the changes.

From time to time, legislation is drafted andintroduced in Congress that could significantly change the statutory provisionsgoverning the approval, manufacturing and marketing of drug products andmedical devices.  In addition, FDAregulations and guidance are often revised or reinterpreted by the agency inways that may significantly affect our business and our products.  It is impossible to predict whetherlegislative changes will be enacted, or FDA regulations, guidance, orinterpretations changed, and what the impact of such changes, if any, may be.

Various foreign countries in which our products are or may be soldimpose additional or different regulatory and testing requirements.  The international regulatory approval processvaries from country to country and is subject to change in a given country asregulatory requirements change.  Thus,the time required for an approval may differ and there can be substantialdelays in obtaining approval after the relevant applications are filed.  There is no assurance that foreign regulatoryauthorities will approve the use or sale of our products in a particularcountry on a timely basis, or at all. Our research and development activities are also subject to regulationfor safety, efficacy and quality by numerous governmental authorities in theUnited States.  In the United States, thedevelopment, manufacturing and marketing of synthetic vascular grafts aresubject to regulation for safety and efficacy by the FDA in accordance with theFood, Drug and Cosmetic Act.  Syntheticvascular grafts are subject to rigorous FDA regulation, including pre-clinicaland clinical testing.  The process ofcompleting clinical trials and obtaining FDA approvals for marketing a medicaldevice is likely to take a number of years, requires the expenditure ofsubstantial resources and is often subject to unanticipated delays.  There can be no assurance that any productwill receive such approval on a timely basis, if at all.  Furthermore, we or the FDA may suspendclinical trials at any time upon a determination that the subjects or patientsare being exposed to an unacceptable adverse health risk ascribable to ourproducts.  If clinical studies aresuspended, we may be unable to continue the development of the investigationalproducts affected.

Gishand CDT are both registered as a medical device manufacturer with the FDA andstate agencies.  Gish and CDT areinspected periodically by both the FDA and the state agencies for compliancewith the FDA’s good manufacturing processes (“GMP”) and other requirementsincluding the medical device reporting regulation and various requirements forlabeling and promotion.  The FDA QualitySystem Regulations (“QSR”), which became effective June 1, 1997, no longerlimit control to manufacturing and post market controls, but specifyrequirements during design (Design Control), manufacturing, and servicing aswell.  Much of the new QSR is based onthe ISO 13485 Quality Standard, and is, as such, in harmony with the thrusttowards world harmonization of medical device requirements.  The FDA’s GMP regulation requires, amongother things, that (i) the manufacturing process be regulated and controlled bythe use of written procedures, and (ii) the ability to produce devices thatmeet the manufacturer’s specifications be validated by extensive and detailedtesting of every aspect of the process. The medical device reporting regulation requires that the devicemanufacturer provide information to the FDA on deaths or serious injuriesalleged to have been associated with the use of its marketed devices, as wellas product malfunctions that would likely cause or contribute to a death orserious injury if the malfunction were to recur. 

11

----

Changesin existing requirements or interpretations (on which regulations heavilydepend) or adoption of new requirements or policies could adversely affect ourability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a materialadverse effect on our business.

Webelieve all of our present products are in compliance in all material respectswith all applicable performance standards as well as good manufacturingpractices, record keeping and reporting requirements in the production anddistribution of such products.  Most ofGish’s products have been determined by the FDA to be devices substantiallysimilar to devices marketed by others prior to May 28, 1976, the effective dateof the Amendments, and marketing of them has been authorized pending theclassification by the FDA of such products. Gish does not anticipate any significant difficulty or material costincreases in complying with applicable performance standards if any suchproducts were to be classified in Class II by the FDA.  If the FDA were to classify use of Gish’scardiovascular or catheter products as Class III products, pre-marketingclinical testing and evaluation would be required in order to obtain FDAapproval for the sale of such products.

Healthcareproviders, including hospitals and physicians that purchase medical devices foruse on their patients, generally rely on third-party payers, principallyMedicare, Medicaid and private health insurance plans, to reimburse all or partof the costs associated with the procedures performed with these devices.   Devices produced by Gish are reimbursedunder Diagnostic Related Groups for the specific surgical procedure in whichthey are utilized.  There is no specificreimbursement for the products themselves.

**Backlog**

Almostall of our cardiopulmonary products are repetitive purchase, single use,disposable products, which are shipped shortly after receipt of a customer’spurchase order.  We believe an adequatelevel of finished goods inventory is maintained to fulfill the customer’s needson demand.  Accordingly, we believe thebacklog of orders at any given point in time is not indicative of it’s futurelevel of sales.

Ourbacklog for contract manufacturing products is $1,171,000 at March 31, 2007.

**EnvironmentalCompliance**

Ourdirect expenditures for environmental compliance were not material in the threemost recent fiscal years.  However,certain costs of manufacturing have increased due to environmental regulationsplaced upon suppliers of components and services.

**Employees**

Asof March 31, 2007, we had 16 full-time employees at our headquarters inMassachusetts of whom 5 were in production and the remaining in management,administrative, and marketing positions.

Asof March 31, 2007, we had 42 full-time employees in Minnesota of whom 12 are incontract research and development, 25 are in manufacturing and production, and5 are in management, administrative, and marketing positions.

Asof March 31, 2007, we had 95 full-time employees in California of whom 75 wereengaged in manufacturing and the remainder in sales, marketing, research anddevelopment, administrative and executive positions.

Noneof these employees are covered by a collective bargaining agreement andmanagement considers its relations with its employees to be good.

**Item 1A.**              Risk Factors

Youshould carefully consider the risks and uncertainties described below and theother information in this filing before deciding to purchase our commonstock.  If any of these risks oruncertainties occurs, our business, financial condition or operating resultscould be materially harmed.  In that casethe trading price of our common stock could decline and you could lose all orpart of your investment.  The risks anduncertainties described below are not the only ones we may face.  We believe that this filing containsforward-looking statements as that term is defined in the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-looking statements are subject to regulatory risks and clinicaluncertainties.  Such statements are basedon management’s current expectations and are subject to facts that could causeresults to differ materially from the forward-looking statements.

12

----

**RisksRelated to Liquidity**

*We havereported net losses in the last six fiscal years and may continue to report netlosses in the future.  We cannot assureyou that our revenue will be maintained at the current level or increase in thefuture.*

Our future growth maydepend on our ability to raise capital for acquisitions and to support researchand development activities, including costs for clinical trials, and to marketand sell our vascular graft technology, specifically the coronary artery bypassgraft.  We may require substantial fundsfor further research and development, future pre-clinical and clinical trials,regulatory approvals, establishment of commercial-scale manufacturingcapabilities, and the marketing of our products.  Our capital requirements depend on numerousfactors, including but not limited to, the progress of our research anddevelopment programs, including costs for clinical trials; the cost of filing,prosecuting, defending and enforcing any intellectual property rights;competing technological and market developments; changes in our development ofcommercialization activities and arrangements; and the purchase of additionalfacilities and capital equipment.  If theCompany is unable to sell Gish Biomedical, Inc., we believe our cash positionas of March 31, 2007 will be sufficient to fund our working capital andresearch and development activities for the next twelve months.

**RisksRelated to Our Growth Strategy**

*We could experience rapid growththat could strain our managerial and other resources.*

Since becoming listed onthe American Stock Exchange in June of 1996 we have grown organically, andthrough the acquisition of three separate businesses.  In July 1999, we acquired the business ofTyndale-Plains Hunter, Ltd.; in May 2001, we acquired Catheter and DisposablesTechnology, Inc.; and in April 2003, we acquired Gish Biomedical, Inc.  While we are not currently considering anacquisition, we may make additional acquisitions of complementary medicalmanufacturing service providers that bring desired capabilities, customers orgeographic coverage and either strengthen our position in our target markets orprovide us with a presence in a new market. The risks we may encounter in pursuing these acquisitions, if any, includeexpenses associated with, and difficulties in identifying, potential targets,costs associated with acquisitions we ultimately are unable to complete andhigher prices for acquired companies due to competition for attractive targets.  Completing acquisitions also may result indilution to our existing stockholders and may require us to seek additionalcapital, if available, including increasing our indebtedness.

Once acquired, thesuccessful integration and operation of a business requires communication andcooperation among key managers, the transition of customer relationships, themanagement of ongoing projects of acquired companies and the management of newprojects across previously independent facilities.

Customer satisfaction orperformance problems with an acquired company could also harm our reputation asa whole, and any acquired business could significantly under perform relativeto our expectations.  For all thesereasons, our pursuit of an overall acquisition strategy or any individual completed,pending or future acquisition may adversely affect the realization of ourstrategic goals.

In addition, while we mayobtain cost savings, operating efficiencies and other synergies as a result ofpossible future acquisitions, the consolidation of functions and theintegration of departments, systems and procedures present significantmanagement challenges.

The acquisition of newoperations can also introduce new types of risks to our business.  For example, new acquisitions may requiregreater effort to address United States Food and Drug Administration regulationor similar foreign regulation.

*We may not be able to sell GishBiomedical, Inc. at all or at a price that will be favorable to us.*

Our intention is to sellGish, the proceeds of which will be used to fund our ongoing growthinitiatives. However, we cannot assure you that the sale of Gish will beconsummated at all or at a price that will be favorable to us.

*If we cannot obtain theadditional capital required to fund our operations on favorable terms or atall, we may have to delay or reconsider our growth strategy.*

Our growth strategy mayrequire additional capital for, among other purposes, completing acquisitionsof companies and customers’ product lines and manufacturing assets, integratingacquired companies and assets, acquiring new equipment and maintaining thecondition of existing equipment.  If cashgenerated internally is insufficient to fund capital requirements, or if wedesire to make additional acquisitions, we will require additional debt orequity financing.  Adequate financing maynot be available or, if available, may not be available on terms satisfactoryto us.  If we raise additional capital byissuing equity or convertible debt securities, the issuance may dilute theshare ownership of the existing investors. In addition, we may grant future investors rights that are superior tothose of our existing investors.  If wefail to obtain sufficient additional capital in the future, we could be forcedto curtail our growth strategy by reducing or delaying capital expenditures andacquisitions, selling assets or restructuring or refinancing our indebtedness,or delaying plans for clinical trials.

13

----

**RisksRelated to Our Business**

*We have incurred substantialoperating losses and we may never be profitable.*

Our revenues were$21,151,000, $22,381,000 and $21,841,000 for the fiscal years ended March 31,2007, 2006 and 2005, respectively.  Wehad net losses of $2,962,000, $5,069,000 and $1,595,000 for the fiscal yearsended March 31, 2007, 2006 and 2005, respectively.  There is a risk that we will never beprofitable.  None of our coronary arterygraft products and technologies have ever been utilized on a large-scalecommercial basis and it may take several years before these products could becommercialized, if ever.  Our ability togenerate enough revenues to achieve profits will depend on a variety offactors, many of which are outside our control, including:

·                  sizeof market;

·                  competitionand other solutions;

·                  extentof patent and intellectual property protection afforded to our products;

·                  costand availability of raw material and intermediate component supplies;

·                  changesin governmental (including foreign governmental) initiatives and requirements;

·                  changesin domestic and foreign regulatory requirements;

·                  costsassociated with equipment development, repair and maintenance; and

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

*A substantial amount of ourassets comprise goodwill and other intangibles, and our net loss will increaseif our goodwill becomes impaired.*

As of March 31, 2007 and2006, goodwill represented approximately $487,000, or 2.7%, and $487,000, or 2.4%,respectively, of our total assets and net amortizable intangibles representedapproximately $468,000, or 2.6%, and $584,000, or 2.9%, respectively, of ourtotal assets.  In the fiscal year endedMarch 31, 2006, the Company recorded a charge of $598,000 for the impairment ofgoodwill related to its contract manufacturing operations primarily due to theEnd User’s May 2006 decision, as described in Contracts and MaterialRelationships above.  Additionally, inthe fiscal year ended March 31, 2006, the Company recorded a charge of $554,000for the impairment of goodwill related to its cardiopulmonary products divisiondue to continued reduced demand for these products.

Goodwill is generated inour acquisitions when the cost of an acquisition exceeds the fair value of thenet tangible and identifiable intangible assets we acquire.  Goodwill is no longer amortized undergenerally accepted accounting principles as a result of SFAS No. 142.  Instead, goodwill is subject to an impairmentanalysis, performed at least annually, based on the fair value of the reportingunit.  Amortizable intangible assets aresubject to SFAS No. 144, and are subject to periodic reviews for impairment, oras events and circumstances indicate that the carrying amount may not berecoverable.  We could be required torecognize future reductions in our net income caused by the write-down ofgoodwill and other intangibles, if impaired, that, if significant, couldmaterially and adversely affect our results of operations.

*Our operating results havefluctuated in the past from quarter to quarter and are likely to fluctuatesignificantly in the future due to a variety of factors, many of which arebeyond our control, including:*

·                changingdemand for our products and services;

·                thetiming of actual customer orders and requests for product shipment and theaccuracy of our customers’ forecasts of future production requirements;

·                thereduction, rescheduling or cancellation of product orders and development anddesign services requested by customers;

·                difficultiesin forecasting demand for our products and the planning and managing ofinventory levels;

·                theintroduction and market acceptance of our customers’ new products and changesin demand for our customers’ existing products;

·                resultsof clinical trials;

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

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

14

----

·                competitivepressures on selling prices;

·                theamount and timing of costs associated with product warranties and returns;

·                changesin availability or costs of raw materials or supplies;

·                fluctuationsin manufacturing yields and yield losses and availability of productioncapacity;

·                changesin our product distribution channels and the timeliness of receipt ofdistributor resale information;

·                theimpact of vacation schedules and holidays, largely during the second and thirdfiscal quarters of our fiscal year;

·                theamount and timing of investments in research and development;

·                difficultiesin integrating acquired assets and businesses into our operations;

·                chargesto earnings resulting from the application of the purchase method of accountingfollowing acquisitions; and

·                pressureon our selling prices as a result of healthcare industry cost containmentmeasures.

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

***Themedical device industry is cyclical, and an industry downturn could adverselyaffect our operating results.***

Business conditions inthe medical device industry change rapidly between periods of strong and weakdemand.  The industry is characterizedby:

·                  periodsof overcapacity and production shortages;

·                  cyclicaldemand for products;

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

·                  variationsin manufacturing costs and yields;

·                  rapidtechnological change and the introduction of new products by customers;

·                  priceerosion; and

·                  expendituresfor product development.

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

***Thefailure to complete development of our medical technology, obtain governmentapprovals, including required FDA approvals, or to comply with ongoinggovernmental regulations could delay or limit introduction of our proposedproducts, negatively impact our operations and result in failure to achieverevenues or maintain our ongoing business.***

Our research, developmentand production activities, including the manufacture and marketing of ourintended coronary artery bypass graft product, are subject to extensiveregulation for safety, efficacy and quality by numerous government authoritiesin the United States and abroad.

Beforereceiving FDA clearance to market our proposed graft, we will have todemonstrate that our grafts are safe and effective on the patientpopulation.  While we have done somepreliminary animal trials and have seen acceptable results, there can be noassurance that acceptable results will be obtained in human trials.  Clinical trials, manufacturing and marketingof medical devices are subject to the rigorous testing and approval process ofthe FDA and equivalent foreign regulatory authorities.  The Federal Food, Drug and Cosmetic Act andother federal, state and foreign statutes and regulations govern and influencethe testing, manufacture, labeling, advertising, distribution and promotion ofdrugs and medical devices.  As a result,clinical trials and regulatory approval of the coronary artery bypass graft cantake a number of years or longer to accomplish and require the expenditure ofsubstantial financial, managerial and other resources.

15

----

In order to becommercially viable, we must successfully research, develop, obtain regulatoryapproval, manufacture, market and distribute our grafts.  For each device incorporating our artificialgrafts, we must successfully meet a number of critical developmentalmilestones, including:

·                 demonstratebenefit from the use of our grafts in various contexts such as coronary arterybypass surgery;

·                  demonstratethrough pre-clinical and clinical trials that our grafts are safe andeffective; and

·                  establisha viable Good Manufacturing Process capable of potential scale up.

The time frame necessaryto achieve these developmental milestones may be long and uncertain, and we maynot successfully complete these milestones for any of our intended products indevelopment.

In order to conductclinical trials that are necessary to obtain approval by the FDA to market aproduct, it is necessary to receive clearance from the FDA to conduct suchclinical trials.  The FDA can haltclinical trials at any time for safety reasons or because we or our clinicalinvestigators do not follow the FDA’s requirements for conducting clinicaltrials.  If we are unable to receive clearanceto conduct clinical trials or the trials are halted by the FDA, we would not beable to achieve any revenue from such product as it is illegal to sell anymedical device for human consumption without FDA approval.

We are also a medicaldevices contract manufacturing services provider.  Some of the products and components ofproducts that we manufacture may be considered finished medical devices, andthe manufacturing processes used in the production of finished medical devicesare subject to FDA inspection and assessment, and must comply with the FDAquality system regulation.  The FDAquality system regulation establishes good manufacturing practice requirementsfor product design, manufacture, management, packaging, labeling, distribution,and installation for medical devices. Additional FDA regulations impose requirements for record keeping,reporting, facility and product registration, product safety and effectiveness,and product tracking.  Failure to complywith these regulatory requirements may result in civil and criminal enforcementactions, including financial penalties, seizures, injunctions and othermeasures.  Our products must also complywith state and foreign requirements. Also, in order to comply with regulatory requirements, our customers maywish to audit our operations to evaluate our quality systems.

In addition, the FDA andstate and foreign governmental agencies regulate many of our customers’products as medical devices.  FDAapproval is required for those products prior to commercialization in theUnited States, and approval of regulatory authorities in other countries mayalso be required prior to commercialization in those jurisdictions.

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

Sales of medical devicesoutside of the United States are subject to international regulatoryrequirements that vary from country to country. The time required to obtain approval for sales internationally may belonger or shorter than that required for FDA clearance or approval, and therequirements may differ.  We have enteredinto distribution agreements for the foreign distribution of our products.  These agreements generally require that theforeign distributor is responsible for obtaining all necessary regulatoryapprovals in order to allow sales of our products in a particular country.  There can be no assurance that our foreign distributorswill be able to obtain approval in a particular country for any of our futureproducts.

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

FDAenforcement policy strictly prohibits the marketing of cleared or approvedmedical devices for uncleared or unapproved uses.  In addition, product clearances or approvalscould be withdrawn for failure to comply with 

16

----

regulatory standards or the occurrence of unforeseenproblems following initial marketing.  Wewill be required to adhere to applicable FDA GMP regulations and similarregulations in other countries, which include testing, control, anddocumentation requirements.  Ongoingcompliance with GMP and other applicable regulatory requirements, includingmarketing products for unapproved uses, could result in, among other things,warning letters, fines, injunctions, civil penalties, recall or seizure ofproducts, total or partial suspension of production, refusal of the governmentto grant pre-market clearance or pre-market approval for devices, withdrawal ofclearances or approvals and criminal prosecution.  Changes in existing regulations or adoptionof new governmental regulations or policies could prevent or delay regulatoryapproval of our products.

There can be no assurancethat we will be able to obtain FDA 510(k) clearance or PMA for our productsunder development or other necessary regulatory approvals or clearances on atimely basis or at all.  Delays inreceipt of or failure to receive U.S. or foreign clearances or approvals, theloss of previously obtained clearance or approvals, or failure to comply withexisting or future regulatory requirements would have a material adverse effecton our business, financial condition and results of operations.

***Ourmarkets are subject to technological change and our success depends on ourability to develop and introduce new products.***

The market for ourproducts is characterized by:

·                  changingtechnologies;

·                  changingcustomer needs;

·                  frequentnew product introductions and enhancements;

·                  increasedintegration with other functions; and

·                  productobsolescence.

Our success is dependentin part on the design and development of new products in the medical deviceindustry.  To develop new products anddesigns for our cardiothoracic market, we must develop, gain access to and useleading technologies in a cost effective and timely manner and continue toexpand our technical and design expertise. The product development process is time-consuming and costly, and therecan be no assurance that product development will be successfully completed,that necessary regulatory clearances or approvals will be granted by the FDA ona timely basis, or at all, or that the potential products will achieve marketacceptance.  Our failure to develop, obtainnecessary regulatory clearances or approvals for, or successfully marketpotential new products could have a material adverse effect on our business,financial condition and results of operations.

***Thenumber of patients undergoing bypass surgery may continue to decline, resultingin a reduction of our market potential.***

Over the past severalyears, the total number of patients undergoing bypass surgery has decreased asa result of new, less invasive therapies such as pharmacotherapy, angioplastyand stenting.  We cannot assure you thatthe number of patients will not continue to decline as further medical advancesare introduced.  Any future decline inthe total number of patients undergoing bypass surgery could result in lostrevenue and therefore could have a material adverse effect on our business,financial condition and results of operations.

***Wehave limited manufacturing experience and if our coronary bypass graft isapproved, we may not be able to manufacture sufficient quantities at anacceptable cost.***

We are in the clinicaltrial phase of our synthetic coronary artery bypass grafts.  Accordingly, if our products are approved forcommercial sale, we will need to establish the capability to commerciallymanufacture our product(s) in accordance with FDA and other regulatoryrequirements.  We have limited experiencein establishing, supervising and conducting commercial manufacturing ofsynthetic grafts.  If we fail toadequately establish, supervise and conduct all aspects of the manufacturingprocesses, we may not be able to commercialize our products.  We do not presently own manufacturingfacilities necessary to provide clinical or commercial quantities of ourintended graft.  We may not be able toobtain such facilities at an economically feasible cost, or at all.

LeMaitre, a third partycontractor, has manufactured coronary grafts for our limited use.  In October 2006, we purchased proprietaryequipment from LeMaitre for $350,000 in cash which is designed for the futuremanufacture of our CardioPass grafts, as well as for the development ofadditional medical devices.  While theproduction of our own grafts depends on the results of clinical trials,production may be further delayed as a result of the requirement for equipmentvalidation and, therefore may adversely affect our business.

17

----

***Wedepend on outside suppliers and subcontractors, and our production andreputation could be harmed if they are unable to meet our volume and qualityrequirements and alternative sources are not available.***

We have various “solesource” suppliers who supply key components for our products.  Our outside suppliers may fail to develop andsupply us with products and components on a timely basis, or may supply us withproducts and components that do not meet our quality, quantity or costrequirements.  If any of these problemsoccur, we may be unable to obtain substitute sources of these products andcomponents on a timely basis or on terms acceptable to us, which could harm ourability to:  i) manufacture our ownproducts and components profitably or on time, and ii) ship products tocustomers on time and generate revenues. In addition, if the processes that our suppliers use to manufactureproducts and components are proprietary, we may be unable to obtain comparablecomponents from alternative suppliers.

***Aportion of our contract manufacturing revenue comes from relatively few largecustomers, and any decrease in sales to these customers could harm ouroperating results.***

The medical deviceindustry is concentrated, with relatively few companies accounting for a largepercentage of sales in the surgical, interventional and cardiovascular marketsthat are targeted by our disposable medical device and contract manufacturingoperations.  Accordingly, our revenue andprofitability are dependent on our relationships with a limited number of largemedical device companies.  We are likelyto continue to experience a high degree of customer concentration in ourdisposable medical device and contract manufacturing operations, particularlyif there is further consolidation within the medical device industry.  We cannot assure you that there will not be aloss or reduction in business from one or more of our large customers.  In addition, we cannot assure you thatrevenues from our customers that have accounted for significant revenues in thepast, either individually or as a group, will reach or exceed historical levelsin any future period.  The loss or asignificant reduction of business from any of our major customers would adverselyaffect our results of operations.

*A significant portion of ourcardiopulmonary products revenue comes through independent salesrepresentatives and distributors, and any loss of one or more of ourindependent sales representatives or distributors could harm our operatingresults.*

The marketing and sellingof our cardiopulmonary products is dependent upon our ability to attract andretain independent sales representatives and distributors.  Each of these independent salesrepresentatives and distributors are responsible for representing severalcustomers, primarily hospitals which utilize our cardiopulmonary products inopen-heart bypass surgeries. Accordingly, our revenue and profitability are dependent on our relationshipswith a limited number of independent sales representatives anddistributors.  We cannot assure you thatthere will not be a loss or reduction in the number of independent salesrepresentatives or distributors whom market and sell our cardiopulmonaryproducts.  In addition, we cannot assureyou that revenues from the customers of our independent sales representativesand distributors that may have accounted for significant revenues in the past,either individually or as a group, will reach or exceed historical levels inany future period.  The loss ofindependent sales representatives or distributors, or a significant reductionof business from any of the major customers of our independent salesrepresentatives or distributors, would adversely affect our results ofoperations.  One sales representativeorganization comprised 4%, 5% and 4% of the Company’s revenues in our fiscal yearsended March 31, 2007, 2006 and 2005, respectively.

***Ourability to grow and sustain growth levels may be adversely affected byslowdowns in the U.S. economy.***

Due to decreases incorporate profits, capital spending and consumer confidence, we haveexperienced weakness in certain of our end markets.  We are primarily susceptible when clientsstop placing orders for us to build prototypes or develop certain specializedmedical devices through our contract manufacturing operations.  The medical commercial markets, includingbio-medical research and development and medical device manufacturing, could beaffected by the past slowdown in the U.S. economy.  If an economic slowdown occurs and continuesand capital spending for research and development from our clients decreases,our business, financial condition and results of operations may be adverselyaffected.

***Wecould be harmed by litigation involving patents and other intellectual propertyrights.***

None of our patents orother intellectual property rights has been successfully challenged todate.  However, in the future, we couldbe accused of infringing the intellectual property rights of other thirdparties.  We also have certainindemnification obligations to customers with respect to the infringement ofthird party intellectual property rights by our products.  No assurance can be provided that any futureinfringement claims by third parties or claims for indemnification by customersor end users of our products resulting from infringement claims will not beasserted or that assertions of infringement, if proven to be true, will notharm our business.

18

----

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

Any litigation relatingto the intellectual property rights of third parties, whether or not determinedin our favor or settled by us, is costly and may divert the efforts andattention of our management and technical personnel.

***Wemay not be able to protect our intellectual property rights adequately.***

Our ability to compete isaffected by our ability to protect our intellectual property rights.  We rely on a combination of patents,trademarks, copyrights, trade secrets, confidentiality procedures andnon-disclosure and licensing arrangements to protect our intellectual propertyrights.  Despite these efforts, we cannotbe certain that the steps we take to protect our proprietary information willbe adequate to prevent misappropriation of our technology, or that ourcompetitors will not independently develop technology that is substantiallysimilar or superior to our technology. More specifically, we cannot assure you that any future applicationswill be approved, or that any issued patents will provide us with competitiveadvantages or will not be challenged by third parties.  Nor can we assure you that, if challenged,our patents will be found to be valid or enforceable, or that the patents ofothers will not have an adverse effect on our ability to do business.  Furthermore, others may independently developsimilar products or processes, duplicate our products or processes or designtheir products around any patents that may be issued to us.

***Ourfuture success depends on the continued service of management, engineering andsales personnel and our ability to identify, hire and retain additionalpersonnel.***

Our success depends, to asignificant extent, upon the efforts and abilities of members of seniormanagement.  Effective August 7, 2006,Dr. Michael Szycher, our former Chairman and CEO, was replaced by Michael F.Adams, who became CEO and President.  Theloss of the services of one or more of our senior management or other keyemployees could adversely affect our business. We do not maintain key person life insurance on any of our officers,employees or consultants.

There is intensecompetition for qualified employees in the medical industry, particularly forhighly skilled design, applications, engineering and sales people.  We may not be able to continue to attract andretain technologists, managers, or other qualified personnel necessary for thedevelopment of our business or to replace qualified individuals who could leaveus at any time in the future.  Ouranticipated growth is expected to place increased demands on our resources, andwill likely require the addition of new management and engineering staff aswell as the development of additional expertise by existing managementemployees.  If we lose the services of orfail to recruit engineers or other technical and management personnel, ourbusiness could be harmed.

***Periodsof rapid growth and expansion could place a significant strain on ourresources, including our employee base.***

To manage our possiblefuture growth effectively, we will be required to continue to improve ouroperational, financial and management systems. In doing so, we will periodically implement new software and othersystems that will affect our internal operations regionally or globally.  Presently, we are upgrading our enterpriseresource planning software to integrate our operations.  The conversion process is complex andrequires, among other things, that data from our existing system be madecompatible with the upgraded system. During the transition to this upgrade, we could experience delays inordering materials, inventory tracking problems and other inefficiencies, whichcould cause delays in shipments of products to our customers.

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

***Weare exposed to product liability and clinical and pre-clinical liability riskswhich could place a substantial financial burden on us, if we are sued.  Although we have $5 million in productliability insurance coverage, that amount may not be sufficient to cover allpotential claims made against us. Additionally, we face the risk of financial exposure to productliability claims alleging that the use of devices that incorporate our productsresulted in adverse effects.***

While we are not aware ofany claim at this time, our business exposes us to potential product liability,recalls and other liability risks that are inherent in the testing,manufacturing and marketing of medical products.  We cannot assure you that such potentialclaims will not be asserted against us. In addition, the use in our clinical trials 

19

----

of medical products that our potential collaboratorsmay develop and the subsequent sale of these products by us or our potentialcollaborators may cause us to bear a portion of or all product liabilityrisks.  A successful liability claim orseries of claims brought against us could have a material adverse effect on ourbusiness, financial condition and results of operations.

We cannot assure you thatwe will be able to obtain or maintain adequate product liability insurance onacceptable terms, if at all, or that such insurance will provide adequatecoverage against our potential liabilities. Furthermore, our current and potential partners with whom we havecollaborative agreements or our future licensees may not be willing toindemnify us against these types of liabilities and may not themselves besufficiently insured or have a net worth sufficient to satisfy any productliability claims.  Claims or losses inexcess of any product liability insurance coverage that may be obtained by uscould have a material adverse effect on our business, financial condition andresults of operations.

Additionally, wecurrently assist in the development of certain medical products and prototypesfor third parties, including components in other products.  Our contract manufacturing operation producescomponents for medical manufacturers used in products such as catheters anddisposable devices.  Product liabilityrisks may exist even for those medical devices that have received regulatoryapproval for commercial sale or even for products undergoing regulatoryreview.  We currently carry $5 million inproduct liability insurance.  Any defectsin our products used in these devices could result in recalls and/orsignificant product liability costs to us, which may exceed $5 million.  We do not currently carry recall insuranceand we may be subject to significant recall costs in the event of a recall.

***Wemay be affected by environmental laws and regulations.***

We are subject to avariety of laws, rules and regulations in the United States related to the use,storage, handling, discharge and disposal of certain chemical materials such asisocyanates, alcohols, dimethylacetamide, and glycols used in our research andmanufacturing process.  Any of thoseregulations could require us to acquire expensive equipment or to incursubstantial other expenses to comply with them. If we incur substantial additional expenses, product costs couldsignificantly increase.  Our failure tocomply with present or future environmental laws, rules and regulations couldresult in fines, suspension of production or cessation of operations.

***Ifwe are unable to complete our assessments as to the adequacy of our internalcontrols over financial reporting as required by Section 404 of theSarbanes-Oxley Act of 2002, investors could lose confidence in the reliabilityof our financial statements, which could result in a decrease in the value ofour common stock.***

As directed by Section404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commissionadopted rules requiring public companies to include a report of management onthe company’s internal control over financial reporting in their annual reportson Form 10-K.  This report is required tocontain an assessment by management of the effectiveness of such company’sinternal controls over financial reporting. In addition, the public accounting firm auditing a public company’sfinancial statements must attest to and report on management’s assessment ofthe effectiveness of the company’s internal controls over financialreporting.  While we are expendingsignificant resources in developing the necessary documentation and testingprocedures required by Section 404, there is a risk that we will not complywith all of the requirements imposed by Section 404.  If we fail to implement required new orimproved controls, we may be unable to comply with the requirements of Section404 in a timely manner.  This couldresult in an adverse reaction in the financial markets due to a loss ofconfidence in the reliability of our financial statements, which could causethe market price of our common stock to decline and make it more difficult forus to finance our operations.

Under current rules, weare required to report on the effectiveness of our internal controls for theyear ended March 31, 2008.  In thefollowing fiscal year, ending March 31, 2009, our independent registered publicaccounting firm will be required to report on the effectiveness of our internalcontrols.

**RisksRelated to Competition**

The medical deviceindustry is intensely competitive and characterized by rapid innovation andtechnological advances.  Productdifferentiation and performance, client service, reliability, cost and ease ofuse are important competitive considerations in the medical deviceindustry.  We expect the current highlevels of competition and technological change in the medical device industrywill continue to increase.  Severalcompanies offer devices, which compete with devices manufactured by Gish,including Maquet, COBE Cardiovascular, a division of Sorin Biomedica, Terumo,Medtronic, Inc. and Stryker Surgical. Most of our competitors have longer operating histories andsignificantly greater financial, technical, 

20

----

research, marketing, sales, distribution and otherresources.  In addition, our competitorsmay have greater name recognition than us and frequently offer discounts as acompetitive tactic.  There can be noassurance that our current competitors or potential future competitors will notsucceed in developing or marketing technologies and products that are moreeffective or commercially attractive than those that have been and are beingdeveloped by us or that would render our technologies and products obsolete ornoncompetitive, or that such companies will not succeed in obtaining regulatoryapproval for, introducing or commercializing any such products prior tous.  Any of the above competitivedevelopments could have a material adverse effect on our business, financialcondition and results of operations.

**RisksRelated to Pricing Pressure**

We face aggressivecost-containment pressures from governmental agencies and third partypayors.  There can be no assurances thatwe will be able to maintain current prices in the face of continuing pricingpressures.  Over time, the average pricefor our products may decline as the markets for these products become morecompetitive.  Any material reduction inproduct prices could negatively affect our gross margin, necessitating acorresponding increase in unit sales to maintain net sales.

**RisksRelated to Our Dependence on International Sales**

International revenuesaccounted for approximately 16%, 14% and 17% of our total sales in fiscal 2007,2006 and 2005, respectively. International revenues are subject to a number of inherent risks,including the impact of possible recessionary environments in economies outsidethe U.S., unexpected changes in regulatory requirements and fluctuations inexchange rates of local currencies in markets where we sell our products.  While we denominate all of our internationalsales in U.S. dollars, a relative strengthening in the U.S. dollar wouldincrease the effective cost of our products to international customers.  The foregoing factors could reduceinternational sales of our products and could have a material adverse effect onour business, financial condition and results of operations.

**RisksRelated to Our Securities**

***Ourstock price is volatile.***

The market price of ourcommon stock has fluctuated significantly to date.  In the past fiscal year, our stock priceranged from $1.01 to $2.83.  The futuremarket price of our common stock may also fluctuate significantly due to:

·                variationsin our actual or expected quarterly operating results;

·                announcementsor introductions of new products;

·                resultsof clinical trials;

·                technologicalinnovations by our competitors or development setbacks by us;

·                thecommencement or adverse outcome of litigation;

·                changesin analysts’ estimates of our performance or changes in analysts’ forecastsregarding our industry, competitors or customers;

·                announcementsof acquisition or acquisition transactions; or

·                generaleconomic and market conditions.

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

***Additionalauthorized shares of our common stock and preferred stock available forissuance may adversely affect the market.***

We are authorized toissue 50,000,000 shares of our common stock. As of March 31, 2007, there were 20,031,650 shares of common stockissued and outstanding.  However, thetotal number of shares of our common stock issued and outstanding does notinclude shares reserved in anticipation of the exercise of options andwarrants.  As of March 31, 2007, we hadoutstanding stock options and warrants of approximately 6,306,749 shares of ourcommon stock, the exercise price of which range between $0.50 per share to$5.40 per share, and we have reserved shares of our common stock for issuancein connection with the potential exercise thereof.  To the extent such options, warrants oradditional investment rights are exercised, the holders of our common stockwill experience 

21

----

further dilution. Stockholders will also experience dilution upon the exercise of optionsgranted under our stock option plans.  Inaddition, in the event that any future financing or consideration for a futureacquisition should be in the form of, be convertible into or exchangeable for,equity securities investors will experience additional dilution.

The exercise of theoutstanding derivative securities will reduce the percentage of common stockheld by our current stockholders. Further, the terms on which we could obtain additional capital duringthe life of the derivative securities may be adversely affected, and it shouldbe expected that the holders of the derivative securities would exercise themat a time when we would be able to obtain equity capital on terms morefavorable than those provided for by such derivative securities.  As a result, any issuance of additionalshares of common stock may cause our current stockholders to suffer significantdilution which may adversely affect the market. In addition to the above referenced shares of common stock which may beissued without stockholder approval, we have 5,000,000 shares of authorizedpreferred stock, the terms of which may be fixed by our Board, of which 500,000preferred shares were previously issued, but none are currently outstanding.  While we have no present plans to issue anyadditional shares of preferred stock, our Board has the authority, withoutstockholder approval, to create and issue one or more series of such preferredstock and to determine the voting, dividend and other rights of holders of suchpreferred stock.  The issuance of any ofsuch series of preferred stock may have an adverse effect on the holders ofcommon stock.

*Shareseligible for future sale may adversely affect the market.*

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

*Thereis a limitation on director and officer liability.*

As permitted byMassachusetts law, our Restated Articles of Organization limit the liability ofour directors for monetary damages for breach of a director’s fiduciary dutyexcept for liability in certain instances. As a result of our charter provision and Massachusetts law, stockholdersmay have limited rights to recover against directors for breach of fiduciaryduty.  In addition, our bylaws providethat we shall indemnify our directors, officers, employees and agents if suchpersons acted in good faith and reasoned that their conduct was in our bestinterest.

*Theanti-takeover provisions of our Restated Articles of Organization and of theMassachusetts corporation law may delay, defer or prevent a change of control.*

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

Our stockholders mustgive substantial advance notice prior to the relevant meeting to nominate acandidate for director or present a proposal to our stockholders at ameeting.  These notice requirements couldinhibit a takeover by delaying stockholder action.  In addition, our bylaws and Massachusetts lawprovide for staggered board members with each member elected for threeyears.  In addition, directors may beremoved by stockholders only for cause and by a vote of 80% of the stock.

**Risk ofMarket Withdrawal or Product Recall**

Complex medical devices,like our products, can experience performance problems in the field thatrequire review and possible corrective action by the manufacturer.  Similar to many other medical devicemanufacturers, we periodically receive reports from users of our productsrelating to performance difficulties they have encountered.  We expect to continue to receive customerreports regarding the performance and use of our products.  Furthermore, 

22

----

there can be no assurance that component failures,manufacturing errors or design defects that could result in an unsafe conditionor injury to the patient will not occur. If any such failures or defects were deemed serious, we could berequired to withdraw or recall products, which could result in significantcosts.  There can be no assurance thatmarket withdrawals or product recalls will not occur in the future.  Any future product problems could result inmarket withdrawals or recalls of products, which could have a material adverseeffect on our business, financial condition or results of operations.

There can be no assurancethat we will be able to successfully take corrective actions if required, norcan there be any assurance that any such corrective actions will not force usto incur significant costs.  In addition,there can be no assurance any future recalls will not cause us to faceincreasing scrutiny from our customers, which could cause us to lose marketshare or incur substantial costs in order to maintain existing marketshare.  We do not currently carry recallinsurance and we may be subject to significant recall costs in the event of arecall.

**RisksAssociated with Healthcare Reform Proposals**

Political,economical and regulatory influences are subjecting the healthcare industry inthe United States to fundamental change. Potential reforms proposed over the last several years have includedmandated basic healthcare benefits, controls on healthcare spending throughlimitations on the growth of private health insurance premiums and Medicare andMedicaid spending, the creation of large insurance purchasing groups and fundamentalchanges in the healthcare delivery system. In addition, some states in which we operate are also consideringvarious healthcare reform proposals.  Weanticipate that federal and state governments will continue to review andassess alternative healthcare delivery systems and payment methodologies andpublic debate of these issues will likely continue in the future.  Due to uncertainties regarding the ultimatefeatures of reform initiatives and their enactment and implementation, wecannot predict which, if any, of such reform proposals will be adopted, whenthey may be adopted or what impact they may have on us, and there can be noassurance that the adoption of reform proposals will not have a materialadverse effect on our business, operating results or financial condition.  In addition, the actual announcement ofreform proposals and the investment community’s reaction to such proposals, aswell as announcements by competitors and third-party payors of their strategiesto respond to such initiatives, could produce volatility in the trading andmarket price of our common stock.

**Item 1B.**              Unresolved StaffComments

None.

**Item 2.**                       Descriptionof Properties

Ourheadquarters are located in an approximately 27,000 square foot building andunderlying land located at 229 Andover Street, Wilmington, MA, purchased for$1,750,000 in cash.  The currentcorporate and polymer development and manufacturing operations are also locatedin this building.

Wealso lease approximately 16,000 square feet in Plymouth, Minnesota under alease which expires April 2009.  Withinthis facility, we have constructed a Class 10,000 clean room for the assemblyof its products.

OurCalifornia office and manufacturing facilities are located in Rancho SantaMargarita, California in a building containing approximately 52,000 square feetof space under a lease, which expires in February 2011.  Within this facility, we have constructed aClass 10,000 clean room for the assembly of its products.  Our finished goods storage facility islocated in Irvine, California in a building containing approximately 23,000square feet of space under a lease, which expires in January 2010.

**Item 3.**                       LegalProceedings

Weare not a party to any legal proceedings, other than ordinary routinelitigation incidental to our business, which we believe will not have amaterial affect on our financial position or results of operations.

**Item 4.**                          Submission of Matters to aVote of Security Holders

**None.**

23

----

**PART II**

**Item 5.**                       MarketInformation for Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities

Our common stock trades on the American Stock Exchangeunder the symbol “CTE.”  The followingtable sets forth the high and low sales prices of the common stock for each ofthe last two fiscal years, as reported on the American Stock Exchange.
|             | ** ** | **Fiscal Year 2007** | ** ** |
|-------------|------------|--------------------------------|------------|
| ** **  | ** ** | **High**                       | ** ** | **Low** | ** ** |
| 4th Quarter |       | $                              | 2.15       |   | $ | 1.25 |   |
| 3rd Quarter |       | 2.51                           |       | 1.26 |   |
| 2nd Quarter |       | 1.95                           |       | 1.01 |   |
| 1st Quarter |       | 2.83                           |       | 1.85 |   |
|             |            |                                |            |  |  |  |  |

 
|             | ** ** | **Fiscal Year 2006** | ** ** |
|-------------|------------|--------------------------------|------------|
| ** **  | ** ** | **High**                       | ** ** | **Low** | ** ** |
| 4th Quarter |       | $                              | 3.60       |   | $ | 2.30 |   |
| 3rd Quarter |       | 2.82                           |       | 1.93 |   |
| 2nd Quarter |       | 3.70                           |       | 1.70 |   |
| 1st Quarter |       | 2.15                           |       | 1.69 |   |
|             |            |                                |            |  |  |  |  |

 

Asof June 18, 2007, there were approximately 394 stockholders of record and 6,836additional beneficial stockholders (stockholders holding common stock inbrokerage accounts).  The last sale priceas reported by the American Stock Exchange on June 25, 2007, was $1.48.  We have never paid a cash dividend on ourcommon stock and do not anticipate the payment of cash dividends in the foreseeablefuture.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans as of the End of Fiscal2007 Equity Compensation Plan Information**

| Plan Category                                      | ** ** | **Number of   securities to be   issued upon   exercise of   outstanding   options, warrants  and rights** | ** ** | **Weighted average   exercise price of   outstanding   options, warrants   and rights** | ** ** | **Number of   securities   remaining   available for  future   issuance** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by stockholders     |       | 5,921,749                                                                                                                                                              | (1)        | $                                                                                                                                    | 2.24       |                                                                                                    | 1,515,399  |   |
| Equity  compensation plans not approved by stockholders |       | 385,000                                                                                                                                                                |       | $                                                                                                                                    | 2.46       |                                                                                                    | —     |   |
|                                                    |       |                                                                                                                                                                   |       |                                                                                                                                 |       |                                                                                                    |       |
| Total                                                   |       | 6,306,749                                                                                                                                                              |       | $                                                                                                                                    | 2.25       |                                                                                                    | 1,515,399  |   |

 

 

----

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

24

----

**Recent Sales of Unregistered Securities:**

Therewere no sales of unregistered securities in fiscal 2007 and 2006.

**StockRepurchase Plan**

***In June 2001, the Board of Directors authorized the purchaseof up to 250,000 shares of our common stock, of which 174,687 shares have beenpurchased as of March 31, 2007.  In June2004, the Board of Directors authorized the purchase of up to 500,000 additionalshares of our common stock.  We announcedthat purchases may be made from time-to-time in the open market, privatelynegotiated transactions, block transactions or otherwise, at times and pricesdeemed appropriate by management.  Themaximum number of shares that may be purchased under the plans as of March 31,2007 is 575,313 shares.  There were 600shares purchased during the fiscal year ended March 31, 2007 for aggregateconsideration of approximately $1,000.***

***Comparative Stock Performance***

***The comparative stock performance graph below compares thecumulative stockholder return on the Common Stock of CardioTech for the periodfrom March 31, 2002, and through the fiscal years ended March 31, 2003, 2004,2005, 2006 and 2007 with the cumulative total return on: (i) the American StockExchange Composite Index (the “AMEX Index”) and (ii) a peer group (the “PeerGroup”) determined by CardioTech.  Thegraph assumes the investment of $100 in CardioTech’s Common Stock, the AMEXIndex, and the Peer Group on March 31, 2002, and reinvestment of all dividends.  Measurement points are on March 29, 2002,March 31, 2003, 2004, 2005, 2006 and 2007.***

ThePeer Group consists of PLC Medical, Inc., Hydromer Inc., ATS Medical, Inc.,Arrhythmia Research Technology, In., and Memry Corporation.  Management selected the Peer issuers in goodfaith and on an industry or line-of-business basis.

 
|                                      | ** ** | **3/28/02** | ** ** | **3/31/03** | ** ** | **3/31/04** | ** ** | **3/31/05** | ** ** | **3/31/06** | ** ** | **3/31/07** | ** ** |
|--------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| **CardioTech  International, Inc.**  |       | 100.0       |       | 79.8        |       | 399.2       |       | 147.3       |       | 215.5       |       | 116.3       |       |
| **2007  Self-Determined Peer Group** |       | 100.0       |       | 82.5        |       | 385.7       |       | 312.8       |       | 207.0       |       | 454.0       |       |
| **AMEX Composite Index**             |       | 100.0       |       | 90.9        |       | 138.0       |       | 160.3       |       | 212.6       |       | 232.2       |       |

 

25

----

**Item 6.**                       SelectedConsolidated Financial Data

The following selectedconsolidated financial data should be read in conjunction with the auditedconsolidated financial statements and notes thereto and management’s discussionand analysis of financial condition and results of operations includedelsewhere in this Annual Report on Form 10-K. The balance sheet data as of March 31, 2007 and 2006 and the statementsof operations data for the three years ended March 31, 2007 have been derivedfrom the audited consolidated financial statements for such years, includedelsewhere in this Annual Report on Form 10-K. The balance sheet data as of March 31, 2005, 2004, and 2003 and thestatements of operations data for the two years ended March 31, 2004 have beenderived from the audited consolidated financial statements for such years, notincluded in this Annual Report on Form 10-K. Furthermore, results for the year ended March 31, 2007 are notnecessarily indicative of results that may be expected for our next fiscal yearor any other future period.  You shouldread carefully the financial statements included in this Form 10-K, includingthe notes to the financial statements and “Management’s Discussion and Analysisof Financial Condition and Results of Operations.”  The selected financial data in this sectionare not intended to replace the financial statements.
| ** **                                                             | ** ** | **For the Fiscal Years Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per share data)**     | ** ** | **2007**                                                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated  Statements of Operations Data:**                       |       |                                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                              |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Product sales                                                          |       | $                                                                      | 19,593     |   | $ | 21,404 |   | $ | 21,067 |   | $ | 21,323 |   | $ | 2,880 |   |
| Research grants and contracts                                          |       | —                                                                 |       | — |   | — |   | — |   | 88 |   |
| Royalties and development fees                                         |       | 1,558                                                                  |       | 977 |   | 774 |   | 476 |   | 426 |   |
|                                                                   |       | 21,151                                                                 |       | 22,381 |   | 21,841 |   | 21,799 |   | 3,394 |   |
| Cost of sales  (1)                                                     |       | 15,977                                                                 |       | 18,484 |   | 15,795 |   | 15,797 |   | 2,159 |   |
| Gross margin                                                           |       | 5,174                                                                  |       | 3,897 |   | 6,046 |   | 6,002 |   | 1,235 |   |
| Operating  expenses:                                                   |       |                                                                   |       |   |   |   |   |   |   |   |   |
| Cost of research grants and contracts                                  |       | —                                                                 |       | — |   | — |   | — |   | 61 |   |
| Research and development, regulatory and engineering                   |       | 1,547                                                                  |       | 1,385 |   | 1,258 |   | 1,065 |   | 313 |   |
| Selling, general and administrative (1)                                |       | 6,664                                                                  |       | 5,982 |   | 5,865 |   | 5,528 |   | 1,849 |   |
| Impairment of goodwill                                                 |       | —                                                                 |       | 1,152 |   | — |   | — |   | — |   |
| Severance payment                                                      |       | —                                                                 |       | — |   | — |   | 372 |   | — |   |
| Non-cash compensation                                                  |       | 48                                                                     |       | 193 |   | 78 |   | 1,171 |   | 19 |   |
| CarTika acquisition expenses                                           |       | —                                                                 |       | — |   | 333 |   | — |   | — |   |
|                                                                   |       | 8,259                                                                  |       | 8,712 |   | 7,534 |   | 8,136 |   | 2,242 |   |
| Loss from  operations                                                  |       | (3,085                                                                 | )          | (4,815 | ) | (1,488 | ) | (2,134 | ) | (1,007 | ) |
| Interest and other  income and expense, net                            |       | 402                                                                    |       | 146 |   | 6 |   | 620 |   | 44 |   |
| Equity in net  loss of CorNova, Inc.                                   |       | (279                                                                   | )          | (400 | ) | (113 | ) | (1 | ) | — |   |
| Net loss                                                               |       | $                                                                      | (2,962     | ) | $ | (5,069 | ) | $ | (1,595 | ) | $ | (1,515 | ) | $ | (963 | ) |
| Net loss per  common share, basic and diluted                          |       | $                                                                      | (0.15      | ) | $ | (0.26 | ) | $ | (0.09 | ) | $ | (0.10 | ) | $ | (0.11 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 19,859                                                                 |       | 19,451 |   | 18,023 |   | 15,421 |   | 9,129 |   |

 
| ** **                            | ** ** | **As of March 31,** | ** ** |
|---------------------------------------|------------|------------------------------------|------------|
| **(in thousands)**               | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Consolidated  Balance Sheet Data:** |       |                               |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents            |       | $                                  | 4,066      |   | $ | 6,841 |   | $ | 7,469 |   | $ | 7,117 |   | $ | 2,939 |   |
| Current assets                        |       | 12,741                             |       | 14,953 |   | 16,096 |   | 15,338 |   | 3,800 |   |
| Working capital                       |       | 9,803                              |       | 12,135 |   | 13,517 |   | 12,051 |   | 2,659 |   |
| Total assets                          |       | 17,901                             |       | 20,451 |   | 23,762 |   | 22,875 |   | 5,898 |   |
| Revolving line  of credit             |       | —                             |       | — |   | — |   | 730 |   | — |   |
| Total stockholders’  equity      |       | 14,847                             |       | 17,504 |   | 21,010 |   | 19,368 |   | 4,757 |   |
|                                       |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)   An allocation of rent andinsurance costs has been reclassified from selling, general and administrative expenseto cost of sales for the years ended March 31, 2006, 2005, 2004 and 2003 toconform to the current year presentation.

26

----

**Item 7.****                       Management’sDiscussion and Analysis or Plan of Operation**

**Future Operating Results**

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

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

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

**Overview**

CardioTech International,Inc. (the “Company” or “CardioTech”) is a medical device company that designs,develops, manufactures and sells innovative products and materials for thetreatment of cardiovascular, orthopedic, oncological, urological and otherdiseases.  Our business model calls forleveraging our technological and manufacturing expertise in order to expand ourroyalty, development and license fee income, develop next generation polymersand manufacture new and complex medical devices.  We are focusing on developing and marketingpolymers that can be used in products that are designed to reduce risk, trauma,cost and surgical procedure time.  Wehave one operating segment, medical device manufacturing and sales.

*Critical Accounting Policies*

Our significant accounting policies are summarized inNote A to our consolidated financial statements.  However, certain of our accounting policiesrequire the application of significant judgment by our management, and suchjudgments are reflected in the amounts reported in our consolidated financialstatements.  In applying these policies,our management uses its judgment to determine the appropriate assumptions to beused in the determination of estimates. Those estimates are based on our historical experience, terms ofexisting contracts, our observance of market trends, information provided byour strategic partners and information available from other outside sources, asappropriate.  Actual results may differsignificantly from the estimates contained in our consolidated financialstatements.  Our critical accountingpolicies are as follows:

·       *Revenue Recognition.*  We recognize revenue in accordancewith Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in FinancialStatements.”  We recognize revenue fromproduct sales upon shipment, provided that a purchase order has been receivedor a contract has been executed, there are no uncertainties regarding customeracceptance, the sales price is fixed or determinable and collection is deemedprobable.  If uncertainties regardingcustomer acceptance exist, we recognize revenue when those uncertainties areresolved and title has been transferred to the customer.  Amounts collected or billed prior to 

27

----

satisfying the above revenue recognition criteria arerecorded as deferred revenue.  We alsoreceive license and royalty fees for the use of our proprietarybiomaterials.  We recognize these fees asrevenue in accordance with the terms of the contracts.  Contracted product design and developmentprojects are recognized on a time and materials basis as services areperformed.

·       *Accounts Receivable Valuation. *Weperform various analyses to evaluate accounts receivable balances and record anallowance for bad debts based on the estimated collectibility of the accountssuch that the amounts reflect estimated net realizable value.  If actual uncollectible amounts significantlyexceed the estimated allowance, the Company’s operating results would besignificantly and adversely affected.

·       *Inventory Valuation. *Wevalue our inventory at the lower of our actual cost or the current estimatedmarket value.  We regularly reviewinventory quantities on hand and inventory commitments with suppliers andrecord a provision for excess and obsolete inventory based primarily on ourhistorical usage for the prior twelve to twenty-four month period.  Although we make every effort to ensure theaccuracy of our forecasts of future product demand, any significantunanticipated change in demand or technological developments could have asignificant impact on the value of our inventory and our reported operatingresults.

·       *Intangibles. *Our long-lived assets includeintangible assets and goodwill.  Inassessing the recoverability of our intangible assets and goodwill, we mustmake assumptions in determining the fair value of the asset by estimatingfuture cash flows and considering other factors, including our significantchanges in the manner or use of the assets, or negative industry reports oreconomic conditions.  If those estimatesor their related assumptions change in the future, we may be required to recordimpairment charges for those assets. Under the provisions of Statement of Financial Accounting Standards, orSFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to testour intangible assets for impairment on a periodic basis thereafter.  In the fourth quarter of the fiscal yearended March 31, 2007, we completed our annual review of goodwill and otherintangible assets.  As a result of thisreview, we determined the fair value of the one reporting unit for whichgoodwill remains, exceeded its carrying amount and, therefore, no goodwillimpairment existed as of March 31, 2007.

·       *Stock-BasedCompensation.*  Effective April1, 2006, we adopted Statement of Financial Accounting Standard No. 123R (SFAS123R), “*Share-Based Payment,*”**whichrequires the expense recognition of the estimated fair value of all stock-basedpayments issued to employees.  Prior tothe adoption of SFAS 123R, the estimated fair value associated with such awardswas not recorded as an expense, but rather was disclosed in a footnote to ourfinancial statements.

The valuation ofemployee stock options is an inherently subjective process, since market valuesare generally not available for long-term, non-transferable employee stockoptions.  Accordingly, an option pricingmodel is utilized to derive an estimated fair value.  In calculating the estimated fair value ofour stock options we use the Black-Scholes pricing model, which requires theconsideration of the following six variables for purposes of estimating fairvalue:

·                  the stock optionexercise price,

·                  the expectedterm of the option,

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

·                  the expectedvolatility of our common stock,

·                  the expecteddividends on our common stock (we do not anticipate paying dividends in theforeseeable future), and

·                  the risk freeinterest rate for the expected option term.

Stock OptionExercise Price and Grant Date Price of our Common Stock.  The closing market price of our common stockon the date of grant.

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

ExpectedVolatility.  Theexpected volatility is a measure of the amount by which our stock price isexpected to fluctuate during the expected term of options granted.  We determine the expected volatility solelybased 

28

----

upon thehistorical volatility of our common stock over a period commensurate with theoption’s expected term.  We do notbelieve that the future volatility of our common stock over an option’sexpected term is likely to differ significantly from the past.

ExpectedDividends.  We havenever declared or paid any cash dividends on any of our capital stock and donot expect to do so in the foreseeable future. Accordingly, we use an expected dividend yield of zero to calculate thegrant-date fair value of a stock option.

Risk-Free InterestRate.  The risk-freeinterest rate is the implied yield available on U.S. Treasury zero-couponissues with a remaining term equal to the option’s expected term on the grantdate.

Of the variablesabove, the selection of an expected term and expected stock price volatilityare the most subjective.  The majority ofthe stock option expense recorded in the fiscal year ended March 31, 2007relates to the vesting of stock options granted subsequent to April 1, 2006, asthe majority of our outstanding options were fully vested due to theacceleration effective July 8, 2004.

Upon adoption ofSFAS 123R, we were also required to estimate the level of award forfeituresexpected to occur and record compensation expense only for those awards thatare ultimately expected to vest.  Thisrequirement applies to all awards that are not yet vested, including awardsgranted prior to April 1, 2006.  Due tothe limited number of unvested options outstanding, the majority of which areheld by executives and members of the Company’s Board of Directors, the Companyhas estimated a zero forfeiture rate.  TheCompany will revisit this assumption periodically and as changes in thecomposition of our option pool dictate.

Changes in theinputs and assumptions, as described above, can materially affect the measureof estimated fair value of our stock-based compensation.  The Company anticipates the amount ofstock-based compensation to increase in the future as additional options aregranted.  As of March 31, 2007, there wasapproximately $330,000 of unrecognized compensation cost related to stockoption awards that is expected to be recognized as expense over a weightedaverage period of 1.85 years.

**Results of Operations**

*Fiscal Year Ended March 31, 2007 vs. March 31, 2006*

*Revenues*

The following tablepresents revenues and the change in revenues for the years ended March 31,
|                                | ** ** | ** ** | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** |
|--------------------------------|------------|------------|------------|---------------|------------|------------|------------|---------------|------------|
| **(in thousands)**        | ** ** | **2007**   | ** ** | **Revenues**  | ** ** | **2006**   | ** ** | **Revenues**  | ** ** |
| Revenues:                      | ** ** | ** ** |       |          | ** ** | ** ** | ** ** | ** **    |       |
| Product sales                  |       | $          | 19,593     |          | 92.6       | %          | $          | 21,404        |       | 95.6 | % |
| Royalties and development fees |       | 1,558      |       | 7.4           | %          | 977        |       | 4.4           | %          |
|                           |       | $          | 21,151     |          | 100.0      | %          | $          | 22,381        |       | 100.0 | % |

 

The following tablepresents product sales expressed as a percentage of total product sales for thefiscal years ended March 31,
|                         | ** ** | **2007**           | ** ** | **2006**                      | ** ** |
|-------------------------|------------|--------------------|------------|-------------------------------|------------|
| **(in thousands)** | ** ** | **Product  sales** | ** ** | **% of  Product  sales** | ** ** | **Product   sales** | ** ** | **% of   Product  sales** | ** ** |
| Medical devices         |       | $                  | 18,838     |                          | 96.1       | % | $ | 20,411 |   | 95.4 | % |
| Engineering  services   |       | 755                |       | 3.9                           | %          | 993 |   | 4.6 | % |
|                    |       | $                  | 19,593     |                          | 100.0      | % | $ | 21,404 |   | 100.0 | % |

 

Medical device revenuesfor the fiscal year ended March 31, 2007 were $18,838,000 as compared to $20,411,000for the comparable prior year period, a decrease of $1,573,000, or 7.7%.  Medical devices are primarily composed ofcardiopulmonary bypass products, private-label products, and biomaterialstypically used for implantable devices. Medical device revenues decreased primarily due to fewer shipments ofcardiopulmonary bypass products of approximately $1,054,000, principally due tofewer cardiopulmonary 

29

----

bypass procedures being performed and loss ofcustomers.  The rate of decline ofcardiopulmonary procedures is slowing due, in part, to reduced implantation ofstents.  In addition, there were fewershipments of private-label products of approximately $378,000, primarily due tothe loss of a major customer (the “End User”), as described below.

Beginning in fiscal 2005and continuing into fiscal 2006, we started shipping branded catheter products(the “Branded Products”) on a purchase order basis to a single customer in thefiscal year ended March 31, 2006 (the “Intermediary”).  The Intermediary would then performadditional manufacturing processes and ship these Branded Products to the EndUser.  These Branded Products werepreviously developed by the End User who then transferred manufacturing to theIntermediary.  The Intermediary thenengaged us to manufacture the Branded Products. In March 2006, the End User directly sourced the Branded Products fromus.  In May 2006, the End User decided tocease using us for future production due to concerns about supply constraintsrelated to production specifications. We had initially deferred the revenuerelated to shipments to the End User due to the uncertainty regarding customeracceptance of the shipped product. As the contracted period to notify us of anydefective product passed during the second quarter of fiscal 2007 withoutfurther notification from the End User of any defective product, we determinedthat all revenue recognition criteria had been met and $397,000 of revenuerelated to shipments to the End User was recorded during the fiscal year endedMarch 31, 2007. The costs associated with this revenue were expensed during thequarters ended March 31, 2006 and June 30, 2006 because the netrealizable value of the inventory was uncertain due to the likely return andrework of the product.

Engineering servicesrevenues for the fiscal year ended March 31, 2007 were $755,000 as compared to$993,000 for the comparable prior year period, a decrease of $238,000 or24.0%.  Engineering services are providedprimarily to OEM suppliers and development companies with the expectation ofmanufacturing private-label medical devices following the completion of theseservices.  The decrease in engineeringservices is a result of a decrease in contracted projects during fiscal 2007.

Royalties and developmentfees for the fiscal year ended March 31, 2007 were $1,558,000 as compared to$977,000 for the comparable prior year period, an increase of $581,000 or59.5%.  We have agreements to license ourproprietary biomaterial technology to medical device manufacturers.  Royalties are earned when these manufacturerssell medical devices which use our biomaterials; accordingly, the increase inroyalties during the fiscal year ended March 31, 2007 is a result of increasedshipments of existing and new products by these manufacturers.  Additionally, in October 2006, we began togenerate development fees from the supply of our proprietary ChronoFlex polymermaterial, specifically formulated for the development of orthopedic implantdevices, from a leading developer and manufacturer of orthopedic devices..

*Gross Margin*

The following tablepresents product sales gross margins and gross margin percentages as a percentof the respective product sale category for the years ended March 31,
|                         | ** ** | **2007**                | ** ** | **2006**                       | ** ** |
|-------------------------|------------|-------------------------|------------|--------------------------------|------------|
| **(in thousands)** | ** ** | **Gross   Margin** | ** ** | **% Gross   Margin** | ** ** | **Gross   Margin** | ** ** | **% Gross   Margin** | ** ** |
| Product sales           |       | $                       | 3,616      |                           | 18.5       | % | $ | 2,920 |   | 13.6 | % |
|                         |            |                         |            |                                |            |  |  |  |  |  |  |

 

Gross margin on productsales (excluding royalty and development fees) during the quarters endedMarch 31, 2006 and June 30, 2006 was $3,616,000, or 18.5% as apercentage of product revenue during the quarters ended March 31, 2006 andJune 30, 2006 for the fiscal year ended March 31, 2007, as compared to$2,920,000, or 13.6% for the comparable prior year period.

Withoutthe effect of the above described $397,000 in revenues related to the End User,gross margin on product sales (excluding royalty and development fees) was$3,219,000 or 16.8% as a percentage of product revenue for the year ended March31, 2007, as compared to $2,920,000, or 13.6% for the comparable prior yearperiod.  The 3.2% increase in grossmargins as a percentage of product revenue for the fiscal year ended March 31,2007, which excludes the $397,000 in revenues related to the End User, ascompared to March 31, 2006, is due to more efficient manufacturing operationsat our private-label business, offset by: (i) marketplace pricing pressures onrevenues in the cardiopulmonary business, and (ii) increased raw material costsfor the cardiopulmonary products resulting from inflationary pressures onpetrochemical-based supplies.

*Research and Development,Regulatory, and Engineering Expenses*

The following tablepresents research and development expenses as a percentage of revenues for thefiscal years ended March 31,
| (in thousands)                                   | ** ** | **2007** | ** ** | **% of   Revenues** | ** ** | **2006** | ** ** | **% of   Revenues** | ** ** |
|-------------------------------------------------------|------------|----------|------------|-------------------------------|------------|----------|------------|-------------------------------|------------|
| Research and  development, regulatory and engineering |       | $        | 1,547      |                          | 7.3        | %        | $          | 1,385                         |       | 6.2 | % |
|                                                       |            |          |            |                               |            |          |            |                               |            |  |  |

 

30

----

Research and developmentexpenses for the fiscal year ended March 31, 2007 were $1,547,000 as comparedto $1,385,000 for the comparable prior year period, an increase of $162,000 or11.7%.  Our research and developmentefforts are focused on developing new applications of ChronoFlex, syntheticvascular graft technologies, including the CardioPass graft, and GishBiocompatible Surface Coating applications. Research and development expenditures consisted primarily of thesalaries of full time employees and related expenses, and are expensed asincurred.  The Company had additionalstaff for research and development in the year ended March 31, 2007.  These individuals work on a variety ofprojects, including production support, and we believe we are operating at theminimum staffing level to support our operating needs.

We have an investment inCorNova, Inc., of which Dr. Eric Ryan is Chairman, CEO and a majorshareholder.  On July 15, 2004, weentered into a two-year consulting agreement with Dr. Ryan, which provides fora range of payments, in either cash or common stock, for the achievement ofcertain milestones related to the manufacturing, commencement of Europeanclinical trials and the receipt of a restricted CE mark of our CardioPassSynCAB.  This agreement expired as ofJuly 15, 2006.  We have no otherlong-term research and development commitments.

*Selling, General andAdministrative Expenses*

The following tablepresents selling, general and administrative expenses as a percentage ofrevenues for the fiscal years ended March 31,
| (in thousands)                  | ** ** | **2007** | ** ** | **% of  Revenues** | ** ** | **2006** | ** ** | **% of   Revenues** | ** ** |
|--------------------------------------|------------|----------|------------|-------------------------|------------|----------|------------|-------------------------------|------------|
|                                 |       |     |       |                    |       |     |       |                          |       |
| Selling, general  and administrative |       | $        | 6,664      |                    | 31.5       | %        | $          | 5,982                         |       | 26.7 | % |
|                                      |            |          |            |                         |            |          |            |                               |            |  |  |

 

Selling, general andadministrative expenses for the fiscal year ended March 31, 2007 were$6,664,000 as compared to $5,982,000 for the comparable prior year period, anincrease of $682,000 or 11.4%.  Theincrease is attributable, in part, to approximately $600,000 in costs, whichinclude a strategic consulting study and incremental legal and recruiting fees.  Without the effect of the above costs,selling, general and administrative expenses for the year ended March 31, 2007increased $82,000, or by 1.4%, and were equal to 28.7% of revenues.  The remaining increase is primarily due toadditional management employees.

*Impairment of Goodwill*

During the quarter endedMarch 31, 2006, the Company tested its intangible assets for impairment andbased on the results of the first step of the goodwill impairment test, theCompany determined that the fair value of goodwill of its cardiopulmonaryproducts and contract manufacturing operations was less than the respectivecarrying amounts and, therefore, goodwill impairment existed as of March 31,2006.  As a result, the second step ofthe goodwill impairment test was completed and the Company recorded a charge of$598,000 for the impairment of goodwill related to contract manufacturingoperations, primarily due to the cessation of a major customer.  In addition, there was a charge of $554,000for the impairment of goodwill for its cardiopulmonary products operations dueto continued reduced demand for these products. The Company’s remaining goodwill is related to the biomaterialsoperations.  In the fourth quarter of thefiscal year ended March 31, 2007, the Company completed its annual review ofgoodwill and other intangible assets.  Asa result of this review, the Company determined the fair value of the reportingunit exceeded the carrying amount and, therefore, no goodwill impairmentexisted as of March 31, 2007.

*Non-cash Compensation Expense*

Non-cash compensationexpense for the fiscal year ended March 31, 2007 was $48,000 as compared to$193,000 for the comparable prior year period, a decrease of $143,000 or 75.1%,primarily due to a decrease in the number of options granted to an outsideconsultant when compared to fiscal 2006, offset by the adoption of FAS 123R infiscal 2007.

*Interest and Other Income andExpense*

Interest and other incomeand expense, net for the fiscal year ended March 31, 2007 was $402,000 ascompared to $146,000 for the comparable prior year period, an increase of$256,000 or 175.3%.  The increase isprimarily due to the $245,000 recovery of a bad debt which was previouslywritten-off, an increase of $94,000 in interest income in fiscal 2007,partially offset by a $75,000 recovery in fiscal 2006 related to transactioncosts incurred and paid in connection with the proposed acquisition of CarTikaMedical, Inc.

31

----

*Equity in Net Loss of CorNova,Inc.*

During the fiscal yearended March 31, 2007, we recorded an additional $279,000 of equity in net lossin our investment in CorNova, which resulted in our recording losses totalingour investment in CorNova, thereby reducing our investment balance tozero.  During the fiscal year ended March31, 2006, we recorded $400,000 of equity in net loss in our investment in CorNova.  Wehave no additional obligation to contribute assets or additional common stocknor to assume any liabilities or to fund any losses that CorNova may incur.

*Income Taxes*

The Company has federaland state net operating loss carry forwards available to offset future taxableincome. As of March 31, 2007, the Company had federal net operating losses ofapproximately $28,904,000, expiring between 2008 and 2027, and state netoperating losses of approximately $26,671,000, expiring between 2008 and 2012. Approximately$11,349,000 of the federal net operating loss carry forwards is subject toannual limitations as a result of the change in control of Gish.  As of March 31, 2007, the Company had federaland state investment and research tax credit carryforwards available to offsetfuture taxable income of approximately $149,000, expiring between 2008 and2027, and $108,000, expiring between 2008 and 2012, respectively.

*Fiscal Year Ended March 31, 2006 vs. March 31, 2005*

Thefollowing table presents revenues and the change in revenues for the yearsended March 31,
| (in thousands)            | ** ** | **2006**   | ** ** | **% of   Revenues** | ** ** | **2005**   | ** ** | **% of   Revenues** | ** ** |
|--------------------------------|------------|------------|------------|-------------------------------|------------|------------|------------|-------------------------------|------------|
| Revenues:                      | ** ** | ** ** |       |                          | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Product sales                  |       | $          | 21,404     |                          | 95.6       | %          | $          | 21,067                        |       | 96.5 | % |
| Royalties and development fees |       | 977        |       | 4.4                           | %          | 774        |       | 3.5                           | %          |
|                           |       | $          | 22,381     |                          | 100.0      | %          | $          | 21,841                        |       | 100.0 | % |

 

Thefollowing table presents product sales by group expressed as a percentage oftotal product sales for the fiscal years ended March 31,
|                                            | ** ** | **2006**                 | ** ** | **2005**                                  | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **Product   sales** | ** ** | **% of   Product   sales** | ** ** | **Product   sales** | ** ** | **% of   Product   sales** | ** ** |
| Medical devices                            |       | $                        | 20,411     |                                      | 95.4       | % | $ | 19,530 |   | 92.7 | % |
| Contracted  product design and development |       | 993                      |       | 4.6                                       | %          | 1,537 |   | 7.3 | % |
|                                       |       | $                        | 21,404     |                                      | 100.0      | % | $ | 21,067 |   | 100.0 | % |

 

Medicaldevice revenues for the fiscal year ended March 31, 2006 were $20,411,000 ascompared to $19,530,000 for the comparable prior year period, an increase of$881,000, or 4.5%.  Medical devices areprimarily composed of cardiopulmonary bypass products, private-label products,and biomaterials typically used for implantable devices.  Medical device revenues increased principallydue to increases in the sales of private label products (an increase ofapproximately $2,021,000), offset in part by decreases in shipments ofcardiopulmonary bypass products (a decrease of approximately $1,171,000).

InSeptember 2005, we received FDA approval for certain heparin coated productsfor the cardiopulmonary bypass surgery market. We are currently applying for CE Mark in Europe for our heparin coated products.  In October 2005, we hired a Director of Salesand Marketing-Worldwide, to accelerate product sales overseas, primarily inJapan, where we generate higher overall gross margins.

Contractedproduct design and development revenues for the fiscal year ended March 31,2006 were $993,000 as compared to $1,537,000 for the comparable prior yearperiod, a decrease of $544,000 or 35.4%. Contracted product design and development services are providedprimarily to OEM suppliers and development companies with the expectation ofmanufacturing private-label medical devices following the completion of theseservices.  The 

32

----

decreasein contracted product design and development services is a result of a shifttowards an increase in the manufacture and shipment of private-label medicaldevice products.

Royaltiesfor the fiscal years ended March 31, 2006 were $977,000 as compared to $774,000for the comparable prior year period, an increase of $203,000 or 26.2%.  We have agreements to license our proprietarybiomaterial technology to medical device manufacturers.  Royalties are earned when these manufacturerssell medical devices which use our biomaterials; accordingly, the increase inroyalties during the fiscal year ended March 31, 2006 is a result of increasedshipments of product by these manufacturers.

*Gross Margin*

Thefollowing table presents product sales gross margin and gross marginpercentages as a percent of the respective product sale category for the yearsended March 31,
|                         | ** ** | **2006**                | ** ** | **2005**                       | ** ** |
|-------------------------|------------|-------------------------|------------|--------------------------------|------------|
| **(in thousands)** | ** ** | **Gross   Margin** | ** ** | **% Gross   Margin** | ** ** | **Gross   Margin** | ** ** | **% Gross   Margin** | ** ** |
| Product sales           |       | $                       | 2,920      |                           | 13.6       | % | $ | 5,272 |   | 25.0 | % |
|                         |            |                         |            |                                |            |  |  |  |  |  |  |

 

Gross margin on product sales (excluding royaltyincome) was $2,920,000, or 13.6% as a percentage of product revenue for thefiscal year ended March 31, 2006, as compared to $5,272,000, or 25.0% for thecomparable prior year period.

Beginning in fiscal 2005 and continuing into fiscal2006, we started shipping branded catheter products (the “Branded Products”) ona purchase order basis to a major customer (the “Intermediary”).  The Intermediary would then performadditional manufacturing processes and ship these Branded Products to the EndUser.  These Branded Products werepreviously developed by the End User who then transferred manufacturing to theIntermediary.  The Intermediary thenengaged us to manufacture the Branded Products. In March 2006, the End User directly sourced the Branded Products fromus.  In May 2006, the End User decided tocease using us for future production due to concerns about supply constraintsrelated to production specifications.

As further described below, this decision by the EndUser resulted in an impairment of a $556,000 for custom inventory held by us atMarch 31, 2006.

The 11.4% decrease in gross margins as a percentage ofproduct revenue for the fiscal year ended March 31, 2006 as compared to March31, 2005 is due to: (i) first-time pilot production costs incurred during theyear for new products in our private-label medical device manufacturingdivision by the Intermediary/End User, (ii) a $556,000 impairment of certaincustom inventory as of March 31, 2006 associated with the above-describeddecision by the End User to discontinue future purchases, (iii) a change inproduct mix to a higher percentage of lower margin, private-label products,(iv) increased raw material costs for the cardiopulmonary products resultingfrom inflationary pressures on petrochemical-based supplies, and (v) a $240,000provision for a voluntary recall of certain cardiopulmonary products.

*Research and Development,Regulatory, and Engineering Expenses*

The following table presents research and developmentexpenses as a percentage of revenues for the fiscal years ended March 31,
| (in thousands)                                   | ** ** | **2006** | ** ** | **% of   Revenues** | ** ** | **2005** | ** ** | **% of   Revenues** | ** ** |
|-------------------------------------------------------|------------|----------|------------|-------------------------------|------------|----------|------------|-------------------------------|------------|
| Research and  development, regulatory and engineering |       | $        | 1,385      |                          | 6.2        | %        | $          | 1,258                         |       | 5.8 | % |
|                                                       |            |          |            |                               |            |          |            |                               |            |  |  |

 

Research and development expenses for the fiscal yearended March 31, 2006 were $1,385,000 as compared to $1,258,000 for the comparableprior year period, an increase of $127,000 or 10.1%.  This increase is primarily a result of thetiming of activities associated with the development of and clinical effortsassociated with the CardioPass graft and activities for cardiopulmonary products.  Our research and development efforts areprimarily focused on developing our synthetic vascular graft technologies,including the CardioPass graft, and Gish Biocompatible Surface Coatingapplications.  Research and developmentexpenditures consisted primarily of the salaries of full time employees andrelated expenses, and are expensed as incurred. These individuals work on a 

33

----

varietyof projects, including production support, and we believe we are operating atthe minimum staffing level to support our operating needs.

Previously, we entered into a two-year consultingagreement with Dr. Eric Ryan, CEO of CorNova, which provided for a range ofpayments, in either cash or common stock, for the achievement of certainmilestones related to the manufacturing, commencement of European clinicaltrials and the receipt of a restricted CE mark of our CardioPass graft (the “RyanConsulting Agreement”).  Total potentialpayments range from $161,000 to $216,000 based on the timing of the milestoneachievements.  As part of the agreement,Dr. Ryan had the opportunity to earn up to an additional $41,000 based on theachievement of certain milestones related to our other products.  For the fiscal year ended March 31, 2006,several of the contract milestones were achieved and, accordingly, coststotaling $38,000 related to performance under this contract were recognized asresearch and development expense.  Wehave no other long-term research and development commitments.

*Selling, General andAdministrative Expenses*

The following table presents selling, general andadministrative expenses as a percentage of revenues for the fiscal years endedMarch 31,
| (in thousands)                  | ** ** | **2006** | ** ** | **% of   Revenues** | ** ** | **2007** | ** ** | **% of   Revenues** | ** ** |
|--------------------------------------|------------|----------|------------|-------------------------------|------------|----------|------------|-------------------------------|------------|
| Selling, general  and administrative |       | $        | 5,982      |                          | 26.7       | %        | $          | 5,865                         |       | 26.9 | % |
|                                      |            |          |            |                               |            |          |            |                               |            |  |  |

 

Selling, general and administrative expenses for thefiscal year ended March 31, 2006 were $5,982,000 as compared to $5,865,000 forthe comparable prior year period, an increase of $117,000 or 2.0%.

*Impairment of Goodwill*

In the fourth quarter of the fiscal year ended March31, 2006, we completed our annual review of goodwill and other intangibleassets and determined that all goodwill from our contract manufacturing andcardiopulmonary products operations were impaired.  As a result of this review, we recorded acharge of $598,000 for the impairment of goodwill related to our private-labelmedical device manufacturing division primarily due to the current cessation ofthe End User as a customer.  In addition,we recorded an additional $554,000 goodwill impairment charge for ourcardiopulmonary business due to continued reduced demand for these products.

*Non-cash Compensation Expense*

Non-cash compensation expenses for the fiscal yearended March 31, 2006 were $193,000 as compared to $78,000 for the comparableprior year period, an increase of $115,000, or 147.4%, primarily due toincrease in the number of options granted to outside consultants.

*CarTika Acquisition Expenses*

CarTika acquisition expenses for the fiscal year endedMarch 31, 2005 were $333,000.  Theseexpenses related to a potential acquisition in the fiscal year ended March 31,2005 that was not consummated.  Duringthe fiscal year ended March 31, 2006, there were no other charges to berecognized in connection with this terminated acquisition.

*Interest and Other Income andExpense*

Interest and other income and expense, net for thefiscal year ended March 31, 2006 was $146,000 as compared to $6,000 for thecomparable prior year period, an increase of $140,000.  This increase is primarily due to the net$75,000 recovery related to transaction costs incurred and paid in connectionwith the proposed acquisition of CarTika Medical, Inc.

*Equity in Net Loss of CorNova,Inc.*

During the fiscal year ended March 31, 2006, werecorded $400,000 of equity in net loss in our investment in CorNova, due to ahigher net loss at CorNova, which resulted in our recording a cumulative netloss of $546,000.  During the fiscal yearended March 31, 2005, we recorded $113,000 of equity in net loss in ourinvestment in CorNova.  The Company has no additional obligation tocontribute assets or additional common stock nor to assume any liabilities orto fund any losses that CorNova may incur.

34

----

*Income Taxes*

As of March 31, 2006, we had federal and state netoperating loss carry forwards of approximately $26,915,000 and $20,124,000,respectively, available to offset future taxable income, that expire between2008 through 2026. Approximately $11,349,000 of the federal net operating losscarry forwards is subject to annual limitations as a result of the change incontrol of Gish.

**Liquidity and Capital Resources**

As of March 31, 2007, wewere conducting our operations with approximately $4,066,000 in cash and cashequivalents.  At March 31, 2007, we hadno debt. In reviewing the strategic fit of Gish in our business model, wedetermined that Gish did not fit our strategic direction. In January 2007, weretained an investment banking firm to identify potential purchasers of Gishand to manage the sale of Gish. Although the expected sale of Gish will permitthe redeployment of capital into our ongoing growth initiatives, there can beno assurance that the sale will be consummated at all or on terms acceptable tous. We believe our cash position as of March 31, 2007, excluding any futureeffect of a potential sale of Gish, will be sufficient to fund our workingcapital and research and development activities for at least the next twelvemonths.

Our future growth maydepend upon our ability to raise capital to support research and developmentactivities and to market and sell our vascular graft technology, specificallythe coronary artery bypass graft.  We mayrequire substantial funds for further research and development, futurepre-clinical and clinical trials, regulatory approvals, establishment ofcommercial-scale manufacturing capabilities, and the marketing of ourproducts.  Our capital requirementsdepend on numerous factors, including but not limited to, the progress of ourresearch and development programs; the progress of pre-clinical and clinicaltesting; the time and costs involved in obtaining regulatory approvals; thecost of filing, prosecuting, defending and enforcing any intellectual propertyrights; competing technological and market developments; changes in ourdevelopment of commercialization activities and arrangements; and the purchaseof additional facilities and capital equipment.

During the fiscal yearended March 31, 2007, we had net cash outflows of $2,259,000 from operatingactivities as compared to net cash outflows of $1,683,000 for the comparableprior year period.  The $576,000 increasein net cash outflows used in operating activities during the fiscal year endedMarch 31, 2007 as compared to the comparable prior year period was primarily aresult of:  (i) an increase ininventories of approximately $464,000 and (ii) an increase in accountsreceivable-other of $288,000.

During the fiscal yearended March 31, 2007, we had net cash outflows of $733,000 from investingactivities as compared to net cash outflows of $179,000 for the comparableprior year period.  The increase in netcash outflows from investing activities is a result of (i) leaseholdimprovements and (ii) the purchase of production equipment, including thepurchase in October 2006 of $350,000 of proprietary equipment which is designedfor the future manufacture of the Company’s CardioPass grafts, as well as forthe development of additional medical devices.

Duringthe fiscal year ended March 31, 2007, we had net cash inflows of $217,000 fromfinancing activities as compared to net cash inflows of $1,234,000 for thecomparable prior year period.  Thedecrease in net cash inflows is a result of decreased cash generated from theexercise of stock options by employees and consultants.  During the fiscal year ended March 31, 2007we issued 235,417 shares of our common stock as a result of the exercise ofoptions, generating approximate cash proceeds of $218,000.  During the year ended March 31, 2007, wepurchased 600 shares of our common stock at an approximate cost of $1,000.

Contractual obligationsconsist of the following as of March 31, 2007:
|                              | ** ** | **Payment Due by Period** | ** ** |
|------------------------------|------------|------------------------------------------|------------|
| **(in thousands)**      | ** ** | **Total**                                | ** ** | **Less than 1   Year** | ** ** | **1 to 3   Years** | ** ** | **3 to 5   Years** | ** ** | **More than   5 Years** | ** ** |
| Operating lease  obligations |       | $                                        | 2,765      |   | $ | 805 |   | $ | 1,960 |   | $ | — |   | $ | — |   |
| Purchase  obligations        |       | 2,244                                    |       | 2,244 |   | — |   | — |   | — |   |
|                         |       | $                                        | 5,009      |   | $ | 3,049 |   | $ | 1,960 |   | $ | — |   | $ | — |   |

 

Operating leaseobligations are for aggregate future minimum rental payments required under leasesfor office and manufacturing facilities in Rancho Santa Margarita, CA; Irvine,CA; and Plymouth, MN.  Purchaseobligations primarily represent purchase orders issued for inventory used inproduction.

With respect to theExchange and Venture Agreement with CorNova, we have no additional obligationto contribute assets or additional common stock nor to assume any liabilitiesor to fund any losses that CorNova may incur.

As of March 31, 2007, wedid not have any off-balance sheet arrangements that have, or are reasonablylikely to have, a current or future material effect on our consolidatedfinancial condition, results of operations, liquidity, capital expenditures orcapital resources.

35

----

**Item 7A.**              Quantitative andQualitative Disclosures About Market Risk.

Weown certain money market funds that are sensitive to market risks as part ofour investment portfolio.  The investmentportfolio is used to preserve our capital until it is required to fundoperations, investing or financing activities. None of the market-risk sensitive instruments held in our investmentportfolio are held for trading purposes. We do not own derivative financial instruments in our investmentportfolio.  We do not believe that theexposure to market risks in our investment portfolio is material.

**Item 8.**                       FinancialStatements and Supplementary Data

The following documents are filed as part of thisreport on Form 10-K
|                                                                                                         | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------|
| Report of Ernst & Young LLP, Independent  Registered Public Accounting Firm                         |       | F-1        |
| Consolidated Balance Sheets at March 31, 2007 and 2006                                                  |       | F-2        |
| Consolidated Statements of Operations for the years  ended March 31, 2007, 2006 and 2005                |       | F-3        |
| Consolidated Statements of Stockholders’ Equity for  the years ended March 31, 2007, 2006 and 2005 |       | F-4        |
| Consolidated Statements of Cash Flows for the years  ended March 31, 2007, 2006 and 2005                |       | F-5        |
| Notes to Consolidated Financial Statements                                                              |       | F-6        |

 

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

None.

**Item 9A.**              Controls andProcedures

(a)          *Disclosurecontrols and procedures.*

Ourmanagement, including the Chief Executive Officer and Chief Financial Officer,conducted an evaluation of our disclosure controls and procedures (as said termis defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Actof 1934, as amended (the “Exchange Act”)) as of March 31, 2007.  Based on this evaluation, the Chief ExecutiveOfficer and Chief Financial Officer have determined that our controls andprocedures, including those of our consolidated subsidiaries, are effective toensure that information we are required to disclose in reports filed orsubmitted under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission.

*(b)**       InternalControl Over Financial Reporting*

Therehave not been any changes in our internal control over financial reporting (assuch term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)during the fiscal quarter to which this report relates that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

**Item 9B.**              Other Information

**None.**

36

----

**PART III**

**Item10.**     Directors,Executive Officers and Corporate Governance

CardioTech’s Board of Directors is currently comprisedof five directors.  The directors andnamed executive officers, their ages and positions at CardioTech as well ascertain biographical information of these individuals, are set forth below.  The ages of the individuals are provided asof July 16, 2007.
| Name                         | ** ** | **Age** | ** ** | **Position**                                    |
|------------------------------|------------|---------|------------|-------------------------------------------------|
| Michael F. Adams             |       | 51      |       | President, Chief Executive Officer and Director |
| Eric G. Walters              |       | 55      |       | Vice President & Chief Financial Officer    |
| Andrew M. Reed, Ph.D.        |       | 54      |       | Vice President of Science & Technology      |
| Philip A. Beck               |       | 45      |       | Vice President & General Manager, CDT       |
| William J. O’Neill, Jr. |       | 65      |       | Chairman of the Board of Directors              |
| Michael L. Barretti          |       | 62      |       | Director                                        |
| Anthony J. Armini, Ph.D.     |       | 69      |       | Director                                        |
| Jeremiah E. Dorsey           |       | 62      |       | Director                                        |

 

There are no family relationships between anydirector, executive officer, or person nominated or chosen to become a directoror executive officer.

**Mr.Michael F. Adams has been a director of CardioTech since May 1999.  Mr. Adams was appointed as President &Chief Executive Officer on August 7, 2006. From April 1, 2006 until August 7, 2006, Mr. Adams was the Company’sVice President of Regulatory Affairs and Business Development.  Prior to April 2006, Mr. Adams was the VicePresident of PLC Systems, Inc.  Prior tojoining PLC Systems in September 2000, Mr. Adams was Vice President ofAssurance Medical, Inc.  Prior to joiningAssurance Medical in June 1999, Mr. Adams was the Chief Operating Officer andVice President of Regulatory Affairs and Quality Assurance of CardioTech fromJune 1998 to May 1999.  From November1994 through June 1998, Mr. Adams served as the Vice President of CytycCorporation.  Mr. Adams received a BSfrom the University of Massachusetts.**

**Mr. EricG. Walters has been our Vice President & Chief Financial Officer sinceOctober 2005.  Prior to joining us, Mr.Walters from October 2004 through September 2005 served as Vice President andChief Financial Officer at Konarka Technologies, Inc., a developer oflight-activated plastic (photovoltaic) material.  Prior to joining Konarka, Mr. Walters servedin various capacities at PolyMedica Corporation during a 13-year period,including Executive Vice President and Chief Financial Officer.  Mr. Walters, a CPA, is a Member of theAmerican Institute of Certified Public Accountants, a Fellow of theMassachusetts Society of Certified Public Accountants, and a Member inFinancial Executives International.  Mr.Walters serves as a Director and the Chairman of the Audit Committee of theBoard of Directors of MFIC Corporation since November 2005; and as a member ofthe Board of Directors of CorNova Inc., a privately-held development stagecompany.  Mr. Walters received his BSdegree from Colgate University and a Certificate in Accounting from BentleyCollege.**

**Dr.Andrew M. Reed has been our Vice President of Science & Technology sinceApril 2006.  Prior to April 2006, Dr.Reed was Executive Vice President of CCS Medical a direct to patient providerof diabetic, respiratory, ostomy and wound care supplies.  From 1999 to 2005 he was Chief OperatingOfficer and Vice President of Gericare Providers, Inc. a supplier of wound careproducts for patient in-home use.  He wasPresident of Innovative Technologies (US), Inc. the US Division of a UK basedprivate label manufacturer of proprietary wound care products from 1997 through1999.  From 1990 to 1997, Dr. Reed heldmanagement positions of increasing responsibilities at PolyMedica Corporation,a direct to consumer diabetic, pharmaceutical and wound care productmanufacturer and provider, including Vice President of Research and Developmentand President of PolyMedica Wound Care Company. Dr. Reed was responsible for research and development and manufacturingfunctions.  Earlier in his career, Dr.Reed was a Senior Research Chemist at Millipore Corporation.  Dr. Reed is the holder of several U.S.Patents, primarily in the area of polyurethane and wound dressing technologies,and is the co-inventor of ChronoFlex®. Dr. Reed received his Ph.D. in Polymer Chemistry from the University ofLiverpool, UK.  He is the author andco-author of numerous published scientific papers.**

37

----

**Mr.Philip A. Beck has been a Vice President & General Manager of Catheters andDisposables Technology, Inc. (“CDT”), CardioTech’s wholly-owned subsidiary,since October 2006.  Prior to joining us,from March 2005 through October 2006, Mr. Beck was the Chief Financial Officerand Sr. Vice President of Medical Operations of Midwest Plastic Components,Inc., a contract manufacturing company. Prior to Midwest Plastics, from November 2000 through March 2005, Mr.Beck held several positions with Accellent Inc., formally MedSource Technologies,Inc.  Throughout Mr. Beck’s career he hasserved several manufacturing and consulting management positions involvingbusiness development, supply chain management, information technology andfinancial management.  Mr. Beck receiveda Bachelor of Science in Business Management - Accounting from Mankato StateUniversity in Minnesota and is a member of the AICPA.**

**Mr.William J. O’Neill, Jr. has been a director of CardioTech since May 2004 andwas appointed as Chairman on August 7, 2006. Mr. O’Neill is currently the Dean of the Frank Sawyer School ofManagement at Suffolk University in Boston, Massachusetts.  Prior to this appointment, Mr. O’Neill spentthirty years (1969-1999) with the Polaroid Corporation, where he held thepositions of Executive Vice President of the Corporation, President ofCorporate Business Development, and Chief Financial Officer.  He was also Senior Financial Analyst at FordMotor Company.  Mr. O’Neill was a Trusteeat the Dana Farber Cancer Institute, and is currently a member of theMassachusetts Bar Association, a member of the Board of Directors of theGreater Boston Chamber of Commerce, and serves on the Board of Directors ofConcord Camera and EDGAR Online, Inc.. He earned a BA at Boston College in mathematics, a MBA in finance fromWayne State University, and a JD from Suffolk University Law School.**

**Mr.Michael L. Barretti has been a director of CardioTech since January 1998.  Mr. Barretti is the executive in residenceand professor of marketing at Suffolk University in Boston.  Mr. Barretti has been the President of CoolLaser Optics, Inc., a company which commercializes optical technology specificto the medical laser industry, since July 1996. From September 1994 to July 1996, Mr. Barretti was Vice President ofMarketing for Cynosure, Inc., a manufacturer of medical and scientificlasers.  From June 1987 to September1994, Mr. Barretti was a principal and served as Chief Executive Officer ofNorthFleet Management Group, a marketing management firm serving the internationalmedical device industry.  From January1991 to May 1994, Mr. Barretti also acted as President of Derma-Lase, Inc., theU.S. subsidiary of a Glasgow, Scotland supplier of solid-state lasertechnologies to the medical field.  Mr.Barretti received his BA from St. Johns University and an MBA from SuffolkUniversity.**

**Dr.Anthony J. Armini has been a director of CardioTech since August 2000.  Dr. Armini has been the President, ChiefExecutive Officer, and Chairman of the Board of Directors of Implant ScienceCorporation since 1984.  From 1972 to 1984,prior to founding Implant Sciences, Dr. Armini was Executive Vice President atSpire Corporation.  From 1967 to 1972,Dr. Armini was a Senior Scientist at McDonnell Douglas Corporation.  Dr. Armini received his Ph.D. in nuclearphysics from the University of California, Los Angeles in 1967.  Dr. Armini is the author of eleven patents,fifteen patents pending and fourteen publications in the field of implanttechnology.  Dr. Armini has over thirtyyears of experience working with cyclotrons and linear accelerators, theproduction and characterization of radioisotopes, and fifteen years experiencewith ion implantation in the medical and semiconductor fields.**

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

**Section 16(a) Beneficial Ownership ReportingCompliance**

Section 16(a) of the Securities Exchange Act of 1934requires our executive officers, directors and persons who beneficially ownmore than 10% of a registered class of our securities to file reports ofownership and changes in ownership with the SEC.  Based solely on a review of copies of suchforms submitted to CardioTech, we believe that all persons subject to therequirements of Section 16(a) filed such reports on a timely basis in fiscal2007, except as follows.  During fiscal2007, Mr. Dorsey received 12 option grants to purchase shares of the Company’scommon stock and was late in filing 8 Forms 4 for these option grants.

**Code of Conduct and Ethics**

**TheCompany has adopted a code of ethics that applies to its chief executiveofficer, chief financial officer, and vice president of finance.  The code of ethics is posted on the Company’swebsite at www.cardiotech-inc.com.  The**

38

----

**Companyintends to include on its website any amendments to, or waivers from, aprovision of its code of ethics that applies to the Company’s chief executiveofficer, chief financial officer, or vice president of finance that relates toany element of the code of ethics definition enumerated in Item 406 ofRegulation S-K.**

**Stockholder Communications with the Board of Directors**

**Pursuantto procedures set forth in our bylaws, our nominating committee will considerstockholder nominations for directors if we receive timely written notice, inproper form, of the intent to make a nomination at a meeting of stockholders.  To be timely, the notice must be receivedwithin the time frame identified in our bylaws, discussed below.  To be in proper form, the notice must, amongother matters, include each nominee’s written consent to serve as a director ifelected, a description of all arrangements or understandings between thenominating stockholder and each nominee and information about the nominatingstockholder and each nominee.  Theserequirements are detailed in our bylaws, which were attached as an exhibit toour Report on Form 10 filed on May 10, 1996. A copy of our bylaws will be provided upon written request.**

Stockholder proposals submitted pursuant to Rule 14a-8under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) forinclusion in the Company’s proxy materials for its 2008 Annual Meeting ofStockholders must be received by the Clerk of the Company at the principaloffices of the Company no later than April 7, 2008.  The Company has received no stockholdernominations or proposals for the 2007 Meeting.

**The Boardwill give appropriate attention to written communications that are submitted bystockholders, and will respond if and as appropriate.  Stockholders who wish to send communicationson any topic to the Board should address such communications to Board ofDirectors c/o Vice President and Chief Financial Officer, CardioTechInternational, Inc., 229 Andover Street, Wilmington, MA 01887.**

**Audit Committee**

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

**·**      appointing, approving thecompensation of, and assessing the independence of the Company’s independentauditors;

**·**      overseeing the work of theCompany’s independent auditors, including through the receipt and considerationof certain reports from the independent auditors;

**·**      reviewing and discussingwith management and the independent auditors the Company’s annual and quarterlyfinancial statements and related disclosures;

**·**      coordinating the Board ofDirector’s oversight of the Company’s internal control over financialreporting, disclosure controls and procedures and code of conduct and ethics;

**·**      establishing proceduresfor the receipt and retention of accounting related complaints and concerns;

**·**      meeting independently withthe Company’s internal auditing staff, independent auditors and management; and

**·**      preparing the auditcommittee report required by SEC rules (which is included on pages 8 and 9 ofthis proxy statement).

**The Boardof Directors has determined that Mr. O’Neill is an “audit committee financialexpert” as defined in Item 407(d)(5)(ii) of Regulation S-K and is independentunder Section 121A and 121B of the American Stock Exchange Listing Guide.  Mr. O’Neill also acts as the Chairman of theAudit Committee.**

**Duringthe fiscal year ended March 31, 2007, the Audit Committee met five (5)times.  The responsibilities of the AuditCommittee are set forth in its written charter, which is posted on theCompany’s website at www.cardiotech-inc.com under the “Investors – CorporateGovernance” section.**

39

----

**Item 11.**     Executive Compensation

**Compensation Discussion and Analysis**

This section discusses the material elements ofcompensation awarded to, earned by or paid to the executive officers identifiedin the Summary Compensation Table set forth below (whom we refer to as ournamed executive officers) in fiscal 2007.

The Compensation Committee of our Board of Directorsgenerally has responsibility for reviewing and determining on both an annualand an as-needed basis the compensation of our named executive officers and keyemployees and reporting to the Board regarding the foregoing.  The Compensation Committee also hasresponsibility for administering our stock plans and determining the number ofstock options, if any, to be granted under those plans and reporting to theBoard regarding the foregoing.  None ofthe named executive officers are members of the Compensation Committee.  The current Compensation Committee membersare Messrs: Barretti, Dorsey and Armini.

***Overview of Compensation Programsand Objectives***

The objectives of the Compensation Committee inrecommending the levels and components of compensation for the named executiveofficers are to:

(1)   Attract, motivate and retaintalented and dedicated executives;

(2)   Motivate performance to achieveour established goals and objectives; and

(3)   Provide both cash and equityincentives that align the interests of the named executive officers with thelong-term interests of our stockholders.

The Compensation Committee reviews the achievement ofcorporate goals and individual contributions to our success.  The Compensation Committee monitors theresults of our executive compensation program to assure that the compensationpaid to the named executive officers provides overall competitive pay levelsand appropriately rewards superior performance. The Compensation Committee relies on judgment and not upon rigidguidelines or formulas in determining the amount or mix of compensationelements for each named executive officer. Factors affecting the Compensation Committee’s judgment includeperformance compared to strategic goals, the nature of the named executiveofficer’s responsibilities and his or her effectiveness in leading ourinitiatives to achieve our goals.  OurPresident & Chief Executive Officer, as the manager of the members of theexecutive team, assesses the executive officers’ individual contributions totheir respective departmental goals and makes recommendations to theCompensation Committee with respect to increases in base salary, discretionarybonus and long-term incentive awards, for each member of the executiveteam.  The Compensation Committeeevaluates, discusses and approves or modifies these recommendations.  Each member of the Board who is independentin accordance with the standards of the Securities and Exchange Commission ispermitted to attend the Compensation Committee meetings and participate in thediscussion.** **However,approval of each named executive officer’s compensation is made by theCompensation Committee and recommended to the Board for ratification.  As described in more detail below, thematerial components of the named executive officers’ compensation include basesalary, discretionary bonus, long-term incentive awards, limited change-in-controlbenefits and related severance protection, and other employee benefits.  The Compensation Committee believes that eachelement of our executive compensation program helps us to achieve one or moreof our compensation objectives.

Base salaries, change-in-control benefits and otheremployee benefits are all primarily intended to attract and retain qualifiedexecutives.  The value of thesecomponents in any given year is less dependent on performance than the otherelements that comprise our executive compensation package.  The Compensation Committee believes that weneed to provide the named executive officers with a level of predictablecompensation in order to attract and retain top-caliber executives and rewardtheir continued services.  The CompensationCommittee’s general philosophy is that discretionary bonuses and long-termincentive compensation should fluctuate with our success in achieving financialand other goals, and that we should continue to use long-term compensation suchas stock options to align stockholder and executives’ interests.  The Compensation Committee also believes thata mix of longer-term and short-term elements allows us to achieve the dualgoals of attracting and retaining executives while motivating their continuedperformance and aligning their financial interests with those of ourstockholders.

The Compensation Committee continues to place greateremphasis on the “performance” approach to executive compensation, whereby the named executive officers, wouldreceive salary increases based, in part, on individual and Company performanceand on the results of a independent compensation study.

The Compensation Committee uses relevant data pointsderived from independent compensation studies for comparable companies, such assalary surveys, to assist it in determining the compensation for each of ournamed

40

----

executive officers. While the Compensation Committee has found it difficult to benchmark thecompensation levels of our named executive officers within a peer group ofcomparable companies due to the nature of our business and technology, itcontinues to evaluate the compensation practices of other medical devicecompanies in determining an appropriate level and mix of compensation.

***Current Material Elements***

*Base Salary.*  In determining the base salaries of our namedexecutive officers in fiscal 2007, the Compensation Committee did not have aformal program to review base salary.  Insetting the base salaries of our named executive officers for our fiscal year2008, the Compensation Committee considered the performance of each namedexecutive officer, including reviewing the nature of the named executiveofficer’s responsibilities, the Compensation Committee’s expectations for suchnamed executive officer’s performance, and our past compensation practice.  Base salary is paid in cash.

Effective April 1, 2007, base salary increases wereproposed by the Compensation Committee, approved by the Board and then awardedto the President & Chief Executive Officer, Vice President & ChiefFinancial Officer, and Vice President of Science & Technology based on theabove criteria.  These amounts aredisclosed in the notes to the Summary Compensation Table.

*Discretionary Bonuses.*  There was not a formal discretionary bonusprogram in place in fiscal 2007. Therefore, there were no discretionary cashbonuses paid for our named executive officers. This decision was based in large part on the financial performance ofthe Company.

The Compensation Committee may recommend beginning infiscal 2008 that discretionary bonuses be paid on an individual basis to aparticular named executive officer using criteria which the CompensationCommittee believes to be relevant, such as the performance of the particularofficer or the accomplishment of specific objectives by such officer, as well asother factors such as our profitability, revenue, cash flow, customergeneration, market share and industry position.

*Long-Term IncentiveCompensation.* Therewas not a formal discretionary long term incentive compensation program inplace in fiscal 2007.  Periodically, theCompensation Committee grants long-term incentive compensation, in the form ofstock option grants, to our named executive officers in order to provide along-term incentive which is directly tied to the performance of ourstock.  These grants provide an incentiveto maximize stockholder value by providing the executives an equity interestwhich further aligns their interests with those of the stockholders.  Vesting periods associated with such grantsare used to retain our named executive officers and to emphasize the long-termaspect of contribution and performance.

Beginning in fiscal 2008, in making grants oflong-term incentive compensation in the form of stock option grants to ournamed executive officers, the Compensation Committee will consider a number offactors, including our performance, the performance of such persons, theresults of an independent study, the achievement of specific delineated goals,the responsibilities of such persons, the number of stock options and other awardseach such person currently possesses and the underlying value of the optionsand other awards held.  Stock optiongrants are issued pursuant to the terms of the CardioTech International, Inc.2003 Stock Option Plan (the “2003 Stock Plan”), which has previously beenapproved by our stockholders.

*Stock Options*.  Pursuant to the terms of the 2003 Stock Plan,Dr. Andrew M. Reed and Mr. Philip A. Beck each received stock option grants atthe time they joined the Company in March 2006 and October 2006, respectively.  No other named executive officers receivedstock option grants in fiscal 2007.  Whenissued, the exercise price of grants is 100% of the closing price of theunderlying Common Stock on the date of grant. In general, the options granted to our named executive officers vest infour equal annual installments over a three-year period beginning on the dateof grant.  The Compensation Committeemay, in certain instances, grant performance-based options, though it has notdone so to date.

*Equity Grant Practices*.  The Compensation Committee may grant awardsto our named executive officers or other eligible participants under our 2003Stock Plan at any time during the year, including in connection with the hiringor promotion of employees or based upon other special circumstances orperformance.  In accordance withlongstanding policy, the Compensation Committee does not backdate or re-priceoptions or grant options retroactively. In addition, the Compensation Committee does not coordinate grants ofoptions so that they are made before announcements of favorable information, orafter announcements of unfavorable information. Options are granted at fair market value (deemed to be the closing priceof the underlying Common Stock on the date of grant) on a fixed date or event(such as at a regularly scheduled Board meeting for existing employees or on anew employee’s first day of work) with all required approvals obtained inadvance of or on the actual grant date. Board

41

----

and Compensation Committee meetings are generallyscheduled months in advance and scheduling decisions are made without regard toour anticipated earnings or other major announcements.

The Board has provided the President & CEO with apool of 200,000 shares of the Company’s common stock that may be grantedpursuant to the 2003 Stock Plan, on regularly scheduled Board meeting dates, toemployees other than named executive officers, limited to no more than 25,000shares annually to any one person.

*Change-in-Control Benefitsand Severance Protection.*  Certain of our named executive officers haveentered into employment agreements providing change-in-control benefits andseverance protection in the event of (i) termination by the Company of theNamed Executive Officer without Cause, (ii) termination for Good Reason by theNamed Executive Officer following a Change in Control, or (iii) failure by theCompany to renew the Employment Agreement within a period of one (1) to two (2)years following the occurrence of a Change in Control.  The Change-in-Control Benefits and SeveranceProtection provisions are further described below in “Employment Agreements;Change in Control and Severance Provisions.”

*Other Compensation andBenefits. *Our namedexecutive officers participate in the same group insurance and employee benefitplans customarily offered to our other employees.  As a policy, we do not provide loans or otherperquisites to our named executive officers.

*Employment Agreements*

As of March 31, 2007, among the named executiveofficers, the President & Chief Executive Officer, Vice President &Chief Financial Officer, and Vice President & General Manager, CDT, eachhas an employment agreement as described in “Executive Compensation -Employment Agreements”.

***Stock Ownership Guidelines***

The Company currently does not require our directorsor named executive officers to own a particular amount of our CommonStock.  The Compensation Committeerecommends stock and option holdings to our directors and named executive officersto provide motivation to this group and to align their interests with those ofour stockholders.  The majority of ourdirectors and named executive officers are stockholders.

*Return of Incentive Compensation byan Executive*

In the case of a significant restatement of ourfinancial results caused by a named executive officer’s fraudulent orintentional misconduct, the Board may take action to seek reimbursement of anyportion of performance-based or incentive compensation that was paid or awardedto such executive which would not have been paid or awarded if suchcompensation had been calculated based on the restated financial results.  The Audit Committee of the Board willdetermine whether a financial restatement is significant and will make aninitial determination of the cause of the restatement.

***Compensation Consultant***

From time to time the company or the CompensationCommittee may contractually engage or seek the advice of one or morecompensation consultants; however, such consultants have no  role in deciding the amount or form of namedexecutive officer or director compensation. In the future, either we or the Compensation Committee may continue thispractice.

*Tax Consideration*

The Compensation Committee currently intends for allcompensation paid to our named executive officers to be tax deductible to uspursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended(“Section 162(m)”).  Section 162(m)provides that we cannot deduct  forFederal income tax purposes compensation paid to our named executive officersin excess of $1,000,000, unless, in general, (1) such compensation isperformance-based, established by a committee of outside directors andobjective, and (2) the plan or agreement providing for such performance-basedcompensation has been approved in advance by stockholders.  The Compensation Committee believes thatstockholder interests are best served by not restricting the Committee’sdiscretion and flexibility in crafting compensation programs, even though suchprograms may result in certain non-deductible compensation expenses.  Accordingly, in the future, the CompensationCommittee may determine to adopt a compensation program that does not satisfythe conditions of Section 162(m) if in its judgment, after considering theadditional costs of not satisfying Section 162(m), such program isappropriate.  However, the CompensationCommittee does not anticipate paying any named executive officers in excess of$1,000,000 in the near term.

42

----

**COMPENSATIONCOMMITTEE REPORT**

The Compensation Committee has reviewed and discussedthe above Compensation Discussion and Analysis with management.  Based on its review and discussions withmanagement, the Compensation Committee recommended to our Board of Directorsthat the Compensation Discussion and Analysis be incorporated by reference inthe Company’s Annual Report on Form 10-K/A for the year ended March 31, 2007.

Compensation Committee

of the Board of Directors

Michael L. Barretti, Chairman

Jeremiah E. Dorsey

Anthony J. Armini, Ph.D.

**Summary Compensation Table**

The following table provides information concerningcompensation for services rendered to the Company in all capacities for thefiscal year ended March 31, 2007 by our Chief Executive Officer, ChiefFinancial Officer, other most highly compensated executive officers and formerexecutive officer whose total compensation exceeded $100,000 in fiscal 2007.
| **Name and Principal Position**                         | ** ** | **Fiscal  Year** | ** ** | **Salary  ($)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **All Other  Compensation  ($) (2)** | ** ** | **Total  ($)** | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|----------------------------------|------------|------------------------------------------------|------------|----------------|------------|
| **Named  Executive Officers**                                          | ** ** | ** **       | ** ** | ** **      | ** ** | ** **                       | ** ** | ** **                                     | ** ** | ** **     | ** ** |
| Michael F. Adams  President & CEO                                  |       | 2007             |       | $               | 210,452    |                             | $          | —                                         |       | $              | 9,533      |   | $ | 219,985 |   |
|                                                                   |       |             |       |            |       |                             |       |                                           |       |           |       |
| Eric G. Walters Vice President & CFO                               |       | 2007             |       | $               | 173,247    |                             | $          | —                                         |       | $              | 13,600     |   | $ | 186,847 |   |
|                                                                   |       |             |       |            |       |                             |       |                                           |       |           |       |
| Andrew M. Reed, Ph.D. Vice President of Science  & Technology      |       | 2007             |       | $               | 138,482    |                             | $          | —                                         |       | $              | 1,519      |   | $ | 140,001 |   |
|                                                                   |       |             |       |            |       |                             |       |                                           |       |           |       |
| Philip A. Beck (3) Vice President & General  Manager, CDT          |       | 2007             |       | $               | 76,085     |                             | $          | 25,115                                         |       | $              | 663        |   | $ | 101,863 |   |
| **FormerExecutive  Officer**                                           |       |             |       |            |       |                             |       |                                           |       |           |       |
| Michael Szycher  (4) Senior Science Advisor Former CEO & President |       | 2007             |       | $               | 325,000    |                             | $          | —                                         |       | $              | 5,808      |   | $ | 330,808 |   |

 

----

(1)   The amount reported in thiscolumn for the Named Executive Officer represents the dollar amount recognizedfor financial statement reporting purposes in fiscal 2007, determined inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 123R,“*Share-Based Compensation,*” and thusincludes amounts from awards granted in, and prior to, fiscal 2007.  See Note A of Notes to Consolidated FinancialStatements set forth in our Annual Report on Form 10-K for fiscal year 2007 forthe assumptions used in determining the value of such awards.

(2)   Includesi) premiums paid by the Company for disability and term life insurance for allnamed executives and former executive and ii) personal use of leased vehiclesfor Messrs. Adams, Szycher and Walters amounting to $8,096, $3,823, and$12,005, respectively.

(3)   TheCompany entered into an employment agreement with Phil A. Beck on October 12,2006 pursuant to which Mr. Beck will serve as Vice President and GeneralManager, CDT.  Mr. Beck is to receive anannual base salary of $180,000, plus a car allowance of $8,400.  Mr. Beck may also be entitled to receive anannual bonus payment in an amount, if any, to be determined by the CompensationCommittee of the

43

----

Board.  Mr. Beck’s employment agreement is furtherdescribed in “Executive Compensation – Employment Agreements.”

(4)   On August 7, 2006, Dr. MichaelSzycher resigned as Chief Executive Officer, President, Treasurer and member ofthe Board of Directors of the Company, effective that date.  On August 11, 2006 the Company entered into aTransition Agreement with Dr. Szycher, which provides for Dr. Szycher to servein a non-executive capacity as Senior Scientific Advisor to the Company at histhen current annual base salary of $325,000 for a period of one year, at whichtime his employment will terminate.  TheCompany has agreed (i) to provide Dr. Szycher life insurance coverage equal to1.5 times his base salary for a period of 12 months following his separationdate and (ii) to provide Dr. Szycher COBRA medical insurance benefits of whichthe employer portion of premiums will be paid by the Company through February28, 2008.

**2007 Grants of Plan-Based Awards**

The following tableprovides information regarding grants of awards under the CardioTechInternational, Inc. 2003 Stock Option Plan to the Named Executive Officersduring the fiscal year ended March 31, 2007.
| Name           | ** ** | **Grant  Date** | ** ** | **All Other Option  Awards: Number  of Securities  Underlying Options** | ** ** | **Exercise  Price** | ** ** | **Grant  Date Fair  Value** | ** ** |
|----------------|------------|-----------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------|------------|----------------------------------|------------|
| Philip A. Beck |       | 10/23/06        |       | 150,000                                                                                          | (1)        | $                   | 1.64       |                             | $          | 25,115 | (2) |
|                |            |                 |            |                                                                                                  |            |                     |            |                                  |            |  |  |

 

----

(1)   Optionswill vest at the rate of 25% on October 23, 2006, the date of grant, and 25% oneach annual anniversary thereafter ending on October 23, 2009.

(2)   Theamount reported in this column for the Named Executive Officer represents thedollar amount recognized for financial statement reporting purposes in fiscal2007, determined in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 123R, “*Share-Based Compensation,*”and thus includes amounts from awards granted in, and prior to, fiscal2007.  See Note A of Notes toConsolidated Financial Statements set forth in our Annual Report on Form 10-Kfor fiscal year 2007 for the assumptions used in determining the value of suchawards.

**EmploymentAgreements; Change in Control and Severance Provisions**

*Terms of Employment Agreementwith Named Executive Officers*

The Company entered intoemployment agreements (the “Employment Agreement”) with (i) Michael F. Adams onSeptember 13, 2006, effective August 7, 2006 (the “Adams Agreement”), (ii) EricG. Walters on April 2, 2006 (the “Walters Agreement”), and (iii) Philip A. Beckon October 12, 2006 (the “Beck Agreement”).

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

The term of the AdamsAgreement is set to expire on August 6, 2008. After such time, the term of the Adams Agreement will be deemed tocontinue on a month-to-month basis if not expressly extended while Mr. Adamsremains employed by the Company.  Mr.Adams and CardioTech each have the right to terminate the Adams Agreement atany time, with or without cause, as defined below, upon thirty (30) days priorwritten notice.  In the event thatCardioTech terminates the applicable Adams Agreement without cause, or Mr.Adams terminates his employment for good reason following a change in control,as defined below, or CardioTech fails to renew the Adams Agreement within two(2) years following the occurrence of a change in control, Mr. Adams will beentitled to receive severance equal to 2.0 times his annual base salary attermination.  In such event, Mr. Adamswill be bound by a non-compete covenant for one (1) year following terminationof his employment.

The Walters Agreementprovides for Mr. Walters to serve as Vice President and Chief Financial Officerof the Company.  Pursuant to the terms ofthe Walters Agreement, as amended on July 10, 2007, Mr. Walters is to receivean annual base salary of $195,000, effective April 1, 2007.  Mr. Walters’ salary will be reviewed annuallyby the Board.  Additionally, Mr. Waltersmay also be entitled to receive an annual bonus payment in an amount, if any,to be determined by the Compensation Committee of the Board.

44

----

The term of the WaltersAgreement is set to expire on April 1, 2008. After such time, the term of the Walters Agreement will be deemed tocontinue on a month-to-month basis if not expressly extended while Mr. Waltersremains employed by the Company.  Mr.Walters and CardioTech each have the right to terminate the Walters Agreementat any time, with or without cause, as defined below, upon thirty (30) daysprior written notice.  In the event thatCardioTech terminates the applicable Walters Agreement without cause, or Mr.Walters terminates his employment for good reason following a change incontrol, as defined below, or CardioTech fails to renew the Walters Agreementwithin two (2) years following the occurrence of a change in control, Mr.Walters will be entitled to receive severance equal to 2.0 times his annualbase salary at termination.  In suchevent, Mr. Walters will be bound by a non-compete covenant for one (1) yearfollowing termination of his employment.

The Beck Agreementprovides for Mr. Beck to serve as Vice President and General Manager, CDT, awholly-owned subsidiary of the Company. Pursuant to the terms of the Beck Agreement, Mr. Beck is to receive anannual base salary of $180,000.  Mr. Beckwill also receive an annual car allowance of $8,400.  Mr. Beck’s salary will be reviewed annuallyby the President & Chief Executive Officer. Additionally, Mr. Beck may also be entitled to receive an annual bonuspayment in an amount, if any, to be determined by the Compensation Committee ofthe Board.

The term of the BeckAgreement is set to expire on October 22, 2007. After such time, the term of the Beck Agreement will be deemed tocontinue on a month-to-month basis if not expressly extended while Mr. Beckremains employed by the Company.  Mr.Beck and CardioTech each have the right to terminate the Beck Agreement at anytime, with or without cause, as defined below, upon thirty (30) days priorwritten notice.  In the event thatCardioTech terminates the applicable Beck Agreement without cause, or Mr. Beckterminates his employment for good reason following a change in control, asdefined below, or CardioTech fails to renew the Beck Agreement within one (1)year following the occurrence of a change in control, Mr. Beck will be entitledto receive severance equal to 1.0 times his annual base salary attermination.  In such event, Mr. Beckwill be bound by a non-compete covenant for one (1) year following terminationof his employment.

*Employment Agreement Definitions*

*Good Reason. *“Good Reason” shall mean,during the nine (9) month period following a Change in Control, (1) a goodfaith determination by the named executive officer that as a result of suchChange in Control he is not able to discharge his duties effectively or (2)without the named executive officer’s express written consent, the occurrenceof any of the following circumstances: (a) the assignment to the namedexecutive officer of any duties inconsistent (except in the nature of apromotion) with the position in the Company that he held immediately prior tothe Change in Control or a substantial adverse alteration in the nature orstatus of his position or responsibilities or the conditions of his employmentfrom those in effect immediately prior to the Change in Control; (b) areduction by the Company in the Base Salary as in effect on the date of theChange in Control; (c) the Company’s requiring the named executive officer tobe based more than twenty-five (25) miles from the Company’s offices at whichhe was principally employed immediately prior to the date of the Change inControl except for required travel on the Company’s business to an extentsubstantially consistent with his present business travel obligations; or (d)the failure by the Company to continue in effect any material compensation orbenefit plan in which the named executive officer participates immediatelyprior to the Change in Control unless an equitable arrangement (embodied in anongoing substitute or alternative plan) has been made with respect to suchplan, or the failure by the Company to continue the named executive officer’sparticipation therein (or in such substitute or alterative plan) on a basis notmaterially less favorable, both in terms of the amount of benefits provided andthe level of his participation relative to other participants, than existed atthe time of the Change in Control.  Thenamed executive officer’s continued employment shall not constitute consent to,or a waiver of rights with respect to, any circumstance constituting GoodReason hereunder.

*Change in Control.*  A “Change in Control” shall occur or bedeemed to have occurred only if any of the following events occur: (i) any“person,” as such term is used in Sections 13(d) and 14(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), (other than any majorityowned subsidiary thereof, the Company, any trustee or other fiduciary holdingsecurities under an employee benefit plan of the Company, any trustee or otherfiduciary of a trust treated for federal income tax purposes as a grantor trustof which the Company is the grantor, or any corporation owned directly orindirectly by the stockholders of the Company in substantially the sameproportion as their ownership of stock of the Company) is or becomes the“beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directlyor indirectly, of securities of the Company representing 50% or more of thecombined voting power of the Company’s then outstanding securities on anymatter which could come before its stockholders for approval; (ii) individualswho, as of the date hereof, constitute the Board (the “Incumbent Board”) ceasefor any reason to constitute at least a majority of the Board, provided thatany person becoming a director subsequent to the date hereof whose election, ornomination for election by the Company’s stockholders, was

45

----

approved by a vote of atleast a majority of the directors then comprising the Incumbent Board (otherthan an election or nomination of an individual whose initial assumption ofoffice is in connection with an actual or threatened election contest relatingto the election of the directors of the Company, as such terms are used in Rule14a-11 of Regulation 14A under the Exchange Act) shall be, for purposes of thisAgreement, considered as though such person were a member of the IncumbentBoard; (iii) the stockholders of the Company approve a merger or consolidationof the Company with any other corporation, other than (A) a merger orconsolidation which would result in the voting securities of the Companyoutstanding immediately prior thereto continuing to represent (either byremaining outstanding or by being converted into voting securities of thesurviving entity) more than 80% of the combined voting power of the votingsecurities of the Company or such surviving entity outstanding immediatelyafter such merger or consolidation or (B) a merger or consolidation effected toimplement a recapitalization of the Company (or similar transaction) in whichno “person” (as hereinabove defined) acquires more than 50% of the combinedvoting power of the Company’s then outstanding securities; or (iv) thestockholders of the Company approve a plan of complete liquidation of theCompany or an agreement for the sale or disposition by the Company of all orsubstantially all of the Company’s assets.

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

·      misconductof the named executive officer during the course of his employment which ismaterially injurious to the Company and which is brought to the attention ofthe named executive officer promptly after discovery by the Company, includingbut not limited to, theft or embezzlement from the Company, the intentionalprovision of services to competitors of the Company, or improper disclosure ofproprietary information, but not including any act or failure to act by thenamed executive officer that he believed in good faith to be proper conduct notadverse to his duties hereunder;

·      willfuldisregard or neglect by the named executive officer of his duties or of theCompany’s interests that continues after being brought to the attention of thenamed executive officer;

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

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

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

*Potential Payments UponTermination or Change in Control*

The following tabledescribes the estimated incremental compensation upon (i) termination by theCompany of the Named Executive Officer without Cause, (ii) termination for GoodReason by the Named Executive Officer following a Change in Control, or (iii)failure by the Company to renew the Employment Agreement within two (2) yearsfollowing the occurrence of a Change in Control.  The estimated incremental compensationassumes the triggering event had occurred on March 30, 2007 (the last businessday of fiscal 2007).  Benefits generallyavailable to all employees are not included in the table.  The actual amount of compensation can only bedetermined at the time of termination or change in control.
| Named Executive Officer | ** ** | **Base Salary  Continuation** | ** ** | **COBRA  Premiums (4)** | ** ** | **Life Insurance  Premiums (5)** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|------------------------------|------------|--------------------------------------------|------------|
| Michael F. Adams                  |       | $                             | 500,000    | (1)                          | $          | —                                     |       | $ | 1,000 |   |
| Eric G. Walters                   |       | 350,000                            | (2)        | 8,382                        |       | 1,000                                      |       |
| Philip A. Beck                    |       | 180,000                            | (3)        | 8,382                        |       | 425                                        |       |
|                                   |            |                                    |            |                              |            |                                            |            |  |  |  |

 

----

(1)   Lump-sumpayment equal to 2.0 times Mr. Adams’ base salary of $250,000 per annum, thebase salary then in effect as of March 30, 2007.

(2)   Lump-sumpayment equal to 2.0 times Mr. Walters’ base salary of $175,000 per annum, thebase salary then in effect as of March 30, 2007.

(3)   Lump-sumpayment equal to 1.0 times Mr. Beck’s base salary of $180,000 per annum, thebase salary then in effect as of March 30, 2007.

46

----

(4)   Representsestimated out-of-pocket COBRA health insurance premium expenses incurred by theNamed Executive Officers over the six (6) month period following termination tobe reimbursed by the Company. Currently, Mr. Adams does not subscribe toCompany provided health benefits.

(5)   Representsestimated life insurance premiums to be paid by the Company on behalf of theNamed Executive Officers after termination. The Company shall continue in full force and effect, at its expense, thelife insurance benefits provided in the Employment Agreement for a period of 12months after termination of the Named Executive Officer’s employment or untilthe Named Executive Officer becomes employed, whichever occurs first.

**Outstanding Equity Awards at 2007Fiscal Year-End**

The following tableprovides information regarding outstanding stock options held by each NamedExecutive Officer as of the fiscal year ended March 31, 2007.
| Named Executive Officers | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Unexercisable** | ** ** | **Option Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| Michael F. Adams                   |       | 3,625                                                                         |       | —                                                                          |       | $                                        | 0.75       |                         | 7/28/09    |   |
|                               |       | 14,444                                                                        |       | —                                                                          |       | 0.75                                     |       | 7/28/09                      |       |
|                               |       | 24,500                                                                        |       | —                                                                          |       | 0.50                                     |       | 1/2/10                       |       |
|                               |       | 19,625                                                                        |       | —                                                                          |       | 2.06                                     |       | 10/25/10                     |       |
|                               |       | 60,000                                                                        |       | —                                                                          |       | 0.50                                     |       | 1/2/10                       |       |
|                               |       | 25,000                                                                        |       | —                                                                          |       | 1.10                                     |       | 4/29/11                      |       |
|                               |       | 25,522                                                                        |       | —                                                                          |       | 1.61                                     |       | 9/30/11                      |       |
|                               |       | 27,373                                                                        |       | —                                                                          |       | 1.59                                     |       | 10/27/12                     |       |
|                               |       | 10,000                                                                        |       | —                                                                          |       | 5.40                                     |       | 12/30/13                     |       |
|                               |       | 2,500                                                                         |       | —                                                                          |       | 5.40                                     |       | 12/30/13                     |       |
|                               |       | 30,000                                                                        |       | —                                                                          |       | 2.60                                     |       | 2/13/15                      |       |
|                               |       | 242,589                                                                       |       | —                                                                          |       |                                     |       |                         |       |
| Eric G. Walters                    |       | 200,000                                                                       |       | —                                                                          |       | 2.32                                     |       | 10/2/15                      |       |
| Andrew M. Reed, Ph.D.              |       | 40,000                                                                        |       | —                                                                          |       | 1.10                                     |       | 4/29/11                      |       |
|                               |       | 160,000                                                                       |       | —                                                                          |       | 2.57                                     |       | 3/19/16                      |       |
|                               |       | 200,000                                                                       |       | —                                                                          |       |                                     |       |                         |       |
| Philip A. Beck                     |       | 37,500                                                                        |       | 112,500                                                                         | (1) (2)    | 1.64                                     |       | 10/22/16                     |       |
|                               |       | 680,089                                                                       |       | 112,500                                                                         |       |                                     |       |                         |       |
|                                    |            |                                                                               |            |                                                                                 |            |                                          |            |                              |            |  |

 

----

(1)   Optionswill vest at the rate of 25% on October 23, 2006, the date of grant, and 25% oneach annual anniversary thereafter ending on October 23, 2009.

(2)   Optionsgranted in fiscal 2007 are also disclosed in the 2007 Grants of Plan-BasedAwards Table, including the grant date fair value of these options.

47

----

The following table provides information regardingoutstanding stock options held by the Former Executive Officer as of the fiscalyear ended March 31, 2007.
| Former Executive Officer | ** ** | **Number of  Securities  Underlying  Unexercised  Options  Exercisable** | ** ** | **Option Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| Michael Szycher                    |       | 20,000                                                                        |       | 2.19                                     |       | 11/5/07                      |       |
|                               |       | 15,000                                                                        |       | 1.13                                     |       | 11/5/07                      |       |
|                               |       | 5,000                                                                         |       | 1.13                                     |       | 11/5/07                      |       |
|                               |       | 50,000                                                                        |       | 1.83                                     |       | 11/5/07                      |       |
|                               |       | 1,000                                                                         |       | 1.81                                     |       | 11/5/07                      |       |
|                               |       | 37,037                                                                        |       | 0.81                                     |       | 11/5/07                      |       |
|                               |       | 152,794                                                                       |       | 3.06                                     |       | 11/5/07                      |       |
|                               |       | 8,170                                                                         |       | 3.06                                     |       | 11/5/07                      |       |
|                               |       | 100,000                                                                       |       | 2.25                                     |       | 11/5/07                      |       |
|                               |       | 500,000                                                                       |       | 1.10                                     |       | 11/5/07                      |       |
|                               |       | 125,000                                                                       |       | 1.80                                     |       | 11/5/07                      |       |
|                               |       | 995,663                                                                       |       | 0.92                                     |       | 11/5/07                      |       |
|                               |       | 250,000                                                                       |       | 5.15                                     |       | 11/5/07                      |       |
|                               |       | 350,000                                                                       |       | 2.60                                     |       | 11/5/07                      |       |
|                               |       | 2,609,664                                                                     |       |                                     |       |                         |       |

 

**2007 Option Exercises and StockVested**

During the year endedMarch 31, 2007, there were no exercises of option awards by any of the NamedExecutive Officers.  The following tableprovides information regarding the exercise of option awards by the FormerExecutive Officer during the fiscal year ended March 31, 2007.
| Name            | ** ** | **Number of  Shares  Acquired on  Exercise** | ** ** | **Value  Realized on  Exercise (1)** | ** ** |
|-----------------|------------|--------------------------------------------------------|------------|------------------------------------------------|------------|
| Michael Szycher |       | 196,667                                                |       | $                                              | 210,906    |   |
|                 |            |                                                        |            |                                                |            |  |

 

----

(1)         Valuerealized on exercise is determined as the difference between the closing priceof the underlying equity on the date of exercise and the exercise price of theoption.

48

----

**Directors’ Compensation**

The following table sets forth the annual compensationof CardioTech non-employee directors for fiscal 2007, which consisted of annualcash retainers, including amounts associated with serving as Chairman of theBoard and the chair and member of Board committees, and equity awards in theform of options pursuant to the 2003 Stock Option Plan.  Employee directors do not receive anyseparate compensation for their service on the Board.
| Name                         | ** ** | **Fees Earned or  Paid in Cash  ($)** | ** ** | **Option  Awards  ($) (1)** | ** ** | **All Other  Compensation  ($)** | ** ** | **Total  ($)** | ** ** |
|------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------|------------|----------------|------------|
| William J. O’Neill, Jr. |       | $                                                         | 26,750     |                             | $          | —                                |       | $              | —     |   | $ | 26,750 |   |
| Michael L. Barretti (2)      |       | $                                                         | 24,000     |                             | $          | —                                |       | $              | 13,000     |   | $ | 37,000 |   |
| Anthony J. Armini, Ph.D.     |       | $                                                         | 24,000     |                             | $          | —                                |       | $              | —     |   | $ | 24,000 |   |
| Jeremiah E. Dorsey           |       | $                                                         | —     |                             | $          | 14,131                                |       | $              | —     |   | $ | 14,131 |   |

 

----

(1)   Theamount reported in this column for the non-employee director represents thedollar amount recognized for financial statement reporting purposes in fiscal2007, determined in accordance with Statement of Financial Accounting Standards(“SFAS”) No. 123R, “*Share-Based Compensation,*”and thus includes amounts from awards granted in, and prior to, fiscal2007.  See Note A of Notes toConsolidated Financial Statements set forth in our Annual Report on Form 10-K/Afor fiscal year 2007 for the assumptions used in determining the value of suchawards.

(2)   During fiscal 2007, the Companyentered into a consulting agreement with Mr. Barretti for an annualized fee of$50,000.  During the fiscal year endedMarch 31, 2007, the Company recognized $13,000 of expense related to servicesincurred under this consulting agreement.

**Compensation Committee Interlocks and Insider BoardParticipation**

**TheCompensation Committee currently consists of Messrs. Barretti, Armini andDorsey.  None of these CompensationCommittee members has served as an officer or employee of the Company.  None of our executive officers serves as amember of the board of directors or compensation committee of any entity thathas an executive officer serving as a member of our Board of Directors orCompensation Committee.**

49

----

**Item 12.**     Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters

**Informationrelated to securities authorized for issuance under equity compensation plansas of the end of fiscal 2007 is included in Item 5 of Part II of the Company’sAnnual Report of Form 10-K for the year ended March 31, 2007, as amended.**

**Thefollowing table sets forth the beneficial ownership of shares of our commonstock, as of July 16, 2007, of (i) each person known by us to beneficially ownfive percent (5%) or more of such shares; (ii) each of our directors andexecutive officers named in the Summary Compensation Table; and (iii) all ofour current executive officers, directors, and significant employees as agroup.  Except as otherwise indicated,all shares are beneficially owned, and the persons named as owners holdinvestment and voting power.**

**Beneficialownership has been determined in accordance with Rule 13d-3 under theSecurities Exchange Act of 1934.  Underthis rule, certain shares may be deemed to be beneficially owned by more thanone person, if, for example, persons share the power to vote or the power todispose of the shares.  In addition,shares are deemed to be beneficially owned by a person if the person has theright to acquire shares, for example, upon exercise of an option or warrant,within sixty (60) days of July 16, 2007. In computing the percentage ownership of any person, the amount ofshares is deemed to include the amount of shares beneficially owned by suchperson, and only such person, by reason of such acquisition rights.  As a result, the percentage of outstandingshares of any person as shown in the following table does not necessarilyreflect the person’s actual voting power at any particular date.**
| **Name and Address of Beneficial Owner (1)** | ** ** | **Amount and Nature of  Beneficial Ownership** | ** ** | **Percentage of  Class (2)** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------------------------------------|------------|
| **Executive  Officers and Directors**                                      | ** ** | ** **                                                         | ** ** | ** **                             | ** ** |
| Michael F. Adams  (3)                                                      |       | 242,589                                                            |       | 1.2                                    | %          |
| Michael L. Barretti  (4)                                                   |       | 210,833                                                            |       | 1.0                                    | %          |
| Anthony J.  Armini, Ph.D. (5)                                              |       | 143,520                                                            |       | *                                      |       |
| William J.  O’Neill, Jr. (6)                                          |       | 80,000                                                             |       | *                                      |       |
| Jeremiah E.  Dorsey (7)                                                    |       | 72,709                                                             |       | *                                      |       |
| Eric G. Walters  (8)                                                       |       | 200,000                                                            |       | 1.0                                    | %          |
| Andrew M. Reed,  Ph.D. (9)                                                 |       | 200,000                                                            |       | 1.0                                    | %          |
| Philip A. Beck  (10)                                                       |       | 150,000                                                            |       | *                                      |       |
| All executive  officers and directors as a group (8 persons) (11)          |       | 1,299,651                                                          |       | 5.4                                    | %          |
|                                                                       |       |                                                               |       |                                   |       |
| **Other Principal Stockholders**                                           |       |                                                               |       |                                   |       |
| Michael Szycher  (12)                                                      |       | 2,988,918                                                          |       | 13.2                                   | %          |
| 2 Durham Drive                                                             |       |                                                               |       |                                   |       |
| Lynnfield, MA 01940                                                        |       |                                                               |       |                                   |       |

 

----

*****     Less than 1%

**(1)**   Unless otherwiseindicated, the business address of the stockholders named in the table above isCardioTech International, Inc. 229 Andover Street, Wilmington, MA 01887.

**(2)**   Based on 20,031,650outstanding shares as of July 16, 2007.

**(3)**   Includes 242,589 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(4)**   Includes 194,783 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(5)**   Includes 137,520 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(6)**   Includes 80,000 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(7)**   Includes 72,709 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

50

----

**(8)**   Includes 200,000 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(9)**   Includes 200,000 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(10)**Includes 150,000 shares ofcommon stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**(11)**See footnotes (3) through(10).

**(12)**Includes 2,609,664 sharesof common stock, which may be purchased within sixty (60) days of July 16, 2007upon the exercise of stock options.

**Item 13.****     Certain Relationships andRelated Transactions, and Director Independence**

The Company has an investment in CorNova, Inc., ofwhich Dr. Eric Ryan is President and a major shareholder.  The Company, on July 15, 2004, entered into atwo-year consulting agreement with Dr. Ryan, which provided for a range ofpayments, in either cash or common stock, for the achievement of certainmilestones related to the manufacturing, commencement of European clinicaltrials and the receipt of a restricted CE mark of the Company’s CardioPasssynthetic coronary artery bypass graft. Total potential payments ranged from $125,000 to $216,000 based on thetiming of the milestone achievements.  Aspart of the agreement, Dr. Ryan had the opportunity to earn up to an additional$56,000 based on the achievement of certain milestones related to otherproducts of the Company.  At March 31,2006 and 2005, several of the contract milestones had been achieved and,accordingly, costs totaling $38,000 and $73,000 related to performance underthis contract were recognized as a research and development expense for theyears ended March 31, 2006 and 2005, respectively.  There were no research and developmentexpenses recognized during the year ended March 31, 2007 related to thisagreement.  This agreement expired July15, 2006.

During fiscal 2007, the Company entered into aconsulting agreement with Michael L. Barretti, a member of the Board andChairman of the Compensation Committee, for an annualized fee of $50,000.  During the fiscal year ended March 31, 2007,the Company recognized $13,000 of expense related to services incurred underthis consulting agreement, which was recorded as selling, general andadministrative expense.

Transactions with related parties, including, but notlimited to, members of the Board of Directors, are reviewed and approved by allmembers of the Board of Directors.  Inthe event a transaction with a member of the Board is contemplated, theDirector having a beneficial interest in the transaction is not allowed toparticipate in the decision-making and approval process.  The policies and procedures surrounding thereview, approval or ratification of related party transactions are not inwriting, nevertheless, such reviews, approvals and ratifications of relatedparty transactions are documented in the minutes of the meetings of the Boardof Directors and any such transactions are committed to writing between therelated party and the Company in an executed engagement agreement.

**Independence of the Board of Directors**

**The Boardof Directors has adopted director independence guidelines that are consistentwith the definitions of “independence” as set forth in Section 301 of theSarbanes-Oxley Act of 2002, Rule 10A-3 under the Securities Exchange Act of1934 and AMEX listing standards.  Inaccordance with these guidelines, the Board of Directors has reviewed andconsidered facts and circumstances relevant to the independence of each of ourdirectors and director nominees and has determined that, each of the Company’snon-management directors qualifies as “independent” under AMEX listingstandards.**

**The Boardof Directors has an Audit Committee, Compensation Committee andNominating/Corporate Governance Committee. The membership of each, as of July 16, 2007, is indicated in the tablebelow.**

51

----

** **

| Directors                    | ** ** | **Audit** | ** ** | **Compensation** | ** ** | **Nominating/  Corporate  Governance** |
|------------------------------|------------|-----------|------------|------------------|------------|----------------------------------------|
| William J. O’Neill, Jr. |       | Chair     |       |             |       |                                   |
| Michael L. Barretti          |       |      |       | Chair            |       | X                                      |
| Anthony J. Armini            |       | X         |       | X                |       |                                   |
| Jeremiah E. Dorsey           |       | X         |       | X                |       | Chair                                  |

 

The Board ofDirectors has determined that all of the members of each committee areindependent as defined under the AMEX rules, including, in the case of allmembers of the Audit Committee, the independence requirements contemplated byRule 10A-3 under the Exchange Act.  Inaddition, all of the members of the Audit Committee are independent as definedby the AMEX rules that apply to the Company until the date of the AnnualMeeting and otherwise satisfy the AMEX eligibility requirements for AuditCommittee membership.

**Item14.**     PrincipalAccounting Fees and Services

The following is a summary of the fees billed to theCompany by E&Y, our independent auditors, for professional servicesrendered for the fiscal years ended March 31, 2007 and 2006.  The Audit Committee considered and discussedwith Ernst & Young LLP the provision of non-audit services to the Companyand the compatibility of providing such services with maintaining itsindependence as the Company’s auditor.

|                         | ** ** | **Years Ended March 31,** | ** ** |
|-------------------------|------------|------------------------------------------|------------|
| **Fee Category**   | ** ** | **2007**                                 | ** ** | **2006** | ** ** |
| **(in thousands)** | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Audit fees              |       | $                                        | 236        |   | $ | 254 |   |
| Audit-related  fees     |       | 7                                        |       | — |   |
| Tax fees                |       | —                                   |       | — |   |
| All other fees          |       | —                                   |       | — |   |
| Total fees              |       | $                                        | 243        |   | $ | 254 |   |

 

*AuditFees. *This categoryconsists of fees billed for professional services rendered for the audit of ourannual financial statements and review of financial statements included in ourquarterly reports and other professional services provided in connection withregulatory filings.

*Audit-RelatedFees. *This categoryconsists of fees billed for assurance and related services that related to theperformance of the audit or review of our financial statements and are nototherwise reported under “Audit Fees”.

*TaxFees. *This categoryconsists of fees billed for professional services for tax compliance, taxadvice and tax planning.  These servicesinclude assistance regarding federal and state tax compliance and acquisitions.

*Pre-Approval Policies and Procedures.*  The Audit Committee has the authority toapprove all audit and non-audit services that are to be performed by theCompany’s independent auditors. Generally, the Company may not engage its independent auditors to renderaudit or non-audit services unless the service is specifically approved inadvance by the Audit Committee (or a properly delegated subcommittee thereof).

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

52

----

**PART IV**

**Item 15.**                Exhibits,Financial Statement Schedules

The following are filed as part of thisForm 10-K:

(1)          FinancialStatements: For a list of financial statements which are filed as part of thisForm 10-K, See Page 36.

(2)          Exhibits
| Exhibit  Number: | ** ** | **Exhibit Title:**                                                                                                                                                                                                                                                                              |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                                            |
| 2.1              |       | Agreement and plan of merger and reorganization by  and among CardioTech International, Inc., Gish Acquisition Corp. and Gish  Biomedical, Inc., incorporated by reference to Annex A of CardioTech’s  Registration Statement on Form S-4 filed on December 23, 2002.                      |
|             |       |                                                                                                                                                                                                                                                                                            |
| 2.2              |       | Amendment No. 1 to Agreement and Plan of Merger and  Reorganization by and among CardioTech International, Inc., Gish Acquisition  Corp. and Gish Biomedical Inc., incorporated by reference to Exhibit 2.2 to  CardioTech’s Registration Statement on Form S-4 filed on January 16, 2003. |
|             |       |                                                                                                                                                                                                                                                                                            |
| 3.1              |       | Restated Articles of Organization of CardioTech  International, Inc., filed with the Secretary of State of Massachusetts on  May 9, 1996 and incorporated herein by reference to Exhibit 3.1 of  CardioTech’s Registration Statement on Form 10-12G/A filed on May 10, 1996.               |
|             |       |                                                                                                                                                                                                                                                                                            |
| 3.1.1            |       | Certificate of Vote of Directors Establishing a  Class or Series of Stock for Series A Preferred Stock was filed as Exhibit  3.1 to CardioTech’s Form 10-Q for the quarter ended September 30, 1998, filed  on November 17, 1998, and incorporated herein by reference.                    |
|             |       |                                                                                                                                                                                                                                                                                            |
| 3.1.2            |       | Certificate of Correction dated May 8, 1996 and  incorporated herein by reference to Exhibit 3.1 to CardioTech’s Form 10-Q for  the quarter ended December 31, 1998, filed on February 16, 1999.                                                                                           |
|             |       |                                                                                                                                                                                                                                                                                            |
| 3.2              |       | Bylaws of CardioTech International, Inc.,  incorporated by reference to Exhibit 3.2 of CardioTech’s Registration  Statement on Form 10 filed on May 10, 1996.                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                            |
| 4.1              |       | Form of Warrant incorporated by reference to Exhibit  4.1 to CardioTech’s Form 8-K filed on December 23, 2004.                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                            |
| 4.2              |       | Form of Placement Agent Warrant incorporated by  reference to Exhibit 4.2 to CardioTech’s Form 8-K filed on December 23, 2004.                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                            |
| 4.3              |       | Form of Additional Investment Right incorporated by  reference to Exhibit 4.3 to CardioTech’s Form 8-K filed on December 23, 2004.                                                                                                                                                         |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.2             |       | Tax Matters Agreement between PMI and CardioTech,  dated May 13, 1996, was filed as Exhibit 10.2 of the Form 10 and is incorporated  herein by reference.                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.3             |       | Amended and Restated License Agreement between PMI  and CardioTech, dated May 13, 1996, was filed as Exhibit 10.4 of the Form 10  and is incorporated herein by reference.                                                                                                                      |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.4             |       | CardioTech 1996 Employee, Director and Consultant  Stock Option Plan, as amended, was filed as Exhibit 10.4 to CardioTech’s Form  10-K for the year ended March 31, 1998, filed on June 29, 1998, and in  incorporated herein by reference.                                                |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.5             |       | Employment Agreement of Michael Szycher, dated March  26, 1998, was filed as Exhibit 10.5 to CardioTech’s Form 10-K for the year  ended March 31, 1998, filed on June 29, 1998, and incorporated herein by  reference.                                                                     |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.10            |       | Development, Supply and License Agreement between  PMI and Bard Access Systems, dated November 11, 1992, was filed as Exhibit  10.10 of the Form 10 and is incorporated herein by reference.                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                            |
| 10.11            |       | Lease Agreement between CardioTech and Cummings  Properties Management, Inc., dated June 26, 1998, was filed as Exhibit 10.11  to CardioTech’s Form 10-K for the year ended March 31, 1998,                                                                                                |

 

53

----

 
| Exhibit  Number: | ** ** | **Exhibit Title:**                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       | filed on June 29, 1998, and in incorporated herein  by reference.                                                                                                                                                                                                                                                                                                                                                             |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15            |       | Note Purchase Agreement dated as of March 31, 1998  between CardioTech and Dresdner Kleinwort Benson Private Equity Partners, LP  (“Kleinwort Benson”) was filed as Exhibit 99.1 to CardioTech’s Form 8-K filed  with the Securities and Exchange Commission (the “Commission”) on April 15,  1998 and is incorporated herein by reference.                                                          |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15.1          |       | Amendment, dated as of November 12, 1998, to Note  Purchase Agreement and Registration Rights Agreement was filed as Exhibit  10.1 to CardioTech’s Form 10-Q for the quarter ended September 30, 1998,  filed on November 16, 1998 and is incorporated herein by reference.                                                                                                                                              |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18            |       | Form of Unit Purchase Agreement between CardioTech  and certain individuals was filed as Exhibit 99.1 to CardioTech’s Form S-3,  filed with the Securities and Exchange Commission on February 12, 1999, and  is incorporated herein by reference.                                                                                                                                                                       |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.19            |       | Form of Warrant to Purchase Shares of Common Stock  of CardioTech issued to certain individuals was filed as Exhibit 99.2 to  CardioTech’s Form S-3, filed with the Securities and Exchange Commission on  February 12, 1999, and is incorporated herein by reference.                                                                                                                                                   |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.20            |       | First Amendment Between Duke Realty Limited  Partnership and CDT dated May 1, 2004 filed as an Exhibit to CardioTech’s  Form 10-K for the year ended March 31, 2004.                                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.21            |       | Exchange and Venture Agreement by and among  CardioTech International, Inc., Implant Sciences, Inc. and CorNova, Inc.  dated March 5, 2004 filed as an exhibit to CardioTech’s Form 10-KSB for the  fiscal year ended March 31, 2004.                                                                                                                                                                                    |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.22            |       | Plan and Agreement of Merger and Reorganization  dated March 12, 2004 between CardioTech International, Inc. and DermaPhylyx,  Inc., filed as an exhibit to CardioTech’s Form 10-KSB for the year ended  March 31, 2004.                                                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.23            |       | Asset Purchase Agreement, dated as of November 19,  2004 by and among CardioTech International, Inc., CarTika Medical, Inc.,  Thomas C. Carlson and Sheila A. Carlson, incorporated by reference to Exhibit  99 to CardioTech’s Form 8-K filed on November 22, 2004.                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.24            |       | Securities Purchase Agreement between Gryphon Master  Fund, L.P., GSSF Master Fund, LP, Truk Opportunity Fund, LLC, Truk  International Fund, LP, Meadowbrook Opportunity Fund LLC, Capital Ventures  International, Iroquois Capital, L.P. and CardioTech International, Inc.  dated as of December 21, 2004 and incorporated herein by reference to Exhibit  10.1 to CardioTech’s Form 8-K filed on December 23, 2004. |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.25            |       | Registration Rights Agreement between Gryphon Master  Fund, L.P., GSSF Master Fund, LP, Truk Opportunity Fund, LLC, Truk  International Fund, LP, Meadowbrook Opportunity Fund LLC, Capital Ventures  International, Iroquois Capital, L.P. and CardioTech International, Inc.  dated as of December 21, 2004 and incorporated herein by reference to Exhibit  10.2 to CardioTech’s Form 8-K filed on December 23, 2004. |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.26            |       | Lock-Up Agreement between CardioTech International,  Inc. and certain of its officers and directors dated as of December 21, 2004  and incorporated herein by reference to Exhibit 10.3 to CardioTech’s Form 8-K  filed on December 23, 2004.                                                                                                                                                                            |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.27            |       | Employment Agreement of Eric G. Walters, dated April  3, 2006, was filed as Exhibit 10.27 to CardioTech’s Form 8-K/A, filed on  April 4, 2006, and incorporated herein by reference.                                                                                                                                                                                                                                     |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.28            |       | Transition Agreement dated August 11, 2006 between  CardioTech International, Inc. and Michael Szycher filed as Exhibit 10.1 to  CardioTech’s Form 8-K, filed on August 11, 2006, and incorporated herein by  reference.                                                                                                                                                                                                 |
|             |       |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.29            |       | Employment Agreement of Michael F. Adams, dated  September 13, 2006, was filed as Exhibit 10.28 to CardioTech’s Form 8-K/A,  filed on September 15, 2006, and incorporated herein by reference.                                                                                                                                                                                                                          |

 

54

----

 
| Exhibit  Number: | ** ** | **Exhibit Title:**                                                                                                                                  |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                |
| 21               | **         | Subsidiaries of CardioTech                                                                                                                          |
|             |       |                                                                                                                                                |
| 23.1             | **         | Consent of Ernst & Young LLP, Independent  Registered Public Accounting Firm                                                                    |
|             |       |                                                                                                                                                |
| 31.1             | **         | Certification of Chief Executive Officer pursuant to  Section 302 Sarbanes-Oxley Act of 2002                                                        |
|             |       |                                                                                                                                                |
| 31.2             | **         | Certification of Chief Financial Officer pursuant to  Section 302 Sarbanes-Oxley Act of 2002                                                        |
|             |       |                                                                                                                                                |
| 32.1             | **         | Certification of Chief Executive Officer Pursuant to  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|             |       |                                                                                                                                                |
| 32.2             | **         | Certification of Chief Financial Officer Pursuant to  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|             |       |                                                                                                                                                |
| 99.1             |       | Charter of the Compensation Committee of the Board  of Directors, effective June 6, 2006                                                            |

 

----

**          Filedherewith

Copiesof these exhibits are available from us for a reasonable fee upon writtenrequest sent to our corporate headquarters as follows: CardioTechInternational, Inc., 229 Andover Street, Wilmington, MA  01887. ATTN: Thomas F. Lovett.

55

----

Report of IndependentRegistered Public Accounting Firm

To the Board of Directors and Stockholders ofCardioTech International, Inc.:

We have audited theaccompanying consolidated balance sheets of CardioTech International, Inc. asof March 31, 2007 and 2006, and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for each of the three years inthe period ended March 31, 2007.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  We were not engaged to perform an audit ofthe Company’s internal control over financial reporting.  Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over  financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that our auditsprovide a reasonable basis for our opinion.

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of CardioTechInternational, Inc. at March 31, 2007 and 2006 and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended March 31, 2007, in conformity with U.S. generally accepted accountingprinciples.

Asdiscussed in Note A to the consolidated financial statements, effective April1, 2006, CardioTech International, Inc. adopted Statement of FinancialAccounting Standards No. 123 (Revised 2004), “*Share-BasedPayment.*”
|                       | /s/ Ernst & Young LLP |
|-----------------------|---------------------------|
|                  |                      |
| Boston, Massachusetts |                      |
| June 11, 2007         |                      |

 

F-1

----

 

**CardioTech International, Inc.**

**ConsolidatedBalance Sheets**

*(In thousands, except share and pershare amounts)*
| ** **                                                                                                                                                        | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                                                                                        | ** ** | **2007**           | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                                        | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current assets:                                                                                                                                                   |       |               |       |   |   |
| Cash and cash  equivalents                                                                                                                                        |       | $                  | 4,066      |   | $ | 6,841 |   |
| Accounts  receivable-trade, net of allowance of $170 and $572 as of March 31, 2007 and  2006, respectively                                                        |       | 2,712              |       | 2,851 |   |
| Accounts  receivable-other                                                                                                                                        |       | 553                |       | 265 |   |
| Inventories                                                                                                                                                       |       | 5,205              |       | 4,786 |   |
| Prepaid expenses  and other current assets                                                                                                                        |       | 205                |       | 210 |   |
| Total current  assets                                                                                                                                             |       | 12,741             |       | 14,953 |   |
| Property, plant and  equipment, net                                                                                                                               |       | 4,082              |       | 4,059 |   |
| Amortizable intangible  assets, net                                                                                                                               |       | 468                |       | 584 |   |
| Goodwill                                                                                                                                                          |       | 487                |       | 487 |   |
| Other assets                                                                                                                                                      |       | 123                |       | 130 |   |
| Investment in CorNova,  Inc.                                                                                                                                      |       | —             |       | 238 |   |
| Total assets                                                                                                                                                      |       | $                  | 17,901     |   | $ | 20,451 |   |
|                                                                                                                                                              |       |               |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                    | ** ** | ** **         | ** ** | ** ** | ** ** |
| Current liabilities:                                                                                                                                              |       |               |       |   |   |
| Accounts payable                                                                                                                                                  |       | $                  | 1,878      |   | $ | 1,750 |   |
| Accrued expenses                                                                                                                                                  |       | 862                |       | 936 |   |
| Deferred revenue                                                                                                                                                  |       | 198                |       | 132 |   |
| Total current  liabilities                                                                                                                                        |       | 2,938              |       | 2,818 |   |
| Deferred rent                                                                                                                                                     |       | 116                |       | 129 |   |
| Commitments and  contingencies (Note G)                                                                                                                           |       | —             |       | — |   |
| Stockholders’ equity:                                                                                                                                        |       |               |       |   |   |
| Preferred stock;  $.01 par value; 5,000,000 shares authorized; 500,000 shares issued and none  outstanding as of March 31, 2007 and 2006, respectively            |       | —             |       | — |   |
| Common stock; $.01  par value; 50,000,000 shares authorized; 20,031,650 and 19,796,833 shares  issued and outstanding as of March 31, 2007 and 2006, respectively |       | 200                |       | 198 |   |
| Additional  paid-in capital                                                                                                                                       |       | 36,948             |       | 36,685 |   |
| Accumulated  deficit                                                                                                                                              |       | (22,301            | )          | (19,339 | ) |
| Accumulated  other comprehensive loss                                                                                                                             |       | —             |       | (40 | ) |
| Total  stockholders’ equity                                                                                                                                  |       | 14,847             |       | 17,504 |   |
| Total  liabilities and stockholders’ equity                                                                                                                  |       | $                  | 17,901     |   | $ | 20,451 |   |

 

The accompanyingnotes are an integral part of these financial statements.

F-2

----

 

**CardioTech International, Inc.**

**ConsolidatedStatements of Operations**

*(In thousands, except per shareamounts)*
| ** **                                                             | ** ** | **For The Years Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                   |       |                                                       |       |   |   |   |   |
| Revenues:                                                              |       |                                                       |       |   |   |   |   |
| Product sales                                                          |       | $                                                          | 19,593     |   | $ | 21,404 |   | $ | 21,067 |   |
| Royalties and  development fees                                        |       | 1,558                                                      |       | 977 |   | 774 |   |
|                                                                   |       | 21,151                                                     |       | 22,381 |   | 21,841 |   |
| Cost of sales                                                          |       | 15,977                                                     |       | 18,484 |   | 15,795 |   |
| Gross margin                                                           |       | 5,174                                                      |       | 3,897 |   | 6,046 |   |
| Operating expenses:                                                    |       |                                                       |       |   |   |   |   |
| Research and  development, regulatory and engineering                  |       | 1,547                                                      |       | 1,385 |   | 1,258 |   |
| Selling, general  and administrative                                   |       | 6,664                                                      |       | 5,982 |   | 5,865 |   |
| Impairment of  goodwill                                                |       | —                                                     |       | 1,152 |   | — |   |
| Non-cash  compensation (1)                                             |       | 48                                                         |       | 193 |   | 78 |   |
| CarTika  acquisition expenses                                          |       | —                                                     |       | — |   | 333 |   |
|                                                                   |       | 8,259                                                      |       | 8,712 |   | 7,534 |   |
| Loss from operations                                                   |       | (3,085                                                     | )          | (4,815 | ) | (1,488 | ) |
| Interest and other  income and expense:                                |       |                                                       |       |   |   |   |   |
| Interest expense                                                       |       | (2                                                         | )          | — |   | (20 | ) |
| Interest income                                                        |       | 136                                                        |       | 42 |   | 38 |   |
| Other income  (expense), net                                           |       | 268                                                        |       | 104 |   | (12 | ) |
| Other income,  net                                                     |       | 402                                                        |       | 146 |   | 6 |   |
| Equity in net loss of  CorNova, Inc.                                   |       | (279                                                       | )          | (400 | ) | (113 | ) |
| Net loss                                                               |       | $                                                          | (2,962     | ) | $ | (5,069 | ) | $ | (1,595 | ) |
| Net loss per common  share, basic and diluted                          |       | $                                                          | (0.15      | ) | $ | (0.26 | ) | $ | (0.09 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 19,859                                                     |       | 19,451 |   | 18,023 |   |

 

----

(1)          For theyears ended March 31, 2007, 2006 and 2005, non-cash compensation expense wasrelated to selling, general and administrative expenses.

The accompanying notes are an integral part of thesefinancial statements.

F-3

----

**CardioTech International, Inc.**

**Consolidated Statements of Stockholder’sEquity**

**For theYears Ended March 31, 2005, 2006 and 2007**
| ** **                                                                              | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | ** **  | ** ** | **Other**       | ** ** | ** **        | ** ** | **Total**    | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|-------------|------------|-----------------|------------|-------------------|------------|--------------|------------|
| ** **                                                                              | ** ** | **Number of**    | ** ** | ** **     | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | **Stockholders’ ** | ** ** |
| **(in thousands)**                                                                 | ** ** | ** Shares**      | ** ** | **Amount**     | ** ** | **Capital** | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Stock**    | ** ** | **Equity (Deficit)** | ** ** |
| Balance  at April 1, 2004                                                               |       | 17,700                |       | $              | 177        |        | $          | 32,041          |       | $                 | (12,675    | )            | $          | 7 |   | $ | (182 | ) | $ | 19,368 |   |
| Issuance  of common stock in connection with exercise of stock options                  |       | 179                   |       | 2              |       | 252         |       | —          |       | —            |       | —       |       | 254 |   |
| Fair  value of options granted to consultants                                           |       | —                |       | —         |       | 58          |       | —          |       | —            |       | —       |       | 58 |   |
| Issuance  of common stock in connection with private placement, net of $314 of expenses |       | 1,140                 |       | 11             |       | 2,410       |       | —          |       | —            |       | —       |       | 2,421 |   |
| Investment  in CorNova, Inc.                                                            |       | 309                   |       | 3              |       | 747         |       | —          |       | —            |       | —       |       | 750 |   |
| Compensation  expense related to acceleration of employee stock options                 |       | —                |       | —         |       | 20          |       | —          |       | —            |       | —       |       | 20 |   |
| Purchase  of stock, at cost                                                             |       | —                |       | —         |       | —      |       | —          |       | —            |       | (84          | )          | (84 | ) |
| Reclass  of repurchased stock as unissued according to Mass. Business Corporation Act   |       | (69                   | )          | (1             | )          | (265        | )          | —          |       | —            |       | 266          |       | — |   |
| Comprehensive  loss from CorNova, Inc.                                                  |       | —                |       | —         |       | —      |       | —          |       | (182              | )          | —       |       | (182 | ) |
| Net  loss                                                                               |       | —                |       | —         |       | —      |       | (1,595          | )          | —            |       | —       |       | (1,595 | ) |
| Balance  at March 31, 2005                                                              |       | 19,259                |       | 192            |       | 35,263      |       | (14,270         | )          | (175              | )          | —       |       | 21,010 |   |
| Issuance  of common stock in connection with exercise of stock options                  |       | 543                   |       | 6              |       | 1,240       |       | —          |       | —            |       | —       |       | 1,246 |   |
| Fair  value of options granted to consultants                                           |       | —                |       | —         |       | 193         |       | —          |       | —            |       | —       |       | 193 |   |
| Compensation  expense related to acceleration of employee stock options                 |       | —                |       | —         |       | 1           |       | —          |       | —            |       | —       |       | 1 |   |
| Reclass  of repurchased stock, at cost                                                  |       | (5                    | )          | —         |       | (12         | )          | —          |       | —            |       | —       |       | (12 | ) |
| Comprehensive  income from CorNova, Inc.                                                |       | —                |       | —         |       | —      |       | —          |       | 135               |       | —       |       | 135 |   |
| Net  loss                                                                               |       | —                |       | —         |       | —      |       | (5,069          | )          | —            |       | —       |       | (5,069 | ) |
| Balance  at March 31, 2006                                                              |       | 19,797                |       | 198            |       | 36,685      |       | (19,339         | )          | (40               | )          | —       |       | 17,504 |   |
| Issuance  of common stock in connection with exercise of stock options                  |       | 235                   |       | 2              |       | 216         |       | —          |       | —            |       | —       |       | 218 |   |
| Stock-based  compensation                                                               |       | —                |       | —         |       | 48          |       | —          |       | —            |       | —       |       | 48 |   |
| Reclass  of repurchased stock, at cost                                                  |       | (1                    | )          | —         |       | (1          | )          | —          |       | —            |       | —       |       | (1 | ) |
| Comprehensive  income from CorNova, Inc.                                                |       | —                |       | —         |       | —      |       | —          |       | 40                |       | —       |       | 40 |   |
| Net  loss                                                                               |       | —                |       | —         |       | —      |       | (2,962          | )          | —            |       | —       |       | (2,962 | ) |
| Balance at March 31,  2007                                                              |       | 20,031                |       | $              | 200        |        | $          | 36,948          |       | $                 | (22,301    | )            | $          | — |   | $ | — |   | $ | 14,847 |   |

 

The accompanying notes are an integral part of these financialstatements.

F-4

----

**CardioTech International, Inc.**

**ConsolidatedStatements of Cash Flows**

*(In thousands)*
| ** **                                            | ** ** | **For The Years Ended March 31,** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                |       |                                                       |       |   |   |   |   |
| Net loss                                              |       | $                                                          | (2,962     | ) | $ | (5,069 | ) | $ | (1,595 | ) |
| Adjustments to  reconcile net loss to net cash flows: |       |                                                       |       |   |   |   |   |
| Impairment of  goodwill                               |       | —                                                     |       | 1,152 |   | — |   |
| Depreciation and  amortization                        |       | 832                                                        |       | 930 |   | 1,016 |   |
| Equity in net  loss of CorNova, Inc.                  |       | 279                                                        |       | 400 |   | 113 |   |
| Provision for  doubtful accounts                      |       | 84                                                         |       | 245 |   | 202 |   |
| Provision for  excess and obsolete inventory          |       | 45                                                         |       | 642 |   | 115 |   |
| Stock-based  compensation                             |       | 48                                                         |       | 194 |   | 78 |   |
| Deferred rent                                         |       | (13                                                        | )          | (44 | ) | (47 | ) |
| Changes in  assets and liabilities:                   |       |                                                       |       |   |   |   |   |
| Accounts  receivable-trade                            |       | 55                                                         |       | 302 |   | (321 | ) |
| Accounts  receivable-other                            |       | (288                                                       | )          | (34 | ) | (29 | ) |
| Inventories                                           |       | (464                                                       | )          | (626 | ) | (350 | ) |
| Prepaid expenses  and other current assets            |       | 5                                                          |       | (15 | ) | (22 | ) |
| Accounts payable                                      |       | 128                                                        |       | 86 |   | 340 |   |
| Accrued expenses                                      |       | (74                                                        | )          | 285 |   | (94 | ) |
| Deferred revenue                                      |       | 66                                                         |       | (131 | ) | 107 |   |
| Net cash flows  used in operating activities          |       | (2,259                                                     | )          | (1,683 | ) | (487 | ) |
| Cash flows from  investing activities:                |       |                                                       |       |   |   |   |   |
| Purchase of  property, plant and equipment            |       | (740                                                       | )          | (248 | ) | (712 | ) |
| Decrease in  other assets                             |       | 7                                                          |       | 69 |   | 22 |   |
| Payment of  acquisition costs, net of cash acquired   |       | —                                                     |       | — |   | (333 | ) |
| Net cash flows  used in investing activities          |       | (733                                                       | )          | (179 | ) | (1,023 | ) |
| Cash flows from  financing activities:                |       |                                                       |       |   |   |   |   |
| Net repayments  on revolving credit line              |       | —                                                     |       | — |   | (730 | ) |
| Net proceeds  from issuance of common stock           |       | 218                                                        |       | 1,246 |   | 2,676 |   |
| Repurchase of  common stock                           |       | (1                                                         | )          | (12 | ) | (84 | ) |
| Net cash flows  provided by financing activities      |       | 217                                                        |       | 1,234 |   | 1,862 |   |
| Net change in  cash and cash equivalents              |       | (2,775                                                     | )          | (628 | ) | 352 |   |
| Cash and cash  equivalents at beginning of period     |       | 6,841                                                      |       | 7,469 |   | 7,117 |   |
| Cash and cash  equivalents at end of period           |       | $                                                          | 4,066      |   | $ | 6,841 |   | $ | 7,469 |   |
|                                                  |       |                                                       |       |   |   |   |   |
| Supplemental Disclosure  of Cash Flow Information:    |       |                                                       |       |   |   |   |   |
| Interest paid                                         |       | $                                                          | 2          |   | $ | 4 |   | $ | 20 |   |
| Taxes paid                                            |       | $                                                          | 5          |   | $ | 6 |   | $ | 12 |   |

 

**The accompanying notes are an integral part of these financialstatements.**

F-5

----

**CARDIOTECHINTERNATIONAL, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**Nature of Business**

***CardioTech International, Inc. (includingits wholly-owned subsidiaries, collectively “CardioTech” or the “Company”) is amedical device company that designs, develops, manufactures and sellsinnovative products and materials for the treatment of cardiovascular,orthopedic, oncological, urological and other diseases.  The Company’s business model calls forleveraging its technological and manufacturing expertise in order to expand itsroyalty, development and license fee income, develop next generation polymersand manufacture new and complex medical devices.  The Company is focused on developing andmarketing polymers that can be used in products that are designed to reducerisk, trauma, cost and surgical procedure time. The Company’s subsidiaries and divisions are Gish Biomedical, Inc. (“Gish”or cardiopulmonary products division), Catheter and Disposables Technology,Inc. (“CDT” or engineering services and contract manufacturing), and CTBiomaterials (“Biomaterials” or materials science technology).  The Company operates in one segment, medicaldevice manufacturing and sales.***

***CardioTech has partnered with CorNova,Inc. (“CorNova”) to develop a drug-eluting stent.  The Company owns common stock in CorNova andhas a 16% ownership interest in the outstanding common and preferred stock ofCorNova, a privately-held, development stage company focused on the developmentof a next-generation drug-eluting stent. (See Note N).***

***In reviewing the strategic fit of Gish inour business model, we determined that Gish did not fit our strategicdirection. In January 2007, we retained an investment banking firm to identifypotential purchasers of Gish and to manage the sale of Gish. Although theexpected sale of Gish will permit the redeployment of capital into our ongoinggrowth initiatives, there can be no assurance that the sale will be consummatedat all or on terms acceptable to us. We believe our cash position as of March31, 2007, excluding any future effect of a potential sale of Gish, will besufficient to fund our working capital and research and development activitiesfor at least the next twelve months.***

***The Company’s corporate headquarters arelocated in Wilmington, Massachusetts, with manufacturing operations inMassachusetts, California and Minnesota.***

**A.**    Summaryof Significant Accounting Policies:

***AccountingPrinciples***

***The consolidated financial statements andaccompanying notes are prepared in accordance with U.S. generally acceptedaccounting principles.***

***Basis ofConsolidation***

***The consolidated financial statementsinclude the accounts of the Company and its wholly-owned subsidiaries.  All significant intercompany balances andtransactions have been eliminated.  TheCompany’s investment in CorNova is accounted for using the equity method ofaccounting in accordance with APB Opinion No. 18, “The Equity Method ofAccounting for Investments in Common Stock.”***

***Useof Accounting Estimates***

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

*Uncertainties*

The Company is subject torisks common to companies in the medical device industry, including, but notlimited to, development of new technology innovations by competitors of theCompany, dependence on key personnel, protection of proprietary technology, andcompliance with FDA government regulations.

*Reclassifications*

An allocation of rent andinsurance costs has been reclassified from selling, general and administrative expenseto cost of sales for the years ended March 31, 2006 and 2005 to conform to thecurrent year presentation.

*Cash and Cash Equivalents*

Cash and cash equivalentsinclude cash on hand and short-term investments with maturities of three monthsor less when acquired.  Cash equivalentsrepresent a deposit in a money market account.

*Revenue Recognition—Product, Research and RoyaltyRevenue*

The Company recognizesrevenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “RevenueRecognition in Financial Statements.” The Company recognizes revenue from product sales upon shipment,

F-6

----

provided that a purchaseorder has been received or a contract has been executed, there are nouncertainties regarding customer acceptance, the sales price is fixed ordeterminable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Companyrecognizes revenue when those uncertainties are resolved and title has beentransferred to the customer.  Amountscollected or billed prior to satisfying the above revenue recognition criteriaare recorded as deferred revenue.  TheCompany also receives license and royalty fees for the use of its proprietarybiomaterials.  CardioTech recognizesthese fees as revenue in accordance with the terms of the contracts.  Contracted product design and developmentprojects are recognized on a time and materials basis as services are performed.

Generally, the customerspecifies the delivery method and is responsible for delivery costs.  However, in certain situations, the customerspecifies the delivery method and requests the Company pay the delivery costsand then invoice the delivery costs to the customer or include an estimate ofthe delivery costs in the price of the product. Delivery costs billed to customers by the Company for the years endedMarch 31, 2007, 2006 and 2005 of $380,000, $409,000 and $409,000, respectively,have been recorded as revenue, and related costs have been recorded in cost of sales.

*Research and Development, Regulatory and EngineeringExpense*

Research and development,regulatory and engineering expenditures for the years ended March 31, 2007,2006 and 2005 were $1,547,000, $1,385,000 and $1,258,000, respectively, andconsisted primarily of salaries and related costs and are expensed asincurred.  The Company has 10 full timeemployees that work on a variety of projects, including production support.

*Reporting Comprehensive Loss*

SFAS No. 130, “ReportingComprehensive Income (Loss),” establishes standards for the reporting anddisplay of comprehensive income and its components in the consolidatedfinancial statements.  Comprehensiveincome (loss) is the total of net income (loss) and all other non owner changesin equity including such items as unrealized holding gains (losses) onsecurities classified as available-for-sale, foreign currency translationadjustments and minimum pension liability adjustments.  During the years ended March 31, 2007, 2006and 2005, the Company’s only item of other comprehensive loss was its equity inunrealized holding losses on securities classified as available for sale,recorded by CorNova, Inc. of $40,000, $135,000 and $(182,000), respectively.

*Basic and Diluted Earnings Per Share*

The Company follows SFASNo. 128, “Earnings Per Share,” where basic earnings per share is computed bydividing net income (loss) by the weighted average number of common sharesoutstanding during the period.  Dilutedearnings per share are based upon the weighted average number of common sharesoutstanding during the period plus additional weighted average commonequivalent shares outstanding during the period.  Common equivalent shares result from theassumed exercise of outstanding stock options and warrants, the proceeds ofwhich are then assumed to have been used to repurchase outstanding common stockusing the treasury stock method.  Inaddition, the numerator is adjusted for any changes in income or loss thatwould result from the assumed conversion of potential shares.  At March 31, 2007, 2006 and 2005, potentiallydilutive shares of 6,306,749, 7,091,611 and 8,584,311, respectively, wereexcluded from the earnings per share calculation because their effect would beantidilutive.  Shares deemed to beantidilutive include stock options, warrants and additional investment rights.

*Property and Equipment*

Property and equipmentare stated at cost.  Equipment isdepreciated using the straight-line method over the estimated useful lives ofthe assets, ranging from three to seven years, leasehold improvements areamortized using the straight-line method over the shorter of the estimated lifeof the asset or the remaining term of the lease, and the Company’s building isdepreciated using the straight-line method over 40 years.  Expenditures for repairs and maintenance arecharged to expense as incurred.  TheCompany records construction in process in the appropriate asset category andcommences depreciation upon completion and commencement of use of the asset.

F-7

----

*Inventory*

Inventories are stated atthe lower of cost (first-in, first-out) or net realizable value and consist ofthe following:
|                         | ** ** | **March 31,** | ** ** |
|-------------------------|------------|--------------------|------------|
| **(in thousands)** | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Raw materials           |       | $                  | 2,402      |   | $ | 2,143 |   |
| Work in progress        |       | 1,310              |       | 1,033 |   |
| Finished goods          |       | 1,493              |       | 1,610 |   |
| Total  inventories      |       | $                  | 5,205      |   | $ | 4,786 |   |

 

The Company recorded acharge to cost of sales of $556,000 for the impairment of custom inventory heldby the Company at March 31, 2006 related to production of a key customer’sproducts.

*Income Taxes*

The Company follows SFASNo. 109, “Accounting for Income Taxes,” where deferred tax assets andliabilities are recognized based on temporary differences between the financialstatements and tax basis of assets and liabilities using currently enacted taxrates.  A valuation reserve against thenet deferred assets is recorded, if, based upon the weight of availableevidence, it is more likely than not that some or all of the deferred tax assetswill not be realized.

*Intangible Assets and Impairment of Long-Lived Assets*

The Company evaluates itslong-lived assets, which include property and equipment and finite-livedintangible assets for impairment as events and circumstances indicate that the carryingamount may not be recoverable and at a minimum at each balance sheet date.  The Company evaluates the realizability ofits long-lived assets based on profitability and undiscounted cash flowexpectations for the related asset or subsidiary.  Property and equipment and amortizableintangibles are subject to SFAS No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.” Non-amortizable intangibles, such as goodwill, are subject to SFAS No.142, “Goodwill and Other Intangible Assets.”

Ourlong-lived assets include intangible assets and goodwill.  In assessing the recoverability of ourintangible assets and goodwill, we must make assumptions in determining thefair value of the asset by estimating future cash flows and considering otherfactors, including our significant changes in the manner or use of the assets,or negative industry reports or economic conditions.  If those estimates or their relatedassumptions change in the future, we may be required to record additionalimpairment charges for those assets. Under the provisions of SFAS No. 142, we are required to test ourgoodwill and other intangible assets for impairment on an annual basis, or morefrequently if indicators of impairment exist. Our reporting units consist of three operating divisions and goodwill isallocated to the divisions for impairment assessment.  During the quarter ended March 31, 2006, theCompany tested its intangible assets for impairment and based on the results ofthe first step of the goodwill impairment test, the Company determined that thefair value of goodwill of its cardiopulmonary products and contractmanufacturing operations was less than the respective carrying amounts and,therefore, goodwill impairment existed as of March 31, 2006.  As a result, the second step of the goodwillimpairment test was completed and the Company recorded a charge of $598,000 forthe impairment of goodwill related to contract manufacturing operations,primarily due to the cessation of a major customer.  In addition, there was a charge of $554,000for the impairment of goodwill for its cardiopulmonary products operations dueto continued reduced demand for these products. The Company’s remaining goodwill is related to the biomaterialsoperations.  In the fourth quarter of thefiscal year ended March 31, 2007, we completed our annual review of goodwilland other intangible assets.  As a resultof this review, we determined the fair value of the reporting unit exceeded thecarrying amount and, therefore, no goodwill impairment existed as of March 31,2007.  The Company will be required tocontinue to perform a goodwill impairment test on an annual basis and the nexttest is scheduled during the quarter ending March 31, 2008.

As of March 31, 2007 and2006, CardioTech had unamortized goodwill of $487,000 and amortizableidentifiable intangible assets of $468,000 and $584,000, respectively.  Amortization expense related to identifiableintangible assets was approximately $116,000, $192,000 and $192,000 for thefiscal years ended March 31, 2007, 2006 and 2005, respectively.

F-8

----

Theestimated amortization expense related to other identifiable intangible assetsfor the next five years is as follows:
| Fiscal Years Ended March 31, | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|------------|------------|
| **(in thousands)**                          | ** ** | ** ** | ** ** |
| 2008                                             |       | $          | 110        |   |
| 2009                                             |       | 110        |       |
| 2010                                             |       | 110        |       |
| 2011                                             |       | 17         |       |
| 2012                                             |       | 17         |       |
|                                             |       | $          | 364        |   |

 

*Stock Based Compensation*

 In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R, *Share-BasedPayment—An Amendment of FASB Statements No. 123 and 95* (“SFAS No. 123R”),which requires all companies to measure compensation cost for all share-basedpayments, including employee stock options, at fair value. Generally, theapproach in SFAS No. 123R is similar to the approach described in SFAS No. 123,*Accounting for Stock-Based Compensation*(“SFAS No. 123”). However, SFAS No. 123R requires all share-based paymentsto employees, including grants of employee stock options, to be recognized inthe financial statements based on their fair value over the requisite service period.  Pro forma disclosure is no longer analternative.  In March 2005, the SECissued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”), whichexpressed the views of the SEC regarding the interaction between SFAS No. 123Rand certain rules and regulations of the SEC. SAB No. 107 provides guidancerelated to the valuation of stock-based payment arrangements for publiccompanies, including assumptions such as expected volatility and expected term.

Prior to April 1, 2006,the Company applied the pro forma disclosure requirements under SFAS No. 123and accounted for its stock-based employee compensation plans using theintrinsic value method under the recognition and measurement provisions ofAccounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees* and relatedinterpretations.

Effective April 1, 2006, the Company adopted the fairvalue recognition provisions of SFAS No. 123R, using the modified prospectivetransition method.  Under this transitionmethod, compensation cost recognized in the statement of operations for thefiscal year ended March 31, 2007 includes: (a) compensation cost for all stock-basedpayments granted prior to, but not yet vested as of April 1, 2006, based on thegrant-date fair value estimated in accordance with the original provisions ofSFAS No. 123; and (b) compensation cost for all stock-based payments granted,modified or settled subsequent to April 1, 2006, based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123R.  In accordance with the modified prospectivetransition method, results for prior periods have not been restated.

For the fiscal year endedMarch 31, 2007, the Company recorded stock-based compensation expense foroptions that vested of approximately $48,000, which would not have beenrecorded prior to the adoption of SFAS No. 123R.  As a result of the adoption of SFAS No. 123R,the Company’s net loss was higher by $48,000 for the fiscal year ended March31, 2007 than if the Company had continued to account for employee stockoptions under APB No. 25.  Basic anddiluted net loss per share remained unchanged as a result of the adoption ofSFAS No. 123R.  As of March 31, 2007, theCompany has approximately $330,000 of unrecognized compensation cost related tostock options that is expected to be recognized as expense over a weightedaverage period of 1.85 years.

The following tableillustrates the effect on net loss and net loss per share if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to optionsgranted for the fiscal years ended March 31, 2006 and 2005.  Since stock-based compensation expense forthe fiscal year ended March 31, 2007 was calculated under the provisions ofSFAS No. 123R, there is no disclosure of pro forma net loss and net loss pershare for that period.  For purposes ofthe pro forma disclosure for the fiscal years ended March 31, 2006 and 2005 setforth in the table below, the value of the options is estimated using aBlack-Scholes option pricing model.

F-9

----

Had compensation cost forthe Company’s stock option grants been determined consistent with SFAS 123, theCompany’s net loss and net loss per share would approximate the pro formaamounts below:
|                                                                                                                                                  | ** ** | **Years Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(in thousands, except per share data)**                                                                               | ** ** | **2006**                                 | ** ** | **2005** | ** ** |
| Net loss, as  reported                                                                                                                           |       | $                                        | (5,069     | ) | $ | (1,595 | ) |
| Add: Stock-based employee compensation expense  included in reported net loss, net of related tax effects                                        |       | 1                                        |       | 20 |   |
| Deduct: Stock-based employee compensation expense  determined under fair value based method for all employee awards, net of  related tax effects |       | (978                                     | )          | (7,418 | ) |
| Pro forma, net  loss                                                                                                                             |       | $                                        | (6,046     | ) | $ | (8,993 | ) |
| Basic and  diluted loss per share:                                                                                                               |       |                                     |       |   |   |
| As reported                                                                                                                                      |       | $                                        | (0.26      | ) | $ | (0.09 | ) |
| Pro forma                                                                                                                                        |       | $                                        | (0.31      | ) | $ | (0.50 | ) |

 

The significantdifference between “As reported” and “Pro forma” results for the year endedMarch 31, 2005 relates primarily to the effect of the acceleration of thevesting of stock options on July 8, 2004, and the granting in fiscal 2005 of2,073,500 fully vested stock options.

On July 8, 2004, theBoard of Directors of the Company accelerated the vesting of all outstandingoptions, such that at July 8, 2004, all outstanding options are fullyvested.  The Company accelerated thevesting of the options to avoid compensation expense associated with theadoption of SFAS 123R.  This actionresulted in the immediate vesting of options to purchase 922,503 shares of theCompany’s common stock.  No compensationcost was recognized because of the acceleration; however, should an optioneerealize a benefit from the acceleration that they would not have otherwise beeneligible for, the Company would then recognize compensation expense.  The compensation expense would be determinedby the difference between the closing stock price at July 8, 2004 of $3.92 andthe option exercise price, multiplied by the number of shares on which theoptionee obtained a benefit from the accelerated vesting.  At July 8, 2004 the total potential compensationexpense was $149,000.  Compensation costdue to the acceleration of $1,000 and $20,000 has been recorded for fiscalyears 2006 and 2005, respectively.  AtMarch 31, 2007, all compensation cost from the acceleration has beenrecognized.

The valuation of employeestock options is an inherently subjective process, since market values aregenerally not available for long-term, non-transferable employee stockoptions.  Accordingly, an option pricingmodel is utilized to derive an estimated fair value.  The Black-Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable.  In calculating the estimated fair value ofour stock options we use the Black-Scholes pricing model, which requires theconsideration of the following six variables for purposes of estimating fairvalue:

·      thestock option exercise price,

·      theexpected term of the option,

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

·      theexpected volatility of our common stock,

·      theexpected dividends on our common stock (we do not anticipate paying dividendsin the foreseeable future), and

·      therisk free interest rate for the expected option term.

Because the Company’semployee stock options have characteristics significantly different from thoseof traded options, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its employee stock options.

The fair value of eachoption granted during fiscal years 2007, 2006 and 2005 is estimated on the dateof grant using the Black-Scholes option pricing model with the followingweighted average assumptions:

F-10

----

|                                | ** ** | **Years Ended March 31,** | ** ** |
|--------------------------------|------------|------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Dividend yield                 |       | None                                     |       | None |   | None |   |
| Expected  volatility           |       | 77.00                                    |       | 80.00 |   | 80.00 |   |
| Risk-free  interest rate       |       | 4.2%  - 5.2%                             |       | 4.14%  - 4.72% |   | 4.17%  - 4.73% |   |
| Expected life                  |       | 6.5  years                               |       | 10  years |   | 10  years |   |
| Fair value of  options granted |       | $1.24                                    |       | $1.99 |   | $2.61 |   |

 

StockOption Exercise Price and Grant Date Price of our Common Stock.  The closing market price of the Company’scommon stock on the date of grant.

ExpectedTerm.  For optiongrants subsequent to the adoption of SFAS 123R, the expected life of stockoptions granted is based on the simplified method prescribed under SAB 107, “*Share-Based Payment.*” Accordingly, the expected term is presumed to be the midpoint betweenthe vesting date and the end of the contractual term.

ExpectedVolatility.  Theexpected volatility is a measure of the amount by which the Company’s stockprice is expected to fluctuate during the expected term of options granted. TheCompany determines the expected volatility solely based upon the historicalvolatility of its common stock over a period commensurate with the option’sexpected term.

ExpectedDividends. The Company has never declared or paid any cashdividends on any of its capital stock and does not expect to do so in theforeseeable future.  Accordingly, it usesan expected dividend yield of zero to calculate the grant-date fair value of astock option.

Risk-FreeInterest Rate.  Therisk-free interest rate is the implied yield available on U.S. Treasuryzero-coupon issues with a remaining term equal to the option’s expected term onthe grant date.

*Fair Value of FinancialInstruments*

Thefair value of cash and cash equivalents, receivables and payables at March 31,2007 and 2006 approximate their carrying amount due to the short maturities ofthese items.  Financial instruments thatpotentially subject the Company to a concentration of credit risk principallyconsist of cash and cash equivalents and trade receivables.

Allof the Company’s cash and cash equivalents are maintained at major financialinstitutions.

TheCompany performs ongoing credit evaluations of the financial condition of itscustomers and generally does not require collateral.  The Company’s private label medical devicemanufacturing division requires new customers to pay a deposit prior to anywork being performed, which is recorded as deferred revenue.  Although the Company is directly affected bythe overall financial condition of the healthcare industry, management does notbelieve significant credit risk exists at March 31, 2007 and 2006.  The Company maintains an allowance for 

F-11

----

doubtfulaccounts based on accounts past due according to contractual terms andhistorical collection experience.  Actuallosses when incurred are charged to the allowance.

*Recent AccountingPronouncements*

InJune 2006, FIN 48, *“Accounting forUncertainty in Income Taxes,”* an interpretation of SFAS No. 109,clarifies the accounting for uncertainties in income taxes recognized in anenterprise’s financial statements.  TheInterpretation requires that we determine whether it is more likely than notthat a tax position will be sustained upon examination by the appropriatetaxing authority.  If a tax positionmeets the more likely than not recognition criteria, FIN 48 requires the taxposition be measured at the largest amount of benefit greater than fiftypercent (50%) likely of being realized upon ultimate settlement.  This accounting standard is effective forfiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 is not expected to have amaterial affect on our financial position and results of operations.

**B.**    Related Party Transactions

TheCompany has an investment in CorNova, Inc., in which Dr. Eric Ryan is Presidentand a major shareholder.  The Company, onJuly 15, 2004, entered into a two-year consulting agreement with Dr. Ryan,which provided for a range of payments, in either cash or common stock, for theachievement of certain milestones related to the manufacturing, commencement ofEuropean clinical trials and the receipt of a restricted CE mark of the Company’sCardioPass synthetic coronary artery bypass graft.  Total potential payments ranged from $125,000to $216,000 based on the timing of the milestone achievements.  As part of the agreement, Dr. Ryan had theopportunity to earn up to an additional $56,000 based on the achievement ofcertain milestones related to other products of the Company.  At March 31, 2006 and 2005, several of thecontract milestones had been achieved and, accordingly, costs totaling $38,000and $73,000 related to performance under this contract were recognized as aresearch and development expense for the years ended March 31, 2006 and 2005,respectively.  There were no research anddevelopment expenses recognized during the year ended March 31, 2007 related tothis agreement.  This agreement expiredJuly 15, 2006.

TheCompany provides research and development services to CorNova in connectionwith the development of the drug-eluting stent. During the fiscal year ended March 31, 2006, the Company recognizedrevenues of approximately $67,000 in connection with these services.  The Company recognized no revenues in thefiscal years ended March 31, 2007 and 2005. As of March 31, 2007, there were no accounts receivable or payablesoutstanding related to CorNova.

InDecember 2006, Mr. Eric G. Walters, the Company’s Vice President and ChiefFinancial Officer, was appointed a director of CorNova.

Duringfiscal 2007, the Company entered into a consulting agreement with Michael L.Barretti, a member of its Board of Directors, for an annualized fee of$50,000.  During the fiscal year endedMarch 31, 2007, the Company recognized $13,000 of expense related to servicesincurred under this agreement, which was recorded as selling, general andadministrative expense.

**C.****    LicenseAgreements**

PolyMedicaCorporation (NASDAQ: “PLMD”) granted to CardioTech an exclusive, perpetual,worldwide, royalty-free license for CardioTech to use all of the necessarypatent and other intellectual property owned by PLMD in the implantable devicesand materials field (collectively, “PLMD Licensed Technology”).  CardioTech, at its own expense, will filepatents or other applications for the protection of all new inventionsformulated, made, or conceived by CardioTech during the term of the licensethat related to PLMD Licensed Technology and all such inventions shall beexclusively licensed to PLMD for use by PLMD in fields other than theimplantable devices and materials field. There are no financial commitments of CardioTech related to thislicense.

F-12

----

**D.**    Property andEquipment

**Property and equipmentconsists of the following:**
|                                                  | ** ** | **March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------|------------|
| **(in thousands)**                          | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Land                                             |       | $                  | 500        |   | $ | 500 |   |
| Building                                         |       | 2,153              |       | 2,053 |   |
| Machinery,  equipment and tooling                |       | 2,936              |       | 2,473 |   |
| Furniture,  fixtures and office equipment        |       | 820                |       | 651 |   |
| Leasehold  improvements                          |       | 1,343              |       | 1,336 |   |
|                                             |       | 7,752              |       | 7,013 |   |
| Less:  accumulated depreciation and amortization |       | (3,670             | )          | (2,954 | ) |
|                                             |       | $                  | 4,082      |   | $ | 4,059 |   |

 

**Depreciationexpense for property and equipment for the fiscal years ended March 31, 2007,2006 and 2005 was approximately $716,000, $798,000 and $824,000, respectively.**

**E.**     Income Taxes

Reconciliation between the Company’s effective taxrate and the United States statutory rate is as follows:
|                                                 | ** ** | **For The Years Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Expected federal  tax rate                      |       | 34.0                                                       | %          | 34.0 | % | 34.0 | % |
| State income  taxes, net of federal tax benefit |       | 6.0                                                        | %          | 4.2 | % | 4.4 | % |
| Non-deductible  expenses                        |       | (0.9                                                       | )%         | (9.3 | )% | (1.0 | )% |
| Deductible stock  compensation                  |       | 0.0                                                        | %          | 1.9 | % | 0.0 | % |
| Change in  valuation allowance                  |       | (39.1                                                      | )%         | (30.8 | )% | (37.4 | )% |
| Effective tax  rate                             |       | 0.0                                                        | %          | 0.0 | % | 0.0 | % |

 

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

F-13

----

Significant components of the Company’s deferred taxassets and deferred tax liabilities as of March 31, 2007 and 2006 consisted ofthe following:
|                                                                        | ** ** | **March 31,** | ** ** |
|------------------------------------------------------------------------|------------|--------------------|------------|
| **(in thousands)**                                                | ** ** | **2007**           | ** ** | **2006** | ** ** |
| ***Deferred  Tax Assets:***                                            | ** ** | ** **         | ** ** | ** ** | ** ** |
| Net operating  loss carryforwards                                      |       | $                  | 11,500     |   | $ | 10,413 |   |
| Tax credits                                                            |       | 220                |       | 135 |   |
| Inventory and  receivable allowances                                   |       | 347                |       | 542 |   |
| Accrued expenses  deductible when paid                                 |       | 376                |       | 387 |   |
| Depreciation and  amortization                                         |       | 225                |       | 134 |   |
| Deferred tax  assets                                                   |       | 12,668             |       | 11,611 |   |
|                                                                   |       |               |       |   |   |
| ***Deferred  Tax Liabilities:***                                       |       |               |       |   |   |
| Basis difference  in equity investment in CorNova                      |       | —             |       | (39 | ) |
| Deferred tax  liability on basis difference of amortizable intangibles |       | (154               | )          | (195 | ) |
| Deferred tax  liabilities                                              |       | (154               | )          | (234 | ) |
| Sub-total                                                              |       | 12,514             |       | 11,377 |   |
| Valuation  allowance                                                   |       | (12,514            | )          | (11,377 | ) |
| Net deferred tax  asset                                                |       | $                  | —     |   | $ | — |   |

 

TheCompany had federal and state net operating loss carry forwards available tooffset future taxable income. As of March 31, 2007, the Company had federal netoperating losses of approximately $28,904,000, expiring between 2008 and 2027,and state net operating losses of approximately $26,671,000, expiring between2008 and 2012.  Approximately $11,349,000of the federal net operating loss carry forwards is subject to annuallimitations as a result of the change in control of Gish.  As of March 31, 2007, the Company had federaland state investment and research tax credit carryforwards available to offsetfuture taxable income of approximately $149,000, expiring between 2008 and2027, and $108,000, expiring between 2008 and 2012, respectively.

Inaddition to the deferred tax assets disclosed above, the Company hasapproximately $1 million of net operating loss carryforwards as ofMarch 31, 2007 related to excess tax benefits. The benefit of thesedeferred tax assets, when realized, will be reported as additional paid-incapital.

**F.**     Concentrationof Credit Risk and Major Customers

Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist principally of cash and cash equivalents and tradeaccounts receivable.  The Companymaintains cash and cash equivalents with high credit, quality financialinstitutions.  To manage accountsreceivable credit risk, the Company continuously evaluates the creditworthinessof its customers and maintains allowances for potential credit losses.  As of March 31, 2007 and 2006, the Companybelieves it has no significant concentration of credit risk.  One sales representative organizationcomprised 4%, 5% and 4% of the Company’s revenues in fiscal 2007, 2006 and2005, respectively.

**G.**    Commitments

The Company leases approximately 16,000 square feet ofoffice and manufacturing space in Plymouth, Minnesota under a lease whichexpires in April 2009; 52,000 square feet of office and manufacturing space inRancho Santa Margarita, California under a lease which expires in February2011; and 23,000 square feet of storage space in Irvine, California under alease, which expires in January 2010.

F-14

----

Aggregate future minimum rental payments requiredunder operating leases for the Rancho Santa Margarita, Irvine, and Plymouthfacilities are as follows:
| Fiscal Years Ended March 31, (in thousands) | ** ** | **Rancho Santa   Margarita, CA** | ** ** | **Irvine, CA** | ** ** | **Plymouth, MN** | ** ** |
|----------------------------------------------------------------------|------------|-------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| 2008                                                                 |       | $                                               | 458        |                | $          | 159                   |       | $ | 188 |   |
| 2009                                                                 |       | 472                                             |       | 165                 |       | 78                    |       |
| 2010                                                                 |       | 486                                             |       | 170                 |       | —                |       |
| 2011                                                                 |       | 415                                             |       | 174                 |       | —                |       |
| 2012                                                                 |       | —                                          |       | —              |       | —                |       |
| Thereafter                                                           |       | —                                          |       | —              |       | —                |       |
|                                                                 |       | $                                               | 1,831      |                | $          | 668                   |       | $ | 266 |   |

 

Rentexpense charged to operations was $761,000, $761,000 and $732,000 for the yearsended March 31, 2007, 2006 and 2005, respectively.

TheCompany also has purchase commitments totaling approximately $2.2 million atMarch 31, 2007 related to outstanding noncancelable purchase orders, primarilyfor raw materials.

**H.**    Stockholders’Equity

***Common Stock Options and Warrants***

OnDecember 22, 2004, the Company issued 1,139,586 shares of its common stock at$2.40 per share in a private placement receiving approximately $2,735,000 ingross proceeds, less placement agent fees and related transaction costs ofapproximately $314,000.

Inconnection with the transaction, the Company issued warrants to the investorsto purchase 569,793 shares of common stock at an exercise price of $3.00 pershare, which are exercisable until December 22, 2009.  In addition, the investors had rights topurchase up to 1,139,586 shares of common stock at a price of $2.40 per share,which were exercisable for a period commencing on December 22, 2004 and endingon July 24, 2005.  We also issuedwarrants to the placement agent to purchase 113,959 shares of our common stockat an exercise price of $2.40 per share and 56,979 shares of our common stockat an exercise price of $3.00 per share, which are exercisable until December22, 2009.  If all warrants are exercised,the Company would receive gross proceeds of approximately $2,490,000, lessrelated transaction costs.

Thefair market value of the warrants and additional investment rights granted wasestimated to be $1,606,000 and $768,000 on the date of grant,respectively.  The fair market value ofthe warrants and additional investment rights granted were determined byestimating the fair market value using the Black-Scholes option valuationmethod with the following weighted average assumptions: dividends yield-none;expected volatility-80%; risk free interest rate 3.60%-5 yr. rate in December2004; expected life-5 years; fair value of options granted-$0.67 (additional investmentrights)-$1.59 ($2.40 warrants)-$1.99 ($3.00 warrants).

TheCompany issued 235,417 shares of common stock during the year ended March 31,2007, as a result of the exercise of options by employees and consultants,generating cash proceeds of $218,000. The Company issued 543,254 shares of common stock during the year endedMarch 31, 2006, as a result of the exercise of options by employees andconsultants, generating cash proceeds of $1,246,000.  The Company issued 179,501 shares of commonstock during the year ended March 31, 2005, as a result of the exercise ofoptions by employees and consultants, generating cash proceeds of $254,000.

Duringthe 2005 fiscal year, the Company recorded non-cash compensation expense forinvestment advisory services of $58,000 related to options granted to purchase100,000 shares of the Company’s common stock at an exercise price of $3.50,expiring September 2006.  The compensation expense was determined byestimating the fair market value of the options granted by using theBlack-Scholes option valuation model with the following weighted averageassumptions; dividends yield-none; expected volatility-80%; risk-free interestrate-4.52%; expected life-18 months.

F-15

----

OnJanuary 26, 2004, the Board of Directors of CardioTech retained a consultant(the “Consultant”) for a period of six months to continue to representCardioTech to the investment community. Services to be performed were i) to create greater awareness in thebrokerage community for CardioTech and ii) to advise CardioTech on marketconditions.  Fees for these servicesincluded (a) all pre-approved out-of-pocket expenses and (b) the periodic grantof stock options in tranches, up to a maximum aggregate grant of 1,000,000shares.  The options have an exerciseprice equal to 75% of the closing price for the day prior to the date of eachgrant, and expire three months from the grant date.  The formal agreement with the Consultantexpired January 25, 2005.  No optionswere granted to the Consultant during the fiscal year ended March 31,2005.  During the fiscal year ended March31, 2006, the Company granted the Consultant fully vested options totaling240,000 shares with expirations of one month after the grant dates for servicesas described above.  During the fiscalyear ended March 31, 2006, the Consultant exercised the same 240,000 optionsand the Company received proceeds totaling $607,000.  The Company recorded an expense of $193,000for the difference between the proceeds received and the fair market value ofthe options on the date of grant.  Nooptions were granted to the Consultant during the fiscal year ended March 31,2007.  The Company has terminated itsrelationship with the Consultant.

***Treasury Stock and Other Transactions***

InJune 2001, the Board of Directors authorized the purchase of up to 250,000shares of the Company’s common stock.  InJune 2004, the Board of Directors authorized the purchase of up to 500,000additional shares of the Company’s common stock.  Since June 2001, the Company has purchased atotal of 174,687 shares.  During theyears ended March 31, 2007, 2006 and 2005, the Company has purchased 600shares, 5,410 shares and 23,600 shares, respectively, at an approximatepurchase cost of $1,000, $12,000, and $86,000, respectively.  The Company announced that purchases may bemade from time-to-time in the open market, privately negotiated transactions,block transactions or otherwise, at times and prices deemed appropriate bymanagement.

EffectiveJuly 1, 2004, companies incorporated in Massachusetts became subject to theMassachusetts Business Corporation Act, which provides that shares that arereacquired by a company become authorized but unissued shares.  As a result, the concept of “treasury shares”is eliminated and shares reacquired by a company become “authorized butunissued” shares.  Accordingly, theCompany reclassified treasury stock at March 31, 2005 as a reduction of commonstock at the par value amount of $.01 per share and the excess of the cost ofthe treasury stock over the par value has been recorded as a reduction ofadditional paid-in capital.  At March 31,2005, 68,677 shares of treasury stock with a cost of $266,000 have been soreclassified.

**I.**      Enterpriseand Related Geographic Information

TheCompany acquired Gish Biomedical, Inc. effective April 7, 2003 and subsequentto that date, the Company has managed its business in fiscal 2007, 2006 and2005 on the basis of one reportable operating segment, Medical DeviceManufacturing and Sales, in accordance with the qualitative and quantitativecriteria established by SFAS 131, “Disclosures about Segments of an Enterpriseand Related Information.”

Salesto foreign customers (primarily Europe and Asia) aggregated approximately$3,456,000, $3,228,000 and $3,676,000 in 2007, 2006 and 2005,respectively.  The Company has nolong-lived assets outside of the United States.

Revenuesfor the presented periods are as follows:
|                                            | ** ** | **For The Years Ended March 31,** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------------|------------|
| **(in thousands)**                    | ** ** | **2007**                                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Medical devices                            |       | $                                                          | 18,838     |   | $ | 20,411 |   | $ | 19,530 |   |
| Contracted  product design and development |       | 755                                                        |       | 993 |   | 1,537 |   |
| Royalties and  development fees            |       | 1,558                                                      |       | 977 |   | 774 |   |
|                                       |       | $                                                          | 21,151     |   | $ | 22,381 |   | $ | 21,841 |   |

 

**J.**     SupplementalDisclosures for Stock-Based Compensation

CardioTech’s1996 Employee, Director and Consultants Stock Option Plan (the “1996 Plan”) wasapproved by CardioTech’s Board of Directors and Stockholders in March1996.  A total of 7,000,000 shares havebeen reserved for issuance under the Plan. Under the terms of the Plan the exercise price of Incentive StockOptions issued under the Plan must be equal to the fair market value of thecommon stock at the date of grant.  Inthe event that Non 

F-16

----

QualifiedOptions are granted under the Plan, the exercise price may be less than thefair market value of the common stock at the time of the grant (but not lessthan par value).  In October 2003, theCompany’s shareholders approved the CardioTech International, Inc. 2003 StockOption Plan (the “2003 Plan”), which authorizes the issuance of 3,000,000shares of common stock with terms similar to the 1996 Plan.  In January 2006, the Company filed Form S-8with the Securities and Exchange Commission registering an addition 489,920shares of common stock in the 1996 Plan and 2003 Plan.  Total shares of common stock registered forthe 1996 Plan and 2003 Plan are 10,489,920. Substantially all of the stockoptions granted pursuant to the 1996 Plan provide for the acceleration of thevesting of the shares of Common Stock subject to such options in connection withcertain changes in control of the Company. A similar provision is not included in the 2003 Plan.  Normally, options granted expire ten yearsfrom the grant date.

Activityunder the Plans for the year ended March 31, 2007 is as follows:
|                                                          | ** ** | ** **      | ** ** | ** **                       | ** ** | **Weighted  **    | ** ** | **  ** | ** ** |
|----------------------------------------------------------|------------|-----------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|
| ** **                                               | ** ** | ** **      | ** ** | ** **                       | ** ** | **Average**                 | ** ** | ** **       | ** ** |
| ** **                                               | ** ** | ** **      | ** ** | **Weighted Average**        | ** ** | **Remaining**               | ** ** | **Aggregate**    | ** ** |
| ** **                                               | ** ** | **Options**     | ** ** | **Exercise Price per** | ** ** | **Contractual**             | ** ** | **Intrinsic**    | ** ** |
| ** **                                               | ** ** | **Outstanding** | ** ** | **Share**                        | ** ** | **Term in Years** | ** ** | **Value**        | ** ** |
| Options  outstanding as of April 1, 2006                 |       | 6,210,880       |       | $                                | 2.21       |                        | 6.50       |             |       |   |
| Granted                                                  |       | 294,918         |       | 1.69                             |       |                        |       |             |       |
| Exercised                                                |       | (235,417        | )          | 0.93                             |       |                        |       |             |       |
| Cancelled                                                |       | (419,951        | )          | 3.45                             |       |                        |       |             |       |
| Forfeited                                                |       | (424,412        | )          | 1.94                             |       |                        |       |             |       |
| Options  outstanding as of March 31, 2007                |       | 5,426,018       |       | $                                | 2.16       |                        | 6.15       |             | $          | 1,207,568 |   |
| Options  exercisable as of March 31, 2007                |       | 5,201,915       |       | $                                | 2.18       |                        | 6.00       |             | $          | 1,202,082 |   |
| Options vested or  expected to vest as of March 31, 2007 |       | 5,201,915       |       | $                                | 2.18       |                        | 6.00       |             | $          | 1,202,082 |   |

 

Theaggregate intrinsic value in the table above represents the total pre-taxintrinsic value (the difference between the closing price of the common stockon March 31, 2007 of $1.56 and the exercise price of each in-the-money option)that would have been received by the option holders had all option holdersexercised their options on March 31, 2007. Total intrinsic value of stock options exercised under the Plan for thefiscal years ended March 31, 2007, 2006 and 2005 was $246,000, $466,000 and $289,000,respectively.  The total fair value ofstock options that vested during the fiscal years ended March 31, 2007, 2006 and2005 were $91,549, $1,169,532 and $6,396,000.

As ofMarch 31, 2007, 294,918 shares were issued under the 2003 Stock OptionPlan.  During the year ended March 31,2006, 385,000 options were granted pursuant to Rule 711 of the American StockExchange.  Under Rule 711, a first-timeemployee may be granted an option without approval of stockholders if approvedby the Company’s Board of Directors.

AtMarch 31, 2007 there were no shares remaining to be granted under the 1996Stock Option Plan and 1,515,399 shares were available for grant under the 2003Stock Option Plan.

At March 31, 2007,warrants issued to purchase 880,731 shares of common stock wereoutstanding.  Warrants for 140,000 sharesof common stock have an exercise price of $2.40 and expire on July 11,2008.  Warrants for 740,731 shares ofcommon stock have an exercise price of $3.00 and expire on December 22, 2009.

F-17

----

**K.**    IntangibleAssets

Amortizableintangible assets consist of the following:
| ** **                          | ** ** | **Estimated**        | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------------------------------|------------|----------------------|------------|--------------------|------------|------------|------------|
| ** **                          | ** ** | **Useful Life** | ** ** | **March 31,** | ** ** |
| **(in thousands)**             | ** ** | **in Years**    | ** ** | **2007**           | ** ** | **2006**   | ** ** |
| Customer  intangibles               |       | 5  to 7              |       | $                  | 644        |       | $          | 1,056 |   |
| Technology  intangibles             |       | 15                   |       | 262                |       | 262        |       |
|                                |       |                 |       | 906                |       | 1,318      |       |
| Less:  accumulated amortization     |       |                 |       | (438               | )          | (734       | )          |
| Amortizable  intangible assets, net |       |                 |       | $                  | 468        |       | $          | 584 |   |

 

Goodwill consistsof the following:

|                                                      | ** ** | ** ** | ** ** | **March 31,** | ** ** |
|------------------------------------------------------|------------|------------|------------|--------------------|------------|
| **(in thousands)**                              | ** ** | ** ** | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Goodwill                                             |       |       |       | $                  | 1,215      |   | $ | 2,367 |   |
| Less: accumulated amortization                       |       |       |       | (728               | )          | (728 | ) |
|                                                 |       |       |       | 487                |       | 1,639 |   |
| Less: write-off for goodwill impairment (See Note A) |       |       |       | —             |       | (1,152 | ) |
| Goodwill                                             |       |       |       | $                  | 487        |   | $ | 487 |   |

 

**L.**    Valuationand Qualifying Accounts        
| ** **                       | ** ** | **Balance at ** | ** ** | **Charged to** | ** ** | ** ** | ** ** | ** **    | ** ** | **Balance at** | ** ** |
|----------------------------------|------------|---------------------------|------------|---------------------|------------|------------|------------|---------------|------------|---------------------|------------|
| ** **                       | ** ** | **beginning of**     | ** ** | **costs and**  | ** ** | ** ** | ** ** | ** **    | ** ** | **end of**     | ** ** |
| **(in thousands)**          | ** ** | **period**                | ** ** | **expenses**        | ** ** | **Other**  | ** ** | **Write-off** | ** ** | **period**          | ** ** |
| Year ended March 31,  2007:      |       |                      |       |                |       |       |       |          |       |                |       |
| Deducted from assets  accounts:  |       |                      |       |                |       |       |       |          |       |                |       |
| Allowance for  doubtful accounts |       | $                         | 572        |                | $          | 84         |       | $             | (3         | )                   | $          | (483 | ) | $ | 170 |   |
| Excess and  obsolescence reserve |       | 982                       |       | 45                  |       | —     |       | (727          | )          | 300                 |       |
| Total                            |       | $                         | 1,554      |                | $          | 129        |       | $             | (3         | )                   | $          | (1,210 | ) | $ | 470 |   |
|                             |       |                      |       |                |       |       |       |          |       |                |       |
| Year ended March 31,  2006:      |       |                      |       |                |       |       |       |          |       |                |       |
| Deducted from assets  accounts:  |       |                      |       |                |       |       |       |          |       |                |       |
| Allowance for  doubtful accounts |       | $                         | 326        |                | $          | 251        |       | $             | 1          |                | $          | (6 | ) | $ | 572 |   |
| Excess and  obsolescence reserve |       | 402                       |       | 642                 |       | —     |       | (62           | )          | 982                 |       |
| Total                            |       | $                         | 728        |                | $          | 893        |       | $             | 1          |                | $          | (68 | ) | $ | 1,554 |   |
|                             |       |                      |       |                |       |       |       |          |       |                |       |
|                             |       |                      |       |                |       |       |       |          |       |                |       |
| Year ended March 31,  2005:      |       |                      |       |                |       |       |       |          |       |                |       |
| Deducted from assets  accounts:  |       |                      |       |                |       |       |       |          |       |                |       |
| Allowance for  doubtful accounts |       | $                         | 201        |                | $          | 202        |       | $             | 7          |                | $          | (84 | ) | $ | 326 |   |
| Excess and  obsolescence reserve |       | 372                       |       | 115                 |       | —     |       | (85           | )          | 402                 |       |
| Total                            |       | $                         | 573        |                | $          | 317        |       | $             | 7          |                | $          | (169 | ) | $ | 728 |   |

 

**M.**   Benefit Planand Employment Agreements of Executive Officers

TheCompany has several Salary Reduction Profit Sharing Plans (“the Plans”),established under Section 401(k) of the Internal Revenue Code.   All full time employees who are eighteenyears of age and have completed 30 days of employment are eligible toparticipate.  The Company’s contributionsare discretionary and the Company made 

F-18

----

nomatching contributions in 2007, 2006 and 2005. An annual Company contribution to the Plans was $23,000, $21,000 and$27,000 in the years ended March 31, 2007, 2006 and 2005, respectively.

TheCompany has entered into an employment agreement with Eric G. Walters (the “WaltersAgreement”), pursuant to which said individual serves as Vice President andChief Financial Officer of the Company. Pursuant to the terms of the Walters Agreement, Mr. Walters is toreceive an annual base salary of One Hundred Seventy Five Thousand ($175,000)dollars.  Mr. Walters’ salary will bereviewed annually by the Board. Additionally, Mr. Walters may also be entitled to receive an annualbonus payment in an amount, if any, to be determined by the CompensationCommittee of the Board.

Theterm of the Walters Agreement by and between the Company and Mr. Walters is setto expire on April 1, 2008.  After suchtime, the term of the Walters Agreement will be deemed to continue on amonth-to-month basis if not expressly extended while Mr. Walters remainsemployed by the Company.  Mr. Walters andCardioTech each have the right to terminate the Walters Agreement at any time,with or without cause (as defined in the Walters Agreement), upon thirty (30)days prior written notice.  In the eventthat CardioTech terminates the applicable Walters Agreement without cause, orMr. Walters terminates his employment for good reason following a change incontrol (as such terms are defined in the Walters Agreement) or CardioTechfails to renew the Employment Agreement within two (2) years following theoccurrence of a change in control, Mr. Walters will be entitled to receive severanceequal to 2.0 times his annual base salary at termination.  In such event, Mr. Walters will be bound by anoncompete covenant for one (1) year following termination of his employment.

OnAugust 7, 2006, the Board of Directors of CardioTech International, Inc. (the “Company”)accepted the resignation of Dr. Michael Szycher as Chief Executive Officer,President and Treasurer of the Company, effective as of that date.  Dr. Szycher also resigned as a member of theCompany’s Board of Directors.  He willremain an employee of the Company in a non-executive capacity as SeniorScientific Advisor for a period of one year. On August 11, 2006 the Company entered into a transition agreement (the “TransitionAgreement”) with Dr. Szycher.  TheTransition Agreement provides for Dr. Szycher to serve in a non-executivecapacity as Senior Scientific Advisor to the Company at his current annual basesalary of $325,000 for a period of one year, at which time his employment willterminate.  The Company agreed (i) to continueDr. Szycher’s current life insurance coverage for 12 months following hisseparation date and (ii) to pay Dr. Szycher’s COBRA medical insurance premiumsfor a period of 6 months following his separation date.

OnAugust 7, 2006, the Company appointed Michael F. Adams as Chief ExecutiveOfficer and President of the Company. Mr. Adams has been a director of theCompany since May 1999 and joined the Company as its Vice President ofRegulatory Affairs and Business Development on April 1, 2006.  The Company entered into an employmentagreement with Mr. Adams (the “Adams Agreement”) on September 13, 2006.  Under the terms of the Adams Agreement, Mr.Adams will be employed by the Company for two years and receive an annual basesalary of $250,000, which is subject to annual review by the Company’s Board ofDirectors.  During the Employment Period,as defined in the Adams Agreement, Mr. Adams may receive an annual bonus to bedetermined at the sole discretion of the Compensation Committee of the Board ofDirectors.  The Company may renew theAdams Agreement at the end of the initial term, however, lacking any expressagreement between the parties at the end of the Employment Period, the AdamsAgreement shall be deemed to continue on a month-to-month basis.  Either party has the right to terminate theAdams Agreement upon thirty (30) days written notice.  Mr. Adams is eligible for participation inall executive benefit programs, including health insurance, life insurance, andstock-based compensation.  If Mr. Adams’employment is terminated without cause, the Company is obligated to (i) pay Mr.Adams an amount equal to two (2) times his base salary upon such termination,(ii) provide Mr. Adams with health insurance benefits for a period of 18 monthsafter such termination, of which the premiums for the first six (6) monthsafter such termination shall be paid by the Company, and (iii) provide Mr.Adams life insurance benefits for one (1) year after such termination at theCompany’s expense.

**N.**    Investmentin CorNova, Inc.

AnExchange and Venture Agreement (the “Agreement”) was entered into on March 5,2004 by and among CardioTech, Implant, and CorNova, Inc. (“CorNova”).  CorNova is a privately-held, developmentstage company, incorporated as a Delaware corporation on October 12, 2003.  CorNova’s focus is the development of anext-generation drug-eluting stent.  OnMarch 5, 2004, CardioTech and Implant each agreed to transfer to CorNova 12,931shares and 10,344 shares of their common stock (collectively, the “ContributoryShares”), respectively, in exchange for 1,500,000 shares, each, of CorNova’scommon stock.  The number of ContributoryShares issued reflects the fair market value of CardioTech’s and Implant’scommon stock as of November 18, 2003, for an

F-19

----

aggregatevalue of $75,000 each.  This alsoresulted in CardioTech and Implant each receiving a thirty percent (30%)ownership interest in CorNova.

Uponthe event of CorNova securing additional financing in the minimum amount of$1,000,000 and up to a maximum amount of $3,000,000 (the “Series A Financing”),CardioTech and Implant were each required to issue additional shares of theircommon stock (the “Investment Shares”), where the number of Investment Sharesto be issued was equal to twenty-five percent (25%) of the gross proceeds ofthe Series A Financing divided by the respective five (5) day average of theclosing prices of the common stock of CardioTech and Implant as published inthe Wall Street Journal on the dates immediately preceding the closing of theSeries A Financing.  CorNova, Inc. completed its Series AFinancing transaction on February 4, 2005. At that time, the Company became obligated to contribute shares of itscommon stock equal to $750,000.  Thenumber of shares was determined to be 308,642. The Company has no additional obligation to contribute assets oradditional common stock nor to assume any liabilities or to fund any lossesthat CorNova may incur.  Inaddition to the issuance of its common stock at the completion of a Series AFinancing, CardioTech granted to CorNova an exclusive license for thetechnology consisting of ChronoFlex DES polymer, or any poly (carbonate)urethane containing derivative thereof, for use on drug-eluting stents.

Boththe Contributory Shares and the Investment Shares (collectively, the “Securities”)are restricted securities within the meaning of Rule 144 of the Securities andExchange Commission under the Securities Act of 1933, as amended (the “SecuritiesAct”), and none of the Securities may be sold except pursuant to an effectiveregistration statement under the Securities Act or under the securities laws ofany state, or in a transaction exempt from registration under the SecuritiesAct.

TheSeries A Financing transaction resulted in the issuance by CorNova of 3,050,000shares of preferred stock.  The preferredstock has a liquidation preference equal to $1.00 per share, the originalpreferred stock purchase price and the same voting rights as CorNova’s commonstock.  The CorNova preferred stock canbe converted on a share for share basis into CorNova common stock at thediscretion of the preferred stockholders. The preferred stock is subject to several mandatory conversionrequirements based on future events and subject to redemption at a premium,which varies based on the redemption date. CorNova currently also has outstanding warrants for the purchase of150,000 shares of its common stock at $1.00 per share, issued in conjunctionwith its original seed loans and warrants for the purchase 635,000 shares ofits common stock at $1.10 per share, issued to an individual as a “finders”fee.  Additionally, CorNova’sshareholders have approved the 2004 Qualified Incentive Stock Option Plan (“2004Plan”) which authorized the Board of Directors of CorNova to grant options to purchaseup to 1,000,000 shares of CorNova’s common stock to employees and consultants.

CardioTechhas a 30% ownership interest in the common stock of  CorNova and, accordingly, CardioTech has usedthe equity method of accounting in accordance with APB Opinion No. 18, “TheEquity Method of Accounting for Investments in Common Stock”, and recorded 30%of the net loss of CorNova in its consolidated financial statements for thefiscal years ended March 31, 2007, 2006 and 2005.  During thefiscal year ended March 31, 2007, the Company recorded equity in the net lossof CorNova of $279,000, and equity in comprehensive income of CorNova of$40,000 (related to unrealized holding gains on securities classified asavailable-for-sale). During the fiscal year ended March 31, 2006,the Company recorded equity in the net loss of CorNova of $400,000, and equityin comprehensive income of CorNova of $135,000 (related to unrealized holdinggains on securities classified as available-for-sale).  During thefiscal year ended March 31, 2005, the Company recorded equity in the net lossof CorNova of $113,000, and equity in comprehensive loss of CorNova of $182,000(related to unrealized holding losses on securities classified asavailable-for-sale).  The Company has no additional obligation tocontribute assets or additional common stock nor to assume any liabilities orto fund any losses that CorNova may incur.

AtMarch 31, 2007, CorNova had total assets of $1,327,000, of which $504,000 wascash and short-term investments, liabilities totaling $386,000 and stockholders’equity of $940,000 of which $5,471,000 is a retained earnings deficit and$111,000 is comprehensive loss related to the decline in market value of thecommon stock of CardioTech and Implant Sciences held by CorNova and which wastransferred to CorNova in the transactions discussed above.

AtMarch 31, 2006, CorNova had total assets of $2,411,000, of which $771,000 wascash and short-term investments, liabilities totaling $280,000 and stockholders’equity of $2,132,000 of which $1,716,000 is a retained earnings deficit and$475,000 is comprehensive loss related to the decline in market value of thecommon stock of 

F-20

----

CardioTechand Implant Sciences held by CorNova and which was transferred to CorNova inthe transactions discussed above.

**O.**    TerminatedAcquisition of CarTika Medical, Inc.

On November 19, 2004, theCompany entered into a definitive agreement (the “Asset Purchase Agreement”) toacquire substantially all of the assets and assume certain liabilities ofCarTika Medical, Inc., a privately owned medical device contract manufacturerheadquartered in Plymouth, Minnesota (“CarTika”).  The transaction closing was subject to avariety of closing conditions, including the successful filing of aregistration statement covering the shares. Because of the protracted time in obtaining regulatory clearance for theacquisition, on June 14, 2005, CarTika terminated the proposedacquisition.  The Company incurredCarTika related acquisition costs totaling $333,000, which have been charged toexpense at March 31, 2005.  A net $75,000recovery related to transaction costs incurred and paid in connection with theproposed acquisition of CarTika Medical, Inc. is included in other income in fiscal2006.

**P.**    CondensedConsolidated Quarterly Financial Data (unaudited)

Thefollowing consolidated interim financial information is unaudited.  Such information reflects all adjustments,consisting solely of normal recurring adjustments, which are in the opinion ofmanagement necessary for a fair presentation of the quarterly financial data.
|                                                                        | ** ** | **Year Ended March 31, 2007** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share data)**     | ** ** | **Qtr. 1**                                   | ** ** | **Qtr. 2** | ** ** | **Qtr. 3** | ** ** | **Qtr. 4** | ** ** |
| Total revenues                                                         |       | $                                                 | 4,970      |   | $ | 5,282 |   | $ | 5,414 |   | $ | 5,485 |   |
| Gross margin (1)                                                       |       | 888                                               |       | 1,542 |   | 1,367 |   | 1,377 |   |
| Net loss                                                               |       | (1,210                                            | )          | (346 | ) | (826 | ) | (580 | ) |
| Net loss per  common share, basic and diluted                          |       | $                                                 | (0.06      | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.03 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 19,813                                            |       | 19,832 |   | 19,832 |   | 19,957 |   |

 
|                                                                        | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                             | ** ** | **Year Ended March 31, 2006** | ** ** |
| **(in thousands, except per share data)**                              | ** ** | **Qtr. 1**                                        | ** ** | **Qtr. 2** | ** ** | **Qtr. 3** | ** ** | **Qtr. 4** | ** ** |
| Total revenues                                                         |       | $                                                 | 5,640      |       | $          | 6,034      |       | $          | 5,469      |   | $ | 5,238 |   |
| Gross margin (1)                                                       |       | 1,123                                             |       | 1,579      |       | 961        |       | 234        |       |
| Net loss (2)                                                           |       | (567                                              | )          | (285       | )          | (958       | )          | (3,259     | )          |
| Net loss per  common share, basic and diluted (2)                      |       | $                                                 | (0.03      | )          | $          | (0.01      | )          | $          | (0.05      | ) | $ | (0.17 | ) |
| Shares used in  computing net loss per common share, basic and diluted |       | 19,258                                            |       | 19,350     |       | 19,499     |       | 19,699     |       |

 

----

(1)  An allocation of rent and insurance costshas been reclassified from selling, general and administrative expense to costof sales for the years ended March 31, 2006 and 2005 to conform to the currentyear presentation.

(2)  During the quarter ended March 31,2006, the Company tested its intangible assets for impairment and based on theresults of the first step of the goodwill impairment test, the Companydetermined that the fair value of goodwill of its cardiopulmonary products andcontract manufacturing operations was less than the respective carrying amountsand, therefore, goodwill impairment existed as of March 31, 2006.  As a result, the second step of the goodwillimpairment test was completed and the Company recorded a charge of $598,000 forthe impairment of goodwill related to contract manufacturing operations,primarily due to the cessation of a major customer.  In addition, there was a charge of $554,000for the impairment of goodwill for its cardiopulmonary products operations dueto continued reduced demand for these products. The Company’s remaining goodwill is related to the biomaterialsoperations.  In the fourth quarter of thefiscal year ended March 31, 2007, we completed our annual review of goodwilland other intangible assets.  As a resultof this review, we determined the fair value of the reporting unit exceeded thecarrying amount and, therefore, no goodwill impairment existed as of March 31,2007.

F-21

----

**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, as amended, the registrant has duly causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
| Dated: July 26, 2007 | ** ** | **CardioTech International, Inc.** |
|---------------------------|------------|-----------------------------------------|
|                      | ** ** | ** **                              |
|                      | ** ** | ** **                              |
|                      |       | By:                                     | /s/ MICHAEL F. ADAMS |
| * *                  |       | * *                                |   | Michael F. Adams |
| * *                  |       | * *                                |   | *Chief  Executive Officer and President* |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.
| Dated: July 26, 2007  |                                                                                                                          | /s/ MICHAEL F. ADAMS |   |
|----------------------------|-------------------------------------------------------------------------------------------------------------------------------|----------------------|--------|
|                       | Michael F. Adams

Chief Executive Officer  and President

(Principal Executive  Officer)                                      |                 |
|                       |                                                                                                                          |                 |   |
| Dated: July 26,  2007 |                                                                                                                          | /s/ ERIC G. WALTERS  |   |
|                       | Eric G. Walters

Vice President and Chief Financial  Officer

(Principal Financial Officer and  Principal Accounting Officer) |                 |

 

----