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

**Washington,D.C. 20549**

**Form 10-KSB**
| **(Mark One)**                                                                                                                                                           | ** ** | ** **                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|
| x                                                                                                                                                                        | ** ** | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE** |
| ** **                                                                                                                                                               | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                 |
| **For the fiscal year ended March 31, 2005**                                                                                                                        |
| o                                                                                                                                                                        | ** ** | **TRANSITION REPORT UNDER  SECTION 13 OR 15(d) OF THE**   |
| ** **                                                                                                                                                               | ** ** | **SECURITIES EXCHANGE ACT OF 1934**                                 |
| **For the transition period from                      to** |

 

**CommissionFile No. 0-28034**

**CardioTech International, Inc.**

(Name of small businessissuer 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 registeredunder 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** |
|---------------------------------------------------------------|-----------------------------------------------------------------------|

 

**Securitiesregistered pursuant to Section 12(g) of the Act: None**

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

Check if there is no disclosure of delinquent filersin 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, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB. o

State issuer’s revenues for its most recent fiscal year.$21,841,000

As of June 10, 2005, 19,257,589 shares of theregistrant’s Common Stock were outstanding, and the aggregate market value ofthe registrant’s Common Stock held by non-affiliates of the registrant (withoutadmitting that such person whose shares are not included in such calculation isan affiliate) was approximately $33,672,000 based on the last sale price asreported by the American Stock Exchange on such date.

TransitionalSmall Business Disclosure Format (check one): Yes o  No x

 

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**CardioTech International, Inc**

**FORM 10-KSBFOR THE YEAR ENDED MARCH 31, 2005**

**INDEX**
| **PART I**        |   |                                                                                                                         |   |   |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------|--------|--------|
| Item  1.          |   | Description of Business                                                                                                      |   | 3      |
| Item  2.          |   | Description of Property                                                                                                      |   | 27     |
| Item 3:           |   | Legal Proceedings                                                                                                            |   | 27     |
| Item  4:          |   | Submission of Matters to a  Vote of Security Holders                                                                         |   | 27     |
| **PART II**  |   |                                                                                                                         |   |   |
| Item  5.          |   | Market Information for  Common Equity and Related Stockholder Matters                                                        |   | 28     |
| Item  6.          |   | Management’s Discussion and  Analysis or Plan of Operation                                                              |   | 29     |
| Item 7.           |   | Financial Statements                                                                                                         |   | 34     |
| Item  8.          |   | Changes In and Disagreements  With Accountants on  Accounting and Financial Disclosure                                       |   | 34     |
| Item  8a.         |   | Controls and Procedures                                                                                                      |   | 34     |
| Item 8b.          |   | Reports on Form 8-K                                                                                                          |   | 34     |
| **PART III** |   |                                                                                                                         |   |   |
| Item  9.          |   | Directors, Executive  Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange Act. |   | 35     |
| Item  10.         |   | Executive Compensation                                                                                                       |   | 38     |
| Item  11.         |   | Security Ownership of  Certain Beneficial Owners and Management                                                              |   | 40     |
| Item  12.         |   | Certain Relationships and  Related Transactions                                                                              |   | 41     |
| **PART IV**  |   |                                                                                                                         |   |   |
| Item  13.         |   | Exhibits, Financial  Statement Schedules, and Reports on Form 10-KSB                                                    |   | 42     |
| Item 14.          |   | Principal  Accounting Fees and Services                                                                                      |   | 44     |
|              |   | Index to Financial Statements                                                                                                |   | F-1    |

 

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**PART I**

**Item 1.**                        Descriptionof Business

**Forward Looking Statements**

The Annual Report on Form 10-KSBcontains statements which are not historical and constitute “ForwardLooking Statements” within the meaning of Section 27A of the SecuritiesAct and Section 21E of the Securities Exchange Act of 1934, includingstatements regarding the expectations, beliefs, intentions or strategies forthe future. We intend that all forward-looking statements we make in thispublic filing be subject to the safe-harbor provisions of the PrivateSecurities Litigation Reform Act of 1995. These forward-looking statements areonly predictions and reflect our views as of the date they are made withrespect to future events and financial performance. Forward-looking statementsare subject to many risks and uncertainties which could cause our actualresults to differ materially from any future results expressed or implied bythe forward-looking statements. For adiscussion of important factors that could affect the Company’s results, pleaserefer to “Risk Factors” below.

Except to the extentrequired by applicable laws or rules, we do not undertake any obligation orduty to publicly update or revise any forward-looking statements, whether as aresult of new information, future events or otherwise.

**General**

CardioTech International, Inc. (“CardioTech” orthe “Company”) was founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”).In June 1996, PMI distributed all of the shares of CardioTech’s commonstock, par value $.01 per share, that PMI owned, to PMI stockholders of recordas of June 3, 1996. The Company is headquartered in Wilmington,Massachusetts where its biomaterial division is located; operates contractresearch and development services and outsourced manufacturing from its CDTfacility in Plymouth, Minnesota; and manufactures and sells products used inopen heart surgery, vascular access and orthopedic surgery from its Gishfacility in Rancho Santa Margarita, California. CardioTech has managed itsbusiness in fiscal 2005 and 2004 on the basis of one reportable operatingsegment: Medical Device Manufacturing and Sales. However, withinthis segment CardioTech serves a variety of customer needs.

The Company is using its proprietary manufacturingtechnology to develop and manufacture small bore vascular grafts, or syntheticblood vessels, made of ChronoFlex, a family of polyurethanes that has beendemonstrated to be biocompatible and non-toxic. Vascular grafts are used toreplace, bypass or provide a new lining or arterial wall for occluded, damaged,dilated or severely diseased arteries. The Company developed a vascular accessgraft tradenamed VascuLink Vascular Access Graft and was developing aperipheral graft tradenamed MyoLink Peripheral Graft. The Company sold theVascuLink and MyoLink products to Nervation Ltd in connection with thedisposition of the Company’s UK subsidiary, CardioTech International, Ltd(“CTL”) in November 2000. The Company is currently developing a layeredmicroporous coronary artery bypass graft tradenamed CardioPass, that utilizessimilar material used in the grafts produced by CTL.

In 2001, the Company acquired Catheter and DisposablesTechnology, Inc., a Minnesota corporation (“CDT”). CDT is an originalequipment manufacturer; supplier of specialized disposable medical devices tomedical device companies from concept to finished packaged, sterile product;and uses its experience in the design, development, prototyping andmanufacturing to provide turnkey contract services. Some devices designed, developedand manufactured for customers by CDT include sensing, balloon, and drugdelivery catheters; disposable endoscopes; and in-vitro diagnostic and surgicaldisposables.

Additionally, through its Biomaterials division, theCompany develops, manufactures and markets polyurethane-basedbiomaterials for use in both acute and chronically implanted devices such asstents, 

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artificial hearts, andvascular ports. These premium biomaterials are sold under the tradenames:ChronoFlex, ChronoThane, HydroThane, ChronoFilm, HydroMed and Hydroslip.

CardioTech owns a number of patents relating to itsvascular graft manufacturing technology. In addition, PMI has granted toCardioTech an exclusive, perpetual, worldwide, royalty-free license for the useof one polyurethane patent and related technology in the field consisting ofthe development, manufacture and sale of implantable medical devices andbiodurable polymer material to third parties for the use in medicalapplications (the “Implantable Device and Materials Field”). PMI also owns,jointly with Thermedics, Inc., an unrelated company that manufacturesmedical grade polyurethane, the ChronoFlex polyurethane patents relating to theChronoFlex technology (“Joint Technology”). PMI has granted to CardioTech anon-exclusive, perpetual, worldwide, royalty-free sublicense of these patentsfor 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 andCardioPass are trademarks of CardioTech.

On April 7, 2003, a subsidiary of the Companymerged with Gish Biomedical, Inc., a California corporation (“Gish”), withits corporate headquarters in Rancho Santa Margarita, California. Eachoutstanding share of Gish common stock was converted into 1.3422 shares ofCardioTech common stock. CardioTech issued 4,901,817 shares to former holdersof Gish stock, which equaled approximately 35% of the total shares outstanding.Gish specializes in the manufacture and sale of products used in open-heartsurgery, vascular access and orthopedic surgery. Gish is registered as amedical device manufacturer with the FDA, the European Union and stateagencies, such as the California Department of Health Services.

In July 1999, Dermaphylyx International, Inc.(“Dermaphylyx”), was formed by certain affiliates of CardioTech to developadvanced wound healing products. Dermaphylyx was merged into CardioTechInternational, Inc. effective March 12, 2004 and is now a whollyowned subsidiary of CardioTech. Due to CardioTech’s controlling financialinterest, Dermaphylyx has been consolidated in the financial statements ofCardioTech as of December 31, 2003. Upon the merger, the currentshareholders of Dermaphylyx received 3,827 shares of common stock of CardioTechvalued 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 wounddressings available for sale, AlgiMed and HydroMed and Blist-Rx, a blisterprevention dressing. AlgiMed wound dressings are designed for exudating andbleeding wounds and HydroMed is an absorbent dressing designed for lowexudating wounds. Both dressings have been granted Medicare billing codes.Blist-Rx is a breathable polyurethane foam dressing intended to be used bysports enthusiasts to prevent blisters. In October 2004,Deramphylyx introduced a hydrating mask, trade named AloeGlow, which will besold directly to beauty salons, professional outlets and regional distributors.

In March 2004,CardioTech joined with Implant Sciences, Inc. (IMX on American StockExchange) to participate in the funding of CorNova, Inc. CorNova, Inc.was formed to develop a novel coronary drug eluting stent using the combinedcapabilities and technology of CorNova, Implant Sciences and CardioTech.CardioTech currently has a thirty percent equity interest in CorNova. CorNovacompleted its initial funding on February 5, 2005 by obtaining privateinvestments totaling approximately $3,000,000, at which time CardioTechcontributed 308,642 shares of its common stock with a market value at thetime of contribution of twenty-five per cent of the amount raised ($750,000).The stent will utilize a design similar to the CardioPass and the Chronoflexmaterial. CorNova is in its initial stage of product development. CardioTechaccounts for its investment in CorNova using the equity method of accounting.

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**Medical Background**

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

Vascular grafts are usedto replace or bypass occluded, damaged, dilated or severely diseased arteriesand are sometimes used to provide access to the bloodstream for patientsundergoing hemodialysis treatments. Existing small bore graft technologiessuffer from a variety of disadvantages in the treatment of certain medicalconditions, depending upon the need for biodurability, compliance (elasticity)and other characteristics necessary for long-term interface with the humanbody.

**Product in Pre-clinical Development**

***CardioPass Coronary Artery Bypass Graft***

Coronary artery bypass graft (“CABG”) surgery isperformed to treat the impairment of blood flow to portions of the heart. CABGsurgery involves the addition of one or more new vessels to the heart tore-route blood around blocked coronary arteries.

Autogenous grafts (using the patient’s own saphenousvein, radial artery, or mammary artery) have been successfully used in CABGprocedures for a number of years and have shown a relatively high patency rate(80% to 90% for saphenous veins and over 90% for mammary arteries one yearafter surgery) with no risk of tissue rejection. However, the surgicalharvesting of vessels for autogenous grafts involves significant trauma andexpense. In addition, not all patients requiring CABG surgery have sufficientnative vessels as a result of previous bypass surgeries, or their vessels maybe of inferior quality due to trauma or disease. Cryo-preserved saphenous veinsare available, but these veins often deteriorate due to attack by the body’simmune system.

CardioTech is developing its grafts using specializedChronoFlex polyurethane materials that it believes will provide significantlyimproved performance in the treatment of arterial disorders. The grafts havethree layers, similar to natural arteries and are designed to replicate thephysical characteristics of human blood vessels.

The Company is developing the CardioPass CoronaryArtery Bypass Graft to be a synthetic graft of 4mm in diameter specificallydesigned for use in CABG surgery. If successfully developed, the Companybelieves that the CardioPass Graft may be used initially to provide analternative to patients with insufficient or inadequate native vessels for usein bypass surgery as a result of repeat procedures, trauma, disease or otherfactors. The Company believes, however, that the CardioPass Graft mayultimately be used as a substitute for native saphenous veins, thus avoidingthe trauma and expense associated with the surgical harvesting of the vein.

The Company estimates that approximately 650,000 CABGprocedures were performed worldwide during fiscal 2004, of which nearly 300,000were performed in the United States. The Company believes that approximately20% of these CABG procedures were performed on patients who had previouslyundergone bypass surgery, and that the number of repeat procedures willcontinue to increase as a percentage of procedures performed. Currently,approximately 70% of CABG procedures are performed utilizing the saphenousvein.

The CardioPass Coronary Artery Bypass Graft hasconducted limited clinical trials in Brazil. The Company announced that threeadult human implants have occurred and, as of March 31, 2005, all threepatients and grafts are performing uneventfully. The Company has announced thatit is planning the 

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commencement of clinicaltrials in Europe to obtain European marketing approval and  Phase II clinical trials in Brazil, in Fiscal2006.

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

***Custom Cardiovascular Tubing Systems***

During open-heart surgery, the patient’s blood isdiverted from the heart through sterile plastic tubing and various otherdevices to an oxygenator device, which oxygenates the blood before it isreturned to the patient. Each hospital performing open-heart surgery specifiesthe components to be included in its custom tubing sets, based on theparticular needs of its surgical team. The complexity of the sets varies fromsimple tubing systems to all-inclusive operating packs. The packs usuallyinclude blood filters, gas filters, reservoirs used to collect blood lostduring surgery and other components. Gish produces custom tubing sets usingclear MediflexTM tubing. Such components are assembled in the Gish clean room,sterilized and then shipped either to the hospital or to one of Gish’sspecialty distributors, which service such hospitals.

Custom tubing systems aresold separately and combined with an oxygenator. Revenue from sales of customtubing systems sold separately equaled 12% of total Company revenue for fiscal2005.

***Arterial Filters***

The arterial filter is the last device the bloodpasses through in the cardiovascular bypass circuit as it is being returned tothe 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.

The Company introduced itsfirst arterial filters in 1985. Gish’s first design contained a safety bypassloop incorporated into the filter housing. The Company received FDA approval tomarket an improved design, which became available for sale during the secondquarter of fiscal 1994.

***Cardiotomy Reservoirs***

Cardiac suction is a technique employed in open-heartsurgery 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 replacementfrom donor sources, thereby reducing the risk of blood compatibility problemsand blood-borne viral diseases such as AIDS and hepatitis.

The Company’s cardiotomy reservoir systems consist ofa polycarbonate reservoir, defoaming and filtration cartridge, and mountingbracket. 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 thecardiotomy reservoirs’ use in the operating room, The Company has developedseveral systems that allow the cardiotomy reservoir to be used as a pleuraldrainage or autotransfusion system during recovery.

***Vision(TM) Oxygenator***

An oxygenator enables gas exchange of oxygen andcarbon dioxide and also regulates the temperature of the patient’s blood. As alife sustaining device used during open-heart surgery, the oxygenator is a keycomponent of the bypass circuit. Vision is assembled in a clean room usingstate of the art equipment and biocompatible materials, and then each unit isleak tested before shipment.           Vision’sgas transfer 

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performance is excellent,dependable and capable of maintaining the oxygen demands of patients of all sizesfor periods of up to six hours.

Vision’s unique air separation channel utilizes anarterial outlet pressure gradient and the natural buoyancy of air to minimizethe passage of gaseous emboli towards the patient. Unwanted emboli are safelypurged for safe venting back to the reservoir. Through studies at anindependent testing facility, Vision’s air handling abilities were provensuperior to competitive devices.

Vision also eliminates common difficulties associatedwith other oxygenators. The blood ports are oriented on one side, gas and wateron the other to reduce contamination. Different sized gas inlet and outletports resolve any gas line confusion. Angled water ports allow Vision’s heatexchanger to drain, minimizing the creation of water puddles on the floor.During long pump runs, a fluid dam and evacuation port divert condensation awayfrom the gas scavenge port. Finally, a protective rib below the blood inletport prevents any contact between the port and the floor.

The Vision oxygenator issold separately, or with a reservoir, and also with a reservoir and customtubing system. The Vision oxygenator was sold in selected accounts bothdomestically and internationally for the first half of fiscal 1998. The Companymade its full market release of this product for sale in January 1998. TheCompany believes that the Vision oxygenator’s superior air handlingcapabilities provides The Company with a competitive advantage in theoxygenator market place. Revenue generated from sales that included an oxygenatorequaled 32% of total Company revenue for fiscal 2005.

***Venous Reservoirs***

A venous reservoir is adevice used to pool, filter and defoam blood prior to its introduction to theoxygenator. Gish offers a variety of venous reservoirs, including some whichincorporate the capacity for autologous transfusion post surgically. Gish alsohas several products that incorporate the functions of cardiotomy, venousreservoir, post surgical blood collection and blood reinfusion devices. Thisfunctional bundling is usually cost effective for the hospital.

***CAPVRF44***

The Company’s CAPVRF44 hardshell venous reservoircombines a 360° rotational, top-entry  1¤2"inlet for unrestricted venous drainage and a high performance cardiotomycompartment with six sucker inlet ports to handle all of the blood coming fromthe surgical field. The Company has incorporated the advantages of the depthfilter in its cardiotomies into the CAPVRF44 for reduced hold-up volumes,making more blood available to the patient. With an operating capacity of 4400ml, the CAPVRF44 also has the capacity to handle high blood volume proceduressuch as valve replacements and second surgeries.

The CAPVRF44 is aperioperative device, capable of operating in both the Operating Room andRecovery Room. Following surgery, through a simple conversion process, theCAPVRF44 collects blood shed from the chest cavity and removes unwanted debrisbefore the filtered blood is reinfused back into the patient. Blood recoveryand autotransfusion through the CAPVRF44’s closed system limits hospital staffexposure to potential blood infections. Recovered blood may be reinfusedcontinuously, intermittently, or not at all, in support of all patients’religious beliefs, including Jehovah’s Witnesses. The CAPVRF44’s dual role meansfewer homologous blood products are needed, further reducing surgical costs andimproving patient safety.

***Cardioplegia Delivery Systems***

Cardioplegia encompasses several techniques employedin open-heart surgery to preserve, protect and manage the heart tissue. Thetechnique typically involves the use of a chilled solution that is infused intothe heart through the coronary arteries to cool the heart and reduce heartactivity and metabolism. However, there are many different techniques utilized,depending on the physician and patient needs. The 

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use of these techniquessignificantly reduces damage to heart tissue during surgery, enhancesrestoration of heart function and helps return the patient to a normalheartbeat when the surgical procedure is complete.

The Company has developeda complete line of cardioplegia delivery systems, including a new cardioplegiadevice. In April 2002, the FDA granted the Company clearance to sell thedevice in the United States of America. Additionally, the new cardioplegia deviceis CE marked, allowing sale in Europe. Multiple systems are required for thistechnique due to varying physician preferences. The Company’s originalofferings for this procedure were a series of reservoirs with a recirculationvalve (CPS) and a series of cooling coils (CCS series). The Company has sincedeveloped a line of cardioplegia systems and heat exchangers designed toutilize a blood and potassium mixture and allow the surgeon to quickly changethe temperature delivered to the patient.

***Oxygen Saturation Monitor***

In February 1992, theCompany introduced a digital blood saturation monitor for open-heart surgery,the StatSatTM. The StatSat is an electronic device that measures the oxygencontent of the patient’s blood during surgery. These readings are takencontinuously and the StatSatTM plots the course of the blood oxygen saturationduring the surgery. Although the StatSat is reusable, it uses a disposablesensor for each surgery.

***Critical Care Central Venous Access Catheters andPorts***

The Company’s Hemed central venous access cathetersystems have applications in hyper-alimentation, chemotherapy, andlong-term vascular access. These long-term indwelling catheters are surgicallyimplanted to provide direct access to the central venous system for highprotein intravenous solutions needed by patients having nonfunctional digestivesystems and for rapid dilution and dispersion of highly concentrated drugadministration in chemotherapy for cancer.

The product line includes sterile single, dual andtriple lumen catheters and accessories sold in kits. The triple lumen catheter,which permit three substances to be administered through the same catheter, wasintroduced during fiscal 1997. In 1993, the Company introduced an enhancementto its Hemed catheter line, the CathCap. The CathCap reduces the risk ofinfection at the injection site by continually bathing the injection cap in anantimicrobial solution between injections.

The Company has enhanced the Hemed line with theVasPort Implantable Ports and the VasTack Needle Support System. The VasPortconsists of a silicone catheter with an implantable injection port, allowingvascular access through small needle sticks with the skin acting as a naturalbarrier to infection. This access method eliminates the need for a cumbersomeexternal catheter. The Company introduced a detachable port/catheter system infiscal 1994. The Company also introduced a dual VasPort in July 1996 tomeet the needs of patients requiring multiple infusions. The VasTack consistsof a specially designed needle and positioning system for use with the VasPort.The needle extends the life of the implanted injection port and the positioningsystem gives the nursing staff a sure, safe method for accessing the VasPort.

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

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***Orthofuser***

The patented OrthofuserTMis designed for post-operative use in orthopedic surgeries such as hip and kneereplacements and provides for the safe recovery and transfusion of the patient’sown blood. This product is well suited for orthopedic procedures, as it isportable and incorporates its own internal vacuum source. Salvaging and reusingas little as 500 cc’s of blood post surgically may be enough to avoid the useof donor blood in these types of surgeries.

***FDA Clearance for Heparin Coated Products***

In Fiscal 2004, theCompany received FDA clearance for its heparin coating to be used inconjunction with Gish’s line of heart-lung bypass products. The GBSÔ(Gish Biocompatible Surfaces) Coating is a heparin based, covalently boundbiocompatible coating that will be used to cover the surfaces of  disposable products. Heparin coatings areknown to inhibit blood coagulation, decrease the risk of Systemic InflammatoryResponse Syndrome, reduce complement activation and platelet adhesion, reduceblood loss and hemolysis, provide stable antithrombotic activity and reducethrombus formatiom, as well as decrease leucocyte (white blood cells)activation.

**Biomaterials**

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

CardioTech also manufactures and sells its proprietaryHydroThane biomaterials to medical device manufacturers that are evaluatingHydroThane for use in their products. HydroThane is a thermoplastic, water-absorbing,polyurethane elastomer, that possesses properties that CardioTech believes makeit well suited for the complex requirements of a variety of catheters. Inaddition to its physical properties, CardioTech believes HydroThane exhibits aninherent 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 hydrophilicpolyurethanes are primarily sold to customers as part of an exclusivearrangement. Certain customers are supplied tailored, patented hydrophilicpolyurethanes in exchange for multi-year, royalty-bearing exclusivesupply contracts. The Company owns 29 patents in the field of hydrophilicpolyurethanes.

**Dermaphylyx**

In October 2002,Dermaphylyx developed an advanced water absorbent wound and burn dressing. Thedressing is trade named HydroMed, a name meaning “breathable artificial skin.”The wound dressing received FDA clearance for marketing on May 31, 2002 asa Class I Exempt device. Dermaphylyx currently has two moist wounddressings available for sale, AlgiMed and HydroMed and Blist-Rx, a blisterprevention dressing. AlgiMed wound dressings are designed for exudating andbleeding wounds and HydroMed is an absorbent dressing designed for lowexudating wounds. Both dressings have been granted Medicare billing codes.Blist-Rx is a breathable polyurethane foam dressing intended to be used bysports enthusiasts to prevent blisters. The wound dressings will be marketed byCardioTech.In October 2004, Deramphylyx introduced a hydratingmask, trade named AloeGlow, which will be sold directly to beauty salons,professional outlets and regional distributors.

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**Product Group Revenue**

Company revenues were$21,841,000 and $21,799,000 for the years ended March 31, 2005 and 2004,respectively. For the year ended March 31, 2005, 80% of revenues weregenerated from our California operations, primarily disposable medical devices,7% of revenues were generated from the Biomaterials division, and 13% ofrevenues were generated from contract development and manufacturing  activities by our Minnesota operation. Forthe year ended March 31, 2004, 81% of revenues were generated from ourCalifornia operations, primarily disposable medical devices, 5% of revenueswere generated from the Biomaterials division, and 14% of revenues weregenerated from contract development and manufacturing activities by ourMinnesota operations.

**Manufacturing**

CardioTech currently manufactures limited quantitiesof ChronoFlex and HydroThane for sale to medical device manufacturers. To date,CardioTech’s manufacturing activities with respect to the specializedChronoFlex materials used in vascular grafts have consisted primarily ofmanufacturing small quantities of such products for use in clinical trials. TheCompany has an agreement with CTL, formerly a subsidiary ofNervation Ltd., pursuant to which the Company is required to purchase fromand CTL has agreed to sell to the Company the vascular grafts it needs, subjectto the Company’s ability to obtain another supplier or to obtain “technologytransfer.” In May 2003, all of the assets of CTL were sold to LeMaitreVascular Inc. By requesting “technology transfer,” CardioTech retained theright to undertake large scale commercial production of vascular grafts, when,and if it elects to do so. This would entail, among other things, the purchaseof specialized extrusion equipment capable of producing the grafts. To achieveprofitability, vascular graft products must be manufactured in largercommercial quantities in compliance with regulatory requirements and atacceptable costs. Production in larger commercial quantities will requireCardioTech to expand its manufacturing capabilities significantly and to hireand train additional personnel.

The development and manufacture of CardioTech’sproducts are subject to good laboratory practice (“GLP”) and good manufacturingpractice (“GMP”) requirements prescribed by the Food and Drug Administration (“FDA”)and other standards prescribed by the appropriate regulatory agency in thecountry of use. There can be no assurance that CardioTech will be able toobtain or manufacture products in a timely fashion at acceptable quality andprices, that it or any suppliers can comply with GLP or GMP, as applicable, orthat it or such suppliers will be able to manufacture an adequate supply ofproducts. Both the California and Minnesota facilities are EN ISO 13485certified and include a “Class 10,000” clean room.

**Competition**

Competition in the medical device industry in generalis intense and based primarily on scientific and technological factors, theavailability of patent and other protection for technology and products, theability to commercialize technological developments and the ability to obtaingovernmental approval for testing, manufacturing and marketing products.

Competition among products is based, among otherthings, on product efficacy, safety, reliability, availability, price and patentposition. An important factor is the timing of the market introduction ofCardioTech’s or competitors’ products. Accordingly, the relative speed withwhich CardioTech can develop products, complete the clinical trials andapproval processes and supply commercial quantities of the products to themarket is expected to be an important competitive factor. CardioTech’scompetitive position depends upon its ability to attract and retain qualifiedpersonnel, to obtain patent protection or otherwise develop proprietaryproducts or processes, and to secure sufficient capital resources for the oftensubstantial period between technological conception and commercial sales.

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The market for medical devices of the type sold by theCompany is extremely competitive. The Company believes that productdifferentiation and performance, client service, reliability, cost and ease ofuse are important competitive considerations in the markets in which itcompetes. Most of the Company’s competitors are larger and possess greaterfinancial and other resources than the Company. The Company has approximatelyfour competitors within each of the hospital markets in which it competes. Noone competitor is a dominant force in this market. The Company believes it hasachieved its position in the marketplace for its present principal products bymeans of superior design, quality, and service, and the Company intends tocontinue to utilize these means of competing.

At March 31,2005, we know of only one other company, CABG Medical Inc., that isdeveloping an artificial graft similar to the Company’s CardioPass coronaryartery bypass graft. CABG Medical is now listed in the NASDAQ as “CABG,” havingraised $30,250,000 in an initial public offering on December 13, 2004.

**Researchand Development, Regulatory and Engineering**

CardioTech’s research and development efforts areprimarily focused on developing its synthetic vascular graft technologies.CardioTech’s development decisions are based on (1) development costs, (2) productneed, (3) third-party interest and funding availability, and (4) regulatoryconsiderations. Research and development, regulatory and engineeringexpenditures for the years ended March 31, 2005 and 2004 were $1,258,000and $1,065,000, respectively, and consisted primarily of salaries and relatedcosts (60% in fiscal 2005 and 72% in fiscal 2004), and are expensed asincurred. In this income statement category, the Company has six full timeemployees and allocates a portion of Dr. Szycher’s salary and relatedcosts to this income statement category. These individuals work on a variety ofprojects, including production support, and the Company believes it isoperating at the minimum staffing level to support its operating needs. Thestaffing level is consistent with prior years and the Company anticipates thatit will continue at a similar level in the future. The costs related to thisminimum level of operations totaled $888,000 and $975,000 in fiscal 2005 and2004, respectively. Research and development costs will increase significantlyshould the Company enter into European Union, Brazil or United States ofAmerica clinical trials with its CardioPass graft, or other products.

In April 2002, the Company concluded a technologytransfer and license agreement with Credent Vascular Technologies, Ltd.,of Wrexham, U.K.(“ Credent”). Total consideration paid by Credent to CardioTechfor the purchase of the transferred rights to ChronoFlex RC was $500,000.Credent paid CardioTech $400,000 in fiscal year 2004 and  $100,000 in fiscal year2003.

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

**Government Regulation**

CardioTech’s research and development activities arealso subject to regulation for safety, efficacy and quality by numerousgovernmental authorities in the United States. In the United States, thedevelopment, manufacturing and marketing of synthetic vascular grafts aresubject to regulation for safety and efficacy by the FDA in accordance with theFood, Drug and Cosmetic Act. Synthetic vascular grafts are subject to rigorousFDA regulation, including pre-clinical and clinical testing. The process ofcompleting clinical trials and obtaining FDA approvals for marketing a medicaldevice is likely to take a number of years, requires the expenditure ofsubstantial resources and is often subject to unanticipated delays. There canbe 

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no assurance that anyproduct will receive such approval on a timely basis, if at all. Furthermore,CardioTech or the FDA may suspend clinical trials at any time upon adetermination that the subjects or patients are being exposed to anunacceptable adverse health risk ascribable to CardioTech’s products. Ifclinical studies are suspended, CardioTech may be unable to continue thedevelopment of the investigational products affected.

The Company’s products are also subject to the FederalFood, Drug and Cosmetic Act (the “Act”) and regulations issued there under. TheAct is administered by the FDA, which has authority to regulate the marketing, manufacturing,labeling, packaging and distribution of products subject to the Act. Inaddition, there are requirements under other federal laws and under state,local and foreign statutes, which apply to the manufacturing and marketing of  products. The Company’s California operations(Gish) and Minnesota operations (CDT) operate quality systems certified to ENISO 13485, a standard for quality recognized worldwide. In addition, Gish hasbeen found in compliance with the European Economic Community (“EEC”) MedicalDevice Directive, which equivocates to portions of the United States FDACurrent Good Manufacturing Practices (“CGMP”) Quality System Regulations. Thisallows Gish to export and distribute its products with free movement within theEuropean Community.

Gish  and CDTare registered as a medical device manufacturer with the FDA and stateagencies. Gish and CDT are inspected periodically by both the FDA and the stateagencies for compliance with the FDA’s GMP and other requirements including themedical device reporting regulation and various requirements for labeling andpromotion. The FDA Quality System Regulations (“QSR”), which became effective June 1,1997, no longer limit control to manufacturing and post market controls, butspecify requirements during design (Design Control), manufacturing, andservicing as well. Much of the new QSR is based on the ISO9001 QualityStandard, and is, as such in harmony with the thrust towards worldharmonization of medical device requirements. The FDA’s GMP regulationrequires, among other things, that (i) the manufacturing process beregulated and controlled by the use of written procedures, and (ii) theability to produce devices that meet the manufacturer’s specifications bevalidated by extensive and detailed testing of every aspect of the process. Themedical device reporting regulation requires that the device manufacturerprovide information to the FDA on deaths or serious injuries alleged to havebeen associated with the use of its marketed devices, as well as productmalfunctions that would likely cause or contribute to a death or serious injuryif the malfunction were to recur. Changes in existing requirements orinterpretations (on which regulations heavily depend) or adoption of newrequirements or policies could adversely affect the ability of the Company tocomply with regulatory requirements. Failure to comply with regulatoryrequirements could have a material adverse effect on the Company’s business.

The Company believes all of its present products are incompliance in all material respects with all applicable performance standardsas well as good manufacturing practices, record keeping and reportingrequirements in the production and distribution of such products. Most of Gish’sproducts have been determined by the FDA to be devices substantially similar todevices marketed by others prior to May 28, 1976, the effective date ofthe Amendments, and marketing of them has been authorized pending theclassification by the FDA of such products. Gish does not anticipate anysignificant difficulty or material cost increases in complying with applicableperformance standards if any such products were to be classified in Class IIby the FDA. If the FDA were to classify use of Gish’s cardiovascular orcatheter products as Class III products, pre-marketing clinical testingand evaluation would be required in order to obtain FDA approval for the saleof such products.

Regulations under the Actpermit export of products which comply with the laws of the country to whichthey are exported. Gish relies upon its foreign distributors for the necessarycertifications and compliances in their countries, except in the EEC where theMedical Device Directive prescriptively defines requirements.

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**Marketing and Distribution**

Internationally, Gish is represented by specialtymedical distributors in over fifty countries around the world. Gish’sinternational sales represented approximately 17% and 15% of total Companysales in fiscal 2005 and 2004, respectively. The Company’s sales to foreigncustomers are primarily in Europe and Asia. All international transactions areconducted in U.S. dollars, thus reducing the risk from currency fluctuations.The Company does not have any facilities, property or other assets, exceptsales representative supplies, located in any geographic area other than theUnited States of America.

The Company has notexperienced, and does not expect to experience sales of the Company’s productsto be subject to seasonality in any material respect.

**Components and Parts**

Gish purchases components for its various productsfrom vendors who sell such components generally to the medical device industry.Most components for the Company’s proprietary products are manufactured fromtooling owned by the Company. Other components are manufactured by outsidesuppliers in accordance with the Company’s specifications.

Certain components of Gish’s custom tubing sets arepurchased from competitors. Gish has not experienced difficulty in obtainingsuch components in the past and believes adequate sources of supply for suchitems are available on reasonable terms.

Membrana GmbH is aprincipal supplier of the Company and provides a polyester wrap thread for usein the VisionÔ Oxygenator.

**Patents and License Agreements**

The Company has beenissued or has patents pending on several of its products. There can be noassurance that any patents issued would afford the Company adequate protectionagainst competitors which sell similar inventions or devices. There also can beno assurance that the Company’s patents will not be infringed upon or designedaround by others. However, the Company intends to vigorously enforce allpatents it has been issued.

**Customer Information**

The Company performs ongoing credit evaluations andmaintains allowances for potential credit losses. As of March 31, 2005,the Company believes it has no significant concentrations of credit risk.

One of Gish’s salesrepresentative organizations comprised 8% of the Company’s net sales in fiscal2005. The Company believes that the loss of this sales representativeorganization 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 acustomer’s purchase order. Therefore, Gish believes that the Company and itsdistributors generally maintain an adequate finished goods inventory to fulfillthe customer’s needs on demand. Accordingly, Gish believes that the backlog oforders at any given point in time is not indicative of the Company’s futurelevel of sales.

CDT had a backlog of$1,602,000 at March 31, 2005.

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**Contracts**

The Company has nocontracts with customers where cancellation or renegotiation would have amaterial impact on the Company’s sales or profit margins.

**Environmental Compliance**

The Company’s directexpenditures for environmental compliance were not material in the two mostrecent fiscal years. However, certain costs of manufacturing have increased dueto environmental regulations placed upon suppliers of components and services.

**Employees**

As of March 31, 2005, the Company has 11full-time employees at its headquarters in Massachusetts, consisting of 4 inBiomaterials and the remaining in management, administrative, and marketingpositions.

At March 31, 2005, the Company has 46 full-timeemployees in Minnesota, 12 are in contract research and development, 32 are inmanufacturing and production, and 2 are in management, administrative, andmarketing positions.

As of March 31, 2005, the Company’s Californiaoperations had 111 full-time employees, of whom 9 were engaged in sales andsales management, 89 were engaged in manufacturing and the remainder inmarketing, research and development, administrative and executive positions.

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

**RISK FACTORS**

*Youshould carefully consider the risks and uncertainties described below and theother information in this filing before deciding to purchase our common stock.If any of these risks or uncertainties occurs, our business, financialcondition or operating results could be materially harmed. In that case thetrading price of our common stock could decline and you could lose all or partof your investment. The risks and uncertainties described below are not theonly ones we may face.*

**Liquidity**

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

The Company’s futuregrowth may depend upon its ability to raise capital for acquisitions and tosupport research and development activities and to market and sell its vasculargraft technology, specifically the coronary artery bypass graft. CardioTech mayrequire substantial funds for further research and development, futurepre-clinical and clinical trials, regulatory approvals, establishment ofcommercial-scale manufacturing capabilities, and the marketing of itsproducts. CardioTech’s capital requirements depend on numerous factors,including but not limited to, the progress of its research and developmentprograms; the progress of pre-clinical and clinical testing; the time and costsinvolved in obtaining regulatory approvals; the cost of filing, prosecuting,defending and enforcing any intellectual property rights; competingtechnological and market developments; changes in CardioTech’s development ofcommercialization activities and arrangements; and the purchase of additionalfacilities and capital equipment.

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**Risks Related to Our Growth Strategy**

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

Since becoming listed in June of 1996 we havegrown organically, and through the acquisition of three separate businesses. InJuly 1999, we acquired the business of Tyndale-Plains Hunter, Ltd.;in May 2001, we acquired Catheter and Disposables Technology; and in April 2003,we acquired Gish Biomedical, Inc.

We may make additional acquisitions of complementarymedical manufacturing service providers that bring desired capabilities,customers or geographic coverage and either strengthen our position in ourtarget markets or provide us with a presence in a new market. Although we arenot currently negotiating with any additional acquisition targets, it is likelythat we will consider additional potential acquisitions in the future. Therisks we may encounter in pursuing these acquisitions, if any, include expensesassociated with, and difficulties in identifying, potential targets, costsassociated with acquisitions we ultimately are unable to complete and higherprices for acquired companies due to competition for attractive targets.Completing acquisitions also may result in dilution to our existingstockholders and may require us to seek additional capital, if available,including increasing our indebtedness.

Once acquired, the successful integration andoperation of a business requires communication and cooperation among keymanagers, the transition of customer relationships, the management of ongoingprojects of acquired companies and the management of new projects acrosspreviously independent facilities.

Customer satisfaction or performance problems with anacquired company could also harm our reputation as a whole, and any acquiredbusiness could significantly under perform relative to our expectations. Forall these reasons, our pursuit of an overall acquisition strategy or anyindividual completed, pending or future acquisition may adversely affect therealization of our strategic goals.

In addition, while we anticipate cost savings,operating efficiencies and other synergies as a result of our acquisitions, theconsolidation of functions and the integration of departments, systems andprocedures present significant management challenges.

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

***If we cannot obtain theadditional capital required to fund our operations and finance acquisitions onfavorable terms or at all, we may have to delay or abandon our fast growthstrategy.***

Our growth strategy willrequire additional capital for, among other purposes, completing acquisitionsof companies and customers’ product lines and manufacturing assets, integratingacquired companies and assets, acquiring new equipment and maintaining thecondition of existing equipment. If cash generated internally is insufficientto fund capital requirements, or if we desire to make additional acquisitions,we will require additional debt or equity financing. Adequate financing may notbe available or, if available, may not be available on terms satisfactory tous. If we raise additional capital by issuing equity or convertible debtsecurities, the issuance may dilute the share ownership of the existinginvestors. In addition, we may grant future investors rights that are superiorto those of our existing investors. If we fail to obtain sufficient additionalcapital in the future, we could be forced to curtail our growth strategy byreducing or delaying capital expenditures and acquisitions, selling assets orrestructuring or refinancing our indebtedness.

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**Risks Related to Our Business**

***Wehave incurred substantial operating losses and we may never generate anymeaningful revenue or earn any profits.***

Our sales were$21,841,000 and $21,799,000 for the years ended March 31, 2005 and 2004,respectively. We had net losses of $1,595,000 and $1,515,000 in fiscal 2005 and2004, respectively. There is a risk that we will never be profitable. None ofour coronary artery graft products and technologies have ever been utilized ona large-scale commercial basis. Our ability to generate enough revenues toachieve profits will depend on a variety of factors, many of which are outsideour control, including:

·       sizeof market;

·       competitionand other solutions;

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

·       costand availability of raw material and intermediate component supplies;

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

·       changesin domestic and foreign regulatory requirements;

·       costsassociated with equipment development, repair and maintenance; and

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

***A substantial amount of ourassets comprise goodwill and other intangibles, and our net income will bereduced if our goodwill becomes impaired.***

As of March 31, 2005, goodwill representedapproximately $1,638,000, or 7%, of our total assets and amortizableintangibles represented approximately $776,000, or 3%, of our total assets.Goodwill is generated in our acquisitions when the cost of an acquisitionexceeds the fair value of the net tangible and identifiable intangible assetswe acquire. Goodwill is no longer amortized under generally accepted accountingprinciples as a result of SFAS No. 142. Instead, goodwill is subject to animpairment analysis at least annually based on the fair value of the reportingunit. Amortizable intangible assets are subject to SFAS No. 144, and aresubject to periodic reviews for impairment, or as events and circumstancesindicate that they carrying amount may not be recoverable. We could be requiredto recognize reductions in our net income caused by the write-down of goodwilland other intangibles, if impaired, that, if significant, could materially andadversely affect our results of operations.

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

·       changingdemand for our products and services;

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

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

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

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

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

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

·       competitivepressures on selling prices;

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

·       changesin availability or costs of raw materials or supplies;

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

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

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

·       theamount and timing of investments in research and development;

·       difficultiesin integrating acquired assets and businesses into our operations;

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

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

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

***The medical deviceindustry is cyclical, and an industry downturn could adversely affect ouroperating results.***

Business conditionsin the medical device industry have rapidly changed between periods of strongand weak demand. The industry is characterized by:

·       periodsof overcapacity and production shortages;

·       cyclicaldemand for products;

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

·       variationsin manufacturing costs and yields;

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

·       priceerosion; and

·       expendituresfor product development.

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

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

Our research, development and production activities,including the manufacture and marketing of our intended coronary artery bypassgraft product, are subject to extensive regulation for safety, efficacy andquality by numerous government authorities in the United States and abroad.

Before receiving FDA clearance to market our proposedgraft, we will have to demonstrate that our grafts are safe and effective onthe patient population. While we have done some preliminary animal trials andhave seen acceptable results, there can be no assurance that acceptable resultswill be obtained in human trials. Clinical trials, manufacturing and marketingof medical devices are subject to the rigorous testing and approval process ofthe FDA and equivalent foreign regulatory authorities. The Federal Food, Drugand Cosmetic Act and other federal, state and foreign statutes and regulationsgovern and influence the testing, manufacture, labeling, advertising,distribution and promotion of drugs and medical devices. As a result, clinicaltrials and regulatory approval of the coronary artery bypass graft can take anumber of years or longer to accomplish and require the expenditure ofsubstantial financial, managerial and other resources.

In order to becommercially viable, we must successfully research, develop, obtain regulatoryapproval, manufacture, market and distribute our grafts. For each deviceincorporating our artificial grafts, we must successfully meet a number ofcritical developmental milestones, including:

·       demonstratebenefit from the use of our grafts in various contexts such as coronary artery bypasssurgery;

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

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

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

In order to conduct clinical trials that are necessaryto obtain approval by the FDA to market a product, it is necessary to receiveclearance from the FDA to conduct such clinical trials. The FDA can haltclinical trials at any time for safety reasons or because we or our clinicalinvestigators do not follow the FDA’s requirements for conducting clinicaltrials. If we are unable to receive clearance to conduct clinical trials or thetrials are halted by the FDA, we would not be able to achieve any revenue fromsuch product as it is illegal to sell any medical device for human consumptionwithout FDA approval.

We are also a medical devices contract manufacturing servicesprovider. Some of the products and components of products that we manufacturemay be considered finished medical devices, and the manufacturing processesused in the production of finished medical devices are subject to FDAinspection and assessment, and must comply with the FDA quality systemregulation. The FDA quality system regulation establishes good manufacturingpractice requirements for product design, manufacture, management, packaging,labeling, distribution, and installation for medical devices. Additional FDAregulations impose requirements for record keeping, reporting, facility andproduct registration, product safety and effectiveness, and product tracking.Failure to comply with these regulatory requirements may result in civil and criminalenforcement actions, including financial penalties, seizures, injunctions andother measures. Our products must also comply with state and foreignrequirements. Also, in order to comply with regulatory requirements, ourcustomers may wish to audit our operations to evaluate our quality systems.

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In addition, the FDA and state and foreigngovernmental agencies regulate many of our customers’ products as medicaldevices. FDA approval is required for those products prior to commercializationin the United States, and approval of regulatory authorities in other countriesmay also be required prior to commercialization in those jurisdictions.

***Our markets aresubject to technological change and our success depends on our ability todevelop and introduce new products primarily in cardiothoracic surgery.***

The cardiothoracic market for our products ischaracterized by:

·       changingtechnologies;

·       changingcustomer needs;

·       frequentnew product introductions and enhancements;

·       increasedintegration with other functions; and

·       productobsolescence.

The Company’s success isdependent in part on the design and development of new products in the medicaldevice industry. To develop new products and designs for ourcardiothoracic market, we must develop, gain access to and use leadingtechnologies in a cost effective and timely manner and continue to expand ourtechnical and design expertise.Theproduct development process is time-consuming and costly, and there can be noassurance that product development will be successfully completed, thatnecessary regulatory clearances or approvals will be granted by the FDA on atimely basis, or at all, or that the potential products will achieve marketacceptance. Failure by the Company to develop, obtain necessary regulatory clearancesor approvals for, or successfully market potential new products could have amaterial adverse effect on the Company’s business, financial condition andresults of operations.

***The number ofpatients undergoing bypass surgery may continue to decline, resulting in areduction of our market potential.***

Over the past several years, the total number ofpatients undergoing bypass surgery has decreased as a result of new, lessinvasive therapies such as pharmacotherapy, angioplasty and stenting. We cannotassure you that the number of patients will not continue to decline as furthermedical advances are introduced. Any future decline in the total number ofpatients undergoing bypass surgery could result in lost revenue and thereforecould have a material adverse effect on our business, financial condition andresults of operations.

***We have limitedmanufacturing experience and if our coronary bypass graft is approved, we maynot be able to manufacture sufficient quantities at an acceptable cost.***

We remain in the research and development phase of ourarterial grafts. Accordingly, if our products are approved for commercial sale,we will need to establish the capability to commercially manufacture ourproduct(s) in accordance with FDA and other regulatory requirements. Wehave limited experience in establishing, supervising and conducting commercialmanufacturing. If we fail to adequately establish, supervise and conduct allaspects of the manufacturing processes, we may not be able to commercialize ourproducts. We do not presently own manufacturing facilities necessary to provideclinical or commercial quantities of our intended graft. We may not be able toobtain such facilties at an economically feasible cost, or at all.

We presently rely on a third party contractor,LeMaitre Vascular Products, Inc., to manufacture all of our coronarygrafts for our limited use. This exposes us to the risk of not being able todirectly oversee the production and quality of the manufacturing process. Thiscontractor may experience regulatory compliance difficulty, mechanical shutdowns, employee strikes, or any other unforeseeable events that 

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may delay production.Furthermore, LeMaitre has developed an expertise in the manufacturing processwith machinery that may not get transferred to us. If we elect to produce thegrafts ourselves, this may delay production and adversely affect our business.Pursuant to an agreement, we have requested that LeMaitre act in good faith totransfer the technology to us in exchange for payment of personnel time plus40% uplift. Such transfer has not yet been requested by the Company.

***We depend onoutside suppliers and subcontractors, and our production and reputation couldbe harmed if they are unable to meet our volume and quality requirements andalternative sources are not available.***

The Company has various “solesource” suppliers who supply key components for the Company’s products. Ouroutside suppliers may fail to develop and supply us with products andcomponents on a timely basis, or may supply us with products and componentsthat do not meet our quality, quantity or cost requirements. If any of theseproblems occur, we may be unable to obtain substitute sources of these productsand components on a timely basis or on terms acceptable to us, which could harmour ability to manufacture our own products and components profitably or ontime. In addition, if the processes that our suppliers use to manufactureproducts and components are proprietary, we may be unable to obtain comparablecomponents from alternative suppliers.

***A significantportion of the revenue comes from relatively few large customers, and anydecrease in sales to these customers could harm our operating results.***

The medical device industry is concentrated, withrelatively few companies accounting for a large percentage of sales in thesurgical, interventional and cardiovascular markets that are targeted by ourdisposable medical device and contract manufacturing operations. Accordingly,our revenue and profitability are dependent on our relationships with a limitednumber of large medical device companies. We are likely to continue toexperience a high degree of customer concentration in our disposable medicaldevice and contract manufacturing operations, particularly if there is furtherconsolidation within the medical device industry. We cannot assure you thatthere will not be a loss or reduction in business from one or more of our majorcustomers. In addition, we cannot assure you that revenues from our customersthat have accounted for significant revenues in the past, either individuallyor as a group, will reach or exceed historical levels in any future period. Theloss or a significant reduction of business from any of our major customerswould adversely affect our results of operations.

***Our ability to growand sustain growth levels may be adversely affected by the recent slowdown inthe U.S. economy.***

Due to the recent decrease in corporate profits,capital spending and consumer confidence, we have experienced weakness incertain of our end markets. We are primarily susceptible when clients stopplacing orders for us to build prototypes or develop certain specializedmedical devices through our contract manufacturing operations. The medicalcommercial markets, including bio-medical research and development and medicaldevice manufacturing, have been affected by the past slowdown in the U.S.economy. If an economic slowdown continues and capital spending for researchand development from our clients decreases, our business, financial conditionand results of operations may be adversely affected.

***We could be harmedby litigation involving patents and other intellectual property rights.***

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

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

Any litigation relating to the intellectual propertyrights of third parties, whether or not determined in our favor or settled byus, is costly and may divert the efforts and attention of our management andtechnical personnel.

***We may not be ableto protect our intellectual property rights adequately.***

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

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

Our success depends, to a significant extent, upon theefforts and abilities of Dr. Michael Szycher, our president and chiefexecutive officer, and other members of senior management. The loss of theservices of one or more of our senior management or other key employees couldadversely affect our business. We do not maintain key person life insurance onany of our officers, employees or consultants.

There is intense competition for qualified employeesin the medical industry, particularly for highly skilled design, applicationsand engineers and sales people. We may not be able to continue to attract andretain technologists, managers, or other qualified personnel necessary for thedevelopment of our business or to replace qualified individuals who could leaveus at any time in the future. Our anticipated growth is expected to placeincreased demands on our resources, and will likely require the addition of newmanagement and engineering staff as well as the development of additionalexpertise by existing management employees. If we lose the services of or failto recruit engineers or other technical and management personnel, our businesscould be harmed.

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

To manage our possible future growth effectively, wewill be required to continue to improve our operational, financial andmanagement systems. In doing so, we will periodically implement new softwareand other systems that will affect our internal operations regionally or globally.Presently, we are upgrading our enterprise resource planning software tointegrate our operations. The conversion process is complex and requires, amongother things, that data from our existing system be made compatible with theupgraded system. During the transition to this upgrade, we could experiencedelays in ordering materials, inventory tracking problems and otherinefficiencies, which could cause delays in shipments of products to ourcustomers.

Future growth will also require us to successfullyhire, train, motivate and manage our employees. In addition, our continuedgrowth and the evolution of our business plan will require significantadditional 

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management, technical andadministrative resources. We may not be able to effectively manage the growthand evolution of our current business.

***We are exposed toproduct liability and clinical and pre-clinical liability risks which couldplace a substantial financial burden on us, if we are sued. Although we have5 million dollars in product liability insurance coverage, that amount maynot be sufficient to cover all potential claims made against us.***

Our business exposes us to potential product liabilityand other liability risks that are inherent in the testing, manufacturing andmarketing of medical products. We cannot assure you that such potential claimswill not be asserted against us. In addition, the use in our clinical trials ofmedical products that our potential collaborators may develop and thesubsequent sale of these products by us or our potential collaborators maycause us to bear a portion of or all product liability risks. A successfulliability claim or series of claims brought against us could have a materialadverse effect on our business, financial condition and results of operations.

We cannot assure you that we will be able to obtain ormaintain adequate product liability insurance on acceptable terms, if at all,or that such insurance will provide adequate coverage against our potentialliabilities. Furthermore, our current and potential partners with whom we havecollaborative agreements or our future licensees may not be willing toindemnify us against these types of liabilities and may not themselves besufficiently insured or have a net worth sufficient to satisfy any product liabilityclaims. Claims or losses in excess of any product liability insurance coveragethat may be obtained by us could have a material adverse effect on ourbusiness, financial condition and results of operations. We do not currentlycarry recall insurance and we may be subject to significant recall costs in theevent of a recall.

***We may be affectedby environmental laws and regulations.***

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

***If we are unable tocomplete our assessments as to the adequacy of our internal controls overfinancial reporting as required by Section 404 of the Sarbanes-Oxley Actof 2002, investors could lose confidence in the reliability of our financialstatements, which could result in a decrease in the value of our common stock.***

As directed by Section 404 of the Sarbanes-OxleyAct of 2002, the Securities and Exchange Commission adopted rules requiringpublic companies to include a report of management on the company’s internalcontrol over financial reporting in their annual reports on Form 10-K.This report is required to contain an assessment by management of theeffectiveness of such company’s internal controls over financial reporting. Inaddition, the public accounting firm auditing a public company’s financialstatements must attest to and report on management’s assessment of theeffectiveness of the company’s internal controls over financial reporting.While we are expending significant resources in developing the necessarydocumentation and testing procedures required by Section 404, there is arisk that we will not comply with all of the requirements imposed by Section 404.If we fail to implement required new or improved controls, we may be unable tocomply with the requirements of Section 404 in a timely manner. This couldresult in an adverse reaction in the financial markets due to a loss ofconfidence in the reliability of our financial statements, which could causethe market price of our common stock to decline and make it more difficult forus to finance our operations.

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***We face the risk offinancial exposure to product liability claims alleging that the use of devicesthat incorporate our products resulted in adverse effects.***

We currently assist in thedevelopment of certain medical products and prototypes for third parties,including components in other products. Our contract manufacturing operationproduces components for medical manufacturers used in products such ascatheters and disposable devices. Product liability risks may exist even forthose medical devices that have received regulatory approval for commercialsale or even for products undergoing regulatory review. We currently carry5 million dollars in product liability insurance. Any defects in ourproducts used in these devices could result in significant product liabilitycosts to us, which may exceed 5 million dollars. We do not currently carryrecall insurance and we may be subject to significant recall costs in the eventof a recall.

**RisksRelated to Our Securities**

***Our stock price isvolatile.***

The market price ofour common stock has fluctuated significantly to date. In the past fiscal year,our stock price ranged from $1.80 to $5.20. The future market price of ourcommon stock may also fluctuate significantly due to:

·       variationsin our actual or expected quarterly operating results;

·       announcementsor introductions of new products;

·       technologicalinnovations by our competitors or development setbacks by us;

·       thecommencement or adverse outcome of litigation;

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

·       announcementsof acquisition or acquisition transactions; or

·       generaleconomic and market conditions.

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

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

We are authorized to issue 50,000,000 shares of ourcommon stock. As of March 31, 2005, there were 19,258,983 shares ofcommon stock issued and outstanding, respectively. However, the total number ofshares of our common stock issued and outstanding does not include sharesreserved in anticipation of the exercise of options, warrants or additionalinvestment rights. As of March 31, 2005, we had outstanding stock options,warrants and additional investment rights to purchase approximately 8,584,690 sharesof our common stock, the exercise price of which range between $0.28 per shareto $5.40 per share, and we have reserved shares of our common stock forissuance in connection with the potential exercise thereof. To the extent suchoptions, warrants or additional investment rights are exercised, the holders ofour common stock will experience further dilution. Stockholders will alsoexperience dilution upon the exercise of options granted under our stock optionplans. In addition, in the event that any future financing or consideration fora future acquisition, should be in the form of, be convertible into orexchangeable for, equity securities investors will experience additionaldilution.

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The exercise of theoutstanding derivative securities, will reduce the percentage of common stockheld by our current stockholders. Further, the terms on which we could obtainadditional capital during the life of the derivative securities may be adverselyaffected, and it should be expected that the holders of the derivativesecurities would exercise them at a time when we would be able to obtain equitycapital on terms more favorable than those provided for by such derivativesecurities. As a result, any issuance of additional shares of common stock maycause our current stockholders to suffer significant dilution which mayadversely affect the market.

In addition to the abovereferenced shares of common stock which may be issued without stockholderapproval, we have 5,000,000 shares of authorized preferred stock, the terms ofwhich may be fixed by our Board. We presently have 500,000 issued and nooutstanding shares of preferred stock and while we have no present plans toissue any additional shares of preferred stock, our Board has the authority,without stockholder approval, to create and issue one or more series of suchpreferred stock and to determine the voting, dividend and other rights ofholders of such preferred stock. The issuance of any of such series ofpreferred stock may have an adverse effect on the holders of common stock.

***Shares eligible for future sale may adversely affectthe market.***

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

***Limitation on director/officer liability.***

As permitted byMassachusetts law, our Restated Articles of Organization limit the liability ofour directors for monetary damages for breach of a director’s fiduciary dutyexcept for liability in certain instances. As a result of our charter provisionand Massachusetts law, stockholders may have limited rights to recover againstdirectors for breach of fiduciary duty. In addition, our bylaws provide that weshall indemnify our directors, officers, employees and agents if such personsacted in good faith and reasoned that their conduct was in our best interest.

***The anti-takeover provisions of our Restated Articlesof Organization and of the Massachusetts corporation law may delay, defer orprevent a change of control.***

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

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Our stockholders must givesubstantial advance notice prior to the relevant meeting to nominate acandidate for director or present a proposal to our stockholders at a meeting.These notice requirements could inhibit a takeover by delaying stockholderaction. In addition, our bylaws and Massachusetts law provide for staggeredboard members with each member elected for three years. In addition, directorsmay be removed by stockholders only for cause and by a vote of 80% of thestock.

**Competition**

The medical deviceindustry in general, and the market for products for use in cardiovascularsurgery in particular, is intensely competitive and characterized by rapidinnovation and technological advances. Product differentiation and performance,client service, reliability, cost and ease of use are important competitiveconsiderations in the medical device industry. The Company expects that thecurrent high levels of competition and technological change in the medicaldevice industry in general, and the cardiovascular surgery products industry inparticular, will continue to increase. Several companies offer devices, whichcompete with devices manufactured by Gish, including Maquet, COBECardiovascular, a division of Sorin Biomedica, Terumo, Medtronic, Inc. andStryker Surgical. Most of the Company’s competitors have longer operatinghistories and significantly greater financial, technical, research, marketing,sales, distribution and other resources than the Company. In addition, theCompany’s competitors have greater name recognition than the Company andfrequently offer discounts as a competitive tactic. There can be no assurancethat the Company’s current competitors or potential future competitors will notsucceed in developing or marketing technologies and products that are moreeffective or commercially attractive than those that have been and are beingdeveloped by the Company or that would render the Company’s technologies and productsobsolete or noncompetitive, or that such companies will not succeed inobtaining regulatory approval for, introducing or commercializing any suchproducts prior to the Company. Any of the above competitive developments couldhave a material adverse effect on the Company’s business, financial conditionand results of operations.

**Risk of PricingPressure**

CardioTech is currentlyfacing and may continue to face intense competition in the cardiovascularsurgery products market. Additionally, CardioTech faces aggressivecost-containment pressures from governmental agencies and third party payors.There can be no assurances that CardioTech will be able to maintain currentprices in the face of continuing pricing pressures. Over time, the averageprice for CardioTech’s products may decline as the markets for these productsbecome more competitive. Any material reduction in product prices wouldnegatively affect CardioTech’s gross margin, necessitating a correspondingincrease in unit sales to maintain net sales.

**Dependenceon International Sales**

International net revenuesaccounted for approximately 17% and 15% of the Company’s total net sales infiscal 2005 and 2004, respectively. International sales are subject to a numberof inherent risks, including the impact of possible recessionary environmentsin economies outside the U.S., unexpected changes in regulatory requirementsand fluctuations in exchange rates of local currencies in markets where theCompany sells its products. While the Company denominates all of itsinternational sales in U.S. dollars, a relative strengthening in the U.S.dollar would increase the effective cost of the Company’s products tointernational customers. The foregoing factors could reduce international salesof the Company’s products and could have a material adverse effect on theCompany’s business, financial condition and results of operations.

**Riskof Market Withdrawal of Product Recall**

Complex medical devices,such as the Company’s products, can experience performance problems in thefield that require review and possible corrective action by the manufacturer.Similar to many other 

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medicaldevice manufacturers, the Company periodically receives reports from users ofits products relating to performance difficulties they have encountered. TheCompany expects that it will continue to receive customer reports regarding theperformance and use of its products. Furthermore, there can be no assurancethat component failures, manufacturing errors or design defects that couldresult in an unsafe condition or injury to the patient will not occur. If anysuch failures or defects were deemed serious, the Company could be required towithdraw or recall products, which could result in significant costs to theCompany. There can be no assurance that market withdrawals or product recallswill not occur in the future. Any future product problems could result inmarket withdrawals or recalls of products, which could have a material adverseeffect on the Company’s business, financial condition or results of operations.

There can be no assurancethat the Company will be able to successfully take corrective actions ifrequired, nor can there be any assurance that any such corrective actions willnot force the Company to incur significant costs. In addition, there can be noassurance any future recalls will not cause the Company to face increasingscrutiny from its customers, which could cause the Company to lose market shareor incur substantial costs in order to maintain existing market share.Wedo not currently carry recall insurance and we may be subject to significantrecall costs in the event of a recall.

**RisksAssociated with Extensive Government Regulation**

The manufacture and saleof medical devices, including products currently sold by the Company and theCompany’s other potential products, are subject to extensive regulation bynumerous governmental authorities in the United States, principally the FDA,and corresponding state agencies, such as the CDHS. In order for the Company tomarket its products for clinical use in the United States, the Company mustobtain clearance from the FDA of a 510(k) pre-market notification orapproval or a more extensive submission known as a pre-market approval (“PMA”)application. In addition, certain material changes to medical devices also aresubject to FDA review and clearance or approval. The process of obtaining FDAand other required regulatory clearances and approvals is lengthy, expensiveand uncertain, frequently requiring from one to several years from the date ofFDA submission if pre-market clearance or approval is obtained at all. SecuringFDA clearances and approvals may require the submission of extensive clinicaldata and supporting information to the FDA.

Sales of medical devicesoutside of the United States are subject to international regulatoryrequirements that vary from country to country. The time required to obtainapproval for sales internationally may be longer or shorter than that requiredfor FDA clearance or approval, and the requirements may differ. The Company hasentered into distribution agreements for the foreign distribution of itsproducts. These agreements generally require that the foreign distributor isresponsible for obtaining all necessary regulatory approvals in order to allowsales of the Company’s products in a particular country. There can be noassurance that the Company’s foreign distributors will be able to obtainapproval in a particular country for any future products of the Company.

Regulatory clearances orapprovals, if granted, may include significant limitations on the indicateduses for which the product may be marketed. In addition, to obtain suchclearances or approvals, the FDA and certain foreign regulatory authoritiesimpose numerous other requirements with which medical device manufacturers mustcomply. FDA enforcement policy strictly prohibits the marketing of cleared orapproved medical devices for uncleared or unapproved uses. In addition productclearances or approvals could be withdrawn for failure to comply withregulatory standards or the occurrence of unforeseen problems following theinitial marketing. The Company will be required to adhere to applicable FDA GMPregulations and similar regulations in other countries, which include testing,control, and documentation requirements. Ongoing compliance with GMP and otherapplicable regulatory requirement, including marketing products for unapproveduses, could result in, among other things, warning letters, fines, injunctions,civil penalties, recall or seizure of products, total or partial suspension ofproduction, refusal of the government to grant pre-market clearance orpre-market approval for devices, 

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withdrawalof clearances or approvals and criminal prosecution. Changes in existingregulations or adoption of new governmental regulations or policies couldprevent or delay regulatory approval of the Company’s products.

There can be no assurancethat the Company will be able to obtain FDA 510(k) clearance or PMA forits products under development or other necessary regulatory approvals orclearances on a timely basis or at all. Delays in receipt of or failure toreceive U.S. or foreign clearances or approvals, the loss of previouslyobtained clearance or approvals, or failure to comply with existing or futureregulatory requirements would have a material adverse effect on the Company’sbusiness, financial condition and results of operations.

**RisksAssociated with Healthcare Reform Proposals**

Political, economical andregulatory influences are subjecting the healthcare industry in the UnitedStates to fundamental change. Potential reforms proposed over the last severalyears have included mandated basic healthcare benefits, controls on healthcarespending through limitations on the growth of private health insurance premiumsand Medicare and Medicaid spending, the creation of large insurance purchasinggroups and fundamental changes in the healthcare delivery system. In addition,some states in which the Company operates are also considering various healthcarereform proposals. The Company anticipates that federal and state governmentswill continue to review and assess alternative healthcare delivery systems andpayment methodologies and public debate of these issues will likely continue inthe future. Due to uncertainties regarding the ultimate features of reforminitiatives and their enactment and implementation, the Company cannot predictwhich, if any, of such reform proposals will be adopted, when they may beadopted or what impact they may have on the Company, and there can be noassurance that the adoption of reform proposals will not have a materialadverse effect on the Company’s business, operating results or financialcondition. In addition, the actual announcement of reform proposals and theinvestment community’s reaction to such proposals, as well as announcements bycompetitors and third-party payors of their strategies to respond to suchinitiatives, could produce volatility in the trading and market price of theCompany’s common stock.

**Item2. Description of Property**

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

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

The Company’s Californiaoffice and manufacturing facilities are located in Rancho Santa Margarita,California in a building containing approximately 52,000 square feet of spaceunder a lease, which expires in February 2011. Within this facility, TheCompany has constructed a Class 10,000 clean room for the assembly of itsproducts. The Company’s finished goods storage facility is located in Irvine,California in a building containing approximately 23,000 square feet of spaceunder a lease, which expires in January 2006.

**Item 3: LegalProceedings**

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

**Item4: Submission of Matters to a Vote of Security Holders—**NONE

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**PART II**

**Item 5. Market Information for Common Equity andRelated Stockholder Matters**

Thecommon stock trades on the American Stock Exchange under the symbol “CTE.” Thefollowing table sets forth the high and low sales prices of the common stockfor each of the last two fiscal years, as reported on the American StockExchange.
| **FiscalYear Ended March 31, 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| June 30                                            |       | $          | 5.20       |     | $          | 3.20    |       |
| September 30                                       |       | $          | 4.21       |     | $          | 2.55    |       |
| December 31                                        |       | $          | 3.10       |     | $          | 2.40    |       |
| March 31                                           |       | $          | 2.99       |     | $          | 1.80    |       |

 
| **Fiscal Year Ended March 31, 2004** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------------------------------|------------|------------|------------|----------|------------|---------|------------|
| June 30                                                  |       | $          | 3.89       |     | $          | 0.90    |       |
| September 30                                             |       | $          | 4.48       |     | $          | 2.30    |       |
| December 31                                              |       | $          | 6.54       |     | $          | 3.31    |       |
| March 31                                                 |       | $          | 7.20       |     | $          | 3.95    |       |

 

As of June 10, 2005,there were approximately 420 stockholders of record and 6,415 additionalbeneficial stockholders (stockholders holding common stock in brokerageaccounts). The last sale price as reported by the American Stock Exchange on June 10,2005, was $1.79. The Company has never paid a cash dividend on its common stockand does not anticipate the payment of cash dividends in the foreseeablefuture.

**SecuritiesAuthorized for Issuance under Equity Compensation Plans as of the End of 2005Equity Compensation Plan Information**
| **Plan  category **                      | ** ** | ** ** | ** **  | **Number of securities to be  issued upon exercise of  outstanding options  warrant and rights (a)** | ** ** | **Weighted average exercise  price of outstanding  options, warrants and  rights (b)** | ** ** | **Number of securities  remaining available for  future issuance (c)** | ** ** |
|---------------------------------------------------------|------------|------------|-------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by stockholders      |       |       | 6,590,035(1 | )                                                                                                                                                           |       |                                                                                                                      | 2.30       |                                                                                                 |       |   | 257,046 |   |   |
| Equity compensation plans not approved by  stockholders |       |       | -0-         |                                                                                                                                                        |       |                                                                                                                      | n/a        |                                                                                                 |       |   | -0- |   |   |
| Total                                                   |       |       | 6,590,035   |                                                                                                                                                        |       |                                                                                                                      | 2.30       |                                                                                                 |       |   | 257,046 |   |   |

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

Recent Sales of Unregistered Securities

In fiscal 2005, the Company sold the followingunregistered securities, that were not reported on Form 8-K:

In February 2005,CardioTech contributed 308,642 shares of its common stock to CorNova, Inc.to participate in the funding of CorNova. As the issuance represented atransaction by an issuer not involving any public offering, the shares wereissued pursuant to the private offering exemption set forth in Section 4(2) ofthe Securities Act of 1933.

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**IssuerPurchases of Equity Securities**

**ISSUERPURCHASES OF EQUITY SECURITIES**
| **Period**                  | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans** | ** ** | **Maximum Number  of Shares that May  Yet Be Purchased  Under the Plans** | ** ** |
|-----------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|
| January 1 - 31,  2005  |       |       | 100        |                                                 |       |                                             | $          | 2.47                                                                                                           |       |                                                                                                              |       | 100 |   |   |   |   |   |   |
| February 1 -  28, 2005 |       |       | 100        |                                                 |       |                                             | $          | 2.63                                                                                                           |       |                                                                                                              |       | 100 |   |   |   |   |   |   |
| March 1 - 31,  2005    |       |       | 1,000      |                                                 |       |                                             | $          | 2.16                                                                                                           |       |                                                                                                              |       | 1,000 |   |   |   |   |   |   |
| Total                       |       |       | 1,200      |                                                 |       |                                             | $          | 2.22                                                                                                           |       |                                                                                                              |       | 1,200 |   |   |   | 581,323 |   |   |

 

In June 2004, theBoard of Directors authorized the purchase of up to 500,000 additional sharesof the Company’s common stock. In June 2001, the board of Directorsauthorized the purchase of up to 250,000 shares of the Company’s common stockof which 168,677 shares have been purchased at March 31, 2005. The Companyannounced that purchases may be made from time-to-time in the open market,privately negotiated transactions, block transactions or otherwise, at timesand prices deemed appropriate by management.

**Item 6. Management’s Discussion and Analysis orPlan of Operation**

The Company has adopted a Plan of Operation, which hasa dual focus on the development of new cardiovascular products and thecontinued improvement and expansion of its medical device operations. TheCompany has managed its business in fiscal 2005 and 2004 on the basis of onereportable operating segment: Medical Device Manufacturing and Sales. However,within this segment the Company serves a variety of customer needs.

The Company plans to continue its efforts towards thereceipt of marketing approval in the European Union for its synthetic layeredmicroporous coronary artery bypass graft trade named CardioPass. The Companyintends to seek approval from its notified body of a requirements list for thereceipt of European Union marketing approval. The Company anticipates thatresearch and development expenses will continue to increase as it continues itsefforts toward receipt of the requirements list for marketing approval and itcommences actions required to receive European marketing approval. Futureresearch and development expenses will depend on the requirements list.However, the Company has the ability to exercise a great deal of control overresearch and development expenditures to ensure the efforts undertaken matchthe funds available. Subsequent to March 31, 2005, the Company submittedinformation and a request to its notified body for approvals necessary for theCompany to commence European clinical trials of CardioPass, but the Company iscurrently unable to estimate if or when it will receive the approval tocommence clinical trials or marketing approval.

The Company, in March 2004, joined with ImplantSciences, Inc. (IMX on American Stock Exchange) to participate in thefunding of CorNova, Inc. CorNova, Inc. was formed to develop a novelcoronary drug-eluting stent using the combined capabilities and technology ofCorNova, Implant Sciences, Inc. and the Company. The Company currently hasa thirty percent equity interest in CorNova. CorNova completed its initialfunding February 4, 2005 by obtaining private investments totaling$3,000,000, at which time the Company became obligated to contribute 308,642shares of its common stock with a market value at the time of contribution oftwenty-five percent of the amount raised ($750,000). The stent will utilize theCompany’s Chronoflex polyurethane as a drug depot. CorNova is in its initialstage of product development and is unable to accurately estimate when, or if,it will complete its product development efforts, obtain marketing approval orcommence sales, however, it is CorNova’s Plan to have an initial non—drugeluting stent obtain market approval in the European Union in calendar year2005. The Company accounts for its investment in CorNova using the equitymethod of accounting and anticipates 

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that CorNova will incuroperating losses during its development stage period, the length of which cannotbe determined at this time. For the 2005 fiscal year, the Company recorded a$113,000 charge for its equity in the net loss of CorNova, Inc. The Company has no further obligation tocontribute assets or additional common stock nor to assume any liabilities orto fund any losses that CorNova may incur.

The cardiac surgery market is the primary marketwithin the medical device industry that the Company serves. The Companygenerates revenue from the manufacture and sale of single use, disposablemedical devices, from the operation as an outsourcing source for medical deviceOEM and development companies, from the manufacture, sale or license oftechnology of specialized polymer based materials and the sale of wounddressings. Product sales of the Company for fiscal 2005 decreased 1% whencompared to fiscal 2004, as disposable medical device sales and outsourcingrevenue each decreased, but this decrease was partially offset by an increasein biomaterial revenue.

Productrevenue by product group for the presented periods is as follows:
| ** **                              | ** ** | **Fiscal Year Ended  March 31,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                        | ** ** | **2004** | ** ** |
| Sales of medical  devices               |       | $                                               | 17,435,000 |   | $ | 17,781,000 |   |
| Outsourcing  services and manufacturing |       | 2,804,000                                       |       | 2,966,000 |   |
| Other revenues                          |       | 828,000                                         |       | 576,000 |   |
|                                    |       | $                                               | 21,067,000 |   | $ | 21,323,000 |   |

 

The Company’s Plan is to continue its gradual increasein market share and to identify strategic alliances and acquisitionopportunities that are synergistic with its available production capabilitiesand/or our sales organization.

Royalty revenue increased 62% when compared with theprior fiscal year and has the potential for continued gradual increase as theCompany continues to explore other uses for its patented materials.

Thedecrease in gross margin percentage to 25.7% for fiscal year 2005 from 26.5% infiscal year 2004 relates primarily to an increase of $100,000 to its reservefor slow-moving inventory recorded in December 2004 in its wound dressingoperations and the expensing of initial contract start-up costs for anoutsourcing manufacturing contract in the Company’s fiscal fourth quarter.
| ** **                                            | ** ** | **Fiscal Year Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **03/31/05**                    | ** ** | **03/31/04** | ** ** |
| Research and  development, Regulatory and Engineering |       | $                               | 1,258,000  |   | $ | 1,065,000 |   |
| Selling and  marketing                                |       | $                               | 2,838,000  |   | $ | 2,572,000 |   |
| General and  administrative                           |       | $                               | 3,177,000  |   | $ | 3,083,000 |   |
| Severance payment                                     |       |                            |       | $ | 372,000 |   |
| Non-cash  compensation and research contract expense  |       | $                               | 78,000     |   | $ | 1,171,000 |   |
| CarTika acquisition  expenses                         |       | $                               | 333,000    |   |   |   |

 

CardioTech’s research and development efforts areprimarily focused on developing its synthetic vascular graft technologies andGBS coating applications. Research and development, regulatory and engineeringexpenditures for the years ended March 31, 2005 and 2004 consistedprimarily of salaries and related costs ( 60% in fiscal 2005 and 72% in fiscal2004), and are expensed as incurred. In this income statement category, theCompany has six full time employees and allocates a portion of Dr. Szycher’ssalary and related costs to this income statement category. These individualswork on a variety of projects, including production support, and the Companybelieves it is operating at the minimum staffing level to support its operatingneeds. The staffing level is consistent with prior years and the Companyanticipates that it will continue at a similar level in the future. The costsrelated to this minimum level of operations 

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totaled $888,000 and$975,000 in fiscal 2005 and 2004, respectively. Research and development costswill increase significantly when the Company enters into European Union, Brazilor United States of America clinical trials with its CardioPass graft, or otherproducts. Expenses for the year ended March 31, 2005 compared with theprior year increased due to an increase in CardioPass related expenditures.

The increase in selling and marketing expenses for theyear ended March 31, 2005 compared to the prior year is due primarily to afull year of marketing efforts of the wound dressings ($200,000) and increasedoutsourcing revenue generation efforts.

The increase in general and administrative expensesfor the year ended March 31, 2004 compared to the prior year is due to anincrease in the Company’s allowance for doubtful accounts of $230,000 recordedin December 2004 and a general decrease in costs related to a variety ofbusiness activities. The increase in the allowance for doubtful accountsrelates to one customer for which the Company performs outsourcing services($80,000) and one customer to which the Company sells disposable medicaldevices ($150,000).

Effective April 30, 2003, the former CEO of Gishresigned from his position. In accordance with his employment agreement, he wasto 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 theremaining amount due was  paid ineighteen equal monthly payments. The full amount of the severance obligation,including estimated payroll taxes, of $372,000, was recorded as severancepayment in April 2003.

For fiscal 2005, the Company had non-cash compensationexpenses of $58,000 related to the granting of options to purchase 100,000shares of the Company’s common stock at $3.50 per share in payment for  investment advisory services and $20,000related to the acceleration in July 2004 of vesting of stock options. Forfiscal 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 warrantmodifications for 80,000 shares of common stock, a $210,000 expense due to theissuance of 40,000 shares of common stock to Implant pursuant to the jointresearch program on developing a drug-eluting stent and a $92,000 expense forstock options granted to two consultants. Additionally, there was a non-cashexpense of $293,000 related to the issuance of 95,000 treasury shares tovarious employees and board members for their effort in the Gish transactionand a $232,000 expense related to stock options granted at a discount to aconsultant.

On November 19, 2004, the Company entered into adefinitive agreement (the “Asset Purchase Agreement”) to acquire substantiallyall of the assets and assume certain liabilities of CarTika Medical, Inc.,a privately owned medical device contract manufacturer headquartered inPlymouth, Minnesota (“CarTika”).As part of the transaction, the Company was toissue consideration to the stockholders of CarTika consisting of shares of theCompany’s common stock, equal in value to $1,662,000, with the number of sharesbased upon the fair market value of the common stock at the date of closing (“StockConsideration”), and $4,985,000 in cash (“Cash Consideration”). The transactionclosing was subject to a variety of closing conditions, including the successfulfiling of a registration statement covering the Stock Consideration shares.Because of the protracted time in obtaining regulatory clearance involving theacquisition, on June 14, 2005, CarTika terminated the proposedacquisition. The Company incurred CarTika related acquisition costs totaling$333,000, which have been charged to expense at March 31, 2005.

The Company had $645,000 in other income for fiscal2004. During fiscal 2004, Credent paid CardioTech $400,000 due to the sale of acontrolling interest in Credent pursuant to a technology and license agreementrelating to Chronoflex RC. The payment was net against $17,000 of accountsreceivable due from Credent and is recorded as other income of $383,000 in thestatement of operations. The Company also recognized income of $237,000 fromthe recovery of a previously written off receivable and $25,000 of rentalincome.

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The Company had net losses of $1,595,000 and$1,515,000 in fiscal 2005 and 2004, respectively. Included in net losses infiscal 2004 was an accrual for severance costs of $372,000 for the formerpresident of Gish, non-cash compensation and research and development expensesof $1,171,000 and other income of $645,000, which included repayment of a notepreviously charged-off and a payment by Credent. Without these charges orcredits, net loss for fiscal 2004 would have been $617,000 (Adjusted Net Loss).The increase in Adjusted Net Loss of $1,214,000 (Net Loss as Reported of$1,595,000 less $78,000 non-cash compensation expense and $333,000 of CarTikaacquisition expenses) for fiscal 2005 compared to Adjusted Net Loss of $617,000for fiscal 2004 relates primarily to the previously mentioned increases inoperating expenses.

At March 31, 2005,the Company had $24,200,000 and $20,600,000 of Federal and State income tax netoperating loss carryovers, respectively. In fiscal 2005, the Company paidincome taxes totaling $12,000, primarily consisting of required minimum statetax payments.

**Liquidity and Capital Resources**

Through March 31, 2005, the Company continued togenerate revenues from the sale of biomaterials and royalties earned onbiomaterials; the performance of outsourced research and development andmanufacturing contracts and the manufacture and sale of specialized disposablemedical devices.

During the year ended March 31, 2005, the Companyused cash totaling $487,000 in operating activities as compared to generatingcash of $431,000 in the prior year. The change related primarily to theinclusion in net loss for the year ended March 31, 2004 of significantlymore non-cash stock and compensation expenses than in the year ended March 31,2005.

During fiscal 2005, the Company used cash totaling$1,023,000 in investing activities as compared to using $2,461,000 in fiscal2004. The decrease reflects the completion of the build-out of the Company’sWilmington, Massachusetts facility and the completion of the Gish acquisitionin fiscal 2004, partially offset by  $333,000of costs related to the termination of the CarTika acquisition.

On December 22, 2004, the Company issued1,139,586 shares of its common stock at $2.40 per share in a private placementreceiving $2,735,000 in gross proceeds, less placement agent fees and relatedtransaction costs of approximately $314,000. In connection with the transaction,the Company issued warrants to the investors to purchase 569,793 shares ofcommon stock at an exercise price of $3.00 per share, which are exercisableuntil December 22, 2009. In addition, the investors have rights topurchase up to 1,139,586 shares of common stock at a price of $2.40 per share,which are exercisable for a period commencing on December 22, 2004 andending on July 24, 2005. The Company also issued warrants to the placementagent to purchase 113,959 shares of our common stock at an exercise price of$2.40 per share and 56,979 shares of our common stock at an exercise price of$3.00 per share, which are exercisable until December 22, 2009. Should theinvestors exercise the additional investment rights (described above), theplacement agent will receive an additional warrant up to 113,959 shares ofcommon stock at an exercise price of $2.40 per share. If all warrants andadditional investment rights are exercised, the Company would receive grossproceeds of $5,162,326, less related transaction costs.

In fiscal 2005, stock options for 179,501 shares ofthe Company’s common stock were exercised, resulting in net cash proceeds ofapproximately $254,000 to the Company. In fiscal 2005, the Company made openmarket purchases of 24,000 shares of the Company’s common stock at an aggregatecost of approximately $84,000.

In December 2000, Gish entered into a $2,000,000three-year revolving line of credit agreement. In February 2002, therevolving line of credit agreement was amended to extend the agreement for anadditional year and increase the line to $4,000,000. At March 31, 2005,Gish had no outstanding balance 

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under the revolving lineof credit, as the revolving line of credit agreement was terminated by theCompany in January 2005.

The Company’s future growth may depend upon itsability to raise capital to support research and development activities and tomarket and sell its vascular graft technology, specifically the coronary arterybypass graft. CardioTech may require substantial funds for further research anddevelopment, future pre-clinical and clinical trials, regulatory approvals,establishment of commercial-scale manufacturing capabilities, and themarketing of its products. CardioTech’s capital requirements depend on numerousfactors, including but not limited to, the progress of its research anddevelopment programs; the progress of pre-clinical and clinical testing; thetime 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’sdevelopment of commercialization activities and arrangements; and the purchaseof additional facilities and capital equipment.

As of March 31, 2005,CardioTech was conducting its operations with approximately $7,469,000 in cashand cash equivalents. CardioTech believes its current cash position will besufficient to fund its working capital and research and development activitiesfor at least the next twelve months beyond March 31, 2005. The Companypaid $1,750,000 in cash to purchase its new Corporate Headquarters inWilmington, MA in fiscal 2004 and will evaluate various options to subsequentlymortgage the new building, and/or explore other debt options, including arevolving  line of credit such as waspreviously  used  by Gish to fund its operations, if additionalfunds are required. At  March 31,2005 the Company had no long-term debt.

*Critical AccountingPolicies*

Our significantaccounting policies are summarized in Note A to our consolidated financialstatements. However, certain of our accounting policies require the applicationof significant judgment by our management, and such judgments are reflected inthe amounts reported in our consolidated financial statements. In applyingthese policies, our management uses its judgment to determine the appropriateassumptions to be used in the determination of estimates. Those estimates arebased on our historical experience, terms of existing contracts, our observanceof market trends, information provided by our strategic partners andinformation available from other outside sources, as appropriate. Actualresults may differ significantly from the estimates contained in ourconsolidated financial statements. Our critical accounting policies are asfollows:

·       *Accounts Receivable Valuation  *Weperform various analyses to evaluate accounts receivable balances and record anallowance for bad debts based on the estimated collectibility of the accountssuch that the amounts reflect estimated net realizable value. If actualuncollectible amounts significantly exceed the estimated allowance, the Company’soperating results would be significantly and adversely affected.

·       *Inventory Valuation  *We value ourinventory at the lower of our actual cost or the current estimated marketvalue. We regularly review inventory quantities on hand and inventorycommitments with suppliers and record a provision for excess and obsoleteinventory based primarily on our historical usage for the prior twelve totwenty-four month period. Although we make every effort to ensure the accuracyof our forecasts of future product demand, any significant unanticipated changein demand or technological developments could have a significant impact on thevalue of our inventory and our reported operating results.

·       *Intangibles  *Our long-lived assetsinclude intangible assets and goodwill. At March 31, 2005, we had$2,414,000 of intangible assets and goodwill, net, which accounted forapproximately 10% of our total assets. In assessing the recoverability of ourintangible assets and goodwill, we must make assumptions in determining thefair value of the asset by estimating future cash flows and 

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considering otherfactors, including our significant changes in the manner or use of the assets,or negative industry reports or economic conditions. If those estimates ortheir related assumptions change in the future, we may be required to recordimpairment charges for those assets. Under the provisions of Statement ofFinancial Accounting Standards, or SFAS No. 142, “Goodwill and OtherIntangible Assets,” we are required to test our intangible assets forimpairment on a periodic basis thereafter. During the quarter ended March 31,2005 the Company tested its intangible assets for impairments and based on theresults of the first step of the goodwill impairment test, the Company hasdetermined that the fair value of each of its reporting units exceeded thecarrying amounts and, therefore, no goodwill impairment existed as of March 31,2005. As a result, the second step of the goodwill impairment test is notrequired to be completed. The company will be required to continue to perform agoodwill impairment test on an annual basis and the next test is scheduled duringthe quarter ending March 31, 2006.

**Item 7. Financial Statements**

Thefollowing documents are filed as part of this report on Form 10-KSB
| ** **                                                                                             | ** ** | **Page**             | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| Report of Ernst &  Young LLP, Independent Registered Public Accounting Firm                   |       | F-1                  |       |
| Consolidated Balance Sheet at  March 31, 2005                                                     |       | F-2                  |       |
| Consolidated Statements of  Operations for the years ended March 31, 2005 and 2004                |       | F-3                  |       |
| Consolidated Statements of  Stockholders’ Equity for the years ended March 31, 2005 and 2004 |       | F-4                  |       |
| Consolidated Statements of  Cash Flows for the years ended March 31, 2005 and 2004                |       | F-5                  |       |
| Notes to Consolidated Financial Statements                                                             |       | F-6 - F-25 |       |

 

**Item8. Changes In and Disagreements With Accountants on Accounting andFinancial Disclosure**

NONE

**Item 8a. Controls and Procedures**

(a)           *Evaluationof disclosure controls and procedures.*

The Company’s management,including the Chief Executive Officer and Chief Financial Officer, conducted anevaluation of the Company’s disclosure controls and procedures as of March 31,2005. Based on this evaluation, the Chief Executive Officer and Chief FinancialOfficer have determined that such controls and procedures are effective toensure that information relating to the Company, including its consolidatedsubsidiaries, required to be disclosed in reports that it files or submitsunder the Securities Exchange Act is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. There have been no changes in the Company’sinternal controls over financial reporting that were identified during theevaluation that occurred during the Company’s last fiscal quarter of 2005 thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

**Item 8b. Reports on Form 8-K—**NONE

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**PART III**

**Item9 Directors, Executive Officers, Promoters and Control Persons; Compliancewith Section 16(a) of the Exchange Act.**

**DIRECTORS AND EXECUTIVE OFFICERS**

CardioTech’s board of directors is currently comprisedof six directors. The directors and executive officers, their ages andpositions at CardioTech as well as certain biographical information of theseindividuals, are set forth below. The ages of the individuals are provided asof March 31, 2005.
| **Name**                  | ** ** | ** ** | ** ** | **Age**                                                                   | ** ** | **Position(s)** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------------------------------------------------|------------|-----------------|------------|
| Dr. Michael  Szycher |       | 66         |       | Chairman  of the Board, President, Chief  Executive Officer and Treasurer |       |
| Leslie M. Taeger          |       | 54         |       | Chief  Financial Officer                                                  |       |
| Thomas Lovett             |       | 50         |       | Vice  President of Finance                                                |       |
| Michael Adams             |       | 49         |       | Director                                                                  |       |
| Anthony J. Armini         |       | 67         |       | Director                                                                  |       |
| Michael Barretti          |       | 59         |       | Director                                                                  |       |
| Jerry Dorsey              |       | 60         |       | Director                                                                  |       |
| William O’Neill Jr.  |       | 62         |       | Director                                                                  |       |

 

Dr. Michael Szycher has been Chairman of theBoard, President, Chief Executive Officer and Treasurer of CardioTech since June 1996.From October 1989 until joining CardioTech in June 1996, Dr. Szycherserved as Chairman of PolyMedica Industries, Inc. (“PMI”) and ChiefExecutive Officer of PMI from November 1990 to June 1996, and as adirector of PMI from its inception until June 1996. Dr. Szycher isalso a director of Implant Sciences Corporation (AMEX: IMX). Dr. Szycheris a recognized international authority on polyurethanes and blood compatiblepolymers. He is the author of over eighty original research articles, and was apivotal force in the creation of the Medical Plastics Division of the SPE. Heis the Editor of five books, “Biocompatible Polymers, Metals and Composites;” “SyntheticBiomedical Polymers;” “Blood Compatible Materials and Devices: PerspectivesTowards the 21st Century;” High Performance Biomaterials: A Comprehensive Guideto Medical/Pharmaceutical Applications;” and “Szycher’s Dictionary ofBiomaterials and Medical Devices,” and the acclaimed “Szycher’s Dictionary ofMedical Devices.” He is also Editor-In-Chief of the quarterly Journal ofBiomaterials Applications. Dr. Szycher received a Ph.D. in CardiacPhysiology from Boston University School of Medicine, and an MBA from SuffolkUniversity.

Mr. Taeger became Chief Financial Officer ofCardioTech in February 2004, and has been Chief Financial Officer of Gishsince September 2000. Prior to joining Gish, Mr. Taeger was employedfor 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 Californiaand received a BS in Accounting from California State University at Fullerton.

Mr. Thomas F. Lovett has served as Vice Presidentof Finance since May 2003. He served as the Corporate Controller ofCardioTech from August 2000 through May 2003. From 1992 until joiningCardioTech, Mr. Lovett served in the capacities of Controller and CostAccounting Manager at Cynosure, Inc. Additionally, Mr. Lovett servedin a number of capacities, including Cost Accounting Manager, for Candela LaserCardioTech from 1983 to 1992. Mr. Lovett holds a BS degree in Accountingfrom Northeastern University.

Mr. Michael Adams has been a director ofCardioTech since May 1999. He is also the Vice President of PLC Systems, Inc.Prior to joining PLC Systems in September 2000, Mr. Adams was VicePresident of Assurance Medical, Inc., (“Assurance Medical”). Prior tojoining Assurance Medical in June 1999, Mr. Adams was the ChiefOperating Officer and Vice President of Regulatory Affairs and Quality 

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Assurance of CardioTechfrom June 1998 to May 1999. From November 1994 through June 1998,Mr. Adams served as the Vice President of Cytyc Corporation.

Dr. Anthony J. Armini has been a director ofCardioTech since August 2000. Dr. Armini has been the President,Chief Executive Officer, and Chairman of the Board of Directors of ImplantScience Corporation since 1984. From 1972 to 1984, prior to founding ImplantSciences, Dr. Armini was Executive Vice President at Spire Corporation.From 1967 to 1972, Dr. Armini was a Senior Scientist at McDonnell DouglasCorporation. Dr. Armini received his Ph.D. in nuclear physics from theUniversity of California, Los Angeles in 1967. Dr. Armini is the author ofeleven patents, fifteen patents pending and fourteen publications in the fieldof implant technology. Dr. Armini has over thirty years of experienceworking with cyclotrons and linear accelerators, the production andcharacterization of radioisotopes, and fifteen years experience with ionimplantation in the medical and semiconductor fields.

Mr. Michael Barretti has been a director ofCardioTech since January 1998. Mr. Barretti is the executive inresidence and professor of marketing at Suffolk University in Boston. Mr. Barrettihas been the President of Cool Laser Optics, Inc., a company whichcommercializes optical technology specific to the medical laser industry, sinceJuly 1996. From September 1994 to July 1996, Mr. Barrettiwas Vice President of Marketing for Cynosure, Inc., a manufacturer ofmedical and scientific lasers. From June 1987 to September 1994, Mr. Barrettiwas a principal and served as Chief Executive Officer of NorthFleet ManagementGroup, a marketing management firm serving the international medical deviceindustry. From January 1991 to May 1994, Mr. Barretti also actedas President of Derma-Lase, Inc., the U.S. subsidiary of a Glasgow,Scotland supplier of solid-state laser technologies to the medical field.

Mr. Jeremiah E. Dorsey has been a director ofCardioTech since May, 2004. Mr. Dorsey retired in 2002. From 1992 to 2002,Mr. Dorsey was President and Chief Operating Officer of The West Company(Lionville, PA), a leading supplier of components to the pharmaceutical,medical device and dental businesses. From 1990 to 1992, Mr. Dorsey wasPresident and Chief Executive Officer of Foster Medical (Waltham, MA), a supplierof hospital equipment. From 1988 to 1990, he was President of Towles HousewaresCompany (Newburyport, MA), and Vice President and Board Member of J&JDental Products Company (East Windor, NJ), a world leader in compositematerials, dental amalgams, cleaning and polishing products.

Mr. William J. O’Neill, Jr.has been a director of CardioTech since May 2004. Mr. O’Neill iscurrently the Dean of the Frank Sawyer School of Management at SuffolkUniversity in Boston, Massachusetts. Prior to this appointment, Mr. O’Neillspent thirty years (1969-1999) with the Polaroid Corporation, where he held thepositions of Executive Vice President of the Corporation, President ofCorporate Business Development, and Chief Financial Officer. He was also SeniorFinancial Analyst at Ford Motor Company. Mr. O’Neill was a Trustee at theDana Farber Cancer Institute, and is currently a member of the MassachusettsBar Association, a member of the Board of Directors of the Greater BostonChamber of Commerce, and serves on the Board of Directors of Concord Camera. Heearned a BA at Boston College in mathematics, a MBA in finance from Wayne StateUniversity, and a JD from Suffolk University Law School.

***Committees; Attendance***

*Meeting Attendance.  *Duringthe fiscal year ended March 31, 2005, there were four (4) meetings ofthe Board. The various committees of the Board also met a total of three (3) timesduring fiscal 2005. Each director attended in excess of 75% of the total numberof meetings of the Board and of committees of the Board on which he servedduring fiscal 2005. In addition, from time to time, the members of the Boardand its committees acted by unanimous written consent pursuant to Massachusettslaw.

*AuditCommittee.  *The Board has designated from among itsmembers an Audit Committee, which consisted of Mr. O’Neill (Chairman), Mr. MichaelBarretti, and Mr. Anthony Armini. Mr. O’Neill, 

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Mr. Barretti,and Mr. Armini are independent members. Mr. O’Neill meets therequirements to qualify as a financial expert. The Audit Committee has theresponsibility to ascertain that the Company’s financial statements reflectfairly the financial condition and operating results of the Company and toappraise the soundness, adequacy and application of accounting and operatingcontrols. The Audit Committee recommends the independent auditors to the Board,reviews the scope of the audit functions of the independent auditors andreviews the audit reports. The Audit Committee held a meeting each quarterduring fiscal 2005. The responsibilities of the Audit Committee are outlined ina written charter, which was included as Annex A of the Proxy Statement for the2004 shareholder meeting.

***Compensation and Stock Option Committee***

The Compensation and StockOption Committee, which met three (3) times during fiscal 2005, had threemembers, Mr. Barretti, Mr. Dorsey and Mr. Adams (Chairman). TheCompensation and Stock Option Committee reviews, approves and makesrecommendations on the Company’s compensation policies, practices andprocedures to ensure that legal and fiduciary responsibilities of the Board arecarried out and that such policies, practices and procedures contribute to thesuccess of the Company. The Compensation and Stock Option Committee administersthe 1996 Plan and the 2003 Plan.

***Nominating Committee.***

The Nominating Committee,which was established in March 1998 and had one meeting in fiscal 2005,has three members, Mr. Dorsey, Mr. Barretti and Mr. Adams. TheNominating Committee nominates individuals to serve on the Board. TheNominating Committee considers nominees recommended by Stockholders*.*

*CompensationCommittee Interlocks and Insider Participation*

Other than Mr. Adams,no person serving on the Compensation and Stock Option Committee at any timeduring Fiscal Year 2005 was a present or former officer or employee of theCompany or any of its subsidiaries. During Fiscal Year 2005, other than Dr. Szycher,no executive officer of the Company served as a member of the board ofdirectors or compensation and stock option committee (or other board committeeperforming equivalent functions) of another entity, one of whose executiveofficers served on the Company’s Board or Compensation and Stock OptionCommittee.

*Directors’Compensation*

CardioTech’s policy is to pay $750 per diemcompensation to non-employee members of the Board for attendance at Boardmeetings, and $1,500 per diem to Committee Chairmen. The chairman of the AuditCommittee will also receive $1,500 for each special meeting with CardioTech’sPrincipal Accountants. All non-employee directors are reimbursed for travel andother related expenses incurred in attending meetings of the Board.

Directors are eligible to participate in the 1996 and2003 Plans. In fiscal 2004, CardioTech granted each Director an option topurchase 10,000 shares of the Company’s Common Stock and additional 2,500shares to chairmen of committees. In fiscal 2005, CardioTech granted thechairman of the Audit Committee an option to purchase 50,000 shares and grantedeach director an option to purchase 30,000 shares. Additionally, in fiscal2005, one board member elected to receive stock options to purchase 5,000shares for each Board meeting attended in fiscal 2005 in lieu of per diemcompensation.

The Company has adopted acode of ethics that applies to its chief executive officer, chief financialofficer, and vice president of finance. The code of ethics is posted on theCompany’s website, the address of which is www.cardiotech-inc.com. The Companyintends to include on its website any amendments to, or waivers from, aprovision of its code of ethics that applies to the Company’s chief executiveofficer, chief 

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financialofficer, or vice president of finance that relates to any element of the codeof ethics definition enumerated in Item 406 of Regulation S-B.

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

Section 16(a) ofthe Securities Exchange Act of 1934 requires our executive officers, directorsand persons who beneficially own more than 10% of a registered class of our securitiesto file reports of ownership and changes in ownership with the SEC. Basedsolely on a review of copies of such forms submitted to CardioTech, we believethat all persons subject to the reporting requirements of Section 16(a) filedsuch reports on a timely basis in fiscal 2005.

**Item 10. Executive Compensation**

**Summary Compensation Table:***  *The following table sets forth theaggregate compensation for services rendered in all capacities during thefiscal years ended March 31, 2005, 2004, and 2003 of all persons servingas Chief Executive Officer and all other executive officers whose salary andbonus exceed $100,000 (the “Named Executive Officers”)
| ** **                                     | ** ** | **Annual Compensation** | ** ** | **Long Term Compensation** | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|------------|------------|
| **Name and Principal Position** | ** ** | ** **                   | ** ** | **Year**                             | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **Restricted  Stock Award** | ** ** | **Securities  Underlying  Options (#)** | ** ** | **All Other  Compensation(1)** | ** ** |
| Michael Szycher,  Ph.D, MBA                    |       | 2005                         |       | $                                    | 325,000    |       |       |   |   |   |   |   | 600,000 |   |   | $ | 4,797 |   |   |
| Chairman, CEO and Treasurer                    |       | 2004                         |       | $                                    | 325,000    |       |       |   |   | $ | 55,200 |   |   | 1,017,330 |   |   | $ | 8,092 |   |   |
|                                           |       | 2003                         |       | $                                    | 325,000    |       |       |   |   |   |   |   |   |   |   | $ | 2,955 |   |   |
| Douglas E. Whittaker                           |       | 2005                         |       | $                                    | 148,870    |       |       |   |   |   |   |   | 120,000 |   |   | $ | 250 |   |   |
| President of Gish                              |       | 2004                         |       | $                                    | 147,239    |       |       |   |   |   |   |   | 150,000 |   |   | $ | 250 |   |   |
|                                           |       | 2003                         |       | $                                    | 131,060    |       |       |   |   |   |   |   |   |   |   | $ | 250 |   |   |
| Leslie M. Taeger                               |       | 2005                         |       | $                                    | 144,527    |       |       |   |   |   |   |   | 150,000 |   |   | $ | 250 |   |   |
| CFO                                            |       | 2004                         |       | $                                    | 143,507    |       | $          | 15,000 |   |   |   |   |   | 100,000 |   |   | $ | 250 |   |   |
|                                           |       |  2003                   |       | $                                    | 150,470    |       | $          | 50,000 |   |   |   |   |   |   |   |   | $ | 250 |   |   |
| Thomas F. Lovett                               |       | 2005                         |       | $                                    | 95,000     |       |       |   |   |   |   |   | 100,000 |   |   | $ | 5,451 |   |   |
| Vice President of  Finance                     |       | 2004                         |       | $                                    | 92,000     |       |       |   |   | $ | 18,400 |   |   | 100,000 |   |   | $ | 1,353 |   |   |
|                                           |       | 2003                         |       | *(2)                                 |       |       |       |   |   |   |   |   |   |   | $ | 1,776 |   |   |
|                                                |            |                              |            |                                      |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includespremiums paid by the Company for long term disability insurance and term lifeinsurance. Premiums paid in fiscal 2005, 2004 and 2003 for short and long-termdisability insurance and life insurance, respectively, were $1,284, $885 and$960 for Dr. Szycher. Personal use of leased car for Dr. Szycher was$3,510, $6,247 and $1,737 respectively.

(2)          Less than 100,000 Annual

The Company has entered into an employment agreement(the “Employment Agreement”) with Dr. Michael Szycher, pursuant to whichsaid individual serves as Chief Executive Officer of the Company. Pursuant tothe terms of the Employment Agreement, Dr. Szycher is to receive an annualbase salary of Three Hundred and Twenty Five Thousand ($325,000) dollars. Dr. Szycher’ssalary will be reviewed annually by the Board. Additionally, Dr. Szychermay 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 term of the Employment Agreement by and betweenthe Company and Dr. Szycher is set to expire on December 31, 2007.After such time, the term of the Employment Agreement will be deemed tocontinue on a month-to-month basis if not expressly extended while Dr. Szycherremains employed by the 

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Company. Dr. Szycherand CardioTech each have the right to terminate the Employment Agreement at anytime, with or without cause (as defined in the Employment Agreement), uponthirty (30) days prior written notice. In the event that CardioTechterminates the applicable Employment Agreement without cause, or Dr. Szycherterminates his employment for good reason following a change in control (assuch terms are defined in the Employment Agreement) or CardioTech fails torenew the Employment Agreement within two (2) years following theoccurrence of a change in control, Dr. Szycher will be entitled to receiveseverance equal to 2.99 times his annual base salary at termination. In suchevent, Dr. Szycher will be bound by a noncompete covenant for one (1) yearfollowing termination of his employment.

The following table setsforth information regarding each stock option granted during the fiscal yearended March 31, 2005 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.(1) |       |       | 250,000    |                                                            |       |                                                                                                | 12.1       | %                                   |       |                 | $          | 5.15 |   |   | 3/31/2014 |   |
| Michael Szycher,  Ph.D.(1) |       |       | 350,000    |                                                            |       |                                                                                                | 16.9       | %                                   |       |                 | $          | 2.60 |   |   | 2/13/2015 |   |
| Douglas E.  Whittaker      |       |       | 120,000    |                                                            |       |                                                                                                | 5.8        | %                                   |       |                 | $          | 2.60 |   |   | 2/13/2015 |   |
| Leslie M. Taeger           |       |       | 100,000    |                                                            |       |                                                                                                | 4.8        | %                                   |       |                 | $          | 4.19 |   |   | 6/30/2014 |   |
| Leslie M. Taeger           |       |       | 150,000    |                                                            |       |                                                                                                | 7.2        | %                                   |       |                 | $          | 2.60 |   |   | 2/13/2015 |   |
| Thomas F. Lovett           |       |       | 100,000    |                                                            |       |                                                                                                | 4.8        | %                                   |       |                 | $          | 2.60 |   |   | 2/13/2015 |   |

----

(1)          TheCompany granted options to purchase 2,073,500 shares of Common Stock toemployees and consultants in the fiscal year ended March 31, 2005. Alloptions were granted at an exercise price per share equal to the fair marketvalue of the Common Stock on the date of grant, determined by the closing priceon the American Stock Exchange on the trading day immediately preceding thegrant date. Options vested on the date of grant and normally expire ten yearsfrom the date of the grant.

**Aggregated Option Exercises in Last Fiscal year andFiscal Year-End Option Values**

Thefollowing table provides information regarding the number of shares of CommonStock covered by both exercisable and unexercisable stock options held by eachof the named executive officers as of March 31, 2005 and the values of “in-the-money”options, which values represent the positive spread between the exercise priceof any such option and the fiscal year-end value of the Common Stock.
| ** **              | ** ** | **Underlying Unexercised  Options/SARs at  Fiscal Year-End 2005** | ** ** | **Value of the Unexercised in  the Money Options/SARs at  Fiscal Year-End(1)** | ** ** | **Shares  Aquired on** | ** ** | **Value**       | ** ** |
|-------------------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------|------------|
| **Name**                | ** ** | ** **                                                                            | ** ** | **Exercisable**                                                                                                        | ** ** | **Unexercisable**           | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** | **Exercise(#)** | ** ** | **Realized** | ** ** |
| Michael Szycher,  Ph.D. |       | 3,230,743                                                                             |       |                                                                                                                   |       | $1,667,316                  |       |            |       |   |   |   |   |
| Douglas E.  Whittaker   |       | 270,000                                                                               |       |                                                                                                                   |       |                        |       |            |       |   |   |   |   |
| Leslie M. Taeger        |       | 350,000                                                                               |       |                                                                                                                   |       |                        |       |            |       |   |   |   |   |
| Thomas Lovett           |       | 335,000                                                                               |       |                                                                                                                   |       | $68,438                     |       |            |       |   |   |   |   |
|                         |            |                                                                                       |            |                                                                                                                        |            |                             |            |                 |            |  |  |  |  |  |  |

----

(1)          Thevalue of unexercised in-the-money options at fiscal year end assumes a fairmarket value for the Common Stock of $1.90, the closing sale price per share ofthe Common Stock as reported on the American Stock Exchange for March 31, 2005.

39

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**Item 11. Security Ownership of Certain BeneficialOwners and Management**

The following table sets forth the beneficialownership of shares of our common stock, as of March 31, 2005, of (i) eachperson known by us to beneficially own five percent (5%) or more of suchshares; (ii) each of our directors, executive officers, and significantemployees named in the Summary Compensation Table; and (iii) all of ourcurrent executive officers, directors, and significant employees as a group.Except as otherwise indicated, all shares are beneficially owned, and thepersons named as owners hold investment and voting power.

Beneficial ownership has been determined in accordancewith Rule 13d-3 under the Securities Exchange Act of 1934. Under thisrule, certain shares may be deemed to be beneficially owned by more than oneperson, if, for example, persons share the power to vote or the power todispose of the shares. In addition, shares are deemed to be beneficially ownedby a person if the person has the right to acquire shares, for example, uponexercise of an option or warrant, within 60 days of March 31, 2005.In computing the percentage ownership of any person, the amount of shares isdeemed to include the amount of shares beneficially owned by such person, and onlysuch person, by reason of such acquisition rights. As a result, the percentageof outstanding shares of any person as shown in the following table does notnecessarily reflect the person’s actual voting power at any particular date.

Thepercentage of beneficial ownership for the following table is based on19,258,983 shares of CardioTech common stock outstanding as of March 31,2005. Unless otherwise indicated, the address for each listed stockholder is:c/o CardioTech International, Inc., 229 Andover Street, Wilmington, MA01887. To CardioTech’s knowledge, except as otherwise indicated in thefootnotes to this table and pursuant to applicable community property laws, thepersons named in the table have sole voting and investment power with respectto all shares of common stock.
| **Name and Address of Beneficial Owner**     | ** ** | ** ** | ** ** | **Common Stock  Beneficially  Owned** | ** ** | **Percentage of  Outstanding  Shares** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------------------------------------|------------|---------------------------------------------|------------|
| Michael Szycher(1)                                                    |       |       | 3,608,466  |                                       |       |                                        | 16.0       | % |   |
| Michael  Barretti(2)                                                  |       |       | 290,833    |                                       |       |                                        | 1.5        | % |   |
| Michael Adams(3)                                                      |       |       | 242,589    |                                       |       |                                        | 1.2        | % |   |
| Anthony Armini(4)                                                     |       |       | 143,520    |                                       |       |                                        | 0.7        | % |   |
| William  O’Neill(5)                                              |       |       | 80,000     |                                       |       |                                        | 0.4        | % |   |
| Jermiah Dorsey(6)                                                     |       |       | 45,000     |                                       |       |                                        | 0.2        | % |   |
| Douglas E.  Whittaker(7)                                              |       |       | 270,000    |                                       |       |                                        | 1.4        | % |   |
| Leslie M.  Taeger(8)                                                  |       |       | 376,844    |                                       |       |                                        | 1.9        | % |   |
| Thomas F.  Lovett(9)                                                  |       |       | 355,000    |                                       |       |                                        | 1.8        | % |   |
| All executive officers  and directors as a group (9 persons)(10) |       |       | 5,412,252  |                                       |       |                                        | 22.3       | % |   |

----

  (1)       Includes 3,230,743 sharesof common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (2)       Includes274,783 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (3)       Includes242,589 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (4)       Includes137,520 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (5)       Includes80,000 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

40

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  (6)       Includes45,000 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (7)       Includes270,000 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (8)       Includes350,000 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

  (9)       Includes335,000 shares of common stock, which may be purchased within 60 days of March 31,2005 upon the exercise of stock options and/or warrants.

 (10)       See footnotes (1) through(9).

**Item12. Certain Relationships and Related Transactions (See Financial Stattementsfor Additional Disclosure)**

The Company has an investment in CorNova, Inc.,of which Dr. Eric Ryan is President and a major shareholder. The Company,on July 15, 2004, entered into a one-year consulting agreement with Dr. Ryan,which provides for a range of payments, in either cash or common stock, for theachievement of certain milestones related to the manufacturing, commencement ofEuropean clinical trials and the receipt of a restricted CE mark of the Company’sCardioPass synthetic coronary artery bypass graft. Total potential paymentsrange from $125,000 to $216,000 based on the timing of the milestoneachievements. As part of the agreement, Dr. Ryan has the opportunity toearn up to an additional $56,000 based on the achievement of certain milestonesrelated to other products of the Company. At March 31, 2005, several ofthe contract milestones had been achieved and, accordingly, costs totaling$73,000 related to performance under this contract have been recognized as aresearch and development expense as of March 31, 2005.

CardioTech has entered into an employment arrangementwith Scott Szycher, the son of Dr. Michael Szycher, our Chairman,President, Chief Executive Officer and Treasurer. Mr. Scott Szycheris the worldwide sales manager for the DermaPhylyx division and is responsiblefor coordinating the sales and marketing activities of the DermaPhlyx division.Mr. Scott Szycher is paid an annual salary of $65,000 per year.

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

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

41

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**PART IV**

**Item13. Exhibits, Financial Statement Schedules, and Reports on Form 10-KSB**

(a)           The following are filedas part of this Form 10-KSB:

(1)         Financial Statements: Fora list of financial statements which are filed as part of thisForm 10-KSB, See Page 34

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

42

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| 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.                                                                                                                                              |
| 10.18   |   | Form of Unit  Purchase Agreement between CardioTech and certain individuals was filed as  Exhibit 99.1 to CardioTech’s Form S-3, filed with the Securities  and Exchange Commission on February 12, 1999, and is incorporated herein  by reference.                                                                                                                                                                            |
| 10.19   |   | Form of Warrant to  Purchase Shares of Common Stock of CardioTech issued to certain individuals  was filed as Exhibit 99.2 to CardioTech’s Form S-3, filed with the  Securities and Exchange Commission on February 12, 1999, and is  incorporated herein by reference.                                                                                                                                                        |
| 10.20   |   | First Amendment Between  Duke Realty Limited Partnership and CDT Dated May 1, 2004 Filed as an  Exhibit to CardioTech’s Form 10-K for the year ended March 31,  2004.                                                                                                                                                                                                                                                          |
| 10.21   |   | Exchange and Venture  Agreement by and among CardioTech International, Inc., Implant  Sciences, Inc. and CorNova, Inc. dated March 5, 2004 filed as  an exhibit to CardioTech’s Form 10-KSB for the fiscal year ended  March 31, 2004.                                                                                                                                                                               |
| 10.22   |   | Plan and Agreement of  Merger and Reorganization dated March 12, 2004 between CardioTech  International, Inc. and DermaPhylyx, Inc., filed as an exhibit to  CardioTech’s Form 10-KSB for the year ended March 31, 2004.                                                                                                                                                                                                  |
| 10.23   |   | Asset  Purchase Agreement, dated as of November 19, 2004 by and among  CardioTech International, Inc., CarTika Medical, Inc., Thomas C.  Carlson and Sheila A. Carlson, incorporated by reference to Exhibit 99  to CardioTech’s Form 8-K filed on November 22, 2004.                                                                                                                                                |
| 10.24   |   | Securities Purchase  Agreement between Gryphon Master Fund, L.P., GSSF Master Fund, LP, Truk  Opportunity Fund, LLC, Truk International Fund, LP, Meadowbrook Opportunity  Fund LLC, Capital Ventures International, Iroquois Capital, L.P. and  CardioTech International, Inc. dated as of December 21, 2004 and  incorporated herein by reference to Exhibit 10.1 to CardioTech’s  Form 8-K filed on December 23, 2004. |

43

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| 10.25 |   | Registration Rights Agreement between Gryphon Master  Fund, L.P., GSSF Master Fund, LP, Truk Opportunity Fund, LLC, Truk  International Fund, LP, Meadowbrook Opportunity Fund LLC, Capital Ventures  International, Iroquois Capital, L.P. and CardioTech International, Inc.  dated as of December 21, 2004 and incorporated herein by reference to  Exhibit 10.2 to CardioTech’s Form 8-K filed on December 23,  2004. |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26 |   | Lock-Up Agreement  between CardioTech International, Inc. and certain of its officers and  directors dated as of December 21, 2004 and incorporated herein by  reference to Exhibit 10.3 to CardioTech’s Form 8-K filed on  December 23, 2004.                                                                                                                                                                            |
| 21    | **     | Subsidiaries of  CardioTech                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 23.1  | **     | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1  | **     | Certification of Chief  Financial 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                                                                                                                                                                                                                                                                                                                      |
|       |        |                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |

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**    Filedherewith

(b)          Reports on Form 8-K:None

Copies of these exhibitsare available for a reasonable fee upon written request to the Company at itscorporate headquarters: CardioTech International, Inc., 229 AndoverStreet, Wilmington, MA 01887. ATTN: Thomas F. Lovett.

**Item14. Principal Accounting Fees and Services**

Thefollowing is a summary of the fees billed to the Company by the principalaccountant, Ernst & Young LLP for professional services rendered forthe fiscal years ended March 31, 2005 and 2004. The Audit Committeeconsidered and discussed with Ernst & Young LLP the provision ofnon-audit services to the Company and the compatibility of providing suchservices with maintaining its independence as the Company’s auditor.
| **Fee Category** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------|------------|------------|------------|----------|------------|----------|------------|
| Audit Fees            |       | $          | 247,000    |     | $          | 239,000  |       |
| Audit-Related Fees    |       | —     |       | —   |       |
| Tax Fees              |       | —     |       | —   |       |
| All Other Fees        |       | —     |       | —   |       |
| Total Fees            |       | $          | 247,000    |     | $          | 239,000  |       |

 

*Audit Fees.  *Thiscategory consists of fees billed for professional services rendered for theaudit of our annual financial statements and review of financial statementsincluded in our quarterly reports and other professional services provided inconnection with regulatory filings.

44

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*Audit-Related Fees.  *Thiscategory consists of fees billed for assurance and related services thatrelated to the performance of the audit or review of our financial statementsand are not otherwise reported under “Audit Fees”.

*TaxFees.  *This category consists of fees billed forprofessional services for tax compliance, tax advice and tax planning. Theseservices include assistance regarding federal and state tax compliance andacquisitions.

**AuditCommittee Pre-approval Policies and Procedures**

In addition to approving the engagement of thePrincipal Accountant to audit the Company’s consolidated financial statements,it is the policy of the Committee to approve all use of the Company’s PrincipalAccountant for non-audit services prior to any such engagement. To minimizerelationships that could appear to impair objectivity of the PrincipalAccountant, it is the policy of the Committee to restrict the non-auditservices that may be provided to the Company by the Company’s PrincipalAccountant primarily to services that clearly would not compromise theindependence of the auditor.

 

45

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, as amended, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

| Dated: June 29, 2005 | **CardioTech International, Inc.** |
|---------------------------|-----------------------------------------|
|                      | By:                                     | /s/ MICHAEL SZYCHER |
| * *                  | * *                                | Michael Szycher*Chairman and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.
| Dated: June 29, 2005 |                                                                              | /s/ MICHAEL  SZYCHER               |   |
|---------------------------|-----------------------------------------------------------------------------------|------------------------------------|--------|
|                      | Michael Szycher  Chairman, Chief Executive Officer  (Principal Executive Officer) |                               |
| Dated: June 29 2005  |                                                                              | /s/ MICHAEL F. ADAMS               |   |
|                      | Michael F. Adams  Director                                                        |                               |
| Dated: June 29 2005  |                                                                              | /s/ ANTHONY J. ARMINI              |   |
|                      | Anthony J. Armini  Director                                                       |                               |
| Dated: June 29 2005  |                                                                              | /s/ MICHAEL BARRETTI               |   |
|                      | Michael Barretti  Director                                                        |                               |
| Dated: June 29 2005  |                                                                              | /s/ JERRY DORSEY                   |   |
|                      | Jerry Dorsey  Director                                                            |                               |
| Dated: June 29 2005  |                                                                              | /s/ WILLIAM O’NEILL, JR. |   |
|                      | William O’Neill, Jr.  Director                                          |                               |
| Dated: June 29 2005  |                                                                              | /s/ LESLIE M. TAEGER               |   |
|                      | Leslie M. Taeger  Chief Financial Officer                                         |                               |

 

46

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**Reportof Independent Registered Public Accounting Firm**

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

We have audited the accompanying consolidated balancesheet of CardioTech International, Inc. as of March 31, 2005, and therelated consolidated statements of operations, stockholders’ equity, and cashflows for the years ended March 31, 2005 and 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for expressing an opinion on theeffectiveness of the Company’s internal control over  financial reporting. Accordingly, we expressno such opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

In ouropinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of CardioTechInternational, Inc. at March 31, 2005 and the consolidated results oftheir operations and their cash flows for the years ended March 31, 2005and 2004 in conformity with U.S. generally accepted accounting principles.

|  | /s/ Ernst & Young LLP |
|--|--------------------------------|

 

Boston,Massachusetts

June 15,2005

F-1

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**CARDIOTECH INTERNATIONAL, INC.CONSOLIDATED BALANCE SHEET**
| ** **                                                                                                                   | ** ** | **March 31, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **ASSETS**                                                                                                                   |       |                         |       |
| Current Assets:                                                                                                              |       |                         |       |
| Cash and cash equivalents                                                                                                    |       | $                            | 7,469,000  |   |
| Accounts receivable—trade, net of bad debt allowance  of $326,000                                                       |       | 3,399,000                    |       |
| Accounts receivable—other                                                                                               |       | 221,000                      |       |
| Note receivable—related party                                                                                           |       | 10,000                       |       |
| Inventory                                                                                                                    |       | 4,802,000                    |       |
| Prepaid expenses                                                                                                             |       | 195,000                      |       |
| Total Current Assets                                                                                                         |       | 16,096,000                   |       |
| Property and equipment, net                                                                                                  |       | 4,549,000                    |       |
| Amortizable intangible assets, net                                                                                           |       | 776,000                      |       |
| Goodwill                                                                                                                     |       | 1,638,000                    |       |
| Other non-current assets                                                                                                     |       | 198,000                      |       |
| Investment in CorNova, Inc.                                                                                             |       | 505,000                      |       |
| Total Assets                                                                                                                 |       | $                            | 23,762,000 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                |       |                         |       |
| Current Liabilities:                                                                                                         |       |                         |       |
| Accounts payable                                                                                                             |       | $                            | 1,664,000  |   |
| Accrued expenses                                                                                                             |       | 652,000                      |       |
| Deferred revenue                                                                                                             |       | 263,000                      |       |
| Total Current Liabilities                                                                                                    |       | 2,579,000                    |       |
| Deferred rent                                                                                                                |       | 173,000                      |       |
| Stockholders’ Equity:                                                                                                   |       |                         |       |
| Preferred Stock, $.01 par value, 5,000,000 shares  authorized, 500,000 issued and none outstanding as of March 31, 2005 |       | —                       |       |
| Common Stock, $.01 par value, 50,000,000 shares  authorized, 19,258,983 issued and outstanding as of March 31, 2005     |       | 192,000                      |       |
| Additional paid-in capital                                                                                                   |       | 35,263,000                   |       |
| Accumulated deficit                                                                                                          |       | (14,270,000                  | )          |
| Accumulated other comprehensive income                                                                                       |       | (175,000                     | )          |
| Total Stockholders’ Equity                                                                                              |       | 21,010,000                   |       |
| Total Liabilities and Stockholders’ Equity                                                                              |       | $                            | 23,762,000 |   |
|                                                                                                                              |            |                              |            |  |  |  |

 

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

F-2

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**CARDIOTECH INTERNATIONAL, INC.CONSOLIDATED STATEMENTS OFOPERATIONS**
| ** **                                                             | ** ** | **For the Years Ended March 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Revenue:                                                               |       |                                                       |       |   |   |
| Product sales                                                          |       | $                                                          | 21,067,000 |   | $ | 21,323,000 |   |
| Royalties                                                              |       | 774,000                                                    |       | 476,000 |   |
|                                                                   |       | 21,841,000                                                 |       | 21,799,000 |   |
| Operating Expenses:                                                    |       |                                                       |       |   |   |
| Cost of product sales                                                  |       | 15,645,000                                                 |       | 15,670,000 |   |
| Research and development, regulatory and engineering                   |       | 1,258,000                                                  |       | 1,065,000 |   |
| Selling and marketing                                                  |       | 2,838,000                                                  |       | 2,572,000 |   |
| General and administrative                                             |       | 3,177,000                                                  |       | 3,083,000 |   |
| Severance payment                                                      |       |                                                       |       | 372,000 |   |
| Non-cash compensation and research contract  expense(1)                |       | 78,000                                                     |       | 1,171,000 |   |
| CarTika acquisition expenses                                           |       | 333,000                                                    |       | — |   |
|                                                                   |       | 23,329,000                                                 |       | 23,933,000 |   |
| Loss from  operations                                                  |       | (1,488,000                                                 | )          | (2,134,000 | ) |
| Interest and Other  Income and Expense:                                |       |                                                       |       |   |   |
| Interest expense                                                       |       | (20,000                                                    | )          | (70,000 | ) |
| Interest income                                                        |       | 38,000                                                     |       | 45,000 |   |
| Other income, (expense)                                                |       | (12,000                                                    | )          | 645,000 |   |
| Other income, net                                                      |       | 6,000                                                      |       | 620,000 |   |
| Equity in loss of CorNova, Inc.                                   |       | (113,000                                                   | )          | (1,000 | ) |
| Net Loss                                                               |       | $                                                          | (1,595,000 | ) | $ | (1,515,000 | ) |
| Net loss per  common share, basic and diluted                          |       | $                                                          | (0.09      | ) | $ | (0.10 | ) |
| Shares used in computing  net loss per common share, basic and diluted |       | 18,023,102                                                 |       | 15,420,736 |   |

----

(1)          For the year ended March 31,2005, non-cash compensation expense was a general and administrative expense.For the year ended March 31, 2004, non-cash compensation andresearch contract expense included $210,000 of research contract costs and$961,000 of general and administrative expenses.

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

F-3

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**CARDIOTECH INTERNATIONAL, INC.CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITYFor the Years Ended March 31, 2005 and 2004**
| ** **                                                                                  | ** ** | **Common Stock**      | ** ** | **Additional** | ** ** | ** **           | ** ** | **Other**                            | ** **  | **Subscription  receivable** | ** ** | ** **                     | ** ** | **Total   Stockholders’ ** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------|------------|----------------------|------------|--------------------------------------|-------------|------------------------------|------------|--------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Number of  Shares** | ** ** | **Amount**     | ** ** | **Paid-in  Capital** | ** ** | ** Accumulated   Deficit** | ** **  | **Comprehensive  Income**    | ** ** | **from related  parties** | ** ** | **Treasury  Stock**                       | ** ** | **Equity  (Deficit)** | ** ** |
| Balance as of  April 1, 2003                                                           |       | 9,228,266                  |       | $              | 92,000     |                 | $          | 16,168,000                           |        |                         | $          | (11,160,000                    | )          |                                      |       | — |   |   |   | $ | (178,000 | ) |   | $ | (165,000 | ) |   | $ | 4,757,000 |   |   |
| Issuance of common  stock in connection with exercise of stock options                      |       | 2,354,190                  |       | 24,000         |       | 4,960,000            |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 4,984,000 |   |   |
| Issuance of common  stock in connection with exercise of warrants                           |       | 1,158,900                  |       | 12,000         |       | 1,758,000            |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 1,770,000 |   |   |
| Fair value of options  granted to consultants                                               |       | —                     |       | —         |       | 92,000               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 92,000 |   |   |
| Fair value due to  modification of warrant terms                                            |       | —                     |       | —         |       | 344,000              |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 344,000 |   |   |
| Issuance of shares  related to the Gish merger                                              |       | 4,901,817                  |       | 49,000         |       | 8,162,000            |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 8,211,000 |   |   |
| Issuance of shares  related to the Dermaphylyx merger                                       |       | 3,827                      |       | —         |       | 21,000               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 21,000 |   |   |
| Investment in  CorNova, Inc.                                                           |       | 12,931                     |       | —         |       | 75,000               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 75,000 |   |   |
| Issuance of common  stock to Implant Sciences per contract terms                            |       | 40,000                     |       | —         |       | 249,000              |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 249,000 |   |   |
| Interest due on  officer’s notes                                                       |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | (9,000 | ) |   | — |   |   | (9,000 | ) |   |
| Payment of  interest due on officers’ notes                                            |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | 37,000 |   |   | — |   |   | 37,000 |   |   |
| Note receivable  from related party                                                         |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | (166,000 | ) |   | — |   |   | (166,000 | ) |   |
| Payment of note  receivable from related party                                              |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | 26,000 |   |   | — |   |   | 26,000 |   |   |
| Payment of  subscription receivable                                                         |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | 290,000 |   |   | — |   |   | 290,000 |   |   |
| Issuance of  treasury shares, at cost                                                       |       | —                     |       | —         |       | 212,000              |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | 163,000 |   |   | 375,000 |   |   |
| Purchase of stock,  at cost                                                                 |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | (180,000 | ) |   | (180,000 | ) |   |
| Comprehensive  income from CorNova                                                          |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | 7,000      |                                      |       |   | — |   |   | — |   |   | 7,000 |   |   |
| Net loss                                                                                    |       | —                     |       | —         |       | —               |       |                                 | (1,515,000  | )                            |       |                           | —     |                                      |       |   | — |   |   | — |   |   | (1,515,000 | ) |   |
| Balance at  March 31, 2004                                                             |       | 17,699,931                 |       | 177,000        |       | 32,041,000           |       |                                 | (12,675,000 | )                            |       |                           | 7,000      |                                      |       |   | — |   |   | (182,000 | ) |   | 19,368,000 |   |   |
| Issuance of common  stock in connection with exercise of stock options                      |       | 179,501                    |       | 2,000          |       | 252,000              |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 254,000 |   |   |
| Fair value of  options granted to consultants                                               |       | —                     |       | —         |       | 58,000               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 58,000 |   |   |
| Issuance of common  stock in connection with private placement, net of $314,000 of expenses |       | 1,139,586                  |       | 11,000         |       | 2,410,000            |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 2,421,000 |   |   |
| Investment in  CorNova                                                                      |       | 308,642                    |       | 3,000          |       | 747,000              |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 750,000 |   |   |
| Compensation  expense related to acceleration of employee stock options                     |       | —                     |       | —         |       | 20,000               |       |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | — |   |   | 20,000 |   |   |
| Purchase of stock,  at cost                                                                 |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | —     |                                      |       |   |   |   |   | (84,000 | ) |   | (84,000 | ) |   |
| Reclass of  repurchased stock as unissued according to Mass Business Corp. Act              |       | (68,677                    | )          | (1,000         | )          | (265,000             | )          |                                 | —      |                         |       |                           | —     |                                      |       |   | — |   |   | 266,000 |   |   | — |   |   |
| Comprehensive loss  from CorNova                                                            |       | —                     |       | —         |       | —               |       |                                 | —      |                         |       |                           | (182,000   | )                                         |       |   | — |   |   | — |   |   | (182,000 | ) |   |
| Net loss                                                                                    |       | —                     |       | —         |       | —               |       |                                 | (1,595,000  | )                            |       |                           | —     |                                      |       |   | — |   |   | — |   |   | (1,595,000 | ) |   |
| Balance at  March 31, 2005                                                             |       | 19,258,983                 |       | $              | 192,000    |                 | $          | 35,263,000                           |        |                         | $          | (14,270,000                    | )          |                                      |       | $ | (175,000 | ) |   |   | — |   |   | — |   |   | $ | (21,010,000 | ) |   |
|                                                                                             |            |                            |            |                |            |                      |            |                                      |             |                              |            |                                |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part of theseconsolidated financial statements

F-4

 

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**CARDIOTECH INTERNATIONAL, INC.CONSOLIDATED STATEMENTS OFCASH FLOWS**
| ** **                                                                                 | ** ** | **For the Years Ended** March 31, | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2005**                                                   | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                                       |       |   |   |
| Net Loss                                                                                   |       | $                                                          | (1,595,000 | ) | $ | (1,515,000 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                       |       |   |   |
| Compensation expense related to treasury shares  issued                                    |       | —                                                     |       | 293,000 |   |
| Fair value ascribed to options granted to  nonemployees                                    |       | 58,000                                                     |       | 92,000 |   |
| Discount value ascribed to options granted to  consultant                                  |       | —                                                     |       | 232,000 |   |
| Compensation expense related to modification of  warrants and options                      |       | 20,000                                                     |       | 344,000 |   |
| Non-cash research contract expense                                                         |       | —                                                     |       | 210,000 |   |
| Equity in net loss of CorNova, Inc.                                                   |       | 113,000                                                    |       | 1,000 |   |
| Decrease in carrying value of CorNova, Inc.                                           |       | —                                                     |       | 32,000 |   |
| Depreciation and amortization                                                              |       | 1,016,000                                                  |       | 1,092,000 |   |
| Provision for doubtful accounts                                                            |       | 202,000                                                    |       | 24,000 |   |
| Deferred rent                                                                              |       | (47,000                                                    | )          | (42,000 | ) |
| Changes in assets  and liabilities:                                                        |       |                                                       |       |   |   |
| Accounts receivable—trade                                                             |       | (321,000                                                   | )          | (141,000 | ) |
| Accounts receivable—other                                                             |       | (29,000                                                    | )          | (71,000 | ) |
| Inventory                                                                                  |       | (235,000                                                   | )          | (398,000 | ) |
| Prepaid expenses and other current assets                                                  |       | (22,000                                                    | )          | 155,000 |   |
| Accounts payable                                                                           |       | 340,000                                                    |       | 371,000 |   |
| Accrued expenses                                                                           |       | (94,000                                                    | )          | (139,000 | ) |
| Deferred revenue                                                                           |       | 107,000                                                    |       | (109,000 | ) |
| Net cash provided by (used in) operating activities                                        |       | (487,000                                                   | )          | 431,000 |   |
| Cash flows from  investing activities:                                                     |       |                                                       |       |   |   |
| Purchases of property and equipment                                                        |       | (712,000                                                   | )          | (2,447,000 | ) |
| Decrease in other non-current assets                                                       |       | 22,000                                                     |       | 484,000 |   |
| Payment of acquisition costs, net of cash acquired                                         |       | (333,000                                                   | )          | (498,000 | ) |
| Net cash used in investing activities                                                      |       | (1,023,000                                                 | )          | (2,461,000 | ) |
| Cash flows from  financing activities:                                                     |       |                                                       |       |   |   |
| Repayment on revolving line of credit                                                      |       | (730,000                                                   | )          | (474,000 | ) |
| Net proceeds from issuance of common stock                                                 |       | 2,676,000                                                  |       | 6,503,000 |   |
| Repayment of note receivables from officers and  directors                                 |       | —                                                     |       | 290,000 |   |
| Purchase of stock                                                                          |       | (84,000                                                    | )          | (111,000 | ) |
| Net cash provided by financing activities                                                  |       | 1,862,000                                                  |       | 6,208,000 |   |
| Net increase in cash and cash equivalents                                                  |       | 352,000                                                    |       | 4,178,000 |   |
| Cash and cash equivalents at beginning of period                                           |       | 7,117,000                                                  |       | 2,939,000 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                          | 7,469,000  |   | $ | 7,117,000 |   |

 

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

F-5

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**Nature of Business**

CardioTech International, Inc. (including itssubsidiaries, collectively “CardioTech” or the “Company”) is using itsproprietary technology to develop and manufacture small bore vascular grafts,or synthetic blood vessels, made of ChronoFlex, a family of polyurethanes, thathas been demonstrated to be biocompatible and non -toxic.

Additionally, the Company is an original equipmentmanufacturer; supplier of specialized disposable medical devices to medicaldevice companies from concept to finished packaged, sterile product; and usesits experience in the design, development, prototyping and manufacturing toprovide turnkey contract services. Devices designed, developed and manufacturedfor customers include sensing, balloon, and drug delivery catheters; disposableendoscopes; and in-vitro diagnostic and surgical disposables.

The Company also is a manufacturer of certain singleuse medical devices and medical devices that have a disposal component. Theseproducts are marketed primarily to hospitals through direct salesrepresentatives and distributors domestically and internationally throughdistributors. Primary markets include products for use in cardiac surgery,myocardial management, infusion therapy, and post operative blood salvage.

The Company is headquartered in Wilmington,Massachusetts, where it operates its biomaterials manufacturing and laboratoryfacilities and its wound dressing operations, operates contract research anddevelopment services and outsourced manufacturing from its facility inPlymouth, Minnesota, and manufactures specialized disposable medical devices ata  facility located in Rancho SantaMargarita, California.

Effective March 5,2004, the Company exchanged 12,931 shares of its common stock for 1,500,000shares of common stock of CorNova, Inc., which currently represents an ownership interest of 30%. CorNova, Inc. completed its Series AFinancing transaction on February 4, 2005. At that time, the Companycontributed 308,642 shares of its common stock equal to $750,000. The number ofshares was determined based on the five (5) day average closing priceimmediately preceding the closing date. CorNova is a development stageenterprise, formed to develop a drug eluding stent based upon the Company’sChronoflex technology.

**A. Summary of Significant Accounting Policies andCertain Other Disclosures**

*Basis ofPresentation*

CardioTech was incorporated in March 1993.CardioTech and CardioTech International, Ltd. (“CTL”) were spun off ofPolyMedica Industries, Inc. (“PMI”) in June 1996. CardioTechAcquisition Corp, a wholly-owned subsidiary of the Company, wasincorporated in April 1999. CTL was sold in November 2000. Cathetersand Disposables Technology, Inc. (CDT), an original equipmentmanufacturer; supplier of specialized disposable medical devices to medicaldevice companies from concept to finished packaged, sterile product; and  who uses its experience in the design,development, prototyping and manufacturing to provide turnkey contractservices, was acquired in May, 2001. On April 7, 2003 the Companyconsummated a merger with Gish Biomedical, Inc. (“Gish”). Gish  specializes in the manufacture and sale ofproducts used in open-heart surgery, vascular access and orthopedic surgery.Gish is registered as a medical device manufacturer with the FDA, the EuropeanUnion and state agencies, such as the California Department of Health Services.

F-6

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures(Continued)**

The consolidated financialstatements include the accounts of the Company and its wholly-ownedsubsidiaries. All significant intercompany balances and transactions have beeneliminated. The Company’s investment in CorNova is accounted for using theequity method of accounting.

*Uses of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes. Actual results may differ from those estimates and suchdifferences may be material to the financial statements.

*Uncertainties*

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

*Cash and Cash Equivalents*

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

*Supplemental Disclosure of Cash Flow Information*

For fiscal years ended March 31,2005 and 2004, the Company received interest income of $38,000 and $45,000,respectively. For fiscal years ended March 31, 2005 and 2004, the Companypaid interest  of $20,000 and $70,000,respectively. For fiscal years ended March 31, 2005 and 2004, the Companypaid income taxes of $12,000 and $7,000, respectively. During fiscal 2005, theCompany had one non-cash item, the issuance of 308,642 shares related to theinvestment in CorNova, Inc. During fiscal 2004, the Company had thefollowing three non-cash items: (i) the issuance of 4,901,817 sharesrelated to the Gish merger, (ii) the issuance of 12,931 shares related tothe investment in CorNova, Inc., and (iii) the issuance of 3,827shares related to  the Dermaphylyxmerger.

*Revenue Recognition—Product,Research and Royalty Revenue*

The Company recognizes revenue in accordance withStaff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition inFinancial Statements” and ETIF 00-21, “Revenue Arrangements with MultipleDeliverables”. The Company recognizes revenue from product sales upon shipment,provided that a purchase order has been received or a contract has beenexecuted, there are no uncertainties regarding customer acceptance, the salesprice is fixed or determinable and collection is deemed probable. Ifuncertainties regarding customer acceptance exist, the Company recognizesrevenue when those uncertainties are resolved and title has been transferred tothe customer. Amounts collected or billed prior to satisfying the above revenuerecognition criteria are recorded as deferred revenue. The Company alsoreceives license and royalty fees for the use of its proprietary biomaterials.CardioTech recognizes these fees as revenue in accordance with the terms of thecontracts. Contracted development fees from 

F-7

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures (Continued)**

corporate partners arerecognized upon completion of service or the attainment of technical benchmarks,as appropriate.

Generally, the customerspecifies the delivery method and is responsible for delivery costs. However,in certain situations, the customer specifies the delivery method and requeststhe Company pay the delivery costs and then invoice the delivery costs to thecustomer or include an estimate of the delivery costs in the price of theproduct. Delivery costs billed to customers by the Company for the year ended March 31,2005 and 2004 of $409,000 and $481,000, respectively, have been recorded asrevenue.

*Research andDevelopment, Regulatory and Engineering Expense*

Research and development,regulatory and engineering expenditures for the years ended March 31, 2005and 2004 were $1,258,000 and $1,065,000, respectively, and consisted primarilyof salaries and related costs ( 60% in fiscal 2005 and 72% in fiscal 2004), andare expensed as incurred. In this income statement category, the Company hassix full time employees and allocates a portion of Dr. Szycher’s salaryand related costs to this income statement category. These individuals work ona variety of projects, including production support.

*ReportingComprehensive Income (Loss)*

SFAS No. 130, “ReportingComprehensive Income (Loss),” establishes standards for the reporting anddisplay of comprehensive income and its components in the consolidatedfinancial statements. Comprehensive income (loss) is the total of net income(loss) and all other non owner changes in equity including such items asunrealized holding gains (losses) on securities classified asavailable-for-sale, foreign currency translation adjustments and minimumpension liability adjustments. During the years ended March 31, 2005 and2004, the Company’s only item of other comprehensive income (loss) was itsequity in unrecognized holding gains (losses) on securities classified asavailable for sale, recorded by CorNova, Inc. of ($182,000)and $7,000, respectively.

*Basic and DilutedEarnings Per Share*

The Company follows SFAS No. 128, “Earnings PerShare,” where basic earnings per share is computed by dividing net income(loss) by the weighted average number of common shares outstanding during theperiod. Diluted earnings per share are based upon the weighted average numberof common shares outstanding during the period plus additional weighted averagecommon equivalent shares outstanding during the period. At March 31, 2005and March 31, 2004, exercisable options of 6,590,035 and 4,048,773,respectively, were excluded from the earnings per share calculation becausethey are considered antidilutive. At March 31, 2005, warrants issued topurchase 740,731 shares of common stock, additional investment rights topurchase 1,139,586 shares of common stock and warrants to purchase 113,959shares of common stock if the additional investment rights are exercised, wereexcluded from the earnings per share calculation because they are consideredantidilutive. At March 31, 2004, there were no warrants outstanding topurchase shares of the Company’s common stock.

Common equivalent sharesresult from the assumed exercise of outstanding stock options and warrants, theproceeds of which are then assumed to have been used to repurchase outstandingcommon 

F-8

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures (Continued)**

stockusing the treasury stock method. In addition, the numerator is adjusted for anychanges in income or loss that would result from the assumed conversion ofpotential shares.

*Property and Equipment*

Property and equipment arestated at cost. Equipment is depreciated using the straight-line method overthe estimated useful lives of the assets, ranging from three to seven years,leasehold improvements are amortized using the straight-line method over theshorter 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 over40 years. Expenditures for repairs and maintenance are charged to expenseas incurred. The Company records construction in process in the appropriateasset category and commences depreciation upon completion and commencement ofuse of the asset.

*Inventory*

Inventoriesare stated at the lower of cost (first-in, first-out) or net realizable valueand consists of the following at March 31, 2005.
| Raw materials     |   | $         | 2,343,000 |   |
|-------------------|--------|-----------|-----------|--------|
| Work in progress  |   | 1,182,000 |      |
| Finished goods    |   | 1,277,000 |      |
| Total inventories |   | $         | 4,802,000 |   |

 

*Income Taxes*

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

*Intangible Assets and Impairment of Long-Lived Assets*

The Company evaluates its long-lived assets, whichinclude property and equipment and finite-lived intangible assets forimpairment as events and circumstances indicate that the carrying amount maynot be recoverable and at a minimum at each balance sheet date. The Companyevaluates the reliability of its long-lived assets based on profitability andundiscounted 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 testrequirement of SFAS No. 142, the Company completed the first step of thetraditional goodwill impairment test during the last quarter of fiscal 2005,based on the amount of goodwill as of December 31, 2004. The Companyestimated the fair value of each of its reporting units based on a discountedcash flow model. Based on the results of the first step of the goodwill impairmenttest, the Company has determined that the fair value of each of the reportingunits exceeded the carrying amounts and, therefore, no goodwill impairmentexisted as of March 31, 2005. As a 

F-9

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures (Continued)**

result, the second step ofthe goodwill impairment test is not required to be completed. As of March 31,2005, management is not aware of any events that would cause them to concludethat any indicators of impairment exist. The Company will be required tocontinue to perform a goodwill impairment test on at least an annual basis andthe next test is scheduled during the quarter ending March 31, 2006.

As of March 31, 2005, CardioTech had unamortizedgoodwill of $1,638,000 and amortizable identifiable intangible assets of$776,000. Amortization expense related to identifiable intangible assets thatwill continue to be amortized in the future is approximately $192,000 for thefiscal year ended March 31, 2005.

Theestimated amortization expense related to other identifiable intangible assetsfor the next five years is as follows:
| **Year** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------|------------|------------|------------|------------|------------|
| 2006     |       | $          | 192,000    |       |
| 2007     |       | $          | 118,000    |       |
| 2008     |       | $          | 110,000    |       |
| 2009     |       | $          | 110,000    |       |
| 2010     |       | $          | 110,000    |       |

 

*Stock Based Compensation*

The Company accounts for stock options granted toemployees 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 accountingprovided for under Statement of Financial Standards No. 123, *Accounting for Stock-Based Compensation (“SFAS 123”)*,which requires the use of option valuation models that were not developed foruse in valuing employee stock options. The Company also has issued options tonon-employees for services provided to the Company. Such options have beenaccounted for at fair value in accordance with the provisions of SFAS 123and the Emerging Issues Task Force consensus in Issue No. 96-18, *Accounting for Equity Instruments That are Issued toOther Than Employees for Acquiring, or in Conjunction With Selling Goods orServices*. Such compensation expense is recognized based on thevested portion of the compensation cost at the respective balance sheet dates.

Had compensation cost forthe Company’s stock option grants been determined consistent withSFAS 123, the Company’s net loss and net loss per share would approximatethe pro forma amounts below:
| ** **                                                                                                                                       | ** ** | **Year Ended March 31** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                       | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Net loss, as reported                                                                                                                            |       | $(1,595,000                            | )          | $(1,515,000 | ) |
| Add: Stock-based  employee compensation expense included in reported net loss, net of related  tax effects                                       |       | 20,000                                 |       | — |   |
| Deduct: Stock-based  employee compensation expense determined under fair value based method for  all employee awards, net of related tax effects |       | $(7,418,000                            | )          | $(2,790,000 | ) |
| Pro forma, net loss                                                                                                                              |       | $(8,993,000                            | )          | $(4,305,000 | ) |
| Basic and diluted loss  per share                                                                                                                |       |                                   |       |   |   |
| As reported                                                                                                                                      |       | $(0.09                                 | )          | $(0.10 | ) |
| Pro forma                                                                                                                                        |       | $(0.50                                 | )          | $(0.28 | ) |

 

F-10

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures (Continued)**

The significant difference between “As reported” and “Proforma” results for the year ended March 31, 2005 relates primarily to theeffect of the acceleration of the vesting of stock options on July 8,2004, as described in Note I to these consolidated financial statementsand the granting in fiscal 2005 of 2,073,500 fully vested stock options.

The Black-Scholes option valuation model wasdeveloped for use in estimating the fair value of traded options, which have novesting restrictions and are fully transferable. In addition, option valuationmodels require the input of highly subjective assumptions including theexpected stock price volatility. Because the Company’s employee stock optionshave characteristics significantly different from those of traded options, andbecause changes in the subjective input assumptions can materially affect thefair value estimate, in management’s opinion, the existing models do notnecessarily provide a reliable single measure of the fair value of its employeestock options.

Thefair value of each option granted during the fiscal years 2005 and 2004 isestimated on the date of grant using the Black-Scholes option pricingmodel with the following weighted average assumptions:
| ** **                     | ** ** | **2005**               | ** ** | **2004**               | ** ** |
|--------------------------------|------------|------------------------|------------|------------------------|------------|
| Dividend yield                 |       | None                   |       | None                   |       |
| Expected  volatility           |       | 80.00                  | %          | 80.00                  | %          |
| Risk-free  interest rate       |       | 4.17% - 4.73 | %          | 3.38% - 4.40 | %          |
| Expected life                  |       | 10 years               |       | 10 years               |       |
| Fair value of options  granted |       | $2.61                  |       | $1.64                  |       |

 

*Fair Value ofFinancial Instruments*

The fair value of cash and cash equivalents,receivables and payables at March 31, 2005 approximate their carryingamount due to the short maturities of these items. Financial instruments that potentiallysubject the Company to a concentration of credit risk principally consist ofcash and cash equivalents and trade receivables.

All of the Company’s cash and cash equivalents aremaintained at major financial institutions.

The Company performs ongoingcredit evaluations of the financial condition of its customers and generallydoes not require collateral. The Company’s contract manufacturing operationsrequires new customers to pay a deposit prior to any work being performed,which is recorded as a current liability. Although the Company is directlyaffected by the overall financial condition of the healthcare industry,management does not believe significant credit risk exists at March 31,2005. The Company maintains an allowance for doubtful accounts based onaccounts past due according to contractual terms and historical collectionexperience. Actual losses when incurred are charged to the allowance.

*Reclassifications*

Certain amounts in the2004 financial statements have been reclassified to conform to the 2005presentation.

F-11

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**A. Summaryof Significant Accounting Policies and Certain Other Disclosures (Continued)**

*Recent AccountingPronouncements*

The FASB issued Statement 123R, “Share-BasedPayment,” which requires all companies to measure compensation cost for allshare-based payments, including employee stock options, at fair value,effective for public companies (except small business issuers as defined in SECRegulation S-B) for interim or annual periods beginning after December 15,2005. Retroactive application of the requirements of SFAS No. 123 (“SFAS 123”),“Accounting for Stock-Based Compensation,” not Statement 123R, to thebeginning of the fiscal year that includes the effective date would be permitted,but not required and early adoption of Statement 123R is encouraged. The FASBhas concluded that companies could adopt the new standard in one of two ways.First, under the modified prospective transition method, a company wouldrecognize share-based employee compensation cost from the beginning ofthe fiscal period in which the recognition provisions are first applied as ifthe fair-value-based accounting method had been used to account for allemployee awards granted, modified, or settled after the effective date and toany awards that were not fully vested as of the effective date. Measurement andattribution of compensation cost for awards that are nonvested as of theeffective date of the proposed Statement would be based on the same estimate ofthe grant-date fair value and the same attribution method used previously underSFAS 123 (either for recognition or pro forma purposes). Second, under themodified retrospective transition method, a company would recognize employeecompensation cost for periods presented prior to the adoption of Statement 123Rin accordance with the original provisions of SFAS 123; that is, an entitywould recognize employee compensation cost in the amounts reported in the proforma disclosures provided in accordance with SFAS 123. A company wouldnot be permitted to make any changes to those amounts upon adoption of theproposed Statement unless those changes represent a correction of an error (andare disclosed accordingly). For periods after the date of adoption of Statement123R, the modified prospective transition method described above would beapplied. The Company is in the process of determining the impact of thisstatement on the consolidated financial statements.

In November 2004,the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards (“SFAS”) No. 151, *Inventory Costs* (“SFAS 151”), which amendsAccounting Research Bulletin No. 43, Chapter 4, *Inventory Pricing.*SFAS 151 requires theallocation of fixed production overhead costs be based on the normal capacityof the production facilities and unallocated overhead costs be recognized as anexpense in the period incurred. In addition, other items, such as abnormalfreight, handling costs and wasted materials, require treatment as currentperiod charges rather than a portion of the inventory cost. SFAS 151 iseffective for inventory costs incurred during periods beginning after June 15,2005. The Company does not expect the impact of the adoption of SFAS 151 tohave a material effect on its consolidated financial statements.

**B. Related Party Transactions**

The Company has an investment in CorNova, Inc.,of which Dr. Eric Ryan is President and a major shareholder. The Company,on July 15, 2004, entered into a one-year consulting agreement with Dr. Ryan,which provides for a range of payments, in either cash or common stock, for theachievement of certain milestones related to the manufacturing, commencement ofEuropean clinical trials and the receipt of a restricted CE mark of the Company’sCardioPass synthetic coronary artery bypass graft. Total potential paymentsrange from $125,000 to $216,000 based on the timing of the milestoneachievements. As part of the agreement, Dr. Ryan has the opportunity toearn up to an additional $56,000 based on the achievement 

F-12

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**B. RelatedParty Transactions (Continued)**

of certain milestonesrelated to other products of the Company. At March 31, 2005, several ofthe contract milestones had been achieved and, accordingly, costs totaling$73,000 related to performance under this contract have been recognized as aresearch and development expense as of March 31, 2005.

CardioTech currently employs Scott Szycher, the son ofDr. Michael Szycher, our Chairman, President, Chief Executive Officer andTreasurer. Mr. Scott Szycher is the worldwide sales manager for theDermaphylyx division and is responsible for coordinating the sales andmarketing activities of the Dermaphylyx division. Mr. Scott Szycher ispaid an annual salary of $65,000 per year.

In December 1998, certain executive officers ofthe Company purchased, in the aggregate, 160,000 units as part of the FechtorDetwiler 1998 private placement offering of the Company’s common stock andwarrants exercisable until December 15, 2003 to purchase the Company’scommon stock. A note in the aggregate principal amount of $200,000 issued bythese officers to the Company funded the purchase of the units. The terms ofthe note provided for each executive to repay the note with interest at 4.25%per annum, within five years. The promissory notes, which were full recourseagainst the maker with respect to any amount due under the promissory notes,were secured by the common stock and warrants underlying the units. The principalbalance outstanding of $150,000 was due on December 15, 2003. The Companyreceived notification from a former officer and a current board member of theirintention to exercise the warrants prior to December 15, 2003. Theirpayments for the exercise of the warrants were received after the December 15,2003 expiration date, however the Company allowed for the exercise of thosewarrants. This effective modification of the warrants resulted in a non-cashcompensation expense of $344,000. In applying generally accepted accountingprinciples (GAAP), the acceptance of the late payments on the warrant exerciserepresents a modification of the award and is treated as if a new award wasgranted on the date of modification. The intrinsic value of the awards on thedate of the modification was recorded as non-cash compensation expense in theaccompanying statement of operations.

Effective June 18, 2003, the Company and one ofthe Company’s consultants executed a full recourse promissory note for $26,250related to the exercise of stock options bearing interest at 6% with paymentsdue 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 developadvanced wound healing products. Dermaphylyx was merged into CardioTechInternational, Inc., pursuant to which it became a wholly owned subsidiaryof CardioTech. Due to CardioTech’s controlling financial interest, Dermaphylyxhas been consolidated in the financial statements of CardioTech as of December 31,2003. Prior to December 31, 2003, the operations and total assets ofDermaphylyx were not material to CardioTech. Since July 1999, the yearDermaphylyx was incorporated, all development expenses have been paid byCardioTech International, Inc.

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

F-13

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**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 andother intellectual property owned by PLMD in the implantable devices andmaterials field (collectively, “PLMD Licensed Technology”). CardioTech, at itsown expense, will file patents or other applications for the protection of allnew inventions formulated, made, or conceived by CardioTech during the term ofthe license that related to PLMD Licensed Technology and all such inventionsshall be exclusively licensed to PLMD for use by PLMD in fields other than theimplantable devices and materials field. There are no financial commitments ofCardioTech related to this license.

**D. Property and Equipment**

Propertyand equipment at March 31, 2005 consists of the following:
| Land                                            |   | $          | 500,000   |   |
|-------------------------------------------------|--------|------------|-----------|--------|
| Building                                        |   | 2,030,000  |      |
| Machinery,  Equipment, and Tooling              |   | 2,401,000  |      |
| Furniture,  fixtures and office equipment       |   | 541,000    |      |
| Leasehold improvements                          |   | 1,292,000  |      |
|                                            |   | 6,764,000  |      |
| Less accumulated  depreciation and amortization |   | (2,215,000 | )         |
|                                            |   | $          | 4,549,000 |   |

 

Depreciationexpense for property and equipment for the fiscal years ended March 31,2005 and 2004 was approximately $824,000 and $900,000, respectively.

**E.Income Taxes**

Reconciliationbetween the Company’s effective tax rate and the United States statutory rateis as follows:
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| Expected federal  tax rate                      |       | 34.0     | %          | 34.0     | %          |
| State income  taxes, net of federal tax benefit |       | 4.4      | %          | 5.0      | %          |
| Non deductible  expenses                        |       | (1.0     | )%         | (17.0    | )%         |
| Change in  valuation allowance                  |       | (37.4    | )%         | (22.0    | )%         |
| Effective tax rate                              |       | 0.0      | %          | 0.0      | %          |

 

F-14

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**E. IncomeTaxes (Continued)**

A valuation allowance hasbeen recorded to offset the related deferred tax assets due to uncertainty ofrealizing the benefit of this asset. The following is a summary of thesignificant components of the Company’s deferred tax assets and liabilities asof March 31, 2005:
| Deferred Tax Assets:                                                   |   |       |        |
|------------------------------------------------------------------------|--------|------------|-------------|
| Net operating  loss carry forwards                                     |   | $          | 9,525,000   |   |
| Tax credits                                                            |   | 71,000     |        |
| Inventory and  receivable allowances                                   |   | 540,000    |        |
| Accrued expenses  deductible when paid                                 |   | 360,000    |        |
| Depreciation and  amortization                                         |   | 141,000    |        |
| Deferred tax  assets before valuation allowance                        |   | 10,637,000 |        |
| Deferred tax  liability on basis difference of amortizable intangibles |   | (264,000   | )           |
| Valuation  allowance                                                   |   | $          | (10,373,000 | ) |
| Net deferred tax asset                                                 |   | $          | —      |   |

 

As of March 31, 2005,the Company had federal and state net operating loss carry forwards ofapproximately $24,200,000 and $20,600,000, respectively, available to offsetfuture taxable income, that expire between 2019 through 2026. Approximately$11,349,000 of the Federal net operating loss carry forwards is subject toannual limitations as a result of the change in control of Gish.

**F. Concentration of Credit Risk and Major Customers**

Financial instruments thatpotentially subject the Company to significant concentrations of credit riskconsist principally of cash and cash equivalents and trade accounts receivable.The Company maintains cash and cash equivalents with high credit, qualityfinancial institutions. To manage accounts receivable credit risk, the Companycontinuously evaluates the creditworthiness of its customers and maintains allowancesfor potential credit losses. As of March 31, 2005 the Company believes ithas no significant concentration of credit risks. One sales representativeorganization comprised 8% of the Company’s net sales in fiscal 2005.

**G. Lease Commitments**

Aggregatefuture minimum rental payments required under operating leases for the RanchoSanta Margarita, Irvine, and Plymouth facilities are as follows:
| **Fiscal year ended March 31** | ** ** | ** ** | ** ** | **Rancho  Santa  Margarita** | ** ** | **Irvine** | ** ** | **Plymouth** | ** ** |
|----------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|--------------|------------|
| 2006                                               |       | $          | 470,000    |                         | $          | 124,000    |       | $            | 127,000    |   |
| 2007                                               |       | 484,000    |       | —                       |       | 131,000    |       |
| 2008                                               |       | 498,000    |       | —                       |       | 131,000    |       |
| 2009                                               |       | 514,000    |       | —                       |       | 131,000    |       |
| 2010                                               |       | 529,000    |       | —                       |       | —     |       |
| Thereafter                                         |       | —     |       | —                       |       | —     |       |
|                                               |       | $          | 2,495,000  |                         | $          | 124,000    |       | $            | 520,000    |   |

 

F-15

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**G. LeaseCommitments (Continued)**

Rent expense charged tooperations was $732,000 and $786,000 for the years ended March 31, 2005and 2004, respectively.

**H. Revolving Line of Credit**

When acquired, Gish had a $4,000,000 revolving line ofcredit, expiring in February 2005. Advances, based on eligiblereceivables, were secured by the operating assets of Gish and bear interest atprime plus 2%. The agreement also included various restrictive loan covenants,including a requirement for Gish to maintain a minimum net worth of $7,000,000and to achieve positive net income on a rolling three-month basis.

At March 31, 2005,the Company had no outstanding balance due under the revolving line of credit,as the revolving line of credit agreement was terminated by the Company in January 2005.

**I. Stockholders’ Equity**

***Common Stock Options and Warrants***

On December 22, 2004, the Company issued1,139,586 shares of its common stock at $2.40 per share in a private placementreceiving $2,735,006 in gross proceeds, less placement agent fees and relatedtransaction costs of approximately $314,000.

In connection with the transaction,  the Company issued warrants to the investorsto purchase 569,793 shares of common stock at an exercise price of $3.00 pershare, which are exercisable until December 22, 2009. In addition, theinvestors have rights to purchase up to 1,139,586 shares of common stock at aprice of $2.40 per share, which are exercisable for a period commencing on December 22,2004 and ending on July 24, 2005. We also issued warrants to the placementagent to purchase 113,959 shares of our common stock at an exercise price of$2.40 per share and 56,979 shares of our common stock at an exercise price of$3.00 per share, which are exercisable until December 22, 2009. Should theinvestors exercise the additional investment rights (described above), theplacement agent will receive an additional warrant up to 113,959 shares ofcommon stock at an exercise price of $2.40 per share. If all warrants andadditional investment rights are exercised, the Company would receive grossproceeds of $5,162,326, less related transaction costs.

The fair market value of the warrants and additionalinvestment rights granted was estimated to be $1,606,000 and $768,000 on thedate of grant, respectively. These amounts are disclosed for informationpurposes only as the actual amount to be recorded by the Company upon theexercise of the warrants or additional investment rights will be the net cashproceeds of the exercise.

The fair market value of the warrants and additionalinvestment rights granted were determined by estimating the fair market valueby using the Black-Scholes option valuation method with the following weightedaverage assumptions: dividends yield—none; expected volatility—80%; risk freeinterest rate 3.60%—5 yr. rate in Dec ’04; expected life—5 years; fair value ofoptions granted—$.67 (additional investment rights)—$1.59 ($2.40 warrants)—$1.99($3.00 warrants).

The Company issued 179,501 shares of common stockduring year ended March 31, 2005, as a result of the exercise of optionsby employees and consultants, generating cash proceeds of $254,000. In fiscal2005, the Company issued 308,642 shares of common stock to CorNova, asdescribed in Note P. The 

F-16

----

**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**I.Stockholders’ Equity (Continued)**

Company issued 2,354,190shares of common stock during year ended March 31, 2004, as a result ofthe exercise of options by employees and consultants, generating cash proceedsof $4,985,000 and issued 1,158,900 shares of common stock as a result of theexercise of warrants, generating cash proceeds of $1,770,000. The issuance of40,000 shares of common stock in fiscal 2004 to Implant resulted in netproceeds of $40,000. During the first quarter of fiscal 2004, the Companyissued 4,901,817 shares of common stock as part of the Gish Biomedical mergertransaction. During the forth quarter of fiscal 2004 the Company issued 3,827shares of common stock as part of the Dermaphylyx transaction and 12,931 sharesof common stock in exchange for an equity interest in CorNova, Inc.

During the 2005 fiscal year, the Company recordednon-cash compensation expense for investment advisory services of $58,000related to options granted to purchase 100,000 shares of the Company’s commonat an exercise price of  $3.50, expiring September 2006. The compensation expense was determined byestimating the fair market value of the options granted by using theBlack-Scholes option valuation model with the following weighted averageassumptions; dividends yield—none; expected volatility—80%; risk-free interestrate—4.52%; expected life—18 months.

During the 2004 fiscal year, the Company recordednon-cash compensation expense of $92,000 related to options granted tonon-employees. The compensation expensewas determined by estimating the fair market value of the options granted byusing the Black-Scholes option valuation model with the following weightedaverage assumptions; dividends yield—none; expected volatility—80%; risk-freeinterest rate—2.84% - 4.27%; expected life—10 years. On November 26, 2003,the Company concluded a joint research project with Implant SciencesCorporation (Implant) which awarded Implant the right to purchase 40,000 sharesof the Company’s common stock at $1 a share. This award resulted in a non-cashexpense of $210,000 in fiscal year 2005 to record the excess of the fair valueof the award. The fair value of the award was based on the closing market priceof the Company’s common stock at the date of grant.

On January 26, 2004, the Board of Directors ofCardioTech retained a consultant for a period of six months to continue torepresent CardioTech to the investment community. Services to be performed are1) create greater awareness in the brokerage community for CardioTech and,2) to advise CardioTech on market conditions. Fees for the these serviceswill include (a) all pre-approved out-of-pocket expenses, and (b) theperiodic grant of stock options in tranches, up to a maximum aggregate grant of1,000,000 shares. The options will have an exercise price equal to 75% of theclosing price for the day prior to the date of each grant, and will expirethree months from the grant date. This agreement may be renewed by the mutualconsent of the parties hereto at such terms as shall be mutually agreed to by theparties. During the three-month period ended March 31, 2004, theCompany granted options under this consulting agreement to purchase 150,000shares. The consultant exercised the options during the three-monthperiod ended March 31, 2004 and proceeds from the exercise of theseoptions totaled $697,000. The Company has recorded an expense of $232,000 forthe difference between the proceeds received and the fair market value of theoptions on the date of grant. During the fiscal year ended March 31, 2003,the Company wrote-off a note receivable from this consultant for $280,000 as itdeemed it uncollectible at that time. The Company reasoned that this notereceivable was over two years old, therefore it was appropriate to record theexpense during the fiscal year ended March 31, 2002. The note wasoriginally issued by the Company for the exercise of 200,000 options topurchase shares of common stock. The Company has received payments totaling$237,000 during fiscal 2004, which have been recorded as other income in theaccompanying consolidated statement of operations. The Consultant remainsobligated to the Company 

F-17

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**I.Stockholders’ Equity (Continued)**

for the remaining $43,000,which has been fully reserved for by the Company at March 31, 2005. DuringFiscal 2004, this same consultant exercised options, granted (at the fairmarket value on the date of grant) and vested in fiscal years prior to fiscal2004, for 1,000,000 shares at a total purchase price of $2,695,000.

The agreement with theConsultant expired January 25, 2005 and has not been renewed by thecompany. No options were granted to the Consultant in fiscal 2005.

***Treasury Stock and other transactions***

In June 2004, the Board of Directors authorizedthe purchase of up to 500,000 additional shares of the Company’s common stock. InJune 2001, the Board of Directors authorized the purchase of up to 250,000shares of the Company’s common stock of which 168,677 shares have beenpurchased at March 31, 2005, including 24,000 purchased during the yearended March 31, 2005. The Company announced that purchases may be madefrom time-to-time in the open market, privately negotiated transactions, blocktransactions or otherwise, at times and prices deemed appropriate by management.

Effective July 1, 2004, companies incorporated inMassachusetts became subject to the Massachusetts Business Corporation Act,which provides that shares that are reacquired by a company  become authorized but unissued shares. As a result,the concept of “treasury shares” is eliminated and shares reaquired by acompany become “authorized but unissued” shares. Accordingly, the Company hasreclassified treasury stock at March 31, 2005 as a reduction of commonstock at the par value amount of  $.01share and the excess of the cost of the treasury stock over the par value hasbeen recorded as a reduction of additional paid-in capital. At March 31,2005, 68,677 shares of treasury stock with a cost of $266,000 have been soreclassified.

During the second quarter of fiscal 2004, the Companyissued 95,000 treasury shares to various employees and board members for theireffort in the Gish transaction. The fair market value of these treasury shareswas approximately $293,000, which was recorded as a non-cash compensationexpense in the Consolidated Statement of Operations for 2004 fiscal year.Subsequently, two board members returned the stock to the Company. The 10,000shares returned were recorded at the fair market value on December 9, 2003by increasing additional paid in capital and treasury stock by $68,000 The fair market value was based upon theclosing stock price of the Company’s common stock at the date of grant.

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

***Acceleration of Vesting of Stock Options***

On July 8, 2004, the Board of Directors of theCompany accelerated the vesting of all outstanding options, such that at July 8,2004, all outstanding options are fully vested. The Company accelerated thevesting of the options to avoid compensation expense associated with theadoption of SFAS 123R. This action resulted in the immediate vesting of  options to purchase 922,503 shares of theCompany’s common 

F-18

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**I.Stockholders’ Equity (Continued)**

stock.No compensation cost was recognizable because of the acceleration, however,should an optionee realize a benefit from the acceleration that they would nothave otherwise been eligible for, then the Company would recognize compensationexpense. The compensation expense would be determined by the difference betweenthe closing stock price at July 8, 2004 of $3.92 and the option exerciseprice, multiplied by the number of shares on which the optionee obtained abenefit from the accelerated vesting. At July 8, 2004 the total potentialcompensation expense was $149,000. Compensation cost due to the acceleration of$20,000 has been recorded for  fiscalyear 2005. At March 31, 2005, the total remaining potential unrecognizedcompensation cost from the acceleration is $37,000.

**J. Enterprise and Related Geographic Information**

The Company acquired Gish Biomedical, Inc.effective April 7, 2003 and subsequent to that date, the Company hasmanaged its business in fiscal 2005 and 2004 on the basis of one reportableoperating segment, Medical Device Manufacturing and Sales, in accordance withthe qualitative and quantative ctiteria established by SFAS 131.

Sales to foreign customers (primarily Europe and Asia)aggregated approximately $3,676,000 and $3,247,000 in 2005 and 2004,respectively. The Company has no long-lived assets outside of the UnitedStates.

Productrevenue by product group for the presented periods is as follows:
| ** **                              | ** ** | **The Year Ended** March 31, | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
|                                    | ** ** | **2005**                                         |       | **2004** | ** ** |
| Sales of medical  devices               |       | $                                                | 17,435,000 |   | $ | 17,781,000 |   |
| Outsourcing  services and manufacturing |       | 2,804,000                                        |       | 2,966,000 |   |
| Other revenues                          |       | 828,000                                          |       | 576,000 |   |
|                                    |       | $                                                | 21,067,000 |   | $ | 21,323,000 |   |

 

**K. Supplemental Disclosures for Stock-BasedCompensation**

CardioTech’s 1996 Employee, Director and ConsultantsStock Option Plan (the “1996 Plan”) was approved by CardioTech’s Board ofDirectors and Stockholders in March 1996. A total of 7,000,000 shares havebeen reserved for issuance under the Plan. Under the terms of the Plan theexercise price of Incentive Stock Options issued under the Plan must be equalto the fair market value of the common stock at the date of grant. In the eventthat Non Qualified Options are granted under the Plan, the exercise price maybe 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 shareholdersapproved the CardioTech International, Inc. 2003 Stock Option Plan (the “2003Plan”), which authorizes the issuance of 3,000,000 shares of common stock withterms similar to the 1996 Plan. Substantially all of the stock options grantedpursuant to the 1996 Plan provide for the acceleration of the vesting of theshares of Common Stock subject to such options in connection with certainchanges in control of the Company. A similar provision is not included the 2003Plan. Normally options granted expire ten years from the grant date..

F-19

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**K. SupplementalDisclosures for Stock-Based Compensation (Continued)**

Activityunder the Plans for the years ended March 31, 2005 and 2004 is as follows:
| ** **                       | ** ** | **Number  of Options** | ** ** | **Weighted average  exercise price** | ** ** |
|----------------------------------|------------|-----------------------------|------------|------------------------------------------------|------------|
| Outstanding  March 31,2003  |       | 4,373,222                   |       |                                           | $          | 1.67 |   |   |
| Granted                          |       | 2,880,304                   |       |                                           | 2.45       |   |   |
| Cancelled                        |       | (54,488                     | )          |                                           | 1.85       |   |   |
| Exercised                        |       | (2,354,190                  | )          |                                           | 2.11       |   |   |
| Outstanding  March 31, 2004 |       | 4,844,848                   |       |                                           | 1.97       |   |   |
| Granted                          |       | 2,073,500                   |       |                                           | 3.13       |   |   |
| Cancelled                        |       | (148,812                    | )          |                                           | 4.13       |   |   |
| Exercised                        |       | (179,501                    | )          |                                           | 1.41       |   |   |
| Outstanding March 31,  2005 |       | 6,590,035                   |       |                                           | $          | 2.30 |   |   |

 

Weighted average fair value of the options granted infiscal 2005 was $3.11. As of March 31, 2005, 2,742,954 shares were issuedunder the 2003 Stock Option Plan.

Summarizedinformation about stock options outstanding at March 31, 2005 is asfollows:
| ** **                                  | ** ** | ** **                                     | ** ** | **Weighted  Average**            | ** ** | **Weighted**                 | ** ** | **Exercisable**                   | ** ** |
|---------------------------------------------|------------|------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|-----------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number of   Options  Outstanding** | ** ** | **Remaining  Contractual  Life** | ** ** | **Average  Exercise  Price** | ** ** | **Number of   Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.28—$0.92                            |       | 1,484,302                                      |       |                             | 7.1        |                         |       |                              | $          | 0.85 |   |   | 1,484,302 |   |   | $ | 0.85 |   |   |
| $1.04—$1.95                            |       | 1,811,479                                      |       |                             | 5.0        |                         |       |                              | $          | 1.53 |   |   | 1,811,479 |   |   | $ | 1.53 |   |   |
| $2.06—$3.06                            |       | 1,818,339                                      |       |                             | 9.0        |                         |       |                              | $          | 2.61 |   |   | 1,818,339 |   |   | $ | 2.61 |   |   |
| $3.40—$4.19                            |       | 1,064,000                                      |       |                             | 8.2        |                         |       |                              | $          | 3.99 |   |   | 1,064,000 |   |   | $ | 3.99 |   |   |
| $5.15—$5.40                            |       | 411,915                                        |       |                             | 8.9        |                         |       |                              | $          | 5.25 |   |   | 411,915 |   |   | $ | 5.25 |   |   |
| $0.28—$5.40                            |       | 6,590,035                                      |       |                             | 7.3        |                         |       |                              | $          | 2.30 |   |   | 6,590,035 |   |   | $ | 2.30 |   |   |

 

Options exercisable at March 31, 2005 and March 31,2004 were 6,590,035 and 4,048,773, respectively. At March 31, 2005 therewere no shares remaining to be granted under the 1996 Stock Option Plan and257,046 shares were available for grant under the 2003 Stock Option Plan.

At March 31, 2005, warrants issued to purchase740,731 shares of common stock, additional investment rights to purchase1,139,586 shares of common stock and warrants to purchase 113,959 shares ofcommon stock issuable upon the exercise of the additional investment rights,were outstanding. During fiscal 2004, 1,158,900 warrants were exercised,resulting in net cash proceeds of approximately $1,770,000. No warrants wereoutstanding at March 31, 2004.

The Executive CompensationStructure that The Compensation Committee for the Gish transaction approvedprovided for an stock option grant to Dr. Michael Szycher that ensuredthat Dr. Michael Szycher’s percentage of ownership (20.8%) would be thesame after the Gish transaction as it was before. In fiscal 2004,uponcompletion of the Gish transaction, Michael Szycher was granted a stock optionfor 1,017,330 shares at an exercise price of $0.92. Similar awards may begranted in the future for acquisitions or equity based transactions.

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**L. Intangible Assets**

Intangibleassets consist of the following at March 31:
| ** **                          | ** ** | **Estimated  Useful Life** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|----------|------------|
| Customer  intangibles—CDT      |       | 5 years                         |       | $        | 412,000    |   |
| Less—Accumulated  amortization |       |                            |       | (323,000 | )          |
| Customer  intangibles, net          |       |                            |       | $        | 89,000     |   |
| Customer  intangibles—Gish     |       | 7 years                         |       | $        | 644,000    |   |
| Less—Accumulated  amortization |       |                            |       | (184,000 | )          |
| Customer  intangibles, net          |       |                            |       | $        | 460,000    |   |
| Technology  intangibles—Gish   |       | 15 years                        |       | $        | 262,000    |   |
| Less—Accumulated  amortization |       |                            |       | (35,000  | )          |
| Technology  intangibles, net        |       |                            |       | $        | 227,000    |   |
| Amortizable  intangibles, net       |       |                            |       | $        | 776,000    |   |
| Goodwil                             |       |                            |       | $        | 2,367,000  |   |
| Less—Accumulated  amortization |       |                            |       | (729,000 |       |
| Goodwill, net                       |       |                            |       | $        | 1,638,000  |   |

 

**M. Other Agreements**

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

The owner of the technology used in connection withthe stent will be CardioTech; however, such technology will be transferred toImplant pursuant to a technology license. The developed technology represents a“platform” in the sense that the polyurethane developed by CardioTech andutilized to cover the stent will be the medium in which specificanti-restenosis drugs will be implanted and therefore becomes the keytechnological component of this drug-eluting stent. The research anddevelopment agreement provides for 6 phases including the design of equipmentnecessary to produce prototypes of the stent, development of a series ofprototypes, production of a limited number of prototypes and the delivery ofprototypes to Implant. The material deadline is therefore the delivery of anoperative prototype.

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**M. OtherAgreements (Continued)**

On November 26, 2003, Implant accepted theCompany’s final report covering the joint research program on developing adrug-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 waspayment for the purchase of 40,000 shares of the Company’s common stock at theprice of $1.00 per share. The issuance of 40,000 shares of the Company’s commonstock to Implant resulted in a non-cash expense of approximately $210,000. Theexcess of the fair value of the total award on November 26, 2003 wasrecorded as non-cash research and development expense and included in theaccompanying statement of operations. As of November 26, 2003, Implant haspaid 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, theCompany concluded a technology transfer and license agreement with CredentVascular Technologies, Ltd., of Wrexham, U.K. (“Credent”). Totalconsideration paid by Credent to CardioTech for the purchase of the transferredrights to ChronoFlex RC was $500,000. Under terms of the agreement, CardioTechirrevocably granted an exclusive, worldwide license of its intellectualproperty rights relating to ChronoFlex RC, enabling Credent to exclusivelysynthesize ChronoFlex RC biodurable polycarbonate-urethane. Credent willuse ChronoFlex RC in the manufacture of its vascular access and peripheralvascular grafts and potentially in future development products. Credent haslicensed back to CardioTech the right to use ChronoFlex RC for the manufactureand marketing of coronary artery bypass grafts.

**N.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, 2005: |       |       |       |                                           |       |                                          |       |      |       |                |       |                                         |       |   |   |
| Deducted from  assets accounts:  |       |       |       |                                           |       |                                          |       |      |       |                |       |                                         |       |   |   |
| Allowance for  doubtful accounts |       |       | $          | 201,000                                        |       |                                          | $          | 202,000   |       | $                   | 7,000      |                                         | $          | (84,000 | ) |   | $ | 326,000 |   |   |
| Excess and  obsolescence reserve |       |       | $          | 372,000                                        |       |                                          | $          | 115,000   |       |                |       | $                                            | (85,000    | ) |   | $ | 402,000 |   |   |
| Total                            |       |       | $          | 573,000                                        |       |                                          | $          | 354,000   |       | $                   | 7,000      |                                         | $          | (199,000 | ) |   | $ | 728,000 |   |   |
| Year Ended  March 31, 2004: |       |       |       |                                           |       |                                          |       |      |       |                |       |                                         |       |   |   |
| Deducted from  asset accounts:   |       |       |       |                                           |       |                                          |       |      |       |                |       |                                         |       |   |   |
| Allowance for  doubtful accounts |       |       | $          | 92,000                                         |       |                                          | $          | 24,000    |       | $                   | 80,000     |                                         | $          | 5,000 |   |   | $ | 201,000 |   |   |
| Excess and  obsolescence reserve |       |       | $          | 15,000                                         |       |                                          | $          | 48,000    |       | $                   | 472,000    |                                         | $          | (163,000 | ) |   | $ | 372,000 |   |   |
| Total                            |       |       | $          | 107,000                                        |       |                                          | $          | 72,000    |       | $                   | 552,000    |                                         | $          | (158,000 | ) |   | $ | 573,000 |   |   |

 

**O. Benefit Plan and Employment Agreement**

The Company has several Salary Reduction ProfitSharing Plans (“the Plans”), established under Section 401(k) of theInternal Revenue Code, in which all employees are eligible to participate.Total Company contribution to the Plans was $27,000 in both fiscal 2005and  2004.

The Company has entered into an employment agreement(the “Employment Agreement”) with Dr. Michael Szycher, pursuant to whichsaid individual serves as Chief Executive Officer of the Company. Pursuant tothe terms of the Employment Agreement, Dr. Szycher is to receive an annualbase salary of Three Hundred and Twenty Five Thousand ($325,000) dollars. Dr. Szycher’ssalary will be reviewed 

F-22

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**O.Benefit Plan and Employment Agreement (Continued)**

annually by the Board.Additionally, Dr. Szycher may also be entitled to receive an annual bonuspayment in an amount, if any, to be determined by the Compensation and StockOption Committee of the Board.

The initial term of theEmployment Agreement by and between the Company and Dr. Szycher was set toexpire on December 31, 2004, however, in fiscal 2005, the agreement wasextended until December 31, 2007. After such time, the term of theEmployment Agreement will be deemed to continue on a month-to-month basis ifnot expressly extended while Dr. Szycher remains employed by the Company. Dr. Szycherand CardioTech each have the right to terminate the Employment Agreement at anytime, with or without cause (as defined in the Employment Agreement), uponthirty (30) days prior written notice. In the event that CardioTechterminates the applicable Employment Agreement without cause, or Dr. Szycherterminates his employment for good reason following a change in control (assuch terms are defined in the Employment Agreement) or CardioTech fails torenew the Employment Agreement within two (2) years following theoccurrence of a change in control, Dr. Szycher will be entitled to receiveseverance equal to 2.99 times his annual base salary at termination. In suchevent, Dr. Szycher will be bound by a noncompete covenant for one (1) yearfollowing termination of his employment.

**P. Investment in CorNova, Inc.**

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

Upon the event of CorNova securing additionalfinancing in the minimum amount of $1,000,000 and up to a maximum amount of$3,000,000 (the “Series A Financing”), CardioTech and Implant were eachrequired to issue additional shares of their common stock (the “InvestmentShares”), where the number of Investment Shares to be issued was equal totwenty-five percent (25%), of the gross proceeds of the Series A Financingdivided by the respective five (5) day average of the closing prices ofthe common stock of CardioTech and Implant as published in the Wall StreetJournal on the dates immediately preceding the closing of the Series AFinancing. CorNova, Inc. completedits Series A Financing transaction on February 4, 2005. At that time,the Company became obligated to contribute shares of its common stock equal to$750,000. The number of shares was determined to be 308,642. The Company has noadditional obligation to contribute assets or additional common stock nor toassume any liabilities or to fund any losses that CorNova may incur. Inaddition to the issuance of its common stock at the completion of a Series AFinancing, CardioTech granted to CorNova an exclusive license for thetechnology consisting of Chronoflex DES polymer, or any poly (carbonate)urethane containing derivative thereof, for use on drug-eluting stents.

Both the Contributory Shares and the Investment Shares(collectively, the “Securities”) are restricted securities within the meaningof Rule 144 of the Securities and Exchange Commission under the SecuritiesAct of 1933, as amended (the “Securities Act”), and none of the Securities maybe sold except pursuant to 

F-23

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**P.Investment in CorNova, Inc. (Continued)**

an effective registrationstatement under the Securities Act or under the securities laws of any state, orin a transaction exempt from registration under the Securities Act.

The Series A Financing transaction resulted inthe issuance by CorNova of  3,050,000shares of preferred stock. The preferred stock has a liquidation preferenceequal to $1 a share, the original preferred stock purchase price and the samevoting rights as CorNova’s common stock. The CorNova preferred stock can beconverted on a share for share basis into CorNova common stock at thediscretion of the preferred stockholders. The preferred stock is subject toseveral mandatory conversion requirements based on future events and subject toredemption at a premium, which varies based on the redemption date. CorNovacurrently also has outstanding warrants for the purchase of 150,000 shares of itscommon stock at $1.00 per share, issued in conjunction with its original seedloans and warrants for the purchase 635,000 shares of its common stock at $1.10per share, issued to an individual as a “finders” fee. Additionally, CorNova’sshareholders have approved the 2004 Qualified Incentive Stock Option Plan (“2004Plan”) which authorized the Board of Directors of CorNova to grant options topurchase up to 1,000,000 shares of CorNova’s common stock to employees andconsultants. At March 31, 2005 CorNova has granted no options under the2004 Plan.

CardioTech has a 30% ownership interest in the commonstock of  CorNova and, accordingly,CardioTech has used the equity method of accounting in accordance with APBopinion no. 18, “The Equity Method of Accounting for Investments in CommonStock”, and recorded 30% of the results of CorNova in its consolidatedfinancial statements for the fiscal years ended March 31, 2005 and 2004. During fiscal 2005, the Company recorded equity inthe net loss of CorNova of $113,000, and equity in comprehensive loss ofCorNova of $182,000 (related to unrealized holding losses on securitiesclassified as available-for-sale). During fiscal 2004, the Company recordedequity in the net loss of CorNova of $1,000, equity in comprehensive income ofCorNova of $7,000 (related to unrealized holding gains on securities classifiedas available-for-sale), and recorded a charge of $32,000, reducing its original$75,000 investment to $50,000 at March 31, 2004. Because of theliquidation preference of the preferred stock described above, if CorNova wasliquidated at March 31, 2005, CardioTech would have incurred an additionalloss of its investment of approximately $288,000. The Company has no additional obligation tocontribute assets or additional common stock nor to assume any liabilities orto fund any losses that CorNova may incur.

At March 31, 3005,CorNova had total assets of $3,804,000, of which $2,581,000 was cash andshort-term investments,  liabilitiestotaling $31,000 and  Stockholders’ Equityof $3,773,000 of which $429,000 is a retained earnings deficit and $560,000 is comprehensive loss related tothe decline in market value of the common stock of CardioTech and ImplantSciences held by CorNova and which was transferred to CorNova in thetransactions discussed above.

**Q. Terminated Acquisition of CarTika Medical,  Inc.**

On November 19, 2004, the Company entered into adefinitive agreement (the “Asset Purchase Agreement”) to acquire substantiallyall of the assets and assume certain liabilities of CarTika Medical, Inc.,a privately owned medical device contract manufacturer headquartered inPlymouth, Minnesota (“CarTika”). As part of the transaction, the Company wasto  issue consideration to thestockholders of CarTika consisting of shares of the Company’s common stock,equal in value to $1,662,000, with the number of shares based upon the fairmarket value of the common stock at the date of closing (“Stock Consideration”),and $4,985,000 in cash (“Cash Consideration”). The transaction closing was 

F-24

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**CARDIOTECH INTERNATIONAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Q.Terminated Acquisition of CarTika Medical, Inc. (Continued)**

subject to a variety ofclosing conditions, including the successful filing of a registration statementcovering the Stock Consideration shares. Because of the protracted time inobtaining regulatory clearance involving the acquisition, on June 14,2005, CarTika terminated the proposed acquisition. The Company incurred CarTikarelated acquisition costs totaling $333,000, which have been charged to expenseat March 31, 2005.

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