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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-KSB

|(Mark One)                                                    |                                                                                     
|------------------------------------------------------------- | ------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the fiscal year ended March 31, 2004                     
|o                                                             | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
|For the transition period
from                             to

Commission File No. 0-28034

CardioTech International, Inc.(Name of small business issuer in its charter)

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

Issuer's telephone number(978) 657-0075

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

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

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

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

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. o

State issuer's revenues for its most recent fiscal year. $21,799,000

As
of June 10, 2004, 17,672,384 shares of the registrant's Common Stock were outstanding, and the aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant (without admitting that such person whose shares are not included in such calculation is an affiliate) was approximately $77,405,000 based on the last sale
price as reported by the American Stock Exchange on such date.

Transitional
Small Business Disclosure Format (check
one): Yes o    No ý



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Cardiotech International, Inc

FORM 10-KSB
FOR THE YEAR ENDED MARCH 31, 2004

INDEX

PART I



|Item 1.  |  | Description of Business                                                                                          |  | 1 
|-------- |  | ---------------------------------------------------------------------------------------------------------------- |  | --
|Item 2.  |  | Description of Property                                                                                          |  | 17
|Item 3:  |  | Legal Proceedings                                                                                                |  | 17
|PART II  |  |                                                                                                                 
|Item 5.  |  | Market Information for Common Equity and Related Stockholder Matters                                             |  | 18
|Item 6.  |  | Management's Discussion and Analysis or Plan of Operation                                                        |  | 18
|Item 7.  |  | Financial Statements                                                                                             |  | 24
|Item 8.  |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                             |  | 24
|Item 8a. |  | Controls and Procedures                                                                                          |  | 24
|PART III |  |                                                                                                                 
|Item 9.  |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act. |  | 25
|Item 10. |  | Executive Compensation                                                                                           |  | 28
|Item 11. |  | Security Ownership of Certain Beneficial Owners and Management                                                   |  | 30
|Item 12. |  | Certain Relationships and Related Transactions                                                                   |  | 31
|PART IV  |  |                                                                                                                 
|Item 13. |  | Exhibits, Financial Statement Schedules, and Reports on Form 10-KSB                                              |  | 32
|Item 14. |  | Principal Accounting Fees and Services                                                                           |  | 33

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PART I

Item 1. Description of Business

Forward Looking Statements

The Annual Report on Form 10-KSB contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of important factors.
For a discussion of important factors that could affect the Company's results, please refer to "Risk Factors" below.

General

CardioTech International, Inc. ("CardioTech" or the "Company") was founded in 1993 as a subsidiary of PolyMedica Corporation ("PMI"). In June 1996,
PMI distributed all of the shares of CardioTech's common stock, par value $.01 per share, that PMI owned, to PMI stockholders of record as of June 3, 1996. The Company is headquartered in
Wilmington, Massachusetts where its biomaterial division is located; operates contract research and development services and outsourced manufacturing from its CDT facility in Plymouth, Minnesota; and
manufactures and sells products used in open heart surgery, vascular access and orthopedic surgery from its Gish facility in Rancho Santa Margarita, California.

The
Company is using its proprietary manufacturing technology to develop and manufacture small bore vascular grafts, or synthetic blood vessels, made of ChronoFlex, a family of
polyurethanes that has been demonstrated to be biocompatible and non-toxic. Vascular grafts are used to replace, bypass or provide a new lining or arterial wall for occluded, damaged,
dilated or severely diseased arteries. The Company developed a vascular access graft tradenamed VascuLink Vascular Access Graft and was developing a peripheral graft tradenamed MyoLink Peripheral
Graft. The Company sold the VascuLink and MyoLink products to Nervation Ltd in connection with the disposition of the Company's UK subsidiary, CardioTech International, Ltd
("CTL") in November 2000. The Company is currently developing a layered microporous coronary artery bypass graft tradenamed CardioPass, that utilizes similar material used in the
grafts produced by CTL.

On
May 4, 2001, the Company completed the acquisition of all the shares of CMED Catheter and Disposables Technology, Inc., a Minnesota corporation ("CDT"), from Colorado
Medtech, Inc., a Colorado corporation ("Medtech") pursuant to an Acquisition Agreement dated as of April 30, 2001, by and among CardioTech, CDT and Medtech.

CDT
is an original equipment manufacturer; supplier of specialized disposable medical devices to medical device companies from concept to finished packaged, sterile product; and uses its
experience in the design, development, prototyping and manufacturing to provide turnkey contract services. Some devices designed, developed and manufactured for customers by CDT include sensing,
balloon, and drug delivery catheters; disposable endoscopes; and in-vitro diagnostic and surgical disposables.

Additionally,
through its Biomaterials division, the Company develops, manufactures and markets polyurethane-based biomaterials for use in both acute and chronically implanted devices
such as stents, artificial hearts, and vascular ports. These premium biomaterials are sold under the tradenames: ChronoFlex, ChronoThane, HydroThane, ChronoFilm, HydroMed and Hydroslip.

CardioTech
owns a number of patents relating to its vascular graft manufacturing technology. In addition, PMI has granted to CardioTech an exclusive, perpetual, worldwide,
royalty-free license for the use of one polyurethane patent and related technology in the field consisting of the development, manufacture and sale of implantable medical devices and
biodurable polymer material to third parties for the use in medical applications (the "Implantable Device and Materials Field"). PMI also owns,

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jointly
with Thermedics, Inc., an unrelated company that manufactures medical grade polyurethane, the ChronoFlex polyurethane patents relating to the ChronoFlex technology ("Joint Technology").
PMI has granted to CardioTech a non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents for use in the Implantable Devices and Materials Field.

ChronoFilm
is a registered trademark of PMI. ChronoFlex is a registered trademark of CardioTech. ChronoThane, ChronoPrene, HydroThane, PolyBlend and PolyWeld are tradenames of
CardioTech. DuraGraft and CardioPass are trademarks of CardioTech.

On
April 7, 2003, the Company merged with Gish Biomedical, Inc., a California corporation ("Gish"), with its corporate headquarters in Rancho Santa Margarita, California.
Each outstanding share of Gish common stock was converted into 1.3422 shares of CardioTech common stock. CardioTech issued 4,901,817 shares to holders of Gish stock, which equaled approximately 35% of
the total shares outstanding. Gish specializes in the manufacture and sale of products used in open-heart surgery, vascular access and orthopedic surgery. Gish is registered as a medical
device manufacturer with the FDA, the European Union and state agencies, such as the California Department of Health Services.

In
July 1999, Dermaphylyx International, Inc. ("Dermaphylyx"), was formed by certain affiliates of CardioTech to develop advanced wound healing products. Dermaphylyx was
merged into CardioTech International, Inc. effective March 12, 2004 and is now a wholly owned subsidiary of CardioTech. Due to CardioTech's controlling financial interest, Dermaphylyx has been
consolidated in the financial statements of CardioTech as of December 31, 2003. Upon the merger, the current shareholders of Dermaphylyx received 3,827 shares of common stock of CardioTech
valued at the net book value of Dermaphylyx International, Inc. as of December 31, 2003, which was approximately $21,000.

Dermaphylyx,
in the fourth quarter of fiscal 2004, started marketing its wound dressing products and currently has two moist wound dressings available for sale, AlgiMed and HydroMed and
Blist-Rx, a blister prevention dressing. AlgiMed wound dressings are designed for exudating and bleeding wounds and HydroMed is an absorbent dressing designed for low exudating wounds.
Both dressings have been granted Medicare billing codes. Blist-Rx is a breathable polyurethane foam dressing intended to be used by sports enthusiasts to prevent blisters.

The
Company, in March 2004, joined with Implant Sciences, Inc. (IMX on American Stock Exchange) to participate in the funding of CorNova, Inc. CorNova, Inc.
was formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences, Inc. and the Company. The Company currently has a thirty
per cent equity interest in CorNova. CorNova intends to complete its initial funding within the next twelve months by obtaining private investments totaling between $1,000,000 and $3,000,000, at which
time the Company will be required to contribute shares of its common stock with a market value at the time of contribution of twenty-five per cent of the amount raised. The stent will
utilize a design similar to the CardioPass and the Company's Chronoflex material. CorNova is in its initial stage of product development. The Company accounts for its investment in CorNova using the
equity method of accounting.

Medical Background

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

Vascular
grafts are used to replace or bypass occluded, damaged, dilated or severely diseased arteries and are sometimes used to provide access to the bloodstream for patients undergoing

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hemodialysis
treatments. Existing small bore graft technologies suffer from a variety of disadvantages in the treatment of certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term interface with the human body.

Product in Pre-clinical Development

CardioPass Coronary Artery Bypass Graft

Coronary artery bypass graft ("CABG") surgery is performed to treat the impairment of blood flow to portions of the heart. CABG surgery involves the addition of
one or more new vessels to the heart to re-route blood around blocked coronary arteries.

Autogenous
grafts (using the patient's own saphenous vein or mammary artery) have been successfully used in CABG procedures 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 year after surgery) with no risk of tissue rejection. However, the surgical harvesting of vessels for autogenous grafts
involves significant trauma and expense. In addition, not all patients requiring CABG surgery have sufficient native vessels as a result of previous bypass surgeries, or their vessels may be of
inferior quality due to trauma or disease. Cryo-preserved saphenous veins are available, but these veins often deteriorate due to attack by the body's immune system.

CardioTech
is developing its grafts using specialized ChronoFlex polyurethane materials that it believes will provide significantly improved performance in the treatment of arterial
disorders. The grafts have three layers, similar to natural arteries and are designed to replicate the physical characteristics of human blood vessels.

The
Company is developing the CardioPass Coronary Artery Bypass Graft to be a synthetic graft of 4mm in diameter specifically designed for use in CABG surgery. If successfully developed,
the Company believes that the CardioPass Graft may be used initially to provide an alternative to patients with insufficient or inadequate native vessels for use in bypass surgery as a result of
repeat procedures, trauma, disease or other factors. The Company believes, however, that the CardioPass Graft may ultimately be used as a substitute for native saphenous veins, thus avoiding the
trauma and expense associated with the surgical harvesting of the vein.

The
Company believes that approximately 650,000 CABG procedures were performed worldwide during fiscal 2004, of which nearly 300,000 were performed in the United States. The Company
believes that approximately 20% of these CABG procedures were performed on patients who had previously undergone bypass surgery, and that the number of repeat procedures will continue to increase as a
percentage of procedures performed. Currently, approximately 70% of CABG procedures are performed utilizing the saphenous vein.

The
CardioPass Coronary Artery Bypass Graft is in limited clinical trials, which are currently being conducted in Brazil. The Company announced that three adult human implants have
occurred and, as of May 31, 2004, all three patients and grafts are performing as expected.

The
Company estimates that approximately 100,000 patients are diagnosed by their physicians as having native vessels that are inadequate for use in bypass surgery. If the CardioPass
Graft is successfully developed, the Company believes that the graft may initially be used for these patients. The Company also believes that if long-term clinical results are acceptable
to clinicians (generally, greater than 50% patency five years after implant), the graft may ultimately be used as a direct substitute for autogenous saphenous veins.

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Gish Biomedical Products

Custom Cardiovascular Tubing Systems

During open-heart surgery, the patient's blood is diverted from the heart through sterile plastic tubing and various other devices to an oxygenator
device, which oxygenates the blood before it is returned to the patient. Each hospital performing open-heart surgery specifies the components to be included in its custom tubing sets,
based on the particular needs of its surgical team. The complexity of the sets varies from simple tubing systems to all-inclusive operating packs. The packs usually include blood filters,
gas filters, reservoirs used to collect blood lost during surgery and other components. Gish produces custom tubing sets using clear MediflexTM tubing. Such components are assembled in the Gish clean
room, sterilized and then shipped either to the hospital or to one of Gish's specialty distributors, which service such hospitals.

Custom
tubing systems are sold separately and combined with an oxygenator. Revenue from sales of custom tubing systems sold separately equaled 13% of total Company revenue for fiscal
2004.

Arterial Filters

The arterial filter is the last device the blood passes through in the cardiovascular bypass circuit as it is being returned to the patient. The purpose of the
filter is to remove gaseous micro emboli and debris, which are generated by the oxygenation system, from the patient's blood.

Gish
introduced its first arterial filters in 1985. Gish's first design contained a safety bypass loop incorporated into the filter housing. Gish received FDA approval to market an
improved design, which became available for sale during the second quarter of fiscal 1994.

Cardiotomy Reservoirs

Cardiac suction is a technique employed in open-heart surgery to recover shed blood in the chest cavity and return it to the patient. The use of this
technique reduces the requirements for whole blood replacement from donor sources, thereby reducing the risk of blood compatibility problems and blood-borne viral diseases such as AIDS and hepatitis.

Gish's
cardiotomy reservoir systems consist of a polycarbonate reservoir, defoaming and filtration 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 circulatory system.

In
addition to the cardiotomy reservoirs' use in the operating room, Gish has developed several systems that allow the cardiotomy reservoir to be used as a pleural drainage or
autotransfusion system during recovery.

Vision(TM) Oxygenator

An oxygenator enables gas exchange of oxygen and carbon dioxide and also regulates the temperature of the patient's blood.

As
a life sustaining device used during open-heart surgery, the oxygenator is a key component of the bypass circuit. Vision is assembled in Gish's clean room using state of
the art equipment and biocompatible materials, and then each unit is leak tested before shipment.

Vision's
gas transfer performance is excellent, dependable and capable of maintaining the oxygen demands of patients of all sizes for periods of up to six hours.

Vision's
unique air separation channel utilizes an arterial outlet pressure gradient and the natural buoyancy of air to minimize the passage of gaseous emboli towards the patient.
Unwanted emboli are

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safely
purged for safe venting back to the reservoir. Through studies at an independent testing facility, Vision's air handling abilities were proven superior to competitive devices.

Vision
also eliminates common difficulties associated with other oxygenators. The blood ports are oriented on one side, gas and water on the other to reduce contamination. Different
sized gas inlet and outlet ports resolve any gas line confusion. Angled water ports allow Vision's heat exchanger to drain, minimizing the creation of water puddles on the floor. During long pump
runs, a fluid dam and evacuation port divert condensation away from the gas scavenge port. Finally, a protective rib below the blood inlet port prevents any contact between the port and the floor.

Gish's
Vision oxygenator is sold separately, or with a reservoir, and also with a reservoir and custom tubing system. Gish's Vision oxygenator was sold in selected accounts both
domestically and internationally for the first half of fiscal 1998. Gish made its full market release of this product for sale in January 1998. Gish believes that the Vision oxygenator's
superior air handling capabilities provides Gish with a competitive advantage in the oxygenator market place. Revenue generated from sales that included an oxygenator equaled 31% of total Company
revenue for fiscal 2004.

Venous Reservoirs

A venous reservoir is a device used to pool, filter and defoam blood prior to its introduction to the oxygenator. Gish offers a variety of venous reservoirs,
including some which incorporate the capacity for autologous transfusion post surgically. Gish also has several products that incorporate the functions of cardiotomy, venous reservoir, post surgical
blood collection and blood reinfusion devices. This functional bundling is usually cost effective for the hospital.

CAPVRF44

Gish's CAPVRF44 hardshell venous reservoir combines a 360(0) rotational, top-entry 1/2" inlet for unrestricted venous drainage and a
high performance cardiotomy compartment with six sucker inlet ports to handle all of the blood coming from the surgical field. Gish has incorporated the advantages of the depth filter in its
cardiotomies into the CAPVRF44 for reduced hold-up volumes, making more blood available to the patient. With an operating capacity of 4400 ml, the CAPVRF44 also has the capacity to handle
high blood volume procedures such as valve replacements and second surgeries.

The
CAPVRF44 is a perioperative device, capable of operating in both the Operating Room and Recovery Room. Following surgery, through a simple conversion process, the CAPVRF44 collects
blood shed from the chest cavity and removes unwanted debris before the filtered blood is reinfused back into the patient. Blood recovery and autotransfusion through the CAPVRF44's closed system
limits hospital staff exposure to potential blood infections. Recovered blood may be reinfused continuously, intermittently, or not at all, in support of all patients' religious beliefs, including
Jehovah's Witnesses. The CAPVRF44's dual role means fewer homologous blood products are needed, further reducing surgical costs and improving patient safety.

Cardioplegia Delivery Systems

Cardioplegia encompasses several techniques employed in open-heart surgery to preserve, protect and manage the heart tissue. The technique typically
involves the use of a chilled solution that is infused into the heart through the coronary arteries to cool the heart and reduce heart activity and metabolism. However, there are many different
techniques utilized, depending on the physician and patient needs. The use of these techniques significantly reduces damage to heart tissue during surgery, enhances restoration of heart function and
helps return the patient to a normal heartbeat when the surgical procedure is complete.

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Gish
has developed a complete line of cardioplegia delivery systems, including a new cardioplegia device. On April 10, 2002, the FDA granted Gish clearance to sell the device in
the United States of America. Additionally, the new cardioplegia device is CE marked, allowing sale in Europe. Multiple systems are required for this technique due to varying physician preferences.
Gish's original offerings for this procedure were a series of reservoirs with a recirculation valve (CPS) and a series of cooling coils (CCS series). Gish has since developed a line of cardioplegia
systems and heat exchangers designed to utilize a blood and potassium mixture and allow the surgeon to quickly change the temperature delivered to the patient.

Oxygen Saturation Monitor

In February 1992, Gish introduced a digital blood saturation monitor for open-heart surgery, the StatSatTM. The StatSat is an electronic device
that measures the oxygen content of the patient's blood during surgery. These readings are taken continuously and the StatSatTM plots the course of the blood oxygen saturation during the surgery.
Although the StatSat is reusable, it uses a disposable sensor for each surgery.

Critical Care Central Venous Access Catheters and Ports

Gish's HemedTM central venous access catheter systems have applications in hyper-alimentation, chemotherapy, and long-term vascular access. These
long-term indwelling catheters are surgically implanted to provide direct access to the central venous system for high protein intravenous solutions needed by patients having nonfunctional
digestive systems and for rapid dilution and dispersion of highly concentrated drug administration in chemotherapy for cancer.

The
product line includes sterile single, dual and triple lumen catheters and accessories sold in kits. The triple lumen catheter, which permit three substances to be administered
through the same catheter, was introduced during fiscal 1997. In 1993, Gish introduced an enhancement to its Hemed catheter line, the CathCapTM. The CathCap reduces the risk of infection at the
injection site by continually bathing the injection cap in an antimicrobial solution between injections.

Gish
has enhanced the Hemed line with the VasPort(R) Implantable Ports and the VasTack(R) Needle Support System. The VasPort consists of a silicone catheter with an implantable injection
port, allowing vascular access through small needle sticks with the skin acting as a natural barrier to infection. This access method eliminates the need for a cumbersome external catheter. Gish
introduced a detachable port/catheter system in fiscal 1994. Gish also introduced a dual VasPort in July 1996 to meet the needs of patients requiring multiple infusions. The VasTack consists of
a specially designed needle and positioning system for use with the VasPort. The needle extends the life of the implanted injection port and the positioning system gives the nursing staff a sure, safe
method for accessing the VasPort.

The
Hemed, VasPort and VasTack are alternative vascular access products used for extended long-term infusion management and are designed to complement the Hemed catheter
lines. The VasPort is a device implanted entirely under the skin and consists of a small reservoir with a diaphragm and catheter. The VasPort is accessed by the VasTack, a small patented
non-coring needle system, which penetrates the skin and the diaphragm of the VasPort reservoir. Drugs are readily infused through the VasTack, into the reservoir and then into the
catheter. When the infusion is complete the VasTack is removed and the skin acts as a natural barrier against infection. Single and double reservoir VasPorts are available.

Orthofuser

The patented OrthofuserTM is designed for post-operative use in orthopedic surgeries such as hip and knee replacements and provides for the safe
recovery and transfusion of the patient's own blood.

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This
product is well suited for orthopedic procedures, as it is portable and incorporates its own internal vacuum source. Salvaging and reusing as little as 500 cc's of blood post surgically may be
enough to avoid the use of donor blood in these types of surgeries.

FDA Clearance for Heparin Coated Products

In Fiscal 2004, Gish received FDA clearance for its heparin coating to be used in conjunction with Gish's line of heart-lung bypass products. The
GBS (Gish Biocompatible Surfaces) Coating is a heparin based, covalently bound biocompatible coating that will be used to cover the surfaces of Gish disposable products. Heparin coatings
are known to inhibit blood coagulation, decrease the risk of Systemic Inflammatory Response Syndrome, reduce complement activation and platelet adhesion, reduce blood loss and hemolysis, provide
stable antithrombotic activity and reduce thrombus formatiom, as well as decrease leucocyte (white blood cells) activation.

Biomaterials

CardioTech also develops, manufactures and sells a range of polymer-based materials customized for use in the manufacture of certain medical devices to other
medical device manufacturers. CardioTech sells these custom polymers under the tradenames ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, PolyBlend and PolyWeld. The Company also
provides development services relating to biomaterials to medical device customers.

CardioTech
also manufactures and sells its proprietary HydroThane biomaterials to medical device manufacturers that are evaluating HydroThane for use in their products. HydroThane is a
thermoplastic, water-absorbing, polyurethane elastomer, that possesses properties that CardioTech believes make it well suited for the complex requirements of a variety of catheters. In addition to
its physical properties, CardioTech believes HydroThane exhibits an inherent degree of bacterial resistance, clot resistance and biocompatibility. When hydrated, HydroThane has elastic properties
similar to living tissue.

In
July 1999, CardioTech acquired the assets of Tyndale-Plains-Hunter, Ltd. (TPH), a manufacturer of specialty hydrophilic polyurethanes. These hydrophilic polyurethanes
are primarily sold to customers as part of an exclusive arrangement. Certain customers are supplied tailored, patented hydrophilic polyurethanes in exchange for multi-year, royalty-bearing
exclusive supply contracts. The Company owns 29 patents in the field of hydrophilic polyurethanes.

Dermaphylyx

In October 2002, Dermaphylyx developed an advanced water absorbent wound and burn dressing. The dressing is trade named HydroMed, a name meaning
"breathable artificial skin." The wound dressing received FDA clearance for marketing on May 31, 2002 as a Class I Exempt device. Dermaphylyx
currently has two moist wound dressings available for sale, AlgiMed and HydroMed and Blist-Rx, a blister prevention dressing. AlgiMed wound dressings are designed for exudating and
bleeding wounds and HydroMed is an absorbent dressing designed for low exudating wounds. Both dressings have been granted Medicare billing codes. Blist-Rx is a breathable polyurethane foam
dressing intended to be used by sports enthusiasts to prevent blisters. The wound dressings will be marketed by CardioTech.

Company
revenues were $21,799,000 and $3,394,000 for the years ended March 31, 2004 and 2003, respectively. For the year ended March 31, 2004, 81% of revenues were
generated from Gish, 5% of revenues were generated from the Biomaterials division, and 14% of revenues were generated from CDT. For the year ended March 31, 2003, 31% of revenues were generated
from the Biomaterials division and 69% of revenues were generated at CDT.

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Manufacturing

CardioTech currently manufactures limited quantities of ChronoFlex and HydroThane for sale to medical device manufacturers. To date, CardioTech's manufacturing
activities with respect to the specialized ChronoFlex materials used in vascular grafts have consisted primarily of manufacturing small quantities of such products for use in clinical trials. The
Company has an agreement with CTL, a subsidiary of Nervation Ltd., pursuant to which the Company is required to purchase from and CTL has agreed to sell to the Company the vascular grafts it
needs, subject to the Company's ability to obtain another supplier or to obtain "technology transfer." In May 2003, all of the assets CTL were sold to LeMaitre Vascular Inc. By
requesting "technology transfer," CardioTech retained the right to undertake, through its subsidiary, Catheter and Disposables Technology, Inc. ("CDT"), large scale commercial production of
vascular grafts, when, and if it elects to do so. This would entail, among other things, the purchase of specialized extrusion equipment capable of producing the grafts. To achieve profitability,
vascular graft products must be manufactured in larger commercial quantities in compliance with regulatory requirements and at acceptable costs. Production in larger commercial quantities will require
CardioTech to expand its manufacturing capabilities significantly and to hire and train additional personnel.

The
development and manufacture of CardioTech's products are subject to good laboratory practice ("GLP") and good manufacturing practice ("GMP") requirements prescribed by the Food and
Drug Administration ("FDA") and other standards prescribed by the appropriate regulatory agency in the country of use. There can be no assurance that CardioTech will be able to obtain or manufacture
products in a timely fashion at acceptable quality and prices, that it or any suppliers can comply with GLP or GMP, as applicable, or that it or such suppliers will be able to manufacture an adequate
supply of products. Both Gish's and CDT's facilities are EN ISO 13485 certified and include a "Class 10,000" clean room.

Competition

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

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

The
market for medical devices of the type sold by the Company is extremely competitive. The Company believes that product differentiation and performance, client service, reliability,
cost and ease of use are important competitive considerations in the markets in which it competes. Most of the Company's competitors are larger and possess greater financial and other resources than
the Company. The Company has approximately five competitors within each of the hospital markets in which it competes. No one competitor is a dominant force in this market. The Company believes it has
achieved its position in the marketplace for its present principal products by means of superior design, quality, and service, and the Company intends to continue to utilize these means of competing.

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Research and Development

CardioTech's research and development efforts are primarily focused on developing its synthetic vascular graft technologies. CardioTech's development decisions
are based on (1) development costs, (2) product need, (3) third-party interest and funding availability, and (4) regulatory considerations. Research and development
expenditures, including costs of research grants, for the years ended March 31, 2004 and 2003 were $1,065,000 and $374,000, respectively, and consisted primarily of salaries and related costs.
Research and development costs will increase significantly and should the Company enter into European Union or United States of America clinical trials with its CardioPass graft, or other products.

In
April 2002, the Company concluded a technology transfer and license agreement with Credent Vascular Technologies, Ltd., of Wrexham, U.K. Credent"). Total consideration
paid by Credent to CardioTech for the purchase of the transferred rights to ChronoFlex RC was $500,000. Credent paid CardioTech $400,000 in fiscal year ended March 31, 2004 and paid $100,000 in
fiscal year 2003.

Under
terms of the agreement, CardioTech irrevocably granted an exclusive, worldwide license of its intellectual property rights relating to ChronoFlex RC, enabling Credent to
exclusively synthesize ChronoFlex RC biodurable polycarbonate-urethane. Credent will use ChronoFlex RC in the manufacture of its vascular access and peripheral vascular grafts and potentially in
future development products. Credent has licensed back to CardioTech the right to use ChronoFlex RC for the manufacture and marketing of coronary artery bypass grafts.

Government Regulation

CardioTech's research and development activities are also subject to regulation for safety, efficacy and quality by numerous governmental authorities in the
United States. In the United States, the development, manufacturing and marketing of synthetic vascular grafts are subject to regulation for safety and efficacy by the FDA in accordance with the Food,
Drug and Cosmetic Act. Synthetic vascular grafts are subject to rigorous FDA regulation, including pre-clinical and clinical testing. The process of completing clinical trials and
obtaining FDA approvals for a medical device is likely to take a number of years, requires the expenditure of substantial resources and is often subject to unanticipated delays. There can be no
assurance that any product will receive such approval on a timely basis, if at all.

There
can be no assurance that the FDA will approve any of CardioTech's products currently under research for marketing, or if they are approved, that they will be approved on a timely
basis. Furthermore, CardioTech or the FDA may suspend clinical trials at any time upon a determination that the subjects or patients are being exposed to an unacceptable adverse health risk ascribable
to CardioTech's products. If clinical studies are suspended, CardioTech may be unable to continue the development of the investigational products affected.

Gish's
products are also subject to the Federal Food, Drug and Cosmetic Act (the "Act") and regulations issued there under. The Act is administered by the FDA, which has authority to
regulate the marketing, manufacturing, labeling, packaging and distribution of products subject to the Act. In addition, there are requirements under other federal laws and under state, local and
foreign statutes, which apply to the manufacturing and marketing of Gish products. Gish operates a quality system certified to EN ISO 13485, a standard for quality recognized worldwide. In addition,
Gish has been found in compliance with the European Economic Community ("EEC") Medical Device Directive, which equivocates to portions of the United States FDA Current Good Manufacturing Practices
("CGMP") Quality System Regulations. This allows Gish to export and distribute its products with free movement within the European Community.

9

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Gish
is registered as a medical device manufacturer with the FDA and state agencies, such as the California Department of Health Services ("CDHS"). Gish is inspected periodically by both
the FDA and the CDHS for compliance with the FDA's GMP and other requirements including the medical device reporting regulation and various requirements for labeling and promotion. The FDA Quality
System Regulations ("QSR"), which became effective June 1, 1997, no longer limit control to manufacturing and post market controls, but specify requirements during design (Design Control),
manufacturing, and servicing as well. Much of the new QSR is based on the ISO9001 Quality Standard, and is, as such in harmony with the thrust towards world harmonization of medical device
requirements. The FDA's GMP regulation requires, among other things, that (i) the manufacturing process be regulated and controlled by the use of written procedures, and (ii) the ability
to produce devices that meet the manufacturer's specifications be validated by extensive and detailed testing of every aspect of the process. The medical device reporting regulation requires that the
device manufacturer provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its marketed devices, as well as product malfunctions that would likely
cause or contribute to a death or serious injury if the malfunction were to recur. Changes in existing requirements or interpretations (on which regulations heavily depend) or adoption of new
requirements or policies could adversely affect the ability of Gish to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on
Gish's business.

Gish
believes all of its present products are in compliance in all material respects with all applicable performance standards as well as good manufacturing practices, record keeping and
reporting requirements in the production and distribution of such products. Most of Gish's products have been determined by the FDA to be devices substantially similar to devices marketed by others
prior to
May 28, 1976, the effective date of the Amendments, and marketing of them has been authorized pending the classification by the FDA of such products. Gish does not anticipate any significant
difficulty or material cost increases in complying with applicable performance standards if any such products were to be classified in Class II by the FDA. If the FDA were to classify use of
Gish's cardiovascular or catheter products as Class III products, pre-marketing clinical testing and evaluation would be required in order to obtain FDA approval for the sale of
such products.

Regulations
under the Act permit export of products which comply with the laws of the country to which they are exported. Gish relies upon its foreign distributors for the necessary
certifications and compliances in their countries, except in the EEC where the Medical Device Directive prescriptively defines requirements.

Marketing and Distribution

Internationally, Gish is represented by specialty medical distributors in over fifty countries around the world. Gish's international sales represented
approximately 15% of total Company sales in fiscal 2004. The Company's sales to foreign customers are primarily in Europe and Asia. All international transactions are conducted in U.S. dollars, thus
reducing the risk from currency fluctuations. The Company does not have any facilities, property or other assets, except sales representative supplies, located in any geographic area other than the
United States of America.

The
Company has not experienced, and does not expect to experience sales of the Company's products to be subject to seasonality in any material respect.

Components and Parts

Gish purchases components for its various products from vendors who sell such components generally to the medical device industry. Most components for the
Company's proprietary products are manufactured from tooling owned by the Company. Other components are manufactured by outside suppliers in accordance with the Company's specifications.

10

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Certain
components of Gish's custom tubing sets are purchased from competitors. Gish has not experienced difficulty in obtaining such components in the past and believes adequate sources
of supply for such items are available on reasonable terms.

Membrana
GmbH is a principal supplier of the Company and provides a polyester wrap thread for use in the Vision Oxygenator.

Patents and License Agreements

The Company has been issued or has patents pending on several of its products. There can be no assurance that any patents issued would afford the Company adequate
protection against competitors which sell similar inventions or devices. There also can be no assurance that the Company's patents will not be infringed upon or designed around by others. However, the
Company intends to vigorously enforce all patents it has been issued.

Customer Information

The Company performs ongoing credit evaluations and maintains allowances for potential credit losses. As of March 31, 2004, the Company believes it has no
significant concentrations of credit risk.

One
of Gish's sales representative organizations comprised 10% of the Company's net sales in fiscal 2004. The Company believes that the loss of this sales representative organization
would not have a material effect on its business.

Backlog

Almost all of Gish's products are repetitive purchase, single use, disposable products, which are shipped shortly after receipt of a customer's purchase order.
Therefore, Gish believes that the Company and its distributors generally maintain an adequate finished goods inventory to fulfill the customer's needs on demand. Accordingly, Gish believes that the
backlog of orders at any given point in time is not indicative of the Company's future level of sales.

CDT
had a backlog of $755,000 at March 31, 2004.

Contracts

The Company has no contracts with customers where cancellation or renegotiation would have a material impact on the Company's sales or profit margins.

Environmental Compliance

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

Employees

As of March 31, 2004, the Company has 37 full-time employees at its headquarters in Wilmington and at CDT. Of these full-time
employees, 10 are in contract research and development, 18 are in manufacturing and production, and 9 are in management, administrative, and marketing positions. None of these employees are covered by
a collective bargaining agreement, and management considers its relations with its employees to be good.

As
of March 31, 2004, Gish had 115 full-time employees, of whom 9 were engaged in sales and sales management, 92 were engaged in manufacturing and the remainder in
marketing, research and

11

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development,
administrative and executive positions. Gish believes that its relationship with its employees is good. None of Gish's employees are represented by a labor union.

RISK FACTORS

The following factors should be considered carefully in evaluating the Company and its business:

This
Report on Form 10-KSB contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially
affect results, including those set forth in this paragraph and below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue
to develop and market its products; the market may not accept the Company's existing and future products; the Company may be unable to retain existing key management personnel; and there may be other
material adverse changes in the Company's operations or business. Certain important factors affecting the forward-looking statements made herein 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 its competitors, and (iii) continued periods of net
losses, which could require the Company to find additional sources of financing to fund operations, implement its financial and business strategies, meet anticipated capital expenditures and fund
research and development costs. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations
and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn
affect the Company's financial position and results of operations. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak solely as
of the date of this Form 10-KSB. The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise.

Liquidity

We have reported net losses in the last two fiscal years and may continue to report net losses in the future. We cannot assure you that our revenue will be
maintained at the current level or increase in the future.

Through
March 31, 2004, the Company continued to generate revenues from the sale of biomaterials, royalties earned on biomaterials, the performance of outsourced research and
development or manufacture contracts, and sales of medical devices to healthcare providers.

The
Company's future growth may depend upon its ability to raise capital to support research and development activities and to market and sell its vascular graft technology, specifically
the coronary artery bypass graft. CardioTech may require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing of its products. CardioTech's capital requirements depend on numerous factors, including but not limited to, the
progress of its research and development programs; the progress of pre-clinical and clinical testing; the time and costs involved in obtaining regulatory approvals; the cost of filing,
prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in CardioTech's development of commercialization activities and
arrangements; and the purchase of additional facilities and capital equipment. However, future expenditures for product development, especially relating to outside testing and clinical trials, are
discretionary and, accordingly, can be adjusted based on the availability of cash.

12

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As
of March 31, 2004, CardioTech was conducting its operations with approximately $7,117,000 in cash and cash equivalents, of which $6,503,000 was generated during fiscal 2004
from the exercise of stock options and warrants. CardioTech believes its current cash position will be sufficient to fund its working capital and research and development activities for at least the
next twelve months. During the three months ended December 31, 2003 the Company paid $1,750,000 in cash to purchase its new Corporate Headquarters in Wilmington, MA. If necessary, the Company
will evaluate various options to mortgage the new building. Additionally, the Company had available $1,629,000 on its revolving line of credit at Gish. However, Gish's loan agreement requires lender
approval prior to the transfer or distribution of funds to an affiliate for other than normal business expense reimbursement.

Competition

The medical device industry in general, and the market for products for use in cardiovascular surgery in particular, is intensely competitive and characterized by
rapid innovation and technological advances. Product differentiation and performance, client service, reliability, cost and ease of use are important competitive considerations in the medical device
industry. The Company expects that the current high levels of competition and technological change in the medical device industry in general, and the cardiovascular surgery products industry in
particular, will continue to increase. Several companies offer devices, which compete with devices manufactured by Gish, including Jostra-Bentley, COBE Cardiovascular, a division of Sorin Biomedica,
Terumo, Medtronic, Inc. and Stryker Surgical. Most of the Company's competitors have longer operating histories and significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. In addition, the Company's competitors have greater name recognition than the Company and frequently offer discounts as a competitive tactic. There
can be no assurance that the Company's current competitors or potential future competitors will not succeed in developing or marketing technologies and products that are more effective or commercially
attractive than those that have been and are being developed by the Company or that would render the Company's technologies and products obsolete or noncompetitive, or that such companies will not
succeed in obtaining regulatory approval for, introducing or
commercializing any such products prior to the Company. Any of the above competitive developments could have a material adverse effect on the Company's business, financial condition and results of
operations.

Risk of Pricing Pressure

CardioTech is currently facing and may continue to face intense competition in the cardiovascular surgery products market. Additionally, CardioTech faces
aggressive cost-containment pressures from governmental agencies and third party payors. There can be no assurances that CardioTech will be able to maintain current prices in the face of
continuing pricing pressures. Over time, the average price for CardioTech's products may decline as the markets for these products become more competitive. Any material reduction in product prices
would negatively affect CardioTech's gross margin, necessitating a corresponding increase in unit sales to maintain net sales.

Dependence on International Sales

International net revenues accounted for approximately 15% of the Company's total net sales in fiscal 2004. International sales are subject to a number of
inherent risks, including the impact of possible recessionary environments in economies outside the U.S., unexpected changes in regulatory requirements and fluctuations in exchange rates of local
currencies in markets where the Company sells its products. While the Company denominates all of its international sales in U.S. dollars, a relative strengthening in the U.S. dollar would increase the
effective cost of the Company's products to international customers. The foregoing factors could reduce international sales of the Company's

13

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products
and could have a material adverse effect on the Company's business, financial condition and results of operations.

Risk of Market Withdrawal of Product Recall

Complex medical devices, such as the Company's products, can experience performance problems in the field that require review and possible corrective action by
the manufacturer. Similar to many other medical device manufacturers, the Company periodically receives reports from users of its products relating to performance difficulties they have encountered.
The Company expects that it will continue to receive customer reports regarding the performance and use of its products. Furthermore, there can be no assurance that component failures, manufacturing
errors or design defects that could result in an
unsafe condition or injury to the patient will not occur. If any such failures or defects were deemed serious, the Company could be required to withdraw or recall products, which could result in
significant costs to the Company. There can be no assurance that market withdrawals or product recalls will not occur in the future. Any future product problems could result in market withdrawals or
recalls of products, which could have a material adverse effect on the Company's business, financial condition or results of operations.

There
can be no assurance that the Company will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not
force the Company to incur significant costs. In addition, there can be no assurance any future recalls will not cause the Company to face increasing scrutiny from its customers, which could cause the
Company to lose market share or incur substantial costs in order to maintain existing market share.

Risks Associated with Extensive Government Regulation

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

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

Regulatory
clearances or approvals, if granted, may include significant limitations on the indicated uses for which the product may be marketed. In addition, to obtain such clearances or
approvals, the FDA and certain foreign regulatory authorities impose numerous other requirements with which medical device manufacturers must comply. FDA enforcement policy strictly prohibits the
marketing of cleared or approved medical devices for uncleared or unapproved uses. In addition product clearances or approvals could be withdrawn for failure to comply with regulatory standards or the
occurrence of

14

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unforeseen
problems following the initial marketing. The Company will be required to adhere to applicable FDA GMP regulations and similar regulations in other countries, which include testing,
control, and documentation requirements. Ongoing compliance with GMP and other applicable regulatory requirement, including marketing products for unapproved uses, could result in, among other things,
warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of clearances or approvals and criminal prosecution. Changes in existing regulations or adoption of new governmental regulations or policies
could prevent or delay regulatory approval of the Company's products.

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

Product Liability Risk; Limited Insurance Coverage

The manufacture and sale of medical products entail significant risk of product liability claims. The Company maintains insurance with respect to such claims, but
there can be no assurance that the Company's existing annual insurance coverage limits of $5 million per occurrence and $5 million in the aggregate will be adequate to protect the
Company from any liabilities it might incur in connection with the clinical trials or sales of its products. In addition, the Company may require increased product liability coverage if and when
products under development are successfully commercialized. Such insurance is expensive and in the future may not be available on acceptable terms, or at all. A successful product liability claim or
series of claims brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations.

Risks Relating to New Product Development

The Company's success is dependent in part on the design and development of new products in the medical device industry. The product development process is
time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the
FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or
successfully market potential new products could have a material adverse effect on the Company's business, financial condition and results of operations.

Dependence on Vendors

The Company has various "sole source" vendors who supply key components for the Company's products. While the Company believes alternate supply sources could be
developed, the Company could incur significant costs to obtain alternate components. The alternate components could also require regulatory approval, the denial or delay of which, could adversely
affect the Company's ability to provide products to its customers.

Dependence Upon Key Personnel

The Company is dependent upon a number of key management and technical personnel. The loss of the services of one or more key employees could have a material
adverse effect on the Company. The Company's success will also depend on its ability to attract and retain additional highly qualified

15

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management
and technical personnel. The Company faces intense competition for qualified personnel, many of whom are often subject to competing employment offers, and there can be no assurance that the
Company will be able to attract and retain such personnel.

Risks Associated with Healthcare Reform Proposals

Political, economical and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Potential reforms proposed over
the last several years have included
mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups and fundamental changes in the healthcare delivery system. In addition, some states in which the Company operates are also considering various healthcare reform proposals.
The Company anticipates that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues will
likely continue in the future. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such
reform proposals will be adopted, when they may be adopted or what impact they may have on the Company, and there can be no assurance that the adoption of reform proposals will not have a material
adverse effect on the Company's business, operating results or financial condition. In addition, the actual announcement of reform proposals and the investment community's reaction to such proposals,
as well as announcements by competitors and third-party payors of their strategies to respond to such initiatives, could produce volatility in the trading and market price of the Company's common
stock.

Risks Associated with Environmental Compliance

In the ordinary course of its manufacturing processes, the Company uses a variety of materials subject to use and disposal regulations. The waste created by the
use of these products is transported off-site on a regular basis by a state-registered waste hauler. Although the Company is not aware of any claim involving violation of environmental or
occupational safety and health laws and regulation, there can be no assurance that such a claim may not arise in the future, which may have a material adverse effect on the Company.

Volatility of Stock Price; No Dividends

The trading price of the common stock has been and is likely to continue to be subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant contracts, changes in management, announcements of technological innovations or new products by the Company or its competitors, legislative or
regulatory changes, general trends in the industry and other events and factors. In addition, the stock market has frequently experienced extreme price and volume fluctuations, which have affected the
market price for many companies for reasons unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of the Company's common
stock. The Company currently intends to retain any future earnings for use in its business and does not anticipate any cash dividends in the future.

Adverse Effects of Preferred Stock on Rights of Common Stock

The Board of Directors of the Company is authorized to issue, from time to time, without any action on the part of the Company's shareholders, up to 4,500,000
shares of preferred stock in one or more series, with such relative rights, preferences, privileges and restrictions as are determined by the Board of Directors at the time of issuance. Accordingly,
the Board of Directors is empowered to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which could adversely

16

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affect
the voting power or other rights of the holders of common stock. In the event of such issuance, the preferred stock could have the effect of discouraging, delaying or preventing a change in
control of the Company.

Item 2. Description of Property

Effective November 26, 2003 the Company purchased an approximately 27,000 square foot building and underlying land located at 229 Andover Street,
Wilmington, MA, for $1,750,000 in cash. The Company moved the current corporate and biomaterials operations from the facility in Woburn, MA to the new facility in Wilmington, MA, during the three
months ended March 31, 2004.

The
Company also leases approximately 16,000 square feet in Plymouth, Minnesota for CDT under a lease which expires April 2009. Within this facility, CDT has constructed a
Class 10,000 clean room for the assembly of its products.

Gish's
office and manufacturing facilities are located in Rancho Santa Margarita, California in a building containing approximately 52,000 square feet of space under a lease, which
expires in February 2011. Within this facility, Gish has constructed a Class 10,000 clean room for the assembly of its products. Gish's finished goods storage facility is located in
Irvine, California in a building containing approximately 23,000 square feet of space under a lease, which expires in January 2006.

Item 3: Legal Proceedings

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

Item 4: Submission of Matters to a Vote of Security HoldersNONE

17

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PART II

Item 5. Market Information for Common Equity and Related Stockholder Matters

The common stock trades on the American Stock Exchange under the symbol "CTE." The following table sets forth the high and low sales prices of the common stock
for each of the last two fiscal years, as reported on the American Stock Exchange.

Fiscal Year Ended March 31, 2004

High

LowJune 30

$
3.89

$
0.90September 30

$
4.48

$
2.30December 31

$
6.54

$
3.31March 31

$
7.20

$
3.95


Fiscal Year Ended March 31, 2003

High

LowJune 30

$
1.83

$
1.12September 30

$
1.70

$
1.35December 31

$
1.60

$
1.29March 31

$
1.44

$
1.03


As
of June 10, 2004, there were approximately 425 stockholders of record and 8,276 additional beneficial stockholders (stockholders holding common stock in brokerage accounts).
The last sale price as reported by the American Stock Exchange on June 10, 2004, was $4.38. The Company has never paid a cash dividend on its common stock and does not anticipate the payment of
cash dividends in the foreseeable future.

Item 6. Management's Discussion and Analysis or Plan of Operation

The Company has adopted a Plan of Operation, which has a dual focus on the development of new cardiovascular products and the continued improvement and expansion
of its medical device operations.

The
Company acquired Gish Biomedical, Inc. effective April 7, 2004 and subsequent to that date, the Company has managed its business in fiscal 2004 on the basis of one
reportable operating segment: Medical Device Manufacturing Sales. The Company's operations consist of Gish, CDT, Dermaphylyx,
and the Biomaterials division. The Company also has an investment in CorNova, Inc. Due to the significance of the Gish acquisition, the Company has chosen to identify certain financial
information by operating entity, to enable investors to evaluate the Company's structural transition. In future periods, discussions will focus on primary product groupings.

The
Company plans to continue its efforts towards the receipt of marketing approval in the European Union for its synthetic layered microporous coronary artery bypass graft trade named
CardioPass. The Company intends to seek approval from its notified body of a requirements list for the receipt of European Union marketing approval. The Company anticipates that research and
development expenses will continue at a rate comparable with the current year until the requirements list for marketing approval is agreed to with the selected notified body. Future research and
development expenses will depend on the requirements list. However, the Company has the ability to exercise a great deal of control over research and development expenditures to ensure the efforts
undertaken match the funds available. The Company is currently unable to estimate if or when it will receive marketing approval, however, its Plan is to receive the notified body's approval of the
requirements in this fiscal year 2005.

The
Company, in March 2004, joined with Implant Sciences, Inc. (IMX on American Stock Exchange) to participate in the funding of CorNova, Inc. CorNova, Inc.
was formed to develop a novel

18

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coronary
drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences, Inc. and the Company. The Company currently has a thirty per cent equity interest in
CorNova. CorNova intends to complete its initial funding with the next twelve months by obtaining private investments totaling between $1,000,000 and $3,000,000, at which time the Company will be
required to contribute shares of its common stock with a market value at the time of contribution of twenty-five per cent of the amount raised. CorNova's Plan is to commence its product
development activities prior to the completion of the initial funding. The stent will utilize a design similar to the CardioPass and the Company's Chronoflex material. CorNova is in its initial stage
of product development and is unable to accurately estimate when, or if, it will complete its product development efforts, obtain marketing approval or commence sales, however, it is CorNova's Plan to
have an initial non-drug eluding stent obtain market approval in the European Union in the next twelve months. The Company accounts for its investment in CorNova using the equity method of accounting
and anticipates that CorNova will incur operating losses during its development stage period, the length of which cannot be determined at this time.

The
Company's medical device operations are comprised of Gish Biomedical, Inc. (Gish), Catheter and Disposables Technology, Inc. (CDT), Dermaphylyx, Inc., and the
Biomaterials division of the Company.

Year ended March 31, 2004

Year ended March 31, 2003Revenue

Gross
Profit

Gross
Profit %

Revenue

Gross
Profit

Gross
Profit %(in thousands)Gish

$
17,781

$
4,582

25.8
%
$





CDT


2,966


1,092

36.8
%

2,343


964

41.1
%Dermaphylyx


25


14

56.0
%






Biomaterials


551


(35
)
-6.4
%

537


(146
)
-27.2
%Royalty and other


476


476

100.0
%

514


453

88.1
%$
21,799

$
6,129

28.1
%
$
3,394

$
1,271

37.4
%


---

Gish
operates in a very competitive market and competes against companies who have both a financial and size advantage. The cardiac surgery market, which is the primary market Gish
serves, has been negatively impacted by the introduction of stents and "beating heart" surgeries. Prior to the acquisition by CardioTech, Gish incurred net losses on a stand-alone basis since 1997,
peaking at losses of approximately $2.9 million in 2001. Following the acquisition, without the severance charge for its former president of $372,000, Gish would have recorded a net income of
$216,000 in fiscal 2004. The Company's Plan for Gish is to continue its gradual increase in market share and to identify strategic alliances and acquisition opportunities that are synergistic with our
available production capabilities and/or our sales organization. Gish has also previously announced that it is now marketing Gish Biocompatible Surface (GBS) coating, which will now allow
Gish to compete in the significant portion of the market that will only purchase coated products.

CDT
operates as an outsourcing source for medical device OEM and development companies. CDT has differentiated itself from traditional contract manufacturers by focusing on providing
innovative, unique and complete product development solutions combined with the capability to provide full production manufacturing. CDT works to become an extension of the customer's research and
development group, instead of the traditional approach of a contract manufacturer of being an extension of the manufacturing group. Many medical device companies have embraced outsourcing as a more
efficient, economic and manageable method to bring products through the development to production cycle. The Company believes this "niche" of the medical device outsourcing market is a

19

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growing
market, which will provide future growth opportunities for CDT. The Company's plan for CDT is to position CDT for future growth through gradual expansion of its product development and
manufacturing capabilities and to explore synergistic acquisition opportunities. CDT's increase in revenue results primarily from its ability to capture more of the manufacturing opportunities
generated by its product development activities. The gross profit percentage decrease relates primarily to sales mix.

Dermaphylyx
has just started marketing its wound dressing products and currently has two moist wound dressings available for sale, AlgiMed and HydroMed and Blist-Rx, a
blister prevention dressing. AlgiMed wound dressings are designed for exudating and bleeding wounds and HydroMed is an absorbent dressing designed for low exudating wounds. Both dressings have been
granted Medicare billing codes. Blist-Rx is a breathable polyurethane foam dressing intended to be used by sports enthusiasts to prevent blisters. The Company plans to continue development
of additional wound dressing products. The Company is currently focusing its efforts on establishing distribution relationships and anticipates the revenue contribution from Dermaphylyx will not be
significant for the 2005 fiscal year.

Biomaterials
revenue is comparable with the prior fiscal year and the Company expects minimal, if any, near term growth. However, Biomaterials has provided the platform for the
development of CardioPass, provides CDT the ability to provide innovative solutions to its customers and has provided a royalty revenue source. The Company believes that Biomaterials will continue to
generate new business opportunities.

Royalty
revenue is comparable with the prior fiscal year and has the potential for continued gradual increase as the Company continues to explore other uses for its patented materials.

Year Ended03/31/04

03/31/03(in thousands)Research and development

$
1,065

$
313Selling and marketing

$
2,572

$
234General and administrative

$
3,083

$
1,712Severance payment

$
372

$
Non-cash compensation and research contract expense

$
1,171

$
19


The
increase in research and development, selling and marketing and general and administrative expenses relate primarily to the acquisition of Gish and inclusion of Gish's results in
fiscal 2004. If the Gish results were excluded, the fiscal 2004 results for the remaining entities are comparable to fiscal 2003. Research and development expenses consist primarily of employees'
salaries and related costs.

Effective
April 30, 2003, the former CEO of Gish resigned from his position. In accordance with his employment agreement, he was to receive severance payments equal to two years
of his base salary, which totaled $360,000. An initial payment of $90,000 was made in May 2003 and the remaining amount due is to be paid in eighteen equal monthly payments. The full amount of
the severance obligation, including estimated payroll taxes, of $372,000, was recorded as severance payment in April 2003.

For
fiscal 2004 the Company had a non-cash compensation expense of $1,171,000. These non-cash items were comprised of a $344,000 expense due to warrant
modifications for 80,000 shares of common stock, a $210,000 expense due to the issuance of 40,000 shares of common stock to Implant pursuant to the joint research program on developing a
drug-eluting stent and a $92,000 expense for stock options granted to two consultants. Additionally, there was a non-cash expense of $293,000 related to the issuance of 95,000
treasury shares to various employees and board members for their effort in the Gish transaction and a $232,000 expense related to stock options granted at a discount to a consultant.

20

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The
Company had $645,000 in other income for fiscal 2004. During fiscal 2004, Credent paid CardioTech $400,000 due to the sale of a controlling interest in Credent pursuant to a
technology and license agreement relating to Chronoflex RC. The payment was net against $17,000 of accounts receivable due from Credent and is recorded as other income of $383,000 in the statement of
operations. The Company also recognized income of $237,000 from the recovery of a previously written off receivable and $25,000 of rental income.

The
Company had net losses of $1,515,000 and $963,000 in fiscal 2004 and 2003, respectively. Included in net losses in fiscal 2004 was an accrual for severance costs of $372,000 for the
former president of Gish, non-cash compensation and research and development expenses of $1,171,000 and other income of $645,000, which included repayment of a note previously
charged-off and a payment by Credent. Without these charges or credits, net loss for fiscal 2004 would have been $617,000 (Adjusted Net Loss). The decrease in Adjusted Net Loss of $617,000
for fiscal 2004 compared to $944,000 (Net Loss as Reported of $963,000 less $19,000 non-cash compensation expense) for fiscal 2003 resulted from the inclusion of Gish in fiscal 2004 and
increase in gross profit of the Company's other entities. Adjusted Net Loss is not a measurement in accordance with Generally
Accepted Accounting Principals (GAAP) and may not be comparable to similarly titled measures used by other companies.

Following
is an unaudited reconciliation of GAAP Net Loss to Adjusted Net Loss.

Year ended
March 31, 2004Net Loss-As Reported

$
(1,515,000
)Severance payment


372,000Non-cash compensation and research contract expense


1,171,000Other income


(645,000
)Adjusted Net Loss

$
(617,000
)


The
Company is providing adjusted net loss as the Company believes that certain items reported in net loss for fiscal 2004 should be excluded to enable readers of the financial
statements to more readily compare the Company's operating results over multiple periods and to highlight the effect of several items included in net loss for fiscal 2004, which, the Company believes
should be separately evaluated.

Liquidity and Capital Resources

The Company generated cash from operating activities of $431,000 in fiscal 2004 and used $675,000 cash in operating activities in fiscal 2003. The increase in
cash generated from operating activities is primarily related to inclusion of the results of Gish in fiscal 2004 and the increase in non-cash items in net loss for fiscal 2004.

During
the 2004 fiscal year, stock options for 1,036,940 shares of the Company's' common stock were exercised by employees and directors, resulting in net cash proceeds of approximately
$1,357,000 to the Company. During fiscal 2004, 1,158,900 warrants were exercised, resulting in net cash proceeds of approximately $1,769,000. The issuance of 40,000 shares of common stock to Implant
resulted in net cash proceeds of $40,000 and the exercise of options by consultants of 1,317,250 shares resulted in net cash proceeds of $3,337,000. These exercises of stock options and warrants
resulted in total net cash proceeds of $6,503,000 in fiscal 2004. Additionally, net proceeds of $290,000 resulted from payments on notes receivable by officers and directors.

During
the 2004 fiscal year, the Company made open market purchases of 33,084 shares of the Company's common stock at an aggregate cost of approximately $111,000. The Company issued
95,000 treasury shares to various employees and board members for their effort in the Gish transaction. The fair market value of these treasury shares was approximately $293,000, which was recorded as
a

21

---



non-cash
compensation expense in the accompanying Consolidated Statement of Operations for fiscal year 2004. During the three months ended December 31, 2003, 10,000 of these
treasury shares were returned to the Company. The Company increased the treasury share and additional paid in capital amount on the balance sheet by the fair market value of $68,000. Accordingly,
total shares held in treasury as of March 31, 2004 is 45,077 at an approximate cost of $182,000. In January 2001 the Board of Directors of the Company authorized the purchase of up to
250,000 shares of the Company's common stock of which 114,255 shares had been purchased at March 31, 2004. Subsequent to March 31, 2004, the Board of Directors authorized the purchase of
up to 500,000 of additional shares of the Company's common stock. The Company announced that purchases may be made from time-to-time in the open market, privately negotiated transactions, block
transactions or otherwise, at times and price deemed appropriate by management.

The
Company purchased a building in Wilmington Massachusetts for $1,750,000, in cash, and relocated its headquarters to the acquired facility. The Company has forecast the cost
associated with the move and build out at the Wilmington building to be $750,000. The construction of research labs, production area and offices are estimated to be $400,000. The installation of the
electrical equipment is estimated at $200,000 and the remaining budget is for HVAC system, the moving company and various permits. At March 31, 2004 the Company had incurred costs totaling
$420,000 and estimates remaining costs to total $330,000.

When
acquired, Gish had a $4,000,000 revolving line of credit, expiring in February 2005. Advances, based on eligible receivables, are secured by the operating assets of Gish and
bear interest at prime (4.00% at March 31, 2004) plus 2%. The agreement also includes various restrictive loan covenants, including a requirement for Gish to maintain a minimum net worth of
$7,000,000, and to achieve positive net income on a rolling three-month basis. At March 31, 2004, Gish was in default of the loan covenant requiring it to achieve positive net income on a
rolling three-month basis. Gish has obtained a waiver for this default, and is now in compliance with its loan covenants. At March 31, 2004, Gish had borrowed $730,000 under the revolving line
of credit and would have been entitled to borrow an additional $1,629,000.

Through
March 31, 2004, the Company continued to generate revenues from the sale of biomaterials and royalties earned on biomaterials; the performance of outsourced research and
development and manufacturing contracts and the manufacture and sale of specialized disposable medical devices.

The
Company's future growth may depend upon its ability to raise capital to support research and development activities and to market and sell its vascular graft technology, specifically
the coronary artery bypass graft. CardioTech may require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing of its products. CardioTech's capital requirements depend on numerous factors, including but not limited to, the
progress of its research and development programs; the progress of pre-clinical and clinical testing; the time and costs involved in obtaining regulatory approvals; the cost of filing,
prosecuting, defending and enforcing any intellectual property rights; competing technological and market developments; changes in CardioTech's development of commercialization activities and
arrangements; and the purchase of additional facilities and capital equipment.

As
of March 31, 2004, CardioTech was conducting its operations with approximately $7,117,000 in cash and cash equivalents. CardioTech believes its current cash position will be
sufficient to fund its working capital and research and development activities for at least the next twelve months. The Company paid $1,750,000 in cash to purchase its new Corporate Headquarters in
Wilmington, MA. and will evaluate various options to subsequently mortgage the new building, if funds are required. Additionally, the Company had available $1,629,000 on its revolving line of credit
at Gish. However,

22

---



Gish's
loan agreement requires lender approval prior to the transfer or distribution of funds to an affiliate for other than normal business expense reimbursement.

Critical Accounting Policies

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



23

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Item 7. Financial Statements

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



PageReport of Ernst & Young LLP, Independent Registered Public Accounting Firm

F-1Consolidated Balance Sheet at March 31, 2004

F-2Consolidated Statements of Operations for the years ended March 31, 2004
and 2003

F-3Consolidated Statements of Stockholders' Equity for the years ended March 31, 2004 and 2003

F-4Consolidated Statements of Cash Flows for the years ended March 31, 2004
and 2003

F-5Notes to Consolidated Financial Statements

F-6F-24


Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

NONE

Item 8a. Controls and Procedures

The
Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company's disclosure controls and procedures as of
March 31, 2004. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have determined that such controls and procedures are effective to ensure that information
relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company's internal controls over financial reporting that
were identified during the evaluation that occurred during the Company's last fiscal quarter of 2004 that have materially affected, or are reasonably likely to materially affect, the Company's
internal control over financial reporting.

24

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PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act.

DIRECTORS AND EXECUTIVE OFFICERS

CardioTech's board of directors is currently comprised of six directors. The directors and executive officers, their ages and positions at CardioTech as well as
certain biographical information of these individuals, are set forth below. The ages of the individuals are provided as of March 31, 2004.

|Name                |  | Age |  | Position(s)                                                            
|------------------- |  | --- |  | -----------------------------------------------------------------------
|Dr. Michael Szycher |  | 65  |  | Chairman of the Board, President, Chief Executive Officer and Treasurer
|Leslie M. Taeger    |  | 53  |  | Chief Financial Officer                                                
|Thomas Lovett       |  | 49  |  | Vice President of Finance                                              
|Michael Adams       |  | 45  |  | Director                                                               
|Anthony J. Armini   |  | 65  |  | Director                                                               
|Michael Barretti    |  | 58  |  | Director                                                               
|Jerry Dorsey        |  | 59  |  | Director                                                               
|William O'Neill Jr. |  | 61  |  | Director                                                               

Dr. Michael
Szycher has been Chairman of the Board, President, Chief Executive Officer and Treasurer of CardioTech since June 1996. From October 1989 until joining
CardioTech in June 1996, Dr. Szycher served as Chairman of PolyMedica Industries, Inc. ("PMI") and Chief Executive Officer of PMI from November 1990 to June 1996,
and as a director of PMI from its inception until June 1996. Dr. Szycher is also a director of Implant Sciences Corporation. Dr. Szycher is a recognized international authority on
polyurethanes and blood compatible polymers. Author of over eighty original research articles. Pivotal force in the creation of the Medical Plastics Division of the SPE. He is the Editor of five
books, "Biocompatible Polymers, Metals and Composites;" "Synthetic Biomedical Polymers;" "Blood Compatible Materials and Devices: Perspectives Towards the 21st Century;" High Performance Biomaterials:
A Comprehensive Guide to Medical/Pharmaceutical Applications;" and "Szycher's Dictionary of Biomaterials and Medical Devices", and the acclaimed "Szycher's Dictionary of Medical Devices". He is also
Editor-In-Chief of the quarterly Journal of Biomaterials Applications.

Mr. Taeger
became Chief Financial Officer of the Company in February 2004, and Mr. Taeger has been Chief Financial Officer of Gish since September 2000. Prior
to joining Gish, Mr. Taeger was employed for more than five years as Chief Financial Officer of Cartwright Electronics, Inc., a division of Meggitt, PLC. Mr. Taeger is a CPA in the state
of California and received a BS in Accounting from California State University at Fullerton.

Mr. Tom
Lovett has been the Corporate Controller of CardioTech since August 2000 and Vice President of Finance since May 2003. From 1992 until joining CardioTech,
Mr. Lovett served in the capacities of Controller and Cost Accounting Manager at Cynosure, Inc. Additionally, Mr. Lovett served in a number of capacities, including Cost
Accounting Manager, for Candela Laser Company from 1983 to 1992. Mr. Lovett holds a BS degree in Accounting from Northeastern University.

Mr. Michael
Adams has been a director of CardioTech since May 1999. He is also the Vice President of PLC Systems, Inc. Prior to joining PLC Systems in
September 2000, Mr. Adams was Vice President of Assurance Medical, Inc., ("Assurance Medical"). Prior to joining Assurance Medical in June 1999, Mr. Adams was the
Chief Operating Officer and Vice President of Regulatory Affairs and Quality Assurance of CardioTech from June 1998 to May 1999. From November 1994 through June 1998,
Mr. Adams served as the Vice President of Cytyc Corporation.

25

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

Mr. Michael
Barretti has been a director of CardioTech since January 1998. He has been the President of Cool Laser Optics, Inc., a company which commercializes
optical technology specific to the medical laser industry, since July 1996. From September 1994 to July 1996, Mr. Barretti was Vice President of Marketing for
Cynosure, Inc., a manufacturer of medical and scientific lasers. From June 1987 to September 1994, Mr. Barretti was a principal and served as Chief Executive Officer of
NorthFleet Management Group, a marketing management firm serving the international medical device industry. From January 1991 to May 1994, Mr. Barretti also acted as President of
Derma-Lase, Inc., the U.S. subsidiary of a Glasgow, Scotland supplier of solid-state laser technologies to the medical field.

Dr. William
E Cohn had been a cardiothoracic surgeon at Beth Israel Deaconess Medical Center in Boston since 1993. Dr. Cohn was appointed to the Board in
October 2003. Because of Dr. Cohn's professional responsibilities and recent relocation to Texas, Dr. Cohn was unable to participate in board matters and has resigned from the board of
directors.

Jeremiah
E. Dorsey was nominated as a director of the Company in May 2004. From 1992 to 2002, Mr. Dorsey was President and Chief Operating Officer of The West Company
(Lionville, PA), a leading supplier of components to the pharmaceutical, medical device and dental business. From 1990 to 1992, Mr. Dorsey was President and Chief Executive Officer of Foster
Medical (Waltham, MA), a supplier of hospital equipment. From 1988 to 1990, he was President of Towles Housewares Company (Newburyport, MA), and Vice President and Board Member of J&J Dental Products
Company (East Windor, NJ), a world leader in composite materials, dental amalgams, cleaning and polishing products.

William
J. O'Neill, Jr. was nominated as a director of the Company in May 2004. Mr. O'Neill is a founder and principal of O'Neill Group, Inc., a consulting firm
focused on developing business strategies, operational execution, financial evaluations and fundraising activities. From 1969 to 1999, Mr. O'Neill held various management positions, including
Chief Financial Officer, at Polaroid Corporation, most recently as Executive Vice President and President, Corporate Business Development. Since July 2001, he has served as Dean of the Frank
Sawyer School of Management at Suffolk University in Boston, Massachusetts.

Committees; Attendance

Meeting Attendance.During the fiscal year ended March 31, 2004, there were five (5) meetings of the Board. The
various committees of the Board also met a total of six (6) times during fiscal 2004. Each director attended in excess of 75% of the total number of meetings of the Board and of committees of
the Board on which he served during fiscal 2004. In addition, from time to time, the members of the Board and its committees acted by unanimous written consent pursuant to Massachusetts law.

Audit Committee.The Board has designated from among its members an Audit Committee, which consisted of Mr. Michael
Barretti (former Chairman), Mr. Anthony Armini and Mr. Michael Adams. Effective in May 2004, Mr. O'Neill (current Chairman) replaced Mr. Adams. Mr. Barretti,
Mr. Armini and Mr. O'Neill are independent members. The Audit Committee has the responsibility to ascertain

26

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that
the Company's financial statements reflect fairly the financial condition and operating results of the Company and to appraise the soundness, adequacy and application of accounting and operating
controls. The Audit Committee recommends the independent auditors to the Board, reviews the scope of the audit functions of the independent auditors and reviews the audit reports. The Audit Committee
held a meeting each quarter during fiscal 2004. The responsibilities of the Audit Committee are outlined in a written charter, which was included as Annex A of the Proxy Statement for the 2001
shareholder meeting.

During
fiscal 2004 the Company did not have a financial expert serving on the audit committee, however, effective May of 2004, Mr. William O'Neill, Jr. has joined the Board and
the audit committee. Mr. O'Neill is independent and meets the requirements to qualify as a financial expert.

The
Company has adopted a code of ethics that applies to its chief executive officer, chief financial officer, and vice president of finance. The code of ethics is posted on the
Company's website, the
address of which is www.cardiotech-inc.com. The Company intends to include on its website any amendments to, or waivers from, a provision of its code of ethics that applies to the
Company's chief executive officer, chief financial officer, or vice president of finance that relates to any element of the code of ethics definition enumerated in Item 406(b) of
Regulation S-K.

Compensation and Stock Option Committee

The Compensation and Stock Option Committee, which met four (4) times during fiscal 2004, had two members, Mr. Barretti and Mr. Adams
(Chairman). Effective May 2004 Mr. Dorsey joined the committee. The Compensation and Stock Option Committee reviews, approves and makes recommendations on the Company's compensation
policies, practices and procedures to ensure that legal and fiduciary responsibilities of the Board are carried out and that such policies, practices and procedures contribute to the success of the
Company. The Compensation and Stock Option Committee administers the 1996 Plan and the 2003 Plan.

Nominating Committee. The Nominating Committee, which was established in March 1998 and did not meet in fiscal 2004, has three members, Mr. Dorsey,
Mr. Barretti and Mr. Adams. The Nominating Committee nominates individuals to serve on the Board. The Nominating Committee considers nominees recommended by
Stockholders.

Directors' Compensation

The Company's policy is to pay $1,500 per diem compensation to non-employee members of the Board for attendance at Board meetings or committee
meetings. All non-employee directors are reimbursed for travel and other related expenses incurred in attending meetings of the Board.

Directors
are eligible to participate in the 1996 and 2003 Plans. In fiscal 2004, CardioTech granted each director an option to purchase 10,000 shares of CardioTech Common Stock and an
additional 2,500 shares to chairman of committees. Such options were granted at an exercise price equal to the fair market value of the Common Stock on the grant date and fully vest following one year
of service after the date of grant.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who beneficially own more than
ten percent of the Company's common stock, to file reports of holdings and transactions in the Company's shares with the SEC. Based on the Company's records and other information, the Company believes
that in fiscal 2004, the Company's directors and executive officers met all applicable SEC filing requirements.

27

---



Item 10. Executive Compensation

Summary Compensation Table:The following table sets forth the aggregate compensation for services rendered in all capacities
during the fiscal years ended March 31, 2004, 2003, and 2002 of all persons serving as Chief Executive Officer and all other executive officers whose salary and bonus exceed $100,000 (the
"Named Executive Officers")

|                                                                     |  | Annual Compensation |  | Long Term Compensation |                         |  
|-------------------------------------------------------------------- |  | ------------------- |  | ---------------------- | ----------------------- | -
|
|Michael Szycher, Ph.D, MBA
Chairman, CEO and Treasurer               |  | 2004
2003
2002      |  | $$$                    | 325,000
325,000
261,777 |  
|Liann Johnson
General Manager of Catheter and Disposables Technology |  | 2004
2003
2002      |  | $$                     | 113,760
107,529
*(2     | )
|Douglas E. Whittaker
President of Gish                               |  | 2004
2003           |  | $$                     | 147,239
131,060         |  
|Leslie M. Taeger
CFO                                                 |  | 2004
2003           |  | $$                     | 143,507
150,470         |  
|Thomas F. Lovett
Vice President of Finance                           |  | 2004
2003           |  | $                      | 92,000
*(2              | )

---

The
Company has entered into an employment agreement (the "Employment Agreement") with Dr. Michael Szycher, pursuant to which said individual serves as Chief Executive Officer of
the Company. Pursuant to the terms of the Employment Agreement, Dr. Szycher is to receive an annual base salary of Three Hundred and Twenty Five Thousand ($325,000) dollars.
Dr. Szycher's salary will be reviewed annually by the Board. Additionally, Dr. Szycher may also be entitled to receive an annual bonus payment in an amount, if any, to be determined by
the Compensation and Stock Option Committee of the Board.

The
initial term of the Employment Agreement by and between the Company and Dr. Szycher is set to expire on December 31, 2004. After such time, the term of the Employment
Agreement will be deemed to continue on a month-to-month basis if not expressly extended while Dr. Szycher remains employed by the Company. Dr. Szycher and
CardioTech each have the right to terminate the Employment Agreement at any time, with or without cause (as defined in the Employment Agreement), upon thirty (30) days prior written notice. In
the event that CardioTech terminates the applicable Employment Agreement without cause, or Dr. Szycher terminates his employment for good reason following a change in control (as such terms are
defined in the Employment Agreement) or CardioTech fails to renew the Employment Agreement within two (2) years following the occurrence of a change in control, Dr. Szycher will be
entitled to receive severance equal to 2.99 times his annual base salary at termination. In such event, Dr. Szycher will be bound by a noncompete covenant for one (1) year following
termination of his employment.

28

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The
following table sets forth information regarding each stock option granted during the fiscal year ended March 31, 2004 to each of the named executive officers.

Option Grants in Last Fiscal Year

|Name                      |  | Number of
Securities
Underlying
Options
Granted(1) |  | Percent of
Total Options
Granted to
Employees in
Fiscal Year |   | Exercise
Price Per
Share |      | Expiration
Date
|------------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------ | - | ------------------------ | ---- | ---------------
|Michael Szycher, Ph.D.(2) |  | 1,017,330                                          |  | 48.9                                                         | % | $                        | 0.92 |                
|Liann Johnson             |  | 100,000                                            |  | 4.8                                                          | % | $                        | 4.04 |                
|Douglas E. Whittaker      |  | 150,000                                            |  | 7.2                                                          | % | $                        | 4.04 |                
|Leslie M. Taeger          |  | 100,000                                            |  | 4.8                                                          | % | $                        | 4.04 |                
|Thomas F. Lovett          |  | 100,000                                            |  | 4.8                                                          | % | $                        | 4.04 |                

---

Aggregated Option Exercises in Last Fiscal year and Fiscal Year-End Option Values

The following table provides information regarding the number of shares of Common Stock covered by both exercisable and unexercisable stock options held by each
of the named executive officers as of March 31, 2004 and the values of "in-the-money" options, which values represent the positive spread between the exercise price of
any such option and the fiscal year-end value of the Common Stock.

|                       |  | Underlying Unexercised
Options/SARs at
Fiscal Year-End 2004 |  | Value of the Unexercised in
the Money Options/SARs at
Fiscal Year-End(1) |  |   |           | 
|---------------------- |  | ----------------------------------------------------------- |  | ------------------------------------------------------------------------ |  | - | --------- | 
|
|
|Michael Szycher, Ph.D. |  | 2,612,514                                                   |  | 18,229                                                                   |  | $ | 9,911,668 | 
|Liann Johnson          |  | 98,125                                                      |  | 71,875                                                                   |  | $ | 263,385   | 
|Douglas E. Whittaker   |  | 37,500                                                      |  | 112,500                                                                  |  | $ | 41,625    | 
|Leslie M. Taeger       |  | 25,000                                                      |  | 75,000                                                                   |  | $ | 27,750    | 
|Thomas Lovett          |  | 156,875                                                     |  | 78,125                                                                   |  | $ | 510,469   | 

---

29

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Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table presents, as of March 31, 2004, certain information known to CardioTech regarding the beneficial ownership of CardioTech common stock
by:



Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934. Under this rule, certain shares may be deemed to be
beneficially owned by more than one person, if, for example, persons share the power to vote or the power to dispose of the shares. In addition, shares are deemed to be beneficially owned by a person
if the person has the right to acquire shares, for example, upon exercise of an option or warrant, within 60 days of March 31, 2004. In computing the percentage ownership of any person,
the amount of shares is deemed to include the amount of shares beneficially owned by such person, and only such person, by reason of such acquisition rights. As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily reflect the person's actual voting power at any particular date.

The
percentage of beneficial ownership for the following table is based on 17,699,931 shares of CardioTech common stock outstanding as of March 31, 2004. To CardioTech's
knowledge, except as otherwise indicated in the footnotes to this table and pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with
respect to all shares of common stock.

|Name*                                                                  |  | Shares
Beneficially
Owned |  | Percent of
Class(1) |  
|---------------------------------------------------------------------- |  | ------------------------- |  | ------------------- | -
|Michael Szycher, Ph.D., MBA(1)
229 Andover Street
Wilmington, MA 01887 |  | 2,990,237                 |  | 16.9                | %
|Michael L. Barretti(2)                                                 |  | 158,533                   |  | 0.9                 | %
|Michael Adams(3)                                                       |  | 206,339                   |  | 1.2                 | %
|Anthony Armini, Ph.D.(4)                                               |  | 108,520                   |  | 0.6                 | %
|Doug Whittaker(5)                                                      |  | 37,500                    |  | 0.3                 | %
|Leslie Taeger(6)                                                       |  | 51,844                    |  | 0.2                 | %
|All executive officers and directors as a group (9 persons)(7)         |  | 3,552,973                 |  | 20.1                | %

---

30

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Item 12. Certain Relationships and Related Transactions

In July 1999, Dermaphylyx International, Inc., a related party, was formed by certain affiliates of CardioTech to develop advanced wound healing
products. Dermaphylyx was merged into CardioTech International, Inc,. pursuant to which it became a wholly owned subsidiary of CardioTech. Due to CardioTech's controlling financial interest,
Dermaphylyx has been consolidated in the financial statements of CardioTech as of December 31, 2003. Prior to December 31, 2003, the operations and total assets of Dermaphylyx were not
material to CardioTech. Since July 1999, the year Dermaphylyx was incorporated, all development expenses have been paid by CardioTech International, Inc.

Upon
the merger, the current shareholders of Dermaphylyx received 3,827 shares of common stock of CardioTech valued at the net book value of Dermaphylyx International, Inc., as of
December 31, 2003, which was approximately $21,000.

Compensation Committee Interlocks and Insider Participation

Other than Mr. Adams, no person serving on the Compensation and Stock Option Committee at any time during Fiscal Year 2004 was a present or former officer
or employee of the Company or any of its subsidiaries. During Fiscal Year 2004, other than Dr. Szycher, no executive officer of the Company served as a member of the board of directors or
compensation and stock option committee (or other board committee performing equivalent functions) of another entity, one of whose executive officers served on the Company's Board or Compensation and
Stock Option Committee.

31

---



PART IV

Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 10-KSB



|Exhibit Number: |  |                                                                                                                                                                                                                                                                                                                                        
|--------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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             |  | Articles of Incorporation of CardioTech International, Inc., incorporated by reference to Exhibit 3.1 of CardioTech's Registration Statement on Form 10 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 16, 1998, and is incorporated herein by reference.                                                                
|3.1.2           |  | Certificate of Correction dated December 11, 1998 was filed as Exhibit 3.1 to CardioTech's Form 10-Q for the quarter ended December 31, 1998, filed on February 16, 1999, and is incorporated herein by
reference.                                                                                                                     
|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.                                                                                                                                                                            
|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 in 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, 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.                                                               
|                |  |                                                                                                                                                                                                                                                                                                                                        

32

---



|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-KSB 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 year ended
March 31, 2004                                        
|10.22 |  | Plan and Agreement of Merger and Reorganization dated March 12, 2004 between CardioTech and Dermaphylyx, Inc. Filed as an Exhibit to CardioTech's Form 10-KSB for the year ended March 31, 2004                                                                    
|21    |  | Subsidiaries of CardioTech                                                                                                                                                                                                                                         
|23.2  |  | 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 Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                             
|32.2  |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                             
|99    |  | Gish Financial Statements                                                                                                                                                                                                                                          





Copies
of these exhibits are available for a reasonable fee upon written request to the Company at its corporate headquarters: CardioTech International, Inc., 229 Andover Street,
Wilmington, MA 01887. ATTN: Thomas F. Lovett.

Item 14. Principal Accounting Fees and Services

The information contained under the heading "Fees Paid to Principal Accountants" in the Proxy Statement is incorporated herein by reference.

33

---





Report of Independent Registered Public Accounting Firm

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

We
have audited the accompanying consolidated balance sheet of CardioTech International, Inc. as of March 31, 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended March 31, 2004 and 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of CardioTech International, Inc. at
March 31, 2004 and the consolidated results of its operations and its cash flows for the years ended March 31, 2004 and 2003 in conformity with United States accounting principles.



Boston,
Massachusetts
June 4, 2004,
except for Note R,
as to which the date is June 21, 2004

F-1

---





CARDIOTECH INTERNATIONAL, INC.        CONSOLIDATED BALANCE SHEET

|                                     |                                                                                                                               | March 31, 2004                             |           
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----------
|ASSETS                               |                                                                                                                              
|Current Assets:                      |                                                                                                                               |                                            |           
|                                     | Cash and cash equivalents                                                                                                     |                                            | $         
|                                     | Accounts receivabletrade, net of bad debt allowance of $201,000                                                              |                                            |           
|                                     | Accounts receivableother                                                                                                     |                                            |           
|                                     | Note receivablerelated party                                                                                                 |                                            |           
|                                     | Inventory                                                                                                                     |                                            |           
|                                     | Prepaid expenses                                                                                                              |                                            |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               | Total Current Assets                       |           
|                                     | Property and equipment, net                                                                                                   |                                            |           
|                                     | Amortizable intangible assets, net                                                                                            |                                            |           
|                                     | Goodwill                                                                                                                      |                                            |           
|                                     | Other non-current assets                                                                                                      |                                            |           
|                                     | Investment in CorNova, Inc.                                                                                                   |                                            |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               | Total Assets                               |           
|                                     |                                                                                                                               |                                            |           
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                              
|Current Liabilities:                 |                                                                                                                               |                                            |           
|                                     | Revolving line of credit                                                                                                      |                                            | $         
|                                     | Accounts payable                                                                                                              |                                            |           
|                                     | Accrued expenses                                                                                                              |                                            |           
|                                     | Note payablerelated party                                                                                                    |                                            |           
|                                     | Deferred revenue                                                                                                              |                                            |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               | Total Current Liabilities                  |           
|Deferred rent                        |                                                                                                                               |                                            | 220,000   
|Stockholders' Equity:                |                                                                                                                               |                                            |           
|                                     | Preferred Stock, $.01 par value, 5,000,000 shares authorized, 500,000 issued and none outstanding as of March 31, 2004        |                                            |           
|                                     | Common Stock, $.01 par value, 50,000,000 shares authorized, 17,699,931 issued and 17,654,854 outstanding as of March 31, 2004 |                                            |           
|                                     | Additional paid-in capital                                                                                                    |                                            |           
|                                     | Accumulated deficit                                                                                                           |                                            |           
|                                     | Accumulated other comprehensive income                                                                                        |                                            |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               |                                            | 19,550,000
|                                     | Less: treasury stock, 45,077 shares at cost as of March 31, 2004                                                              |                                            |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               | Total Stockholders' Equity                 |           
|                                     |                                                                                                                               |                                            |           
|                                     |                                                                                                                               | Total Liabilities and Stockholders' Equity |           
|                                     |                                                                                                                               |                                            |           

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

F-2

---





CARDIOTECH INTERNATIONAL, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                      |                                                        | For the Years Ended
March 31, |           
|--------------------------------------------------------------------- | ------------------------------------------------------ | ----------------------------- | ----------
|
|Revenue:                                                              |                                                        |                               |           
|                                                                      | Product sales                                          |                               | $         
|                                                                      | Research grants and contracts                          |                               |           
|                                                                      | Royalties                                              |                               |           
|                                                                      |                                                        |                               |           
|                                                                      |                                                        |                               | 21,799,000
|Operating Expenses:                                                   |                                                        |                               |           
|                                                                      | Cost of product sales                                  |                               |           
|                                                                      | Cost of research grants and contracts                  |                               |           
|                                                                      | Research and development                               |                               |           
|                                                                      | Selling and marketing                                  |                               |           
|                                                                      | General and administrative                             |                               |           
|                                                                      | Severance payment                                      |                               |           
|                                                                      | Non-cash compensation and research contract expense(1) |                               |           
|                                                                      |                                                        |                               |           
|                                                                      |                                                        |                               | 23,933,000
|                                                                      |                                                        |                               |           
|Loss from operations                                                  |                                                        |                               | (2,134,000
|                                                                      |                                                        |                               |           
|Interest and Other Income and Expense:                                |                                                        |                               |           
|                                                                      | Interest expense                                       |                               |           
|                                                                      | Interest income                                        |                               |           
|                                                                      | Other income                                           |                               |           
|                                                                      |                                                        |                               |           
|                                                                      | Other income, net                                      |                               |           
|                                                                      | Equity in loss of CorNova, Inc.                        |                               |           
|                                                                      |                                                        |                               |           
|                                                                      |                                                        | Net Loss                      |           
|                                                                      |                                                        |                               |           
|Net loss per common share, basic and diluted                          |                                                        | $                             | (0.10     
|                                                                      |                                                        |                               |           
|Shares used in computing net loss per common share, basic and diluted |                                                        |                               | 15,420,736
|                                                                      |                                                        |                               |           

---

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

F-3

---





CARDIOTECH INTERNATIONAL, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        For the Years Ended March 31, 2004 and 2003

|                                                                      |  | Common Stock |  |   |         |  |   |            |  |   |             |   |   |       | 
|--------------------------------------------------------------------- |  | ------------ |  | - | ------- |  | - | ---------- |  | - | ----------- | - | - | ----- | 
|
|
|Balance as of April 1, 2002                                           |  | 9,158,601    |  | $ | 91,000  |  | $ | 16,078,000 |  | $ | (10,197,000 | ) | $ |      | 
|Issuance of common stock in connection with exercise of stock options |  | 69,665       |  |   | 1,000   |  |   | 71,000     |  |   |            |   |   |      | 
|Fair value of options granted to consultants                          |  |             |  |   |        |  |   | 19,000     |  |   |            |   |   |      | 
|Interest due on officer's notes                                       |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Payment of note receivable from related party                         |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Write-off of note receivable                                          |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Purchase of stock for treasury, at cost                               |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Net loss                                                              |  |             |  |   |        |  |   |           |  |   | (963,000    | ) |   |      | 
|                                                                      |  |              |  |   |         |  |   |            |  |   |             |   |   |       | 
|Balance as of March 31, 2003                                          |  | 9,228,266    |  |   | 92,000  |  |   | 16,168,000 |  |   | (11,160,000 | ) |   |      | 
|Issuance of common stock in connection with exercise of stock options |  | 2,354,190    |  |   | 24,000  |  |   | 4,960,000  |  |   |            |   |   |      | 
|Issuance of common stock in connection with exercise of warrants      |  | 1,158,900    |  |   | 12,000  |  |   | 1,758,000  |  |   |            |   |   |      | 
|Fair value of options granted to consultants                          |  |             |  |   |        |  |   | 92,000     |  |   |            |   |   |      | 
|Fair value due to modification of warrant terms                       |  |             |  |   |        |  |   | 344,000    |  |   |            |   |   |      | 
|Issuance of shares related to the Gish merger                         |  | 4,901,817    |  |   | 49,000  |  |   | 8,162,000  |  |   |            |   |   |      | 
|Issuance of shares related to the Dermaphylyx merger                  |  | 3,827        |  |   |        |  |   | 21,000     |  |   |            |   |   |      | 
|Investment in CorNova, Inc.                                           |  | 12,931       |  |   |        |  |   | 75,000     |  |   |            |   |   |      | 
|Issuance of common stock to Implant Sciences per contract terms       |  | 40,000       |  |   |        |  |   | 249,000    |  |   |            |   |   |      | 
|Interest due on officer's notes                                       |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Payment of interest due on officers' notes                            |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Note receivable from related party                                    |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Payment of note receivable from related party                         |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Payment of subscription receivable                                    |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Issuance of treasury shares, at cost                                  |  |             |  |   |        |  |   | 212,000    |  |   |            |   |   |      | 
|Purchase of stock for treasury, at cost                               |  |             |  |   |        |  |   |           |  |   |            |   |   |      | 
|Comprehensive income from CorNova, Inc.                               |  |             |  |   |        |  |   |           |  |   |            |   |   | 7,000 | 
|Net loss                                                              |  |             |  |   |        |  |   |           |  |   | (1,515,000  | ) |   |      | 
|                                                                      |  |              |  |   |         |  |   |            |  |   |             |   |   |       | 
|Balance at March 31, 2004                                             |  | 17,699,931   |  | $ | 177,000 |  | $ | 32,041,000 |  | $ | (12,675,000 | ) | $ | 7,000 | 
|                                                                      |  |              |  |   |         |  |   |            |  |   |             |   |   |       | 

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

F-4

---





CARDIOTECH INTERNATIONAL, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                      |                                                                                           | For the Years Ended
March 31,                             |                                          
|------------------------------------- | ----------------------------------------------------------------------------------------- | --------------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities: |                                                                                           |                                                           |                                          
|                                      | Net Loss                                                                                  |                                                           | $                                        
|                                      | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                           |                                          
|                                      |                                                                                           | Compensation expense related to treasury shares issued    |                                          
|                                      |                                                                                           | Fair value ascribed to options granted to nonemployees    |                                          
|                                      |                                                                                           | Discount value ascribed to options granted to consultant  |                                          
|                                      |                                                                                           | Compensation expense related to modification of warrants  |                                          
|                                      |                                                                                           | Non-cash research contract expense                        |                                          
|                                      |                                                                                           | Equity in net loss of CorNova, Inc.                       |                                          
|                                      |                                                                                           | Decrease in carrying value of CorNova, Inc.               |                                          
|                                      |                                                                                           | Depreciation and amortization                             |                                          
|                                      |                                                                                           | Loss on disposal of fixed assets                          |                                          
|                                      |                                                                                           | Interest on officer's notes                               |                                          
|                                      |                                                                                           | Provision for doubtful accounts                           |                                          
|                                      |                                                                                           | Deferred rent                                             |                                          
|                                      |                                                                                           | Changes in assets and liabilities:                        |                                          
|                                      |                                                                                           |                                                           | Accounts receivabletrade                
|                                      |                                                                                           |                                                           | Accounts receivableother                
|                                      |                                                                                           |                                                           | Inventory                                
|                                      |                                                                                           |                                                           | Prepaid expenses and other current assets
|                                      |                                                                                           |                                                           | Accounts payable                         
|                                      |                                                                                           |                                                           | Accrued expenses                         
|                                      |                                                                                           |                                                           | Deferred revenue                         
|                                      |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Net cash provided by (used in) operating activities       |                                          
|                                      |                                                                                           |                                                           |                                          
|Cash flows from investing activities: |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Purchases of property and equipment                       |                                          
|                                      |                                                                                           | Decrease (Increase) in other non-current assets           |                                          
|                                      |                                                                                           | Payment of acquisition costs, net of cash acquired        |                                          
|                                      |                                                                                           | Repayment of note receivables from officers and directors |                                          
|                                      |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Net cash used in investing activities                     |                                          
|                                      |                                                                                           |                                                           |                                          
|Cash flows from financing activities: |                                                                                           |                                                           |                                          
|                                      | Repayment on revolving line of credit                                                     |                                                           |                                          
|                                      | Net proceeds from issuance of common stock related to stock option and warrant exercises  |                                                           |                                          
|                                      | Proceeds from repayment of notes receivable                                               |                                                           |                                          
|                                      | Purchase of treasury stock                                                                |                                                           |                                          
|                                      |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Net cash provided by financing activities                 |                                          
|                                      |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Net increase (decrease) in cash and cash equivalents      |                                          
|                                      |                                                                                           | Cash and cash equivalents at beginning of period          |                                          
|                                      |                                                                                           |                                                           |                                          
|                                      |                                                                                           | Cash and cash equivalents at end of period                |                                          
|                                      |                                                                                           |                                                           |                                          

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

F-5

---





CARDIOTECH INTERNATIONAL, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Nature of Business

CardioTech International, Inc. (including its subsidiaries, collectively "CardioTech" or the "Company") is using its proprietary technology to develop and
manufacture small bore vascular grafts, or synthetic blood vessels, made of ChronoFlex, a family of polyurethanes, that has been demonstrated to be biocompatible and non-toxic.

Additionally,
the Company's wholly owned subsidiary, Catheter and Disposables Technology, Inc. ("CDT"), is an original equipment manufacturer; supplier of specialized disposable
medical devices to medical device companies from concept to finished packaged, sterile product; and uses its experience in the design, development, prototyping and manufacturing to provide turnkey
contract services. Some devices designed, developed and manufactured for customers by CDT include sensing, balloon, and drug delivery catheters; disposable endoscopes; and in-vitro
diagnostic and surgical disposables.

The
Company acquired Gish Biomedical Inc. ("Gish") on April 7, 2003. Gish manufactures certain single use medical devices and medical devices that have a disposal
component. These products are marketed primarily to hospitals through direct sales representatives and distributors domestically and internationally through distributors. Gish's primary markets
include products for use in cardiac surgery, myocardial management, infusion therapy, and post operative blood salvage. (Refer to Note J for further discussion of acquisition.)

In
July 1999, Dermaphylyx International, Inc. ("Dermaphylyx"), a related party, was formed by certain affiliates of CardioTech to develop advanced wound healing products.
Dermaphylyx was merged into CardioTech International, Inc., effective March 12, 2004 and is now a wholly owned subsidiary of CardioTech. Due to CardioTech's controlling financial
interest, Dermaphylyx has been consolidated in the financial statements of CardioTech as of December 31, 2003. Prior to December 31, 2003, the
operations and total assets of Dermaphylyx were not material to CardioTech. Upon the merger, the current shareholders of Dermaphylyx received 3,827 shares of common stock of CardioTech valued at the
net book value of Dermaphylyx International, Inc., which was approximately $21,000.

The
Company is headquartered in Wilmington, Massachusetts, where it operates its biomaterials manufacturing and laboratory facilities. CDT operates contract research and development
services and outsourced manufacturing from its facility in Plymouth, Minnesota. Gish's office and manufacturing facilities are located in Rancho Santa Margarita, California.

Effective
March 5, 2004 the Company exchanged 12,931 shares of its common stock for 1,500,000 shares of common stock of CorNova, Inc., which currently represents an
ownership interest of 30%. CorNova is a development stage enterprise, formed to develop a drug eluding stent based upon the Company's Chronoflex technology.

A. Summary of Significant Accounting Policies

Basis of Presentation

CardioTech was incorporated in March 1993. CardioTech and CardioTech International, Ltd. ("CTL") were spun off of PolyMedica
Industries, Inc. ("PMI") in June 1996. CardioTech Acquisition Corp, a wholly-owned subsidiary of the Company, was incorporated in April 1999. CTL was sold in November 2000.

The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
The Company's investment in CorNova is accounted for using the equity method of accounting.

F-6

---



Uses of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences may be material to the financial
statements.

Uncertainties

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

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less. Cash
equivalents represent a deposit in a money market account.

Supplemental Disclosure of Cash Flow Information

For fiscal years ended March 31, 2004 and 2003, the Company received interest income of $45,000 and $44,000 respectively. For fiscal year ended
March 31, 2004, the Company paid interest expense of $70,000 and in fiscal 2003 there was no interest expense paid. For fiscal years ended March 31, 2004 and 2003, the Company paid
income taxes of $7,000 and $2,000 respectively. During fiscal 2004, the Company had the following three non-cash items: (i) the issuance of 4,901,817 shares related to the Gish
merger, (ii) the issuance of 12,931 shares related to the investment in CorNova, Inc., and (iii) the issuance of 3,827 shares related to Dermaphylyx merger.

Revenue RecognitionProduct, Research and Royalty Revenue

The Company recognizes revenue in accordance with Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The Company
recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the
sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and
title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license
and royalty fees for the use of its proprietary biomaterials. CardioTech recognizes these fees as revenue in accordance with the terms of the contracts. Contracted development fees from corporate
partners are recognized upon completion of service or the attainment of technical benchmarks, as appropriate.

Generally,
the customer specifies the delivery method and is responsible for delivery costs. However, in certain situations, the customer specifies the delivery method and requests the
Company pay the delivery costs and then invoice the delivery costs to the customer or include an estimate of the

F-7

---



delivery
costs in the price of the product. Delivery costs billed to customers by Gish for the year ended March 31, 2004 of $481,000 have been recorded as revenue.

In
November 2002 and May 2003, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance
also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance is effective for revenue arrangements entered into after June 15,
2003. Adoption of this statement did not have an effect on our consolidated financial position or results of operations.

Research and Development Expense

Research and development expense consists primarily of salaries and is charged to expense as incurred.

Reporting Comprehensive Income (Loss)

SFAS No. 130, "Reporting Comprehensive Income (Loss)," establishes standards for the reporting and display of comprehensive income and its components in
the consolidated financial statements. Comprehensive income (loss) is the total of net income (loss) and all other non owner changes in equity including such items as unrealized holding gains (losses)
on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. During the years ended March 31, 2004
and 2003, the Company's only item of other comprehensive income was its equity in unrecognized holding gains on securities classified as available for sale, recorded by CorNova, Inc.

Basic and Diluted Earnings Per Share

The Company follows SFAS No. 128, "Earnings Per Share," where basic earnings per share is computed by dividing net income (loss) by the weighted average
number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted
average common equivalent shares outstanding during the period. At March 31, 2004 and March 31, 2003 exercisable options of 4,048,773 and 3,919,236 respectively, were excluded from the
earnings per share calculation because they are considered antidilutive. At March 31, 2004 there are no warrants outstanding to purchase shares of the Company's common stock.

Common
equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding
common stock using the treasury stock method. Common equivalent shares also result from the assumed conversion of convertible debt using the "If Converted" method. In addition, the numerator is
adjusted for any changes in income or loss that would result from the assumed conversion of potential shares.

F-8

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Property and Equipment

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

Inventory

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consists of the following at
March 31, 2004.

Raw materials

$
2,063,000Work in progress


768,000Finished goods


1,736,000Total inventories

$
4,567,000


Income Taxes

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

Intangible Assets and Impairment of Long-Lived Assets

The Company evaluates its long-lived assets, which include property and equipment and finite-lived intangible assets for impairment as events and
circumstances indicate that the carrying amount may not be recoverable and at a minimum at each balance sheet date. The Company evaluates the reliability of its long-lived assets based on
profitability and undiscounted cash flow expectations for the related asset or subsidiary. Property and equipment and amortizable intangibles are subject to SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Non-amortizable intangibles, such as goodwill, are subject to SFAS No. 142, "Goodwill and Other Intangible Assets."

In
accordance with the annual impairment test requirement of SFAS No. 142, the Company completed the first step of the traditional goodwill impairment test during the last quarter
of fiscal 2004, based on the amount of goodwill as of December 31, 2003. The Company utilized a third party independent valuation to determine the fair value of each of its reporting units.
Based on the results of the first step of the goodwill impairment test, the Company has determined that the fair value of each of reporting units exceeded the carrying amounts and, therefore, no
goodwill impairment existed as of March 31, 2004. As a result, the second step of the goodwill impairment test is not required to be completed. As of March 31, 2004, management is not
aware of any events that would cause them to conclude that any indicators of impairment exist. The Company will be required to continue to perform

F-9

---



a
goodwill impairment test on at least an annual basis and the next test is scheduled during the quarter ending March 31, 2005.

As
of March 31, 2004, CardioTech had unamortized goodwill of $1,638,000 and amortizable identifiable intangible assets of $968,000. Amortization expense related to identifiable
intangible assets that will continue to be amortized in the future is approximately $192,000 for the fiscal year ended March 31, 2004.

The
estimated amortization expense related to other identifiable intangible assets for the next five years is as follows:

Year2005

$
192,0002006

$
192,0002007

$
118,0002008

$
110,0002009

$
110,000


Stock Based Compensation

The Company accounts for stock options granted to employees under the intrinsic value method in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations rather than the alternative fair value accounting provided for under Statement of
Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation ("SFAS 123"), which requires the use of option valuation
models that were not developed for use in valuing employee stock options. The Company also has issued options to non-employees for services provided to the Company. Such options have been
accounted for at fair value in accordance with the provisions of SFAS 123 and the Emerging Issues Task Force consensus in Issue No. 96-18,Accounting
for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling Goods or Services. Such compensation expense for
non-employees is recognized based on the vested portion of the compensation cost at the respective balance sheet dates, is included in non-cash compensation expense in the
accompanying statement of operations.

F-10

---



Had
compensation cost for the Company's stock option grants to employees been determined consistent with SFAS 123, the Company's net loss and net loss per share would approximate
the pro forma amounts below:

Year Ended March 312004

2003Net loss, as reported

$
(1,515,000
)
$
(963,000
)Add: Stock-based employee compensation expense determined under fair value based method for all employee awards

$
(2,790,000
)
$
(841,000
)Pro forma, net loss

$
(4,305,000
)
$
(1,804,000
)Basic and diluted loss per shareAs reported

$
0.10

$
0.11Pro forma

$
0.28

$
0.20


The
effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Additional awards in future years are anticipated.

The
Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

The
Executive Compensation Structure that The Compensation Committee approved provides an anti-dilution provision for Michael Szycher, the Company's President and CEO. This
provision ensures that Michael Szycher's percentage of ownership (20.8%) will be the same after the Gish transaction as it was before. Upon completion of the Gish transaction, Michael Szycher was
granted fully vested stock options for 1,017,330 shares at an exercise price of $0.92, the fair market value at the time of the merger.

The
fair value of each option granted during the fiscal years 2004 and 2003 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted
average assumptions:

2004

2003Dividend yield

None

NoneExpected volatility

80.00
%
80.00
%Risk-free interest rate

3.38%4.40
%
4.90
%Expected life

10 years

10 yearsFair value of options granted

$1.64

$0.92


F-11

---



Fair Value of Financial Instruments

The fair value of cash and cash equivalents, receivables and payables at March 31, 2004 approximate their carrying amount due to the short maturities of
these items. Based upon borrowing rates currently available to the Company for loans with similar terms, the carrying value of its debt obligation approximates fair value. Financial instruments that
potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents and trade receivables.

All
of the Company's cash and cash equivalents are maintained by major financial institutions.

The
Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. The Company's subsidiary CDT requires new customers
to pay a deposit prior to any work being performed, which is recorded as a current liability. Although the Company is directly affected by the overall financial condition of the healthcare industry,
management does not believe significant credit risk exists at March 31, 2004. The Company maintains an allowance for doubtful accounts based on accounts past due according to contractual terms
and historical collection experience. Actual losses when incurred are charged to the allowance. The Company's losses related to collection of trade accounts receivables have consistently been within
management's expectations.

Reclassifications

Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation.

Recent Accounting Pronouncements

In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities," to expand upon and
strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Until now, a company
generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that guidance by requiring a variable interest
entity, as defined, to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of
the entity's residual returns or both. FIN 46 also requires disclosure about variable interest entities that the company is not required to consolidate but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003 and to older entities in the first fiscal year or interim
period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest
entity was established. The Company's adoption of FIN 46 did not have a material impact on its consolidated results of operations and financial position.

On
May 15, 2003, the FASB issued Statement of Financial Accounting Standards No. 150,Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This Statement establishes standards for classifying and measuring as liabilities certain financial instruments that embody
obligations of the issuer and have characteristics of both liabilities and equity. Statement 150 represents a significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain equity derivatives that

F-12

---



frequently
are used in connection with share repurchase programs. The provisions of SFAS No. 150 are effective for public companies for all financial instruments created or modified after
May 31, 2003, and to other instruments at the beginning of the first interim period beginning after June 15, 2003 (July 1, 2003 for calendar quarter companies). The adoption of
SFAS No. 150 did not have a material impact on the Company's financial position or results of its operations.

In
November 2002 and May 2003, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables." EITF Issue No. 00-21 provides guidance and criteria for determining when a multiple deliverable arrangement contains more than one unit of accounting. The guidance
also addresses methods of measuring and allocating arrangement consideration to separate units of accounting. The guidance is effective for revenue arrangements entered into after June 15,
2003. Adoption of this statement did not have a material impact on our consolidated financial position or results of operations.

B. Related Party Transactions

In December 1998, certain executive officers of the Company purchased, in the aggregate, 160,000 units as part of the Fechtor Detwiler 1998 private
placement offering of the Company's common stock and warrants exercisable until December 15, 2003 to purchase the Company's common stock. A note in the aggregate principal amount of $200,000
issued by these officers to the Company funded the purchase of the units. The terms of the note provide for each executive to repay the note with interest at 4.25% per annum, within five years. The
promissory notes, which are full recourse against the maker with respect to any amount due under the promissory notes, were secured by the common stock and warrants underlying the units. The principal
balance outstanding of $150,000 was due on December 15, 2003. The Company received notification from a former officer and a current board member of their intention to exercise the warrants
prior to December 15, 2003. Their payments for the exercise of the warrants were received after the December 15, 2003 expiration date, however the Company allowed for the exercise of
those warrants. This effective modification of the warrants resulted in a non-cash compensation expense of $344,000. In applying generally accepted accounting principles (GAAP), the
acceptance of the late payments on the warrant exercise represents a modification of the award and is treated as if a new award was granted on the date of modification. The intrinsic value of the
awards on the date of the modification was recorded as non-cash compensation expense in the accompanying statement of operations.

Effective
June 18, 2003, the Company and one of the Company's consultants executed a full recourse promissory note for $26,250 related to the exercise of stock options bearing
interest at 6% with payments due monthly as the shares exercised are sold. During the quarter ended September 30, 2003 the consultant paid this promissory note and all related interest in full.

In
July 1999, Dermaphylyx International, Inc., a related party, was formed by certain affiliates of CardioTech to develop advanced wound healing products. Dermaphylyx was
merged into CardioTech International, Inc., pursuant to which it became a wholly owned subsidiary of CardioTech. Due to CardioTech's controlling financial interest, Dermaphylyx has been
consolidated in the financial statements of CardioTech as of December 31, 2003. Prior to December 31, 2003, the operations and total assets of Dermaphylyx were not material to
CardioTech. Since July 1999, the year Dermaphylyx was incorporated, all development expenses have been paid by CardioTech International, Inc.

F-13

---



Upon
the merger, the current shareholders of Dermaphylyx received 3,827 shares of common stock of CardioTech valued at the net book value of Dermaphylyx International, Inc., as of
December 31, 2003, which was approximately $21,000.

C. License Agreements

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

D. Property and Equipment

Property and equipment at March 31, 2004 consists of the following:

Land

$
500,000Building


1,633,000Machinery, Equipment, and Tooling


2,244,000Furniture, fixtures and office equipment


391,000Leasehold improvements


1,285,0006,053,000Less accumulated depreciation and amortization


(1,392,000
)$
4,661,000


Depreciation
expense for property and equipment for the fiscal years ended March 31, 2004 and 2003 was approximately $900,000 and $138,000, respectively. Construction in process
of $379,000 was included in the Building category and was not completed or in use at March 31, 2004, and, accordingly, depreciation of this asset had not commenced at March 31, 2004.

E. Income Taxes

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

2004

2003Expected federal tax rate

34.0
%
34.0
%State income taxes, net of federal tax benefit

5.0
%
3.7
%Non deductible expenses

(17.0
)%
(3.2
)%Change in valuation allowance

(22.0
)%
(34.5
)%Effective tax rate

0.0
%
0.0
%


F-14

---



A
valuation allowance has been recorded to offset the related deferred tax assets due to uncertainty of realizing the benefit of this asset. The following is a summary of the significant
components of the Company's deferred tax assets and liabilities as of March 31, 2004:

Deferred Tax Assets:Net operating loss carry forwards

$
7,058,000Tax credits


77,000Inventory and receivable allowances


515,000Accrued expenses deductible when paid


257,000Depreciation and amortization


96,000Deferred tax assets before valuation allowance


8,003,000Valuation allowance


(8,003,000
)Net deferred tax asset

$



As
of March 31, 2004, the Company had federal and state net operating loss carry forwards of approximately $17,558,000 and $17,009,000, respectively, available to offset future
taxable income, that expire between 2019 through 2025. Approximately $11,349,000 of the Federal net operating loss carry forwards is subject to annual limitations as a result of the change in control
of Gish.

F. Concentration of Credit Risk and Major Customers

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade
accounts receivable. The Company maintains cash and cash equivalents with high credit, quality financial institutions. To manage accounts receivable credit risk, the Company continuously evaluates the
creditworthiness of its customers and maintains allowances for potential credit losses. As of March 31, 2004 the Company believes it has no significant concentration of credit risks. One sales
representative organization comprised 10% of the Company's net sales in fiscal 2004.

G. Lease Commitments

Aggregate future minimum rental payments on a cash basis required under operating leases for the Rancho Santa Margarita, Irvine, and Plymouth facilities are as
follows:

Fiscal year ended March 31

Rancho
Santa
Margarita

Irvine

Plymouth2005

$
449,000

$
161,000

$
127,0002006


463,000


124,000


127,0002007


477,000





130,0002008


491,000





131,0002009


506,000





142,000Thereafter


966,000





$
3,352,000

$
285,000

$
657,000


F-15

---





Rent
expense charged to operations was $786,000 and $330,000 for each of the years ended March 31, 2004 and 2003.

H. Revolving Line of Credit

When acquired, Gish had a $4,000,000 revolving line of credit, expiring in February 2005. Advances, based on eligible receivables, are secured by the
operating assets of Gish and bear interest at prime (4.0% at March 31, 2004) plus 2%. The agreement also includes various restrictive loan covenants, including a requirement for Gish to
maintain a minimum net worth of $7,000,000 and to achieve positive net income on a rolling three-month basis.

At
March 31, 2004, Gish had borrowed $730,000 under the revolving line of credit and would have been entitled to borrow an additional $1,629,000.

During
the 2004 fiscal year, Gish had periods when it was in default of a covenant under its revolving line of credit, which requires Gish to achieve net income on a rolling three-month
basis. Gish has received a waiver from its lender for the defaults and Gish is currently in compliance with its covenants.

I. Stockholders' Equity



The Company issued 2,354,190 shares of common stock during year ended March 31, 2004, as a result of the exercise of options by employees and consultants,
generating cash proceeds of $4,984,000 and issued 1,158,900 shares of common stock as a result of the exercise of warrants, generating cash proceeds of $1,770,000. The issuance of 40,000 shares of
common stock to Implant resulted in net proceeds of $40,000. During the first quarter of fiscal 2004, the Company issued 4,901,817 shares of common stock as part of the Gish Biomedical merger
transaction. During the forth quarter of fiscal 2004 the Company issued 3,827 shares of common stock as part of the Dermaphylyx transaction and 12,931 shares of common stock in exchange for an equity
interest in CorNova, Inc.

During
the 2004 fiscal year, the Company recorded non-cash compensation expense of $92,000 related to options granted to non-employees.

On
January 26, 2004, the Board of Directors of CardioTech retained a consultant for a period of six months to continue to represent CardioTech to the investment community.
Services to be performed are 1) create greater awareness in the brokerage community for CardioTech and, 2) to advise CardioTech on market conditions. Fees for the these services will
include (a) all pre-approved out-of-pocket expenses, and (b) the periodic grant of stock options in tranches, up to a maximum aggregate grant of
1,000,000 shares. The options will have an exercise price equal to 75% of the closing price for the day prior to the date of each grant, and will expire three months from the grant date. This
agreement may be renewed by the mutual consent of the parties hereto at such terms as shall be mutually agreed to by the parties. During the three-month period ended March 31, 2004, the Company
granted options under this consulting agreement to purchase 150,000 shares. The consultant exercised the options during the three-month period ended March 31, 2004 and proceeds from the
exercise of these options totaled $697,000. The Company has recorded an expense of $232,000 for the difference between the proceeds received and the fair market value of the options on the date of
grant. During

F-16

---



the
fiscal year ended March 31, 2003, the Company wrote-off a note receivable from this consultant for $280,000 as it deemed it uncollectible at that time. The Company reasoned that
this note receivable was over two years old, therefore it was appropriate to record the expense during the fiscal year ended March 31, 2002. The note was originally issued by the Company for
the exercise of 200,000 options to purchase shares of common stock. The Company has received payments totaling $237,000 during fiscal 2004, which have been recorded as other income in the accompanying
consolidated statement of operations. The Company expects to recover the remaining $43,000 during fiscal 2005. During Fiscal 2004, this same consultant exercised options, granted (at the fair market
value on the date of grant) and vested in fiscal years prior to fiscal 2004, for 1,000,000 shares at a total purchase price of $2,695,000.



During the second quarter of fiscal 2004, the Company issued 95,000 treasury shares to various employees and board members for their effort in the Gish
transaction. The fair market value of these treasury shares was approximately $293,000, which was recorded as a non-cash compensation expense in the Consolidated Statement of Operations
for 2004 fiscal year. Subsequently, two board members returned the stock to the Company. The 10,000 shares returned were recorded at the fair market value on December 9, 2003 by increasing
additional paid in capital and treasury stock by $68,000. In January 2001, the Board of Directors of the Company authorized the purchase of up to 250,000 shares of the Company's common stock of
which 114,255 shares have been purchased at March 31, 2004. Subsequent to March 31, 2004, the Board of Directors authorized the purchase of up to 500,000 of additional shares of the
Company's common stock. The Company announced that purchases may be made from time-to-time in the open market, privately negotiated transactions, block transactions or otherwise, at times and price
deemed appropriate by management.

During
the 2004 fiscal year, the Company received $150,000 in payments on officer notes, which had been included in subscription receivable from related parties. During the 2004 fiscal
year, the Company recorded additional subscription receivable of $140,000 due to the issuance of stock to holders of options and warrants, prior to receiving payment of the related exercise price.
Their payments for the exercise of the warrants were received after the December 15, 2003 expiration date, however the Company allowed for the exercise of those warrants. During the fourth
quarter of fiscal 2004, these subscription receivables were paid in full.

J. Acquisitions

On April 7, 2003 the Company consummated a merger with Gish Biomedical, Inc. ("Gish"). Gish stockholders received 1.3422 shares of CardioTech common
stock for each share of Gish common stock that they owned. Holders of options to purchase Gish common stock received options to purchase 1.3422 shares of CardioTech common stock for every share of
Gish common stock that they could purchase under the Gish option, at an exercise price per share equal to the exercise price of the Gish option divided by 1.3422. 4,901,817 shares of CardioTech common
stock were issued to the Gish stockholders, representing approximately 35% of the total shares outstanding as of March 31, 2003.

Gish,
a California corporation, was founded in 1976 to design, produce and market innovative specialty surgical devices. All of Gish's products are single use disposable products or have
a disposable component. Gish's primary markets include products for use in cardiac surgery, myocardial

F-17

---



management,
infusion therapy, and post operative blood salvage. The Gish subsidiary will continue to conduct its business in the Rancho Santa Margarita facility. The Company believes that the merger
will result in synergies from combining the respective operations.

As
of December 31, 2003, the total updated purchase price, net of cash acquired, was $8,772,000. The value of the common stock issued was determined based on the average market
price of CardioTech's common stock over a 25 day period before the terms of the acquisition were agreed to and announced. The purchase price includes the fair market value of stock options
issued based on a Black Scholes calculation. There are no contingent payments or commitments outstanding. No major restructuring of personnel or operations is contemplated. The former president of
Gish Biomedical, Inc., resigned as president of Gish on April 30, 2003 and per his contract, CardioTech agreed to pay him $372,000 over the next nineteen months. This amount was recorded
as a compensation charge in the first quarter of fiscal 2004, and included in severance payment in the accompanying statement of operations.

The
operating results of Gish have been included in the Company's statement of operations beginning April 1, 2003. The table below summarizes the fair values of the assets and
liabilities assumed as of the date of acquisition.

From
the third party valuations, the Company originally recorded intangible assets of $906,000 and goodwill of $631,000. Goodwill was adjusted to $554,000 during the three months ended
December 31, 2003. Analysis of Gish's allowance for doubtful accounts resulted in a reduction of $77,000 in the carrying value of the goodwill. The intangible assets are for customer
intangibles of $644,000 and technology intangibles of $262,000. The customer intangibles that meet the criteria for recognition include customer lists, order or production backlog, customer contracts
and the related customer relationships, and non contractual customer relationships. Customer intangible assets are assumed to have a seven year life. The technology intangible assets represent value
attributable to propriety knowledge and processes that have been developed or purchased by a company and are recognized as actually providing, or having the potential to provide, significant
competitive advantages or product differentiation. The technology intangible assets are assumed to have a fifteen year life.

F-18

---



The
following table summarizes the fair values of the assets and liabilities assumed on the date of acquisition. CardioTech has obtained third-party valuations of tangible and intangible
assets and their effect is included in the table below.

As of
April 1, 2003-
AdjustedUnauditedCurrent Assets

$
7,604,000Property and Equipment


2,815,000Amortizable Intangible Assets


906,000Goodwill and Non Amortizable Assets


554,000Other Non Current Assets


242,000Total Asset Acquired


12,121,000Current Liabilities


2,743,000Deferred rent


262,000Total Liabilities Assumed


3,005,000Net Assets Acquired

$
9,116,000


The
following unaudited pro forma combined condensed consolidated statement of income has been prepared to give effect to the merger of CardioTech and Gish using the purchase method of
accounting. The unaudited pro forma combined condensed consolidated statement of income is presented for illustrative purposes only and are not necessarily indicative of the financial position or
results of operations that would have actually been reported had the merger occurred on April 1, 2002 for the year ended March 31, 2003, nor is it indicative of the future position or
results of operations.

UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED STATEMENT OF INCOME

For the year ended
March 31, 2003Net Sales

$
21,103,000Net loss

$
(1,950,000
)Net loss per common share:Basic and diluted(1)

$
(0.14
)Shares used in computing net loss per common share:Basic and diluted(2)


14,031,271


---

F-19

---



K. Enterprise and Related Geographic Information

The Company acquired Gish Biomedical, Inc. effective April 7, 2003 and subsequent to that date, the Company has managed its business in fiscal 2004
on the basis of one reportable operating segment: Medical Device Manufacturing and Sales.

Sales
to foreign customers (primarily Europe and Asia) aggregated approximately $3,247,000 in 2004.

L. Supplemental Disclosures for Stock-Based Compensation

CardioTech's 1996 Employee, Director and Consultants Stock Option Plan (the "1996 Plan") was approved by CardioTech's Board of Directors and Stockholders in
March 1996. A total of 7,000,000 shares have been reserved for issuance under the Plan. Under the terms of the Plan the exercise price of Incentive Stock Options issued under the Plan must be
equal to the fair market value of the common stock at the date of grant. In the event that Non Qualified Options are granted under the Plan, the exercise price may be less than the fair market value
of the common stock at the time of the grant (but not less than par value). In October 2003, the Company's shareholders approved the CardioTech International, Inc. 2003 Stock Option Plan
(the "2003 Plan"), which authorizes the issuance of 3,000,000 shares of common stock with terms similar to the 1996 Plan. Substantially all of the stock options granted pursuant to the 1996 Plan
provide for the acceleration of the vesting of the shares of Common Stock subject to such options in connection with certain changes in control of the Company. A similar provision is not included the
2003 Plan. Normally options garnted expire ten years from the grant date.

During
fiscal 2003, the Company issued options to a consultant to purchase 35,000 shares of the Company's common stock, which were valued at fair market value using the Black Scholes
option-pricing model. These options vest over a 24 month period. During fiscal 2004 and 2003, the Company expensed $56,000 and $16,000, respectively, related to the options.

Activity
under the Plans for the years ended March 31, 2004 and 2003 is as follows:

Number
of Options

Weighted average
exercise priceOutstanding April 1, 2002

4,476,396

$
1.66Granted

182,119


1.58Cancelled

(215,628
)

1.55Exercised

(69,665
)

1.02Outstanding March 31, 2003

4,373,222


1.67Granted

2,880,304


2.45Cancelled

(54,488
)

1.85Exercised

(2,354,190
)

2.11Outstanding March 31, 2004

4,844,848

$
1.97


F-20

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Weighted
average fair value of the options granted in fiscal 2004 was $2.45. As of March 31, 2004, 809,539 shares were issued under the 2003 Stock Option Plan.

Summarized
information about stock options outstanding at March 31, 2004 is as follows:

Weighted
Average
Remaining
Contractual
Life



ExercisableWeighted
Average
Exercise
PriceRange of
Exercise Prices

Number of
Options
Outstanding

Number of
Options

Weighted
Average
Exercise Price$0.28$0.92

1,521,002

8.1

$
0.85

1,521,002

$
0.85$1.04$1.95

1,948,092

6.2

$
1.53

1,850,274

$
1.52$2.06$3.06

368,839

6.4

$
2.63

352,692

$
2.61$4.04$4.04

833,915

9.7

$
4.04

263,121

$
4.04$5.40$5.40

173,000

9.8

$
5.40

61,684

$
5.40$0.28$5.40

4,844,848

7.5

$
1.97

4,048,773

$
1.59


The
Executive Compensation Structure that The Compensation Committee for the Gish transaction approved provides an anti-dilution provision for Michael Szycher. This provision
ensured that Michael Szycher's percentage of ownership (20.8%) would be the same after the Gish transaction as it was before. Upon completion of the Gish transaction, Michael Szycher was granted a
stock option for 1,017,330 shares at an exercise price of $0.92. Similar awards may be granted in the future for acquisitions or equity based transactions.

Options
exercisable at March 31, 2004 and March 31, 2003 were 4,048,773 and 3,919,236, respectively. At March 31, 2004 there were no shares remaining to be granted
under the 1996 Stock Option Plan and 2,190,461 shares were available for grant under the 2003 Stock Option Plan. Of the shares available for grant at March 31, 2004, 850,000 shares are
reserved for potential issuance in connection with the agreement with a consultant described in Note I. Subsequent to March 31, 2004, the Board of Directors granted Michael Szycher
options to purchase 250,000 shares of the Company's common stock, subject to yet to be determined fiscal 2005 performance requirements.

During
fiscal 2004, 1,158,900 warrants were exercised, resulting in net cash proceeds of approximately $1,770,000. At March 31, 2004 there were no warrants outstanding to purchase
shares of the Company's common stock.

F-21

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M. Intangible Assets

Intangible assets consist of the following at March 31:

Estimated
Useful Life

2004Customer intangiblesCDT

5 years

$
412,000LessAccumulated amortization




(240,000
)Customer intangibles, net



$
172,000Customer intangiblesGish

7 years

$
644,000LessAccumulated amortization




(92,000
)Customer intangibles, net



$
552,000Technology intangiblesGish

15 years

$
262,000LessAccumulated amortization




(18,000
)Technology intangibles, net



$
244,000Goodwill



$
2,367,000LessAccumulated amortization




(729,000
)Goodwill, net



$
1,638,000


N. Other Agreements

In March 2000, Implant Sciences Corporation (AMEX:IMX) entered into a $250,000 joint research agreement with the Company for the purpose of having the
Company develop a proprietary porous polymer biocompatible coating technology as a platform for Implant's proprietary radioactive brachytherapy technology. During fiscal 2001, the Company was paid
$50,000 by Implant pursuant to the aforementioned agreement. The joint research and development agreement provides for the Company to develop the polyurethane coating instrumental in the development
of a polyurethane coated drug-eluting stent and for the Company to grant Implant a perpetual worldwide exclusive license to use, sublicense and otherwise deal in any technology developed
by the Company in
connection with the development of the stents. In consideration of the research, development and technology transfer, Implant paid the Company $150,000 in cash pursuant to a milestone schedule. In
addition, Implant agreed to purchase 100,000 shares of CardioTech's common stock at a price of $1.00 per share upon the achievement of certain milestones specified in the agreement. On
April 18, 2002, Implant purchased 60,000 shares of the Company's common stock at $1.00 per share. On November 26, 2003, Implant purchased 40,000 shares of the Company's common stock at
$1.00 per share.

The
owner of the technology used in connection with the stent will be CardioTech; however, such technology will be transferred to Implant pursuant to a technology license. The developed
technology represents a "platform" in the sense that the polyurethane developed by CardioTech and utilized to cover the stent will be the medium in which specific anti-restenosis drugs
will be implanted and therefore becomes the key technological component of this drug-eluting stent. The research and development agreement provides for 6 phases including the design of
equipment necessary to produce prototypes of the stent, development of a series of prototypes, production of a limited number of prototypes and the delivery of prototypes to Implant. The material
deadline is therefore the delivery of an operative prototype.

F-22

---



On
November 26, 2003, Implant accepted the Company's final report covering the joint research program on developing a drug-eluting stent. On November 26, 2003,
Implant paid the Company $75,000; $35,000 was the final payment on the research program and $40,000 was payment for the purchase of 40,000 shares of the Company's common stock at the price of $1.00
per share. The issuance of 40,000 shares of the Company's common stock to Implant resulted in a non-cash expense of approximately $210,000. The excess of the fair value of the total award
on November 26, 2003 was recorded as non-cash research and development expense and included in the accompanying statement of operations. As of November 26, 2003, Implant has
paid the Company the entire $250,000 due under this joint research agreement. Implant and the Company have no further obligations under this agreement.

In
April 2002, the Company concluded a technology transfer and license agreement with Credent Vascular Technologies, Ltd., of Wrexham, U.K. ("Credent"). Total consideration
paid by Credent to CardioTech for the purchase of the transferred rights to ChronoFlex RC was $500,000. Under terms of the agreement, CardioTech irrevocably granted an exclusive, worldwide license of
its intellectual property rights relating to ChronoFlex RC, enabling Credent to exclusively synthesize ChronoFlex RC biodurable polycarbonate-urethane. Credent will use ChronoFlex RC in the
manufacture of its vascular access and peripheral vascular grafts and potentially in future development products. Credent has licensed back to CardioTech the right to use ChronoFlex RC for the
manufacture and marketing of coronary artery bypass grafts.

O. Valuation and Qualifying Accounts

|Description                     |       | Balance at
Beginning of
Period |        | Charged to
Costs and
Expenses |   | Other  |        | Write Offs |         | Balance at
End of Period
|------------------------------- | ----- | ------------------------------ | ------ | ----------------------------- | - | ------ | ------ | ---------- | ------- | ------------------------
|Year Ended March 31, 2004:      |       |                                |        |                               |   |        |        |            |         |                         
|Deducted from assets accounts:  |       |                                |        |                               |   |        |        |            |         |                         
|Allowance for doubtful accounts |       | $                              | 92,000 |                               | $ | 24,000 |        | $          | 80,000  |                         
|Excess and obsolescence reserve |       | $                              | 15,000 |                               | $ | 48,000 |        | $          | 472,000 |                         
|                                | Total |                                | $      | 107,000                       |   | $      | 72,000 |            | $       | 552,000                 
|Year Ended March 31, 2003:      |       |                                |        |                               |   |        |        |            |         |                         
|Deducted from asset accounts:   |       |                                |        |                               |   |        |        |            |         |                         
|Allowance for doubtful accounts |       | $                              | 70,000 |                               | $ | 33,000 |        |            |         |                         
|Excess and obsolescence reserve |       | $                              | 15,000 |                               |   |       |        |            |         |                         
|                                | Total |                                | $      | 85,000                        |   | $      | 33,000 |            |         |                         

P. Benefit Plan and Employment Agreement

The Company has several Salary Reduction Profit Sharing Plans ("the Plans"), established under Section 401(k) of the Internal Revenue Code, in which all
employees are eligible to participate. Total Company contribution to the Plans was $27,000 in the 2004 fiscal year.

The
Company has entered into an employment agreement (the "Employment Agreement") with Dr. Michael Szycher, pursuant to which said individual serves as Chief Executive Officer of
the Company. Pursuant to the terms of the Employment Agreement, Dr. Szycher is to receive an annual base salary of Three Hundred and Twenty Five Thousand ($325,000) dollars.
Dr. Szycher's salary will

F-23

---



be
reviewed annually by the Board. Additionally, Dr. Szycher may also be entitled to receive an annual bonus payment in an amount, if any, to be determined by the Compensation and Stock Option
Committee of the Board.

The
initial term of the Employment Agreement by and between the Company and Dr. Szycher is set to expire on December 31, 2004. After such time, the term of the Employment
Agreement will be deemed to continue on a month-to-month basis if not expressly extended while Dr. Szycher remains employed by the Company. Dr. Szycher and
CardioTech each have the right to terminate the Employment Agreement at any time, with or without cause (as defined in the Employment Agreement), upon thirty (30) days prior written notice. In
the event that CardioTech terminates the applicable Employment Agreement without cause, or Dr. Szycher terminates his employment for good reason following a change in control (as such terms are
defined in the Employment Agreement) or CardioTech fails to renew the Employment Agreement within two (2) years following the occurrence of a change in control, Dr. Szycher will be
entitled to receive severance equal to 2.99 times his annual base salary at termination. In such event, Dr. Szycher will be bound by a noncompete covenant for one (1) year following
termination of his employment.

Q. Investment in CorNova, Inc.

An Exchange and Venture Agreement (the "Agreement") was entered into on March 5, 2004 by and among CardioTech, Implant, and CorNova, Inc.
("CorNova"). Cornova is a start-up company, incorporated as a Delaware corporation on October 12, 2003. CorNova's focus will be the development of a next-generation
drug-eluting stent. On March 5, 2004, CardioTech and Implant each agreed to transfer to CorNova 12,931 shares and 10,344 shares of their common stock (collectively, the
"Contributory Shares"), respectively, in exchange for 1,500,000 shares, each, of CorNova's common stock. The number of Contributory Shares issued reflects the fair market value of CardioTech's and
Implant's common stock as of November 18, 2003, for an aggregate value of $75,000 each. This also resulted in CardioTech and Implant each receiving a thirty percent (30%) ownership interest in
CorNova.

Upon
the 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 will each issue additional shares of their common stock (the "Investment Shares"), where the number of Investment Shares to be issued will be equal to twenty-five percent (25%), of
the gross proceeds of the Series A Financing divided by the respective five (5) day average of the closing prices of the common stock of CardioTech and Implant as published in the Wall
Street Journal on the dates immediately preceding each relevant closing of the Series A Financing. In addition to the issuance of its common stock upon the completion of a Series A
Financing, CardioTech will also grant to CorNova an exclusive license for the technology consisting of Chronoflex DES polymer, or any poly (carbonate) urethane containing derivative thereof, for use
on drug-eluting stents.

Both
the Contributory Shares and the Investment Shares (collectively, the "Securities") are restricted securities within the meaning of Rule 144 of the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Securities Act"), and none of the Securities may be sold except pursuant to an effective registration statement under the Securities Act
or under the securities laws of any state, or in a transaction exempt from registration under the Securities Act.

F-24

---



During
fiscal 2004, the Company used the equity method of accounting and recorded equity in the net loss of CorNova of $1,000, equity in comprehensive income of CorNova of $7,000
(related to unrealized holding gains on securities classified as available-for-sale), and recorded a charge of $32,000, reducing its original $75,000 investment to $50,000 at
March 31, 2004.

R. Subsequent Events



On June 21, 2004 the Board of Directors authorized the purchase of up to 500,000 additional shares of the Company's common stock. In June 2001 the Board of
Directors authorized the purchase of up to 250,000 shares of the Company's common stock, of which 114,255 shares have been purchased at March 31, 2004. The Company announced that purchases may
be made from time-to-time in the open market, privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management.



On April 1, 2004 the Board of Directors granted Michael Szycher options to purchase 250,000 shares of the Company's common stock, subject to yet to be determined
fiscal 2005 performance requirements.

F-25

---



SIGNATURES

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

|Dated: June 25, 2003 |  | CardioTech International, Inc.
|-------------------- |  | ------------------------------
|                     |  |                               
|                     |  | By:                           
|                     |  |                               

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

|Dated: June 25, 2004 |  | Michael Szycher
Chairman, Chief Executive Officer
(Principal Executive Officer) |  | 
|-------------------- |  | ------------------------------------------------------------------------------- |  | 
|Dated: June 25, 2004 |  | Michael F. Adams
Director                                                       |  | 
|Dated: June 25, 2004 |  | Michael Barretti
Director                                                       |  | 
|Dated: June 25, 2004 |  | Anthony J. Armini
Director                                                      |  | 
|Dated: June 25, 2004 |  | Jerry Dorsey
Director                                                           |  | 
|Dated: June 25, 2004 |  | William O'Neill, Jr.
Director                                                   |  | 
|Dated: June 25, 2004 |  | Leslie M. Taeger
Chief Financial Officer                                        |  | 

---