U.S.
SECURITIES AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  Form
10-K
  (Mark
      One)x
              
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the fiscal year ended March 31, 2008o
              
              TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934For
      the transition period
      from                      to
 
  Commission
File No. 0-28034
  CardioTech
International, Inc.
 (Name of
small business issuer in its charter)
  Delaware
                (State
      or other jurisdiction of
                incorporation
      or organization)
              04-3186647
                (I.R.S.
      Employer Identification No.)229
      Andover Street, Wilmington, Massachusetts
                (Address
      of principal executive offices)
              01887
                (Zip
      Code)
 
  Issuer’s
telephone number (978)
657-0075
  Securities
registered under Section 12(b) of the Exchange Act:
  Title
      of each class
                Common
      Stock, $.001 par value per share
              Name
      of each exchange on which registered
                American
      Stock Exchange
 
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes q  No x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.Yes q  No x
  Indicate
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.Yes x  No q
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained in this herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  q
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company in Rule 12b-2 of the Exchange
Act (Check one):
  q  Large
Accelerated
Filer                                                                                                                         
q  Accelerated
Filer
  q  Non-accelerated
Filer                                                                                                                             x  Smaller
reporting company
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes q  No x
  As of
June 16, 2008, 21,067,313 shares of the registrant’s Common Stock were
outstanding.  As of September 30, 2007, the aggregate market value of
the registrant’s Common Stock held by non-affiliates of the registrant (without
admitting that such person whose shares are not included in such calculation is
an affiliate) was $28,173,000 based on the last sale price as reported by the
American Stock Exchange on such date.
   
  CARDIOTECH INTERNATIONAL,
INC.
 FORM
10-K
 FOR
THE YEAR ENDED MARCH 31, 2008
 
 INDEX
 
 PART IItem
      1.
              
              Description
      of Business
              
              3Item
      1A.
              
              Risk
      Factors
              
              10Item
      1B.
              
              Unresolved
      Staff Comments
              
              19Item
      2.
              
              Description
      of Properties
              
              19Item
      3.
              
              Legal
      Proceedings
              
              19Item
      4.
              
              Submission
      of Matters to a Vote of Security Holders
              
              19PART IIItem
      5.
              
              Market
      Information for Registrant’s Common Equity, Related Stockholder
      Matters
                and
      Issuer Purchases of Equity Securities
              
              20Item
      6.
              
              Selected
      Consolidated Financial Data
              
              21Item
      7.
              
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              22Item
      8.
              
              Financial
      Statements and Supplementary Data
              
              28Item
      9.
              
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
              
              28Item
      9A.
              
              Controls
      and Procedures
              
              28Item
      9B.
              
              Other
      Information
              
              29PART IIIItem
      10.
              
              Directors,
      Executive Officers and Corporate Governance
              
              30Item
      11.
              
              Executive
      Compensation
              
              33Item
      12.
              
              Security
      Ownership of Certain Beneficial Owners and Management
                and
      Related Stockholder Matters
              
              39Item
      13.
              
              Certain
      Relationships and Related Transactions, and Director
      Independence
              
              41Item
      14.
              
              Principal
      Accounting Fees and Services
              
              42PART IVItem
      15.
              
              Exhibits,
      Financial Statement Schedules
              
              43Index
      to Financial Statements
              
              F-1
  
   -2-
  PART I
  Item 1.
              Description
      of Business
  Cautionary
      Note Regarding Forward Looking
Statements
  This
Report on Form 10-K contains certain statements that are “forward-looking”
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Litigation Reform Act”).  These forward looking statements and other
information are based on our beliefs as well as assumptions made by us using
information currently available.
  The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and
similar expressions, as they relate to us, are intended to identify
forward-looking statements.  Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, intended or using other similar expressions.
  In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Report on Form 10-K.  For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market its products; the market may not accept our existing and future products;
we may not be able to retain its customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business.  Certain important factors affecting the
forward-looking statements made herein also include, but are not limited to (i)
continued downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement its financial and business strategies,
meet anticipated capital expenditures and fund research and development
costs.  In addition, assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our marketing, capital expenditure or other budgets, which may in turn
affect our financial position and results of operations.  For all of
these reasons, the reader is cautioned not to place undue reliance on
forward-looking statements contained herein, which speak only as of the date
hereof.  We assume no responsibility to update any forward-looking
statements as a result of new information, future events, or otherwise except as
required by law.
  General
  Overview
  We develop advanced polymer materials
which provide critical characteristics in the design and development of medical
devices. Our biomaterials are used in devices that are designed for treating a
broad range of anatomical sites and disease states.  Our business
model leverages our proprietary materials science technology and manufacturing
expertise in order to expand our product sales and royalty and license fee
income.
 
 Our
leading edge technology, notably products such as ChronoFlex®, HydroMedTM, and
HydroThaneTM, has been developed to overcome a wide range of design and
functional challenges, from the need for dimensional stability, ease of
manufacturability and demanding physical properties to overcoming environmental
stress cracking (ESC) and providing heightened lubricity for ease of
insertion.  Our new product extensions allow us to customize our
proprietary polymers for specific customer applications in a wide range of
device categories.
 We also
have an antimicrobial extension line that complements the ChronoFlex® and
HydroMedTM product families.  Through proprietary manufacturing
techniques, we have produced materials which allow for full homogenous
dispersion throughout the polymer, thus resulting in long lasting and consistent
activity and the prevention of leaching.  The end result is a
technologically advanced antimicrobial material which reduces the potential for
foreign body patient infections is less susceptible to bacterial growth and
bio-film formations.
  We are
currently conducting a clinical trial in Europe for CardioPassTM, our synthetic
coronary artery bypass graft.We have developed our 4
mm and 5 mm SynCAB grafts using specialized ChronoFlex polyurethane materials
designed to provide improved performance in the treatment of arterial
disorders.  The grafts have three layers, similar to natural arteries,
and are designed to replicate the physical characteristics of human blood
vessels.
  We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors.  We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.  In
January 2007, we announced the initiation of these clinical trials with the
first patient surgically implanted in March 2007.
 -3-
  In June
2008, in connection with our re-branding launch, we formed AdvanSource
Biomaterials Corporation, a wholly-owned subsidiary, as an initial step in our
ongoing efforts to better reflect our strategic plan.   As part
of this re-branding effort, we are reorganizing our product line.  At
the same time, we launched a new website at
www.AdvBiomaterials.com.  The information available on or through our
website is not a part of this report on Form 10-K.
  History
  We were
founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”).  In
June 1996, PMI distributed all of the shares of CardioTech’s common stock, par
value $0.01 per share, which PMI owned, to PMI stockholders of
record.  Our materials science technology is principally based upon
the ChronoFlexTM
proprietary polymers which represent our core technology.
  In July
1999, we acquired the assets of Tyndale-Plains-Hunter (“TPH”), a manufacturer of
specialty hydrophilic polyurethanes.
  In July
1999, Dermaphylyx International, Inc. (“Dermaphylyx”) was formed by certain of
our affiliates to develop advanced wound healing
products.  Dermaphylyx was merged with and into the Company effective
March 2004 as a wholly-owned subsidiary.  In June 2006, our Board of
Directors decided to cease the operations of Dermaphylyx.  We
considered the net assets of Dermaphylyx to be immaterial.
  In April
2001, we acquired Catheter and Disposables Technology, Inc.
(“CDT”).  CDT, located in Minnesota, is an original equipment
manufacturer and supplier of private-label advanced disposable medical devices
from concept to finished packaged and sterilized products, providing engineering
services and contract manufacturing.  In the development of our
business model, we continue to review the strategic fit of our various business
operations.  As a result, we determined that CDT did not fit our
strategic direction.  CDT was sold in March 2008 (See Note I to
Financial Statements).
  In April
2003, we acquired Gish Biomedical, Inc. (“Gish”).  Gish is located in
southern California and manufacturers single use cardiopulmonary bypass products
that have a disposable component.  In the development of our business
model, we continue to review the strategic fit of our various business
operations.  As a result, we determined that Gish did not fit our
strategic direction.  Gish was sold in July 2007 (See Note I to Notes
to Financial Statements).
  In March
2004, we joined with Implant Sciences Corporation (“Implant”) to participate in
the funding of CorNova.  CorNova was formed to develop a novel
coronary drug eluting stent using the combined capabilities and technology of
CorNova, Implant Sciences and CardioTech.  We currently have a 15%
equity interest in the issued and outstanding common stock of CorNova, based on
the assumed conversion of all outstanding CorNova preferred stock into common
stock.  Although CorNova is expected to incur future operating losses,
we have no obligation to fund CorNova.
  At our
2007 Annual Meeting, our stockholders approved our reincorporation from
Massachusetts to Delaware.  Our Articles of Charter Surrender in
Massachusetts and Certificate of Incorporation and Certificate of Conversion in
Delaware were effective as of October 26, 2007.
  In June
2008, we announced the formation of AdvanSource, a wholly-owned subsidiary, to
re-brand our business and align our name with our strategic focus.
  Sale
of Gish and CDT
   On July
6, 2007, we completed the sale of Gish Biomedical, Inc.(“Gish”), our former
wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007.  The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash.  The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.
 -4-
   Pursuant
to the terms of the Gish Purchase Agreement, we placed $1.0 million in escrow as
a reserve for certain indemnification obligations to Medos, if any, as described
above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to us on July 5, 2008.The
realization of the escrow fund is also contingent upon the realizability of the
Gish accounts receivable and inventory that were transferred to Medos for one
year from the sale date.  The $1.0 million of proceeds being held in
escrow is not included in the calculation of the loss on sale of Gish of
$1,173,000.
   Medos has
advised us that it may assert certain indemnity claims against us relating to
certain representations and warranties up to the full amount of the $1.0 million
escrow balance.  We have advised Medos that we believe any such
claims, if made, would be without merit under the Gish Purchase
Agreement.  We have concluded that a loss resulting from these
potential claims by Medos in excess of the escrow balance is not probable as of
March 31, 2008.
   We have
been notified by Medos as to their assertions that we may be liable for up to
one year of severance costs related to each of the terminations of two key Gish
employees by Medos, whose terminations were effected by Medos subsequent to the
acquisition date.  We have reviewed the assertions by Medos, and have
concluded that a loss resulting from these asserted claims is not probable as of
March 31, 2008.
   In
connection with the sale of Gish, we entered into a non-exclusive, royalty-free
license (the “License Agreement”) with Gish which provides for our use of
certain patented technology of Gish in our products and services, provided such
products and services do not compete with the cardiac bypass product development
and manufacturing businesses of Gish or Medos.  We have determined the
License Agreement has de minimus value and, accordingly, no value has been
ascribed to the license.
  After transaction expenses
and certain post-closing adjustments, we realized approximately $6.1 million in
proceeds from the sale of Gish.  Assuming the disbursement to us of
all funds held in escrow after July 5, 2008, up to an additional $1.0 million
may be realized.Under the terms of the Gish Purchase
Agreement, we owe Medos $149,000 as a result of the change in stockholder’s
equity of Gish from March 31, 2007 to June 30, 2007.  This amount was
recorded as a current liability as of June 30, 2007, has not been paid to Medos,
and is reflected as a current liability of discontinued operations as of March
31, 2008.  This adjustment is included in the calculation of the loss
on sale of Gish through March 31, 2008.  Under the terms of the
Gish Purchase Agreement, we retained Gish’s cash assets of approximately $2.0
million as of June 29, 2007.
   On March
28, 2008, we completed the sale of Catheter and Disposables Technology, Inc.
(“CDT“) our former wholly-owned subsidiary, that is a contract manufacturer and
provider of engineering services, pursuant to a stock purchase agreement (the
“CDT Purchase Agreement”) entered into with TACPRO, Inc. (“Tacpro”) on March 28,
2008.  The CDT Purchase Agreement provided for the sale of CDT to
Tacpro for a purchase price of approximately $1.2 million in
cash.  The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets.  The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement, we
placed $240,000 in escrow as a reserve for our indemnification obligations to
Tacpro if any, as described above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to us on March 28,
2009.The $240,000 of proceeds being held in escrow is not
included in the calculation of the loss on sale of CDT of $690,000.
  After
transaction expenses, which included a non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised us, and
certain post-closing adjustments, we realized approximately $696,000 in cash
proceeds from the sale of CDT.  Assuming the disbursement to us of all
funds held in escrow after March 28, 2009, up to an additional $240,000 may be
realized.
  Business
      Strategy
  Our
vision is to be a world-class, technology company focused on customer-driven
solutions in the medical device industry.  As a result of an in-depth
study of our strengths and weaknesses and the opportunities in the medical
device marketplace, we believe our unique materials science strengths have the
potential to be marketed to our existing customer base and to a broader range of
medical device developers.  We also believe there exists a major void
in the marketplace that could be filled with our strong materials science
capabilities to maximize the early development phase of devices that utilize
polymers.
  In fiscal
2008, we sold both Gish and CDT in order to focus on our strategic plan for
materials science.
 -5-
  We have
expanded our development laboratory at our Massachusetts facility and recently
launched a new concept center.  The expansion of our development
laboratory is a key element of our plan to better combine our core polymer
technology with new product applications and expand customer access to our
capabilities.
  We are
conducting ongoing reviews of intellectual property held by other companies in
which our proprietary polymers are cited.  The results of these
reviews may lead to additional opportunities to exercise our strategy of seeking
license and royalty arrangements for the exclusive use of our polymers, however,
there can be no assurances that any new license and royalty arrangements will be
established as a result of these efforts.
  Technology
  Our
unique materials science strengths are embodied in our family of proprietary
polymers.  We manufacture and sell our custom polymers under the trade
names ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane, and
PolyBlend.  The ChronoFlex family of polymers has the potential to be
marketed beyond our existing customer base.  Our goal is to fulfill
the market’s need for advanced materials science capabilities, thereby enabling
customers to improve devices that utilize polymers.  Our chemists
continue to develop the ChronoFlex family of medical-grade
polymers.  Conventional polymers are susceptible to degradation
resulting in catastrophic failure of long-term implantable devices such as
pacemaker leads.  ChronoFlex and ChronoThane polymers are designed to
overcome such degradation and reduce the incidents of infections associated with
invasive devices.
  Key
characteristics of our polymers are i) optional use as lubricious coatings for
smooth insertion of a device into the body, ii) antimicrobial properties that
are part of the polymer itself, and iii) mechanical properties, such as hardness
and elasticity sufficient to meet engineering requirements.  We
believe our technology has wide application in increasing biocompatibility, drug
delivery, infection control and expanding the utility of complex devices in the
hospital and clinical environment.
  We also
manufacture and sell our proprietary HydroThane polymers to medical device
manufacturers that are evaluating HydroThane for use in their
products.  HydroThane is a thermoplastic, water-absorbing,
polyurethane elastomer possessing properties which we believe make it well
suited for the complex requirements of a variety of catheters.  In
addition to its physical properties, we believe HydroThane exhibits an inherent
degree of bacterial resistance, clot resistance and
biocompatibility.  When hydrated, HydroThane has elastic properties
similar to living tissue.
  We also
manufacture specialty hydrophilic polyurethanes that are primarily sold to
customers as part of exclusive arrangements.  Specifically, one
customer is supplied tailored, patented hydrophilic polyurethanes in exchange
for a multi-year, royalty-bearing exclusive supply contract which generates
royalty income for the Company.
  ChronoFilm
is a registered trademark of PMI.  ChronoFlex is our registered
trademark.  ChronoThane, ChronoPrene, HydroThane, and PolyBlend are
our tradenames.  CardioPass is our trademark.
  Intellectual
      Property
  We own or
license 4 patents relating to our vascular graft manufacturing and polymer
technology and products.  While we believe our patents secure our
exclusivity with respect to certain of our technologies, there can be no
assurance that any patents issued would not afford us adequate protection
against competitors which sell similar inventions or devices, nor can there be
any assurance that our patents will not be infringed upon or designed around by
others.  However, we intend to vigorously enforce all patents issued
to us.
  In June
2007, we filed for a U.S. patent on our proprietary antimicrobial formulation
for ChronoFlex.  Current technology in the marketplace uses antibiotic
drugs.  The antimicrobial component of our polymers has been designed
to be non-leaching as a result of the polymerization process.
  In
addition, PMI has granted us an exclusive, perpetual, worldwide, royalty-free
license for the use of one polyurethane patent and related technology in the
field consisting of the development, manufacture and sale of implantable medical
devices and biodurable polymer material to third parties for the use in medical
applications (the “Implantable Device and Materials Field”).  PMI also
owns, jointly with Thermedics, Inc., an unrelated company that manufactures
medical grade polyurethane, the ChronoFlex polyurethane patents relating to the
ChronoFlex technology (“Joint Technology”).  PMI has granted us a
non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents
for use in the Implantable Devices and Materials Field.
  Manufacturing
      and Service Operations
  We
manufacture polymers at our Massachusetts facility.
 -6-
  Product
      and Services
  Materials
Science Technology
  We
manufacture polymeric materials with a wide-range of physical and biological
properties.  Our polymers are available with a variety of hardness and
mechanical strengths and possess unique characteristics such as biodurability,
biocompatibility, lubricity and antimicrobial properties.  These
polymeric materials may be used as structural engineering polymers or as
coatings for metallic and polymeric surfaces and have a history of use in both
short and long-term implant applications.
  We have
been provided exclusive and non-exclusive perpetual, world-wide, royalty-free
license and sublicense rights for the use of polyurethane patents and related
technology for the development, manufacture and sale of implantable medical
devices and biodurable polymer material.  As a result, we are able to
enter into license and royalty arrangements for the exclusive use of our
customized polymers.  During the years ended March 31, 2008 and 2007,
we generated revenues from royalties of $1,924,000 and $1,558,000,
respectively.
  We have
established a concept center in our Massachusetts facility which enables
customers to access technical experts in advanced biomaterials development and
processing to help develop product ideas, refine concepts and/or solve the
technical problems to enable the customer to bring their product to
market.  The center is focused on better combining core polymer
technology with new product applications to expand customer access to our
materials sciences and product development expertise, to establish new customer
relationships and to deepen those with existing customers.
  CardioPassTM
      Synthetic Coronary Artery Bypass Graft
  (“SynCAB”)
  Overview
and Development
  Blood is
pumped from the heart throughout the body via arteries.  Blood is
returned to the heart at relatively low pressure via veins, which have thinner
walls than arteries and have check valves, which force blood to move in one
direction.  Because a specific area of the body is often supplied by a
single main artery, rupture, severe narrowing or occlusion of the artery
supplying blood to that area is likely to cause an undesirable or catastrophic
medical outcome.
  Vascular
grafts are used to replace or bypass occluded, damaged, dilated or severely
diseased arteries and are sometimes used to provide access to the bloodstream
for patients undergoing hemodialysis treatments.  Existing small bore
graft technologies suffer from a variety of disadvantages in the treatment of
certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term
interface with the human body.
  Coronary
artery bypass graft (“CABG”) surgery is performed to treat the impairment of
blood flow to portions of the heart.  CABG surgery involves the
addition of one or more new vessels to the heart to re-route blood around
blocked coronary arteries.
  According
to the 2004 report of the American Heart Association, approximately 500,000
bypass operations were performed in the U.S. in 2003.  We estimate
approximately 750,000 CABG procedures were performed worldwide during the same
year.  We believe approximately 20% of these CABG procedures were
performed on patients who had previously undergone bypass surgery, and that the
number of repeat procedures will continue to increase as a percentage of
procedures performed, even though the overall number of bypass procedures is
declining.  Currently, approximately 70% of CABG procedures are
performed utilizing the saphenous vein.
  We have
developed our 4 mm and 5 mm SynCAB grafts using specialized ChronoFlex
polyurethane materials designed to provide improved performance in the treatment
of arterial disorders.  The grafts have three layers, similar to
natural arteries, and are designed to replicate the physical characteristics of
human blood vessels.
  We
believe the SynCAB graft may be used initially to provide an alternative to
patients with insufficient or inadequate native vessels for use in bypass
surgery as a result of repeat procedures, trauma, disease or other
factors.  We believe, however, that the SynCAB graft may ultimately be
used as a substitute for native saphenous veins, thus avoiding the trauma and
expense associated with the surgical harvesting of the vein.
  SynCAB
Clinical Trials
  We
initiated plans in fiscal 2006 to obtain European marketing
approvals.  In May 2006, we received written acknowledgement from our
Notified Body in Europe that our clinical trial plan had been
accepted.  The planned 10 patient clinical trial protocol allows
surgeons to intraoperatively decide to use the SynCAB instead of suboptimal
autologous vessels.  The patient enrollment process is not an easy one
for a long-term surgical implant that is designed to improve outcomes for very
sick patients.  Prior to each surgery, our investigators must receive
patient consent for participation in the trials.  The surgeon then
decides at the time of the operation whether or not to utilize the
graft.  Patients will be followed for 90 days and assessed for graft
patency and quality of life measures.  Following the completed
clinical trial, we intend to submit the analyzed data to the Notified Body in
support of our application for CE Mark.
 -7-
   We have
hired a European-based contract research organization (“CRO”) to assist in
management of the entire clinical process.  The CRO helped us review
possible sites in the European Union for the selection of investigators to
follow the approved protocols.  Our first site was selected and a
Principal Investigator was engaged to conduct the trial and provide the
necessary data for the clinical research report.  All necessary
approvals from the Ethics Committee were also received.  Our Principal
Investigator has participated in a wide range of cardiovascular clinical
trials.  Achievement of this important milestone fits within our
planned timeline and is an important benchmark in the commencement and
completion of the clinical trial.  We have undergone a rigorous review
by the Ministry of Health and completed paperwork for an import license, and
prepared for patient selection.  In January 2007, we announced the
initiation of these clinical trials with the first patient surgically implanted
in March 2007.
   In April
2008, we announced a second site for the CardioPass trial.  A second
site for the 10-patient clinical trial offers a larger potential pool of
patients to be reviewed for graft implant eligibility for the
trial.
   In May 2008, we announced that a second 4 mm graft size
was being made available for the trial.  Adding a second graft size
for the 10-patient clinical trial offers the surgeons an important new option
and a larger potential pool of patients to be reviewed for graft implant
eligibility for the trial.  Our two sites will have available both
CardioPassTM sizes
for use in the trial.
   The
objective of the trial is to work towards obtaining European CE Marking for the
CardioPassTM.  Approval
by the Notified Body and obtaining CE Marking would allow CardioPassTM to be
marketed and sold in all European Union countries as well as other countries
worldwide that accept this approval for registration within those
countries.
   We have
applied for and are awaiting for a Certificate of Product Export from the U.S.
Food and Drug Administration that will allow us to send 4 mm grafts to the
site.
   Marketing
      and Sales
  We sell
our polymers directly to our customers from our Massachusetts facility. In
January 2008, we hired a Global Sales Director for materials
science.  In June 2008, we announced that we had formed AdvanSource
Biomaterials Corporation, a wholly-owned subsidiary, to conduct our business and
align our name with our strategic focus.  As part of this re-branding
effort, we are reorganizing our product line.  At the same time, we
launched a new website at www.AdvBiomaterials.com.  The information
available on or through our website is not a part of this report on Form
10-K.
  We have
not experienced, and do not expect to experience, in any material respect,
seasonality in sales of our products.
  We
perform ongoing credit evaluations and maintain allowances for potential credit
losses.  As of March 31, 2008, we believe no significant
concentrations of credit risk exist.
  We do not
have any facilities, property or other assets located in any geographic area
other than the United States of America.
  Contracts
      and Material Relationships
  LeMaitre
Vascular Products, Inc. (“LeMaitre”), a third party contractor, has manufactured
ChrononFlex-based coronary grafts for our limited use.  In October
2006, we paid LeMaitre $350,000 in cash to purchase proprietary equipment
designed for the future manufacture of our CardioPass grafts and development of
additional medical devices.  The production of our grafts depends on
the results of the ongoing SynCAB clinical trial and required equipment
validation.  The inability to successfully complete the SynCAB
clinical trial, including obtaining CE Marking, or validate the equipment could
have a material adverse affect on our business.
  We own
common stock, representing a 15% equity interest, based on outstanding preferred
and common stock ownership, in CorNova, Inc., a privately-held developer of
advanced endovascular devices and catheters.  In December 2006,
CorNova GmbH, a wholly-owned German subsidiary, received CE Marking for its bare
metal ValecorTM
Coronary Stent System, CorNova’s first approved product, allowing CorNova to
market and sell this product.  We granted to CorNova an exclusive
license for the technology consisting of ChronoFlex DES polymer, or any poly
(carbonate) urethane containing derivative thereof, for use on drug-eluting
stents.  We have jointly developed coatings with CorNova that utilize
ChronoFlex’s excellent characteristics for stents to enhance long-term drug
eluting stent performance.
 -8-
  Revenues
  Our
revenues were $3,207,000 and $2,275,000 for the years ended March 31, 2008 and
2007, respectively.
  Competition
  Competition
in the medical device industry in general is intense and based primarily on
scientific and technological factors, the availability of patent and other
protection for technology and products, the ability to commercialize
technological developments and the ability to obtain governmental approval for
testing, manufacturing and marketing products.
  Competition
among products is based, among other things, on product efficacy, safety,
reliability, availability, price and patent position.  An important
factor is the timing of the market introduction of our products or the products
of competitors.  Accordingly, the relative speed with which we can
develop products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market is expected to be an
important competitive factor.  Our competitive position depends upon
our ability to attract and retain qualified personnel, to obtain patent
protection or otherwise develop proprietary products or processes, and to secure
sufficient capital resources for the often substantial period between
technological conception and commercial sales.
  Research
      and Development, Regulatory and
Engineering
  Our
development decisions are based on: (i) development costs, (ii) product need,
(iii) third-party interest and funding availability, and (iv) regulatory
considerations.  Research, development and regulatory expenditures for
the years ended March 31, 2008 and 2007 were $999,000 and $769,000,
respectively, and consisted primarily of salaries and related costs (58% and 65%
in fiscal 2008 and 2007, respectively), and are expensed as
incurred.
  Government
      Regulation
   From time
to time, legislation is drafted and introduced in Congress that could
significantly change the statutory provisions governing the approval,
manufacturing and marketing of drug products and medical devices.
  
 Backlog
  Our
backlog in the ordinary course of business for biomaterial products is
approximately $117,000 at March 31, 2008.
  Environmental
      Compliance
  Our
direct expenditures for environmental compliance were not material in the two
most recent fiscal years.  However, certain costs of manufacturing
have increased due to environmental regulations placed upon suppliers of
components and services.
  Employees
  As of
March 31, 2008, we had 22 full-time employees at our facility in Massachusetts
of whom 4 were in production and the remaining in management, administrative,
development, marketing and sales positions.
  None of
these employees are covered by a collective bargaining agreement, and management
considers its relations with its employees to be good.
   -9-
  Item 1A.
              Risk
      Factors
  You
should carefully consider the risks and uncertainties described below and the
other information in this filing before deciding to purchase our common
stock.  If any of these risks or uncertainties occurs, our business,
financial condition or operating results could be materially
harmed.  In that case the trading price of our common stock could
decline and you could lose all or part of your investment.  The risks
and uncertainties described below are not the only ones we may
face.  We believe that this filing contains forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995.  Such forward-looking statements are subject to regulatory risks
and clinical uncertainties.  Such statements are based on management’s
current expectations and are subject to facts that could cause results to differ
materially from the forward-looking statements.
  Risks
Related to Liquidity
  We
have reported net losses in the last seven fiscal years and may continue to
report net losses in the future.  There can be no assurance that our
revenue will be maintained at the current level or increase in the
future.
  Our
future growth may depend on our ability to raise capital for acquisitions and to
support research and development activities, including costs for clinical
trials, and to market and sell our vascular graft technology, specifically the
coronary artery bypass graft.  We may require substantial funds for
further research and development, future pre-clinical and clinical trials,
regulatory approvals, establishment of commercial-scale manufacturing
capabilities, and the marketing of our products.  Our capital
requirements depend on numerous factors, including but not limited to, the
progress of our research and development programs, including costs for clinical
trials; the cost of filing, prosecuting, defending and enforcing any
intellectual property rights; competing technological and market developments;
changes in our development of commercialization activities and arrangements; and
the purchase of additional facilities and capital equipment.
  Risks
Related to Our Growth Strategy
  If
we cannot obtain the additional capital required to fund our operations on
favorable terms or at all, we may have to delay or reconsider our growth
strategy.
  Our
growth strategy may require additional capital for, among other purposes,
completing acquisitions of companies and customers’ product lines and
manufacturing assets, integrating acquired companies and assets, acquiring new
equipment and maintaining the condition of existing equipment.  If
cash generated internally is insufficient to fund capital requirements, or if we
desire to make additional acquisitions, we will require additional debt or
equity financing.  Adequate financing may not be available or, if
available, may not be available on terms satisfactory to us.  If we
raise additional capital by issuing equity or convertible debt securities, the
issuance may dilute the share ownership of the existing investors.  In
addition, we may grant future investors rights that are superior to those of our
existing investors.  If we fail to obtain sufficient additional
capital in the future, we could be forced to curtail our growth strategy by
reducing or delaying capital expenditures and acquisitions, selling assets or
restructuring or refinancing our indebtedness, or delaying plans for clinical
trials.
  Risks
Related to Our Business
  We
have incurred substantial operating losses and we may never be
profitable.
  Our
revenues were $3,207,000 and $2,275,000 for the years ended March 31, 2008 and
2007, respectively.  We had net losses of $6,090,000 and $2,962,000
for the years ended March 31, 2008 and 2007, respectively.  There is a
risk that we will never be profitable.  None of our coronary artery
graft products and technologies have ever been utilized on a large-scale
commercial basis and it may take several years before these products could be
commercialized, if ever.  Our ability to generate enough revenues to
achieve profits will depend on a variety of factors, many of which are outside
our control, including:
  ·
              size
      of market;
  ·
              competition
      and other solutions;
  ·
              extent
      of patent and intellectual property protection afforded to our
      products;
  ·
              cost
      and availability of raw material and intermediate component
      supplies;
  ·
              changes
      in governmental (including foreign governmental) initiatives and
      requirements;
  ·
              changes
      in domestic and foreign regulatory
requirements;
  ·
              costs
      associated with equipment development, repair and maintenance;
      and
  ·
              our
      ability to manufacture and deliver products at prices that exceed our
      costs.
  -10-
  A
substantial amount of our assets comprise goodwill and other intangibles, and
our net loss will increase if our goodwill becomes impaired.
  As of
March 31, 2008 and 2007, goodwill represented approximately $487,000, or 4.2%,
and $487,000, or 2.7%, respectively, of our total assets.
  Goodwill
is generated when the cost of an acquisition exceeds the fair value of the net
tangible and identifiable intangible assets we acquire.  Goodwill is
no longer amortized under generally accepted accounting principles as a result
of SFAS No. 142.  Instead, goodwill is subject to an impairment
analysis, performed at least annually, based on the fair value of the reporting
unit We could be required to recognize future reductions in our net income
caused by the write-down of goodwill, if impaired, that, if significant, could
materially and adversely affect our results of operations.
  If
we fail to meet the expectations of securities analysts or investors, our stock
price may decrease.  Our operating results have fluctuated in the past
from quarter to quarter and are likely to fluctuate significantly in the future
due to a variety of factors, many of which are beyond our control,
including:
  ·
              changing
      demand for our products and
services;
  ·
              the
      timing of actual customer orders and requests for product shipment and the
      accuracy of our customers’ forecasts of future production
      requirements;
  ·
              the
      reduction, rescheduling or cancellation of product orders and development
      and design services requested by
customers;
  ·
              difficulties
      in forecasting demand for our products and the planning and managing of
      inventory levels;
  ·
              the
      introduction and market acceptance of our customers’ new products and
      changes in demand for our customers’ existing
  products;
  ·
              results
      of clinical trials;
  ·
              changes
      in the relative portion of our revenue represented by our various
      products, services and customers, including the relative mix of our
      business across our target markets;
  ·
              changes
      in competitive or economic conditions generally or in our customers’
      markets;
  ·
              competitive
      pressures on selling prices;
  ·
              the
      amount and timing of costs associated with product warranties and
      returns;
  ·
              changes
      in availability or costs of raw materials or
  supplies;
  ·
              fluctuations
      in manufacturing yields and yield losses and availability of production
      capacity;
  ·
              changes
      in our product distribution channels and the timeliness of receipt of
      distributor resale information;
  ·
              the
      impact of vacation schedules and holidays, largely during the second and
      third fiscal quarters of our fiscal
year;
  ·
              the
      amount and timing of investments in research and
    development;
  ·
              difficulties
      in integrating acquired assets and businesses into our
      operations;
  ·
              charges
      to earnings resulting from the application of the purchase method of
      accounting following acquisitions;
and
  ·
              pressure
      on our selling prices as a result of healthcare industry cost containment
      measures.
  As a
result of these factors, many of which are difficult to control or predict, as
well as the other risk factors discussed in this report, we may experience
material adverse fluctuations in our future operating results on a quarterly or
annual basis.
  -11-
  The
medical device industry is cyclical, and an industry downturn could adversely
affect our operating results.
  Business
conditions in the medical device industry have rapidly changed between periods
of strong and weak demand.  The industry is characterized
by:
  ·
              periods
      of overcapacity and production
shortages;
  ·
              cyclical
      demand for products;
  ·
              changes
      in product mix in response to changes in demand of
    products;
  ·
              variations
      in manufacturing costs and yields;
  ·
              rapid
      technological change and the introduction of new products by
      customers;
   ·
              price
      erosion; and
   ·
              expenditures
      for product development.
   These
factors could harm our business and cause our operating results to
suffer.
  The
failure to complete development of our medical technology, obtain government
approvals, including required FDA approvals, or to comply with ongoing
governmental regulations could delay or limit introduction of our proposed
products, negatively impact our operations and result in failure to achieve
revenues or maintain our ongoing business.
  Our
research, development and production activities, including the manufacture and
marketing of our intended coronary artery bypass graft product, are subject to
extensive regulation for safety, efficacy and quality by numerous government
authorities in the United States and abroad.
  Before
receiving FDA approval to market our proposed graft, we will have to demonstrate
that our grafts are safe and effective on the patient
population.  While we have done some preliminary animal trials and
have seen acceptable results, there can be no assurance that acceptable results
will be obtained in human trials.  Clinical trials, manufacturing and
marketing of medical devices are subject to the rigorous testing and approval
process of the FDA and equivalent foreign regulatory authorities.  The
Federal Food, Drug and Cosmetic Act and other federal, state and foreign
statutes and regulations govern and influence the testing, manufacture,
labeling, advertising, distribution and promotion of drugs and medical
devices.  As a result, clinical trials and regulatory approval of the
coronary artery bypass graft can take a number of years or longer to accomplish
and require the expenditure of substantial financial, managerial and other
resources.
  In order
to be commercially viable, we must successfully research, develop, obtain
regulatory approval, manufacture, market and distribute our
grafts.  For each device incorporating our artificial grafts, we must
successfully meet a number of critical developmental milestones,
including:
  ·
              demonstrate
      benefit from the use of our grafts in various contexts such as coronary
      artery bypass surgery;
  ·
              demonstrate
      through pre-clinical and clinical trials that our grafts are safe and
      effective; and
  ·
              establish
      a viable Good Manufacturing Process capable of potential scale
      up.
  The time
frame necessary to achieve these developmental milestones may be long and
uncertain, and we may not successfully complete these milestones for any of our
intended products in development.
  In order
to conduct clinical trials that are necessary to obtain approval by the FDA to
market a product, it is necessary to receive clearance from the FDA to conduct
such clinical trials.  The FDA can halt clinical trials at any time
for safety reasons or because we or our clinical investigators do not follow the
FDA’s requirements for conducting clinical trials.  If we are unable
to receive clearance to conduct clinical trials or the trials are halted by the
FDA, we would not be able to achieve any revenue from such product as it is
illegal to sell any medical device for human consumption without FDA
approval.
  More
generally, the manufacture and sale of medical devices, including products
currently sold by us and our other potential products, are subject to extensive
regulation by numerous governmental authorities in the United States,
principally the FDA, and corresponding state agencies, such as the
CDHS.  In order for us to market our products for clinical use in the
United States, we must obtain clearance from the FDA of a 510(k) pre-market
notification or PMA application.  In addition, certain material
changes to medical devices also are subject to FDA review and clearance or
approval.  The process of obtaining FDA and other required regulatory
clearances and approvals is lengthy, expensive and uncertain, frequently
requiring from one to several years from the date of FDA submission if
pre-market clearance or approval is obtained at all.  Securing FDA
clearances and approvals may require the submission of extensive clinical data
and supporting information to the FDA.
  Sales of
medical devices outside of the United States are subject to international
regulatory requirements that vary from country to country.  The time
required to obtain approval for sales internationally may be longer or shorter
than that required for FDA clearance or approval, and the requirements may
differ.  We have entered into distribution agreements for the foreign
distribution of our products.  These agreements generally require that
the foreign distributor is responsible for obtaining all necessary regulatory
approvals in order to allow sales of our products in a particular
country.  There can be no assurance that our foreign distributors will
be able to obtain approval in a particular country for any of our future
products.
  -12-
  Regulatory
clearances or approvals, if granted, may include significant limitations on the
indicated uses for which the product may be marketed.  In addition, to
obtain such clearances or approvals, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical device
manufacturers must comply.
  FDA
enforcement policy strictly prohibits the marketing of cleared or approved
medical devices for uncleared or unapproved uses.  In addition,
product clearances or approvals could be withdrawn for failure to comply with
regulatory standards or the occurrence of unforeseen problems following initial
marketing.  We will be required to adhere to applicable FDA GMP
regulations and similar regulations in other countries, which include testing,
control, and documentation requirements.  Ongoing compliance with GMP
and other applicable regulatory requirements, including marketing products for
unapproved uses, could result in, among other things, warning letters, fines,
injunctions, civil penalties, recall or seizure of products, total or partial
suspension of production, refusal of the government to grant pre-market
clearance or pre-market approval for devices, withdrawal of clearances or
approvals and criminal prosecution.  Changes in existing regulations
or adoption of new governmental regulations or policies could prevent or delay
regulatory approval of our products.
  There can
be no assurance that we will be able to obtain FDA 510(k) clearance or PMA for
our products under development or other necessary regulatory approvals or
clearances on a timely basis or at all.  Delays in receipt of or
failure to receive U.S. or foreign clearances or approvals, the loss of
previously obtained clearance or approvals, or failure to comply with existing
or future regulatory requirements would have a material adverse effect on our
business, financial condition and results of operations.
  Our
markets are subject to technological change and our success depends on our
ability to develop and introduce new products, primarily in cardiothoracic
surgery.
  The
cardiothoracic market for our products is characterized by:
  ·
              changing
      technologies;
  ·
              changing
      customer needs;
  ·
              frequent
      new product introductions and
enhancements;
  ·
              increased
      integration with other functions;
and
  ·
              product
      obsolescence.
  Our
success is dependent in part on the design and development of new products in
the medical device industry.  To develop new products and designs for
our cardiothoracic market, we must develop, gain access to and use leading
technologies in a cost effective and timely manner and continue to expand our
technical and design expertise.  The product development process is
time-consuming and costly, and there can be no assurance that product
development will be successfully completed, that necessary regulatory clearances
or approvals will be granted by the FDA on a timely basis, or at all, or that
the potential products will achieve market acceptance.  Our failure to
develop, obtain necessary regulatory clearances or approvals for, or
successfully market potential new products could have a material adverse effect
on our business, financial condition and results of operations.
  The
number of patients undergoing bypass surgery may continue to decline, resulting
in a reduction of our market potential.
  Over the
past several years, the total number of patients undergoing bypass surgery has
decreased as a result of new, less invasive therapies such as pharmacotherapy,
angioplasty and stenting.  There can be no assurances that that the
number of patients will not continue to decline as further medical advances are
introduced.  Any future decline in the total number of patients
undergoing bypass surgery could result in lost revenue and therefore could have
a material adverse effect on our business, financial condition and results of
operations.
  We
have limited manufacturing experience and if our coronary bypass graft is
approved, we may not be able to manufacture sufficient quantities at an
acceptable cost.
  We remain
in the research and development phase of our coronary bypass
graft.  Accordingly, if our product is approved for commercial sale,
we will need to establish the capability to commercially manufacture our product
in accordance with FDA and other regulatory requirements.  We have
limited experience in establishing, supervising and conducting commercial
manufacturing.  If we fail to adequately establish, supervise and
conduct all aspects of the manufacturing processes, we may not be able to
commercialize our products.  We do not presently own manufacturing
facilities necessary to provide clinical or commercial quantities of our
intended graft.  We may not be able to obtain such facilities at an
economically feasible cost, or at all.
  LeMaitre,
a third party contractor, has manufactured coronary grafts for our limited
use.  In October 2006, we paid LeMaitre $350,000 in cash to purchase
proprietary equipment which is designed for the future manufacture of our
CardioPass grafts and development of additional medical devices.  The
production of our grafts depends on the results of the ongoing SynCAB clinical
trial and required equipment validation.  The inability to
successfully complete the SynCAB clinical trial, including obtaining CE Marking,
or validate the equipment could have a material adverse affect on our
business.
  -13-
  We
depend on outside suppliers and subcontractors, and our production and
reputation could be harmed if they are unable to meet our volume and quality
requirements and alternative sources are not available.
  We have
various “sole source” suppliers who supply key components for our
products.  Our outside suppliers may fail to develop and supply us
with products and components on a timely basis, or may supply us with products
and components that do not meet our quality, quantity or cost
requirements.  If any of these problems occur, we may be unable to
obtain substitute sources of these products and components on a timely basis or
on terms acceptable to us, which could harm our ability to:  i)
manufacture our own products and components profitably or on time, and ii) ship
products to customers on time and generate revenues.  In addition, if
the processes that our suppliers use to manufacture products and components are
proprietary, we may be unable to obtain comparable components from alternative
suppliers.
  A
significant portion of our royalty and development fee sales comes from one
large customer, and any decrease in sales to this customer could harm our
operating results.
  The
medical device industry is concentrated, with relatively few companies
accounting for a large percentage of sales in the surgical, interventional and
cardiovascular markets that are targeted by our disposable medical device and
contract manufacturing operations.  Accordingly, our revenue and
profitability are dependent on our relationships with a limited number of large
medical device companies.  We are likely to continue to experience a
high degree of customer concentration in our disposable medical device and
contract manufacturing operations, particularly if there is further
consolidation within the medical device industry.  We cannot assure
you that there will not be a loss or reduction in business from one or more of
our large customers.  In addition, we cannot assure you that revenues
from our customers that have accounted for significant revenues in the past,
either individually or as a group, will reach or exceed historical levels in any
future period.  The loss or a significant reduction of business from
any of our major customers would adversely affect our results of
operations.
  Our
ability to grow and sustain growth levels may be adversely affected by slowdowns
in the U.S. economy.
  Due to
the recent decrease in corporate profits, capital spending and consumer
confidence, we have experienced weakness in certain of our end
markets.  We are primarily susceptible when clients stop placing
orders for us to build prototypes or develop certain specialized medical devices
through our contract manufacturing operations.  The medical commercial
markets, including bio-medical research and development and medical device
manufacturing, could be affected by the past slowdown in the U.S.
economy.  If an economic slowdown occurs and continues and capital
spending for research and development from our clients decreases, our business,
financial condition and results of operations may be adversely
affected.
  We
could be harmed by litigation involving patents and other intellectual property
rights.
  None of
our patents or other intellectual property rights has been successfully
challenged to date.  However, in the future, we could be accused of
infringing the intellectual property rights of other third
parties.  We also have certain indemnification obligations to
customers with respect to the infringement of third party intellectual property
rights by our products.  No assurance can be provided that any future
infringement claims by third parties or claims for indemnification by customers
or end users of our products resulting from infringement claims will not be
asserted or that assertions of infringement, if proven to be true, will not harm
our business.
  In the
event of any adverse ruling in any intellectual property litigation, we could be
required to pay substantial damages, cease the manufacturing, use and sale of
infringing products, discontinue the use of certain processes or obtain a
license from the third party claiming infringement with royalty payment
obligations by us.
  Any
litigation relating to the intellectual property rights of third parties,
whether or not determined in our favor or settled by us, is costly and may
divert the efforts and attention of our management and technical
personnel.
  -14-
  We
may not be able to protect our intellectual property rights
adequately.
  Our
ability to compete is affected by our ability to protect our intellectual
property rights.  We rely on a combination of patents, trademarks,
copyrights, trade secrets, confidentiality procedures and non-disclosure and
licensing arrangements to protect our intellectual property
rights.  Despite these efforts, we cannot be certain that the steps we
take to protect our proprietary information will be adequate to prevent
misappropriation of our technology, or that our competitors will not
independently develop technology that is substantially similar or superior to
our technology.  More specifically, we cannot assure you that any
future applications will be approved, or that any issued patents will provide us
with competitive advantages or will not be challenged by third
parties.  Nor can we assure you that, if challenged, our patents will
be found to be valid or enforceable, or that the patents of others will not have
an adverse effect on our ability to do business.  Furthermore, others
may independently develop similar products or processes, duplicate our products
or processes or design their products around any patents that may be issued to
us.
  Our
future success depends on the continued service of management, engineering and
sales personnel and our ability to identify, hire and retain additional
personnel.
  Our
success depends, to a significant extent, upon the efforts and abilities of
members of senior management.  The loss of the services of one or more
of our senior management or other key employees could adversely affect our
business.  We do not maintain key person life insurance on any of our
officers, employees or consultants.
  There is
intense competition for qualified employees in the medical industry,
particularly for highly skilled design, applications, engineering and sales
people.  We may not be able to continue to attract and retain
technologists, managers, or other qualified personnel necessary for the
development of our business or to replace qualified individuals who could leave
us at any time in the future.  Our anticipated growth is expected to
place increased demands on our resources, and will likely require the addition
of new management and engineering staff as well as the development of additional
expertise by existing management employees.  If we lose the services
of or fail to recruit engineers or other technical and management personnel, our
business could be harmed.
  Periods
of rapid growth and expansion could place a significant strain on our resources,
including our employee base.
  To manage
our possible future growth effectively, we will be required to continue to
improve our operational, financial and management systems.  In doing
so, we will periodically implement new software and other systems that will
affect our internal operations regionally or globally.  Presently, we
are upgrading our enterprise resource planning software to integrate our
operations.  The conversion process is complex and requires, among
other things, that data from our existing system be made compatible with the
upgraded system.  During the transition to this upgrade, we could
experience delays in ordering materials, inventory tracking problems and other
inefficiencies, which could cause delays in shipments of products to our
customers.
  Future
growth will also require us to successfully hire, train, motivate and manage our
employees.  In addition, our continued growth and the evolution of our
business plan will require significant additional management, technical and
administrative resources.  We may not be able to effectively manage
the growth and evolution of our current business.
  We
are exposed to product liability and clinical and pre-clinical liability risks
which could place a substantial financial burden on us, if we are
sued.  Although we have 5 million dollars in product liability
insurance coverage, that amount may not be sufficient to cover all potential
claims made against us.  Additionally, we face the risk of financial
exposure to product liability claims alleging that the use of devices that
incorporate our products resulted in adverse effects.
  While we
are not aware of any claim at this time, our business exposes us to potential
product liability, recalls and other liability risks that are inherent in the
testing, manufacturing and marketing of medical products.  We cannot
assure you that such potential claims will not be asserted against
us.  In addition, the use in our clinical trials of medical products
that our potential collaborators may develop and the subsequent sale of these
products by us or our potential collaborators may cause us to bear a portion of
or all product liability risks.  A successful liability claim or
series of claims brought against us could have a material adverse effect on our
business, financial condition and results of operations.
  We cannot
assure you that we will be able to obtain or maintain adequate product liability
insurance on acceptable terms, if at all, or that such insurance will provide
adequate coverage against our potential liabilities.  Furthermore, our
current and potential partners with whom we have collaborative agreements or our
future licensees may not be willing to indemnify us against these types of
liabilities and may not themselves be sufficiently insured or have a net worth
sufficient to satisfy any product liability claims.  Claims or losses
in excess of any product liability insurance coverage that may be obtained by us
could have a material adverse effect on our business, financial condition and
results of operations.  We do not currently carry recall insurance and
we may be subject to significant recall costs in the event of a
recall.
  -15-
  Additionally,
we currently assist in the development of certain medical products and
prototypes for third parties, including components in other
products.  Our contract manufacturing operation produces components
for medical manufacturers used in products such as catheters and disposable
devices.  Product liability risks may exist even for those medical
devices that have received regulatory approval for commercial sale or even for
products undergoing regulatory review.  We currently carry $5 million
in product liability insurance.  Any defects in our materials used in
these devices could result in recalls and/or significant product liability costs
to us, which may exceed $5 million.  We do not currently carry recall
insurance and we may be subject to significant recall costs in the event of a
recall.
  We
may be affected by environmental laws and regulations.
  We are
subject to a variety of laws, rules and regulations in the United States related
to the use, storage, handling, discharge and disposal of certain chemical
materials such as isocyanates, alcohols, dimethylacetamide, and glycols used in
our research and manufacturing process.  Any of those regulations
could require us to acquire expensive equipment or to incur substantial other
expenses to comply with them.  If we incur substantial additional
expenses, product costs could significantly increase.  Our failure to
comply with present or future environmental laws, rules and regulations could
result in fines, suspension of production or cessation of
operations.
  If
we are unable to complete our assessments as to the adequacy of our internal
controls over financial reporting as required by Section 404 of the
Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of
our common stock.
  As
directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission adopted rules requiring public companies to include a report
of management on the company’s internal control over financial reporting in
their annual reports on Form 10-K.  This report is required to contain
an assessment by management of the effectiveness of such company’s internal
controls over financial reporting.  In addition, the public accounting
firm auditing a public company’s financial statements must attest to and report
on management’s assessment of the effectiveness of the company’s internal
controls over financial reporting.  While we are expending significant
resources in developing the necessary documentation and testing procedures
required by Section 404, there is a risk 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 to comply with the requirements of
Section 404 in a timely manner.  This could result in an adverse
reaction in the financial markets due to a loss of confidence in the reliability
of our financial statements, which could cause the market price of our common
stock to decline and make it more difficult for us to finance our
operations.
  Under
current rules, we are required to report on the effectiveness of our internal
controls for the year ended March 31, 2008.  In the fiscal year
ending March 31, 2010, our independent registered public accounting firm will be
required to report on the effectiveness of our internal controls.
  Risks
Related to Competition
  The
medical device industry in general, and the market for products for use in
cardiovascular surgery in particular, is intensely competitive and characterized
by rapid innovation and technological advances.  Product
differentiation and performance, client service, reliability, cost and ease of
use are important competitive considerations in the medical device
industry.  We expect the current high levels of competition and
technological change in the medical device industry in general. Most of our
competitors have longer operating histories and significantly greater financial,
technical, research, marketing, sales, distribution and other
resources.  In addition, our competitors may have greater name
recognition than us and frequently offer discounts as a competitive
tactic.  There can be no assurance that our current competitors or
potential future competitors will not succeed in developing or marketing
technologies and products that are more effective or commercially attractive
than those that have been and are being developed by us or that would render our
technologies and products obsolete or noncompetitive, or that such companies
will not succeed in obtaining regulatory approval for, introducing or
commercializing any such products prior to us.  Any of the above
competitive developments could have a material adverse effect on our business,
financial condition and results of operations.
   -16-
  Risks
Related to Pricing Pressure
  We face
aggressive cost-containment pressures from governmental agencies and third party
payors.  There can be no assurances that we will be able to maintain
current prices in the face of continuing pricing pressures.  Over
time, the average price for our products may decline as the markets for these
products become more competitive.  Any material reduction in product
prices could negatively affect our gross margin, necessitating a corresponding
increase in unit sales to maintain net sales.
  Risks
Related to Our Securities
  Our
stock price is volatile.
  The
market price of our common stock has fluctuated significantly to
date.  In the past fiscal year, our stock price ranged from $0.52 to
$1.65.  The future market price of our common stock may also fluctuate
significantly due to:
  ·
              variations
      in our actual or expected quarterly operating
  results;
  ·
              announcements
      or introductions of new products;
  ·
              results
      of clinical trials;
  ·
              technological
      innovations by our competitors or development setbacks by
    us;
  ·
              the
      commencement or adverse outcome of
litigation;
  ·
              changes
      in analysts’ estimates of our performance or changes in analysts’
      forecasts regarding our industry, competitors or
  customers;
  ·
              announcements
      of acquisition or acquisition transactions;
or
  ·
              general
      economic and market conditions.
  In
addition, the stock market in recent years has experienced extreme price and
volume fluctuations that have affected the market prices of many medical and
biotechnology companies.  These fluctuations have often been unrelated
or disproportionate to the operating performance of companies in our industry,
and could harm the market price of our common stock.
  Additional
authorized shares of our common stock and preferred stock available for issuance
may adversely affect the market.
  We are
authorized to issue 50,000,000 shares of our common stock.  As of
March 31, 2008, there were 21,067,313 shares of common stock issued and
outstanding.  However, the total number of shares of our common stock
issued and outstanding does not include shares reserved in anticipation of the
exercise of options and warrants.  As of March 31, 2008, we had
outstanding stock options and warrants of approximately 3,736,971 shares of our
common stock, the exercise price of which range between $0.50 per share to $5.40
per share, and we have reserved shares of our common stock for issuance in
connection with the potential exercise thereof.  To the extent such
options, warrants or additional investment rights are exercised; the holders of
our common stock will experience further dilution.  Stockholders will
also experience dilution upon the exercise of options granted under our stock
option plans.  In addition, in the event that any future financing or
consideration for a future acquisition should be in the form of, be convertible
into or exchangeable for, equity securities investors will experience additional
dilution.
  The
exercise of the outstanding derivative securities will reduce the percentage of
common stock held by our current stockholders.  Further, the terms on
which we could obtain additional capital during the life of the derivative
securities may be adversely affected, and it should be expected that the holders
of the derivative securities would exercise them at a time when we would be able
to obtain equity capital on terms more favorable than those provided for by such
derivative securities.  As a result, any issuance of additional shares
of common stock may cause our current stockholders to suffer significant
dilution which may adversely affect the market.  In addition to the
above referenced shares of common stock which may be issued without stockholder
approval, we have 5,000,000 shares of authorized preferred stock, the terms of
which may be fixed by our Board, of which 500,000 preferred shares were
previously issued, but none are currently outstanding.  While we have
no present plans to issue any additional shares of preferred stock, our Board
has the authority, without stockholder approval, to create and issue one or more
series of such preferred stock and to determine the voting, dividend and other
rights of holders of such preferred stock.  The issuance of any of
such series of preferred stock may have an adverse effect on the holders of
common stock.
   -17-
  Shares
eligible for future sale may adversely affect the market.
  From time
to time, certain of our stockholders may be eligible to sell all or some of
their shares of common stock by means of ordinary brokerage transactions in the
open market pursuant to Rule 144, promulgated under the Securities Act, subject
to certain limitations.  In general, pursuant to Rule 144, a
stockholder (or stockholders whose shares are aggregated) who has satisfied a
one year holding period may, under certain circumstances, sell within any three
month period a number of securities which does not exceed the greater of 1% of
the then outstanding shares of common stock or the average weekly trading volume
of the class during the four calendar weeks prior to such sale.  Rule
144 also permits, under certain circumstances, the sale of securities, without
any limitation, by our stockholders that are non-affiliates that have satisfied
a two year holding period.  Any substantial sale of our common stock
pursuant to Rule 144 or pursuant to any resale prospectus may have material
adverse effect on the market price of our securities.
  There
is a limitation on director and officer liability.
  As
permitted by Delaware law, our Restated Articles of Organization limit the
liability of our directors for monetary damages for breach of a director’s
fiduciary duty except for liability in certain instances.  As a result
of our charter provision and Massachusetts law, stockholders may have limited
rights to recover against directors for breach of fiduciary duty.  In
addition, our bylaws provide that we shall indemnify our directors, officers,
employees and agents if such persons acted in good faith and reasoned that their
conduct was in our best interest.
  The
anti-takeover provisions of our Restated Articles of Organization, the Delaware
corporation law and our Stockholder Rights Plan may delay, defer or prevent a
change of control.
  Our board
of directors has the authority to issue up to 4,500,000 shares of preferred
stock and to determine the price, rights, preferences and privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our stockholders.  The rights of the holders of common
stock will be subject to, and may be harmed by, the rights of the holders of any
shares of preferred stock that may be issued in the future.  The
issuance of preferred stock may delay, defer or prevent a change in control
because the terms of any issued preferred stock could potentially prohibit our
consummation of any acquisition, reorganization, sale of substantially all of
our assets, liquidation or other extraordinary corporate transaction, without
the approval of the holders of the outstanding shares of preferred
stock.  In addition, the issuance of preferred stock could have a
dilutive effect on our stockholders.
  Our
stockholders must give substantial advance notice prior to the relevant meeting
to nominate a candidate for director or present a proposal to our stockholders
at a meeting.  These notice requirements could inhibit a takeover by
delaying stockholder action.  In addition, our bylaws and Delaware law
provide for staggered board members with each member elected for three
years.  In addition, directors may be removed by stockholders only for
cause and by a vote of 80% of the stock.
  In
addition, we have adopted a stockholder rights plan that may discourage any
potential acquirer from acquiring more than fifteen percent (15%) of our
outstanding common stock since, upon this type of acquisition without approval
of our board of directors, all other common stockholders will have the right to
purchase a specified amount of common stock at a substantial discount from
market price.
  Risk
of Market Withdrawal or Product Recall
  There can
be no assurance that we will be able to successfully take corrective actions if
required, nor can there be any assurance that any such corrective actions will
not force us to incur significant costs.  In addition, there can be no
assurance any future recalls will not cause us to face increasing scrutiny from
its customers, which could cause us to lose market share or incur substantial
costs in order to maintain existing market share.  We do not currently
carry recall insurance and we may be subject to significant recall costs in the
event of a recall.
  Risks
Associated with Healthcare Reform Proposals
  Political,
economical and regulatory influences are subjecting the healthcare industry in
the United States to fundamental change.  Potential reforms proposed
over the last several years have included mandated basic healthcare benefits,
controls on healthcare spending through limitations on the growth of private
health insurance premiums and Medicare and Medicaid spending, the creation of
large insurance purchasing groups and fundamental changes in the healthcare
delivery system.  In addition, some states in which we operate are
also considering various healthcare reform proposals.  We anticipate
that federal and state governments will continue to review and assess
alternative healthcare delivery systems and payment methodologies and public
debate of these issues will likely continue in the future.  Due to
uncertainties regarding the ultimate features of reform initiatives and their
enactment and implementation, we cannot predict which, if any, of such reform
proposals will be adopted, when they may be adopted or what impact they may have
on us, and there can be no assurance that the adoption of reform proposals will
not have a material adverse effect on our business, operating results or
financial condition.  In addition, the actual announcement of reform
proposals and the investment community’s reaction to such proposals, as well as
announcements by competitors and third-party payors of their strategies to
respond to such initiatives, could produce volatility in the trading and market
price of our common stock.
  -18-
  Item
      1B.
              Unresolved
      Staff Comments
  None.
  Item
      2.
              Description
      of Properties
  Our
corporate headquarters, polymer development and manufacturing
operations, are located in an approximate 22,700 square foot building,
which we own, is located at 229 Andover Street, Wilmington, MA, and was
purchased for $1,750,000 in cash.
  Item 3.
              Legal
      Proceedings
  We are
not a party to any legal proceedings, other than ordinary routine litigation
incidental to our business, which we believe will not have a material affect on
our financial position or results of operations.
  Item 4.
              Submission
      of Matters to a Vote of Security
Holders
  None.
   -19-
  PART II
 Item
      5.
                Market
      Information for Registrant’s Common Equity, Related Stockholder Matters
      and Issuer Purchases of Equity
Securities
  Our
common stock trades on the American Stock Exchange under the symbol
“CTE.”  The following table sets forth the high and low sales prices
of the common stock for each of the last two fiscal years, as reported on the
American Stock Exchange.
  Fiscal
      Year 2008High
                  
                  
                  Low4th
      Quarter
                  
                  $
                  1.10
                  
                  
                  $
                  0.523rd
      Quarter
                  
                  
                  1.44
                  
                  
                  
                  0.672nd
      Quarter
                  
                  
                  1.59
                  
                  
                  
                  1.101st
      Quarter
                  
                  
                  1.65
                  
                  
                  
                  1.21Fiscal
      Year 2007High
                  
                  
                  Low4th
      Quarter
                  
                  $
                  2.15
                  
                  
                  $
                  1.253rd
      Quarter
                  
                  
                  2.51
                  
                  
                  
                  1.262nd
      Quarter
                  
                  
                  1.95
                  
                  
                  
                  1.011st
      Quarter
                  
                  
                  2.83
                  
                  
                  
                  1.85
 As of
June 25, 2008, there were approximately 383 stockholders of
record.  The last sale price as reported by the American Stock
Exchange on June 16, 2008, was $0.50.  We have never paid a cash
dividend on our common stock and do not anticipate the payment of cash dividends
in the foreseeable future.  We submitted an unqualified 2007 Corporate
Governance Certification to the American Stock Exchange in connection with our
fiscal year 2007.
  Securities Authorized for Issuance
under Equity Compensation Plans as of the End of Fiscal 2008 Equity Compensation
Plan Information
  Plan
      Category
                  
                  Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
                  
                  
                  Weighted
      average exercise price of outstanding options, warrants and
      rights
                  
                  
                  Number
      of securities remaining available for future issuanceEquity
      compensation plans approved by stockholders
                  
                  
                  3,376,971
                  (1)
                  
                  $
                  2.07
                  
                  
                  
                  3,268,812Equity
      compensation plans not approved by stockholders
                  
                  
                  360,000
                  
                  
                  
                  2.43
                  
                  
                  
                  -3,736,971
                  
                  
                  
                  
                  
                  
                  
                  3,268,812
 _______________
  (1)           This
total includes shares to be issued upon exercise of outstanding options under
the equity compensation plans that have been approved by our stockholders (i.e.,
the 1996 Plan and the 2003 Plan).
  -20-
 Recent
      Sales of Unregistered Securities:
  During
the three months ended March 31, 2008, we issued warrants to purchase 219,298
shares of our common stock at an exercise price of $0.874 per share in a private
offering pursuant to Section 4 (2) of the Securities Act to Silverwood Partners
as compensation for investment banking services in connection with our sale of
CDT.
  There
were no other sales of unregistered securities during the three months ended
March 31, 2008.
  Stock
      Repurchase Plan
  In June
2001, the Board of Directors authorized the purchase of up to 250,000 shares of
our common stock, of which 174,687 shares have been purchased as of March 31,
2007.  In June 2004, the Board of Directors authorized the purchase of
up to 500,000 additional shares of our common stock.  We announced
that purchases may be made from time-to-time in the open market, privately
negotiated transactions, block transactions or otherwise, at times and prices
deemed appropriate by management.  The maximum number of shares that
may be purchased under the plans as of March 31, 2007 is 575,313
shares.  There were 600 shares purchased during the fiscal year ended
March 31, 2007 for aggregate consideration of approximately
$1,000.  There was no activity in fiscal 2008 with respect to the
stock repurchase plan.
  Stockholder
Rights Plan
  The
Company’s board of directors approved the adoption of a stockholder rights plan
(the “Rights Plan”) under which all stockholders of record as of February 8,
2008 will receive rights to purchase shares of a new series of preferred stock
(the “Rights”).  The Rights will be distributed as a
dividend.  Initially, the Rights will attach to, and trade with, the
Company’s common stock.  Subject to the terms, conditions and
limitations of the Rights Plan, the Rights will become exercisable if (among
other things) a person or group acquires 15% or more of the Company’s common
stock.  Upon such an event, and payment of the purchase price, each
Right (except those held by the acquiring person or group) will entitle the
holder to acquire shares of the Company’s common stock (or the economic
equivalent thereof) having a value equal to twice the purchase
price.  The Company’s board of directors may redeem the Rights prior
to the time they are triggered.  In the event of an unsolicited
attempt to acquire the Company, the Rights Plan is intended to facilitate the
full realization of stockholder value in the Company and the fair and equal
treatment of all Company stockholders.  The Rights Plan will not
prevent a takeover attempt.  Rather, it is intended to guard against
abusive takeover tactics and encourage anyone seeking to acquire the Company to
negotiate with the board of directors.  The Company did not adopt the
Rights Plan in response to any particular proposal.
  Item 6.
              Selected
      Consolidated Financial Data
  Not
Applicable.
   -21-
  Item
      7.
              Management’s
      Discussion and Analysis or Plan of
Operation
  Forward-Looking
Statements
  This
Report on Form 10-K contains certain statements that are “forward-looking”
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Litigation Reform Act”).  These forward looking statements and other
information are based on our beliefs as well as assumptions made by us using
information currently available.
  The words
“anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and
similar expressions, as they relate to us, are intended to identify
forward-looking statements.  Such statements reflect our current views
with respect to future events and are subject to certain risks, uncertainties
and assumptions.  Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated, expected, intended or using other similar expressions.
  In
accordance with the provisions of the Litigation Reform Act, we are making
investors aware that such forward-looking statements, because they relate to
future events, are by their very nature subject to many important factors that
could cause actual results to differ materially from those contemplated by the
forward-looking statements contained in this Report on Form 10-K.  For
example, we may encounter competitive, technological, financial and business
challenges making it more difficult than expected to continue to develop and
market our products; the market may not accept our existing and future products;
we may not be able to retain our customers; we may be unable to retain existing
key management personnel; and there may be other material adverse changes in our
operations or business.  Certain important factors affecting the
forward-looking statements made herein also include, but are not limited to (i)
continued downward pricing pressures in our targeted markets, (ii) the continued
acquisition of our customers by certain of our competitors, and (iii) continued
periods of net losses, which could require us to find additional sources of
financing to fund operations, implement our financial and business strategies,
meet anticipated capital expenditures and fund research and development
costs.  In addition, assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause us to
alter our marketing, capital expenditure or other budgets, which may in turn
affect our financial position and results of operations.  For all of
these reasons, the reader is cautioned not to place undue reliance on
forward-looking statements contained herein, which speak only as of the date
hereof.  We assume no responsibility to update any forward-looking
statements as a result of new information, future events, or otherwise except as
required by law.
  Overview
  We develop advanced polymer materials
which provide critical characteristics in the design and development of medical
devices. Our biomaterials are used in devices that are designed for treating a
broad range of anatomical sites and disease states.  Our business
model leverages its proprietary materials science technology and manufacturing
expertise in order to expand our product sales and royalty and license fee
income.
 
 Critical
      Accounting Policies
  Our
significant accounting policies are summarized in Note A to our consolidated
financial statements.  However, certain of our accounting policies
require the application of significant judgment by our management, and such
judgments are reflected in the amounts reported in our consolidated financial
statements.  In applying these policies, our management uses its
judgment to determine the appropriate assumptions to be used in the
determination of estimates.  Those estimates are based on our
historical experience, terms of existing contracts, our observance of market
trends, information provided by our strategic partners and information available
from other outside sources, as appropriate.  Actual results may differ
significantly from the estimates contained in our consolidated financial
statements.  Our critical accounting policies are as
follows:
  ·
              Revenue
      Recognition.We
      recognize revenue in accordance with Staff Accounting Bulletin (“SAB”) No.
      104, “Revenue
      Recognition in Financial Statements.”  We recognize
      revenue from product sales upon shipment, provided that a purchase order
      has been received or a contract has been executed, there are no
      uncertainties regarding customer acceptance, the sales price is fixed or
      determinable and collection is deemed probable.  If
      uncertainties regarding customer acceptance exist, we recognize revenue
      when those uncertainties are resolved and title has been transferred to
      the customer.  Amounts collected or billed prior to satisfying
      the above revenue recognition criteria are recorded as deferred
      revenue.  We also receive license and royalty fees for the use
      of our proprietary biomaterials.  We recognize these fees as
      revenue in accordance with the terms of the
  contracts.
   -22-
  ·
              Accounts Receivable
      Valuation.We perform various analyses to evaluate
      accounts receivable balances and record an allowance for bad debts based
      on the estimated collectibility of the accounts such that the amounts
      reflect estimated net realizable value.  If actual uncollectible
      amounts significantly exceed the estimated allowance, the Company’s
      operating results would be significantly and adversely
      affected.
  ·
              Inventory
      Valuation.We value our inventory at the lower of our
      actual cost or the current estimated market value.  We regularly
      review inventory quantities on hand and inventory commitments with
      suppliers and record a provision for excess and obsolete inventory based
      primarily on our historical usage for the prior twelve to twenty-four
      month period.  Although we make every effort to ensure the
      accuracy of our forecasts of future product demand, any significant
      unanticipated change in demand or technological developments could have a
      significant impact on the value of our inventory and our reported
      operating results.
   ·
              Goodwill.
      At March 31, 2008, we had $487,000 of goodwill, which was attributable to
      the Company’s only reporting unit.  In assessing the
      recoverability of our goodwill, we must make assumptions in determining
      the fair value of the reporting unit by estimating future cash flows and
      considering other factors, including our stock price, other similar public
      companies negative industry reports and economic conditions.  If
      those estimates or their related assumptions change in the future, we may
      be required to record impairment charges.  Under the provisions
      of Statement of Financial Accounting Standards, or SFAS No. 142, “Goodwill and Other Intangible
      Assets,” we are required to test our intangible assets for
      impairment on an annual basis.  In the fourth quarter of the
      fiscal year ended March 31, 2008, we completed our annual review of
      goodwill.  As a result of this review, we determined the fair
      value of the one reporting unit, for which goodwill remains, exceeded its
      carrying amount and, therefore, no goodwill impairment existed as of March
      31, 2008.  We may be required to perform our impairment test
      more frequently if certain indicators are present or changes in
      circumstances suggest impairment may
exist.
   ·
              Stock-Based
      Compensation.   Effective April 1; 2006, we adopted
      Statement of Financial Accounting Standard No. 123R (SFAS 123R), “Share-Based
      Payment,”which requires
      the expense recognition of the estimated fair value of all stock-based
      payments issued to employees.  Prior to the adoption of SFAS
      123R, the estimated fair value associated with such awards was not
      recorded as an expense, but rather was disclosed in a footnote to our
      financial statements.
   The
valuation of employee stock options is an inherently subjective process, since
market values are generally not available for long-term, non-transferable
employee stock options.  Accordingly, an option pricing model is
utilized to derive an estimated fair value.  In calculating the
estimated fair value of our stock options we use the Black-Scholes pricing
model, which requires the consideration of the following six variables for
purposes of estimating fair value:
   ·
              the
      stock option exercise price;
   ·
              the
      expected term of the option;
   ·
              the
      grant price of our common stock, which is issuable upon exercise of the
      option;
   ·
              the
      expected volatility of our common
stock;
   ·
              the
      expected dividends on our common stock (we do not anticipate paying
      dividends in the foreseeable future);
and
   ·
              the
      risk free interest rate for the expected option
  term.
   Stock Option Exercise Price
and Grant Date Price of our Common Stock.  Stock option
exercise price is typically the closing market price of our common stock on the
date of grant.
   Expected
Term.  For options granted subsequent to the adoption of SFAS
123R, the expected life of stock options granted is based on the simplified
method prescribed under SAB 107, “Share-Based
Payment.”  Accordingly, the expected term is presumed to be the
midpoint between the vesting date and the end of the contractual
term.
   Expected
Volatility.  The expected volatility is a measure of the amount
by which our stock price is expected to fluctuate during the expected term of
options granted.  We determine the expected volatility solely based
upon the historical volatility of our common stock over a period commensurate
with the option’s expected term.  We do not believe that the future
volatility of our common stock over an option’s expected term is likely to
differ significantly from the past.
   -23-
  Expected
Dividends.  We have never declared or paid any cash dividends
on any of our capital stock and do not expect to do so in the foreseeable
future.  Accordingly, we use an expected dividend yield of zero to
calculate the grant-date fair value of a stock option.
   Risk-Free Interest
Rate.  The risk-free interest rate is the implied yield
available on U.S. Treasury zero-coupon issues with a remaining term equal to the
option’s expected term on the grant date.
   Of the
variables above, the selection of an expected term and expected stock price
volatility are the most subjective.  The majority of the stock option
expense recorded in the fiscal years ended March 31, 2008 and 2007 relates to
the vesting of stock options granted subsequent to April 1, 2006, as the
majority of our outstanding options were fully vested on the date of
adoption.
   Upon
adoption of SFAS 123R, we were also required to estimate the level of award
forfeitures expected to occur and record compensation expense only for those
awards that are ultimately expected to vest.  This requirement applies
to all awards that are not yet vested, including awards granted prior to April
1, 2006.  Due to the limited number of unvested options outstanding,
the majority of which are held by executives and members of the Company’s Board
of Directors, the Company has estimated a zero forfeiture rate.  The
Company will revisit this assumption periodically and as changes in the
composition of our option pool dictate.
   Changes
in the inputs and assumptions, as described above, can materially affect the
measure of estimated fair value of our share-based compensation.  The
Company anticipates the amount of stock-based compensation to increase in the
future as additional options are granted.  As of March 31, 2008, there
was approximately $316,000 of unrecognized compensation cost related to stock
option awards that is expected to be recognized as expense over a weighted
average period of 1.77 years.
  Results
of Operations
  Fiscal Year Ended March 31,
2008 vs. March 31, 2007
  Revenues
  The
following table presents revenues for the years ended March 31,
  (dollars
      in thousands)
                  
                  2008
                  
                  
                  %
      of Revenues
                  
                  
                  2007
                  
                  
                  %
      of RevenuesRevenues:Product
      sales
                  
                  $
                  1,283
                  
                  
                  
                  40.0
                  %
                  
                  $
                  717
                  
                  
                  
                  31.5
                  %Royalties
      and development fees
                  
                  
                  1,924
                  
                  
                  
                  60.0
                  %
                  
                  
                  1,558
                  
                  
                  
                  68.5
                  %$
                  3,207
                  
                  
                  
                  100.0
                  %
                  
                  $
                  2,275
                  
                  
                  
                  100.0
                  %
 Product
sales of our biomaterials for the fiscal year ended March 31, 2008 were
$1,283,000 as compared with $717,000 for the comparable prior year period, an
increase of $566,000, or 78.9%.  Product sales increased primarily due
to more shipments of our biomaterials to two large existing customers and
first-time shipments to new customers.   As part of the Company’s
re-branding effort launched in June 2008, the Company will be categorizing its
biomaterials into standard and customized products in order to be better able to
customize the materials properties and characteristics to customers’
specifications.
  Royalties
and development fees for the fiscal year ended March 31, 2008 were $1,924,000 as
compared with $1,558,000 for the comparable prior year period, an increase of
$366,000 or 23.5%.  We have agreements to license our proprietary
biomaterial technology to medical device manufacturers.  Royalties are
earned when these manufacturers sell medical devices which use our biomaterials;
accordingly, the increase in royalties during the fiscal year ended March 31,
2008 is a result of increased shipments of existing and new products to one
manufacturer.  Additionally, in October 2006, we began to generate
development fees from the supply of our proprietary ChronoFlex polymer material,
specifically formulated for the development of orthopedic implant devices, from
a leading developer and manufacturer of orthopedic devices.
  Our
backlog in the ordinary course of business for biomaterial products is
approximately $117,000 at March 31, 2008.
   -24-
  Gross
Profit
  The
following table presents gross profit for the years ended March 31,
  2008
                  
                  2007(dollars
      in thousands)
                  
                  Gross
      Profit
                  
                  Gross
      Margin
                  
                  Gross
      Profit
                  
                  Gross
      MarginGross
      profit
                  
                  $
                  1,950
                  
                  
                  60.8
                  %
                  
                  $
                  1,646
                  
                  
                  72.4
                  %
 Gross
profit (including royalty and development fees) for the fiscal years ended March
31, 2008 and 2007, was $1,950,000 or 60.8% gross margin and $1,646,000 or 72.4%
gross margin, respectively. Gross profit on product sales (excluding royalty and
development fees) was $26,000, or 2.0 % as a percentage of product sales for the
fiscal year ended March 31, 2008, as compared with $88,000, or 12.3% for the
comparable prior year period.  The decrease in gross margin is
primarily due to i) scrap incurred in the production of biomaterials, and ii)
increased overhead costs resulting from staffing costs intended as an investment
to improve our manufacturing processes and quality systems, in the fiscal year
ended March 31, 2008.
  Research,
Development and Regulatory Expenses
  The
following table presents research and development expenses as a percentage of
revenues for the fiscal years ended March 31,
 (dollars
      in thousands)
                  
                  2008
                  
                  
                  %
      of Revenues
                  
                  2007
                  
                  
                  %
      of RevenuesResearch,
      development and regulatory
                  
                  $
                  999
                  
                  
                  
                  31.2
                  %
                  
                  $
                  769
                  
                  
                  
                  33.8
                  %
  Research
and development expenses for the fiscal year ended March 31, 2008 were $999,000
as compared with $769,000 for the comparable prior year period, an increase of
$230,000 or 29.9%.  Our research and development efforts are focused
on developing new applications for our biomaterials.  Research and
development expenditures consisted primarily of the salaries of full time
employees and related expenses, and are expensed as incurred.  We had
additional staff, primarily polymer chemists, to support development activities
in the year ended March 31, 2008.  These individuals work on a variety
of projects, including production support.
  Selling,
General and Administrative Expenses
  The
following table presents selling, general and administrative expenses as a
percentage of revenues for the fiscal years ended March 31,
 (dollars
      in thousands)
                  
                  2008
                  
                  
                  %
      of Revenues
                  
                  2007
                  
                  
                  %
      of RevenuesSelling,
      general and administrative
                  
                  $
                  3,408
                  
                  
                  
                  106.3
                  %
                  
                  $
                  2,598
                  
                  
                  
                  114.2
                  %
  Selling,
general and administrative expenses for the fiscal year ended March 31, 2008
were $3,408,000 as compared with $2,598,000 for the comparable prior year
period, an increase of $810,000 or 31.2%.  The increase is
attributable, in part, to incremental legal, professional and recruiting fees;
the hire of our first-time Global Sales Director for materials science;
significant expansion of marketing and branding initiatives; and fees incurred
in connection with Sarbanes-Oxley compliance.
  Interest
and Other Income and Expense
  Interest
and other income and expense, net for the fiscal year ended March 31, 2008 was
$215,000 as compared with $89,000 for the comparable prior year period, an
increase of $126,000 or 141.6%.  The increase is primarily due to an
increase in interest income for the fiscal year ended March 31, 2008 as a result
of higher average cash and cash equivalent balances in fiscal 2008.
  Net
Loss from Discontinued Operations
  Net loss
from discontinued operations is comprised of two components.  Loss
from discontinued operations for the fiscal year ended March 31, 2008 was
$1,985,000, comprised of approximately $319,000 and $1,666,000 from Gish
and CDT, respectively.  Loss on sale of Gish and CDT for the fiscal
year ended March 31, 2008 was approximately $1,173,000 and $690,000,
respectively.
  Loss from
discontinued operations for the fiscal year ended March 31, 2007 was $1,051,000,
comprised of a loss of approximately $1,360,000 from CDT and income of
approximately $309,000 from Gish.
  -25-
  Equity
in Net Loss of CorNova, Inc.
  During
the fiscal year ended March 31, 2007, we recorded $279,000 of equity in net loss
in our investment in CorNova, which resulted in our recording losses totaling
our investment in CorNova, thereby reducing our investment balance to
zero.  There were no net losses recorded during the fiscal year ended
March 31, 2008 in connection with our investment in CorNova.  We have
no additional obligation to contribute assets or additional common stock nor to
assume any liabilities or to fund any losses that CorNova may
incur.
  Income
Taxes
  As of
March 31, 2008, the Company had federal and state net operating loss carry
forwards available to offset future taxable income of approximately $14,782,000,
expiring between 2009 and 2028, and $10,263,000, expiring between 2009 and 2013,
respectively.  As of March 31, 2008, the Company had a capital
loss carry forward available to offset future taxable income of approximately
$9,987,000, expiring in 2013.  As of March 31, 2008, the Company had
federal and state investment and research tax credit carryforwards available to
offset future taxable income of approximately $64,000, expiring between 2009 and
2028, and $151,000, expiring between 2009 and 2013, respectively,
  Liquidity
and Capital Resources
  On July
6, 2007, we completed the sale of Gish, our former wholly-owned subsidiary that
developed and manufactured single use cardiopulmonary bypass products, pursuant
to a stock purchase agreement (the “Gish Purchase Agreement”) entered into with
Medos Medizintechnik AG, a German corporation (“Medos”), on July 3,
2007.  The Gish Purchase Agreement provided for the sale of Gish to
Medos for a purchase price of approximately $7.5 million in cash.  The
Gish Purchase Agreement also contained representations, warranties and
indemnities that are customary in a transaction involving the sale of all or
substantially all of a company or its assets.  The indemnifications
include items such as compliance with legal and regulatory requirements, product
liability, lawsuits, environmental matters, product recalls, intellectual
property, and representations regarding the fairness of certain financial
statements, tax audits and net operating losses.
  Pursuant
to the terms of the Gish Purchase Agreement, we placed $1.0 million in escrow as
a reserve for certain indemnification obligations to Medos, if any, as described
above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to us on July 5, 2008.The
realization of the escrow fund is also contingent upon the realizability of the
Gish accounts receivable and inventory that were transferred to Medos for one
year from the sale date.  The $1.0 million of proceeds being held in
escrow is not included in the calculation of the loss on sale of Gish of
$1,173,000.
  Medos has
advised us that it may assert certain indemnity claims against us relating to
certain representations and warranties up to the full amount of the $1.0 million
escrow balance.  We have advised Medos that we believe any such
claims, if made, would be without merit under the Gish Purchase
Agreement.  We have concluded that a loss resulting from these
potential claims by Medos in excess of the escrow balance is not probable as of
March 31, 2008.
  We have
been notified by Medos as to their assertions that we may be liable for up to
one year of severance costs related to each of the terminations of two key Gish
employees by Medos, whose terminations were effected by Medos subsequent to the
acquisition date.  We have reviewed the assertions by Medos, and have
concluded that a loss resulting from these asserted claims is not probable as of
March 31, 2008.
  In
connection with the sale of Gish, we entered into a non-exclusive, royalty-free
license (the “License Agreement”) with Gish which provides for our use of
certain patented technology of Gish in our products and services, provided such
products and services do not compete with the cardiac bypass product development
and manufacturing businesses of Gish or Medos.  We have determined the
License Agreement has de minimus value and, accordingly, no value has been
ascribed to the license.
  After transaction expenses
and certain post-closing adjustments, we realized approximately $6.1 million in
proceeds from the sale of Gish.  Assuming the disbursement to us of
all funds held in escrow after July 5, 2008, up to an additional $1.0 million
may be realized.Under the terms of the Gish Purchase
Agreement, we owe Medos $149,000 as a result of the change in stockholder’s
equity of Gish from March 31, 2007 to June 30, 2007.  This amount was
recorded as a current liability as of June 30, 2007, has not been paid to Medos,
and is reflected as a current liability of discontinued operations as of March
31, 2008.  This adjustment is included in the calculation of the loss
on sale of Gish through March 31, 2008.  Under the terms of the
Gish Purchase Agreement, we retained Gish’s cash assets of approximately $2.0
million as of June 29, 2007.
   -26-
  On March
28, 2008, we completed the sale of CDT, our former wholly-owned subsidiary, that
is a contract manufacturer and provider of engineering services, pursuant to a
stock purchase agreement (the “CDT Purchase Agreement”) entered into with
TACPRO, Inc. (“Tacpro”) on March 28, 2008.  The CDT Purchase Agreement
provided for the sale of CDT to Tacpro for a purchase price of approximately
$1.2 million in cash.  The CDT Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, realization of accounts receivable and inventories at
specified time periods, and tax audits. Pursuant to the terms of the CDT
Purchase Agreement, we placed $240,000 in escrow as a reserve for our
indemnification obligations to Tacpro if any, as described above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to us on March 28,
2009.The $240,000 of proceeds being held in escrow is not
included in the calculation of the loss on sale of CDT of $690,000.
  After
transaction expenses and certain post-closing adjustments, we realized
approximately $696,000 in cash proceeds from the sale of CDT.  We also
incurred an additional non-cash expense of approximately $76,000 related to
warrants issued in connection with an investment bank that advised
us.  Assuming the disbursement to us of all funds held in escrow after
March 28, 2009, up to an additional $240,000 may be realized.
   As of
March 31, 2008, we had cash and cash equivalents of $6.7 million, an increase of
$2.6 million when compared with a balance of $4.1 million as of March 31,
2007.
  During
the year ended March 31, 2008, we had net cash outflows of $739,000 from
operating activities of continuing operations as compared to net cash outflows
of continuing operations of $1,563,000 for the comparable prior year
period.  The approximate $824,000 decrease in net cash outflows used
in operating activities of continuing operations during the year ended March 31,
2008, as compared to the comparable prior year period, was primarily a result of
cash provided from increases in accounts payable and accrued expenses; offset by
the $331,000 increase in net loss from continuing operations..
  During
the year ended March 31, 2008, we had net cash inflows of $5,745,000 from
investing activities of continuing operations as compared to net cash outflows
of $453,000 for the comparable prior year period.  Net cash inflows
results from proceeds of $6,747,000 from the sale of Gish and CDT, offset by
$825,000 in purchases of property, plant and equipment during the year ended
March 31, 2008.
  During
the year ended March 31, 2008, there were 1,035,663 options exercised for cash
proceeds of approximately $947,000 pursuant to the 1996 and the 2003 Option
Plans.
  At March
31, 2008, we had no debt.  We believe our March 31, 2008 cash position
will be sufficient to fund our working capital and research and development
activities for at least the next twelve months.
  Our
future growth may depend upon our ability to raise capital to support research
and development activities and to market and sell our vascular graft technology,
specifically the coronary artery bypass graft.  We may require
substantial funds for further research and development, future pre-clinical and
clinical trials, regulatory approvals, establishment of commercial-scale
manufacturing capabilities, and the marketing of our products.  Our
capital requirements depend on numerous factors, including but not limited to,
the progress of its research and development programs; the progress of
pre-clinical and clinical testing; the time and costs involved in obtaining
regulatory approvals; the cost of filing, prosecuting, defending and enforcing
any intellectual property rights; competing technological and market
developments; changes in our development of commercialization activities and
arrangements; and the purchase of additional facilities and capital
equipment.
  With
respect to the Exchange and Venture Agreement with CorNova, we have no
additional obligation to contribute assets or additional common stock nor to
assume any liabilities or to fund any losses that CorNova may
incur.
  Off-Balance
Sheet Arrangements
  As of
March 31, 2008, we did not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future material effect on our
consolidated financial condition, results of operations, liquidity, capital
expenditures or capital resources.
  
 -27-
  Item
      8.
              Financial
      Statements and Supplementary Data
  The
following documents are filed as part of this report on Form 10-K
  PageReport
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm
              
              F-1Consolidated
      Balance Sheets at March 31, 2008 and 2007
              
              F-2Consolidated
      Statements of Operations for the years ended March 31, 2008 and
      2007
              
              F-3Consolidated
      Statements of Stockholders’ Equity for the years ended March 31, 2008 and
      2007
              
              F-4Consolidated
      Statements of Cash Flows for the years ended March 31, 2008 and
      2007
              
              F-5Notes
      to Consolidated Financial Statements
              
              F-6
      - F-21
 
  Item 9.
              Changes
      In and Disagreements With Accountants on Accounting and Financial
      Disclosure
  None.
  Item 9A.
              Controls
      and Procedures
  The
certificates of the Company’s Chief Executive Officer and Chief Financial
Officer attached as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K
include, in paragraph 4 of such certifications, information concerning the
Company’s disclosure controls and procedures, and internal control over
financial reporting.  Such certifications should be read in
conjunction with the information contained in this Item 9A for a more complete
understanding of the matters covered by such certifications.
  Disclosure
      Controls and Procedures.
  The
Company’s management, with the participation of the Company’s Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company’s disclosure controls and procedures as of March 31,
2008.  The term “disclosure controls and procedures”, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the
“Exchange Act”), means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized, and reported, within the time periods specified in the
SEC’s rules and forms.  Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is accumulated and communicated to the company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions to be made regarding required
disclosure.  It should be noted that any system of controls and
procedures, however well designed and operated, can provide only reasonable, and
not absolute, assurance that the objectives of the system are met and that
management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.  Based on the
evaluation of the Company’s disclosure controls and procedures as of March 31,
2008, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of such date, the Company’s disclosure controls and
procedures were effective at the reasonable assurance level.
  Management’s
Annual Report on Internal Control Over Financial Reporting
  The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934).  A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
U.S. generally accepted accounting principles.  Internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the interim or annual
consolidated financial statements.  Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements.  Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
   -28-
  The
Company’s management, with the participation of its Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting as of March 31, 2008 based
on the framework in Internal
Control Integrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission.  Based on this assessment,
the Company’s management concluded that, as of March 31, 2008, the Company’s
internal control over financial reporting was effective based on those
criteria.
  This
annual report on Form 10-K does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting.  Management's report was not subject to attestation by
the Company's registered public accounting firm pursuant to temporary rules of
the Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
  Changes
in Internal Control Over Financial Reporting
  There
were no changes to the Company’s internal control over financial reporting
during the fourth quarter ended March 31, 2008 that has materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
  Item 9B.
              Other
      Information
  None.
   -29-
  PART III
 
 Item 10.
              Directors,
      Executive Officers and Corporate
Governance
  CardioTech’s
Board of Directors is currently comprised of five directors.  The
directors and executive officers, their ages and positions at CardioTech as well
as certain biographical information of these individuals, are set forth
below.  The ages of the individuals are provided as of June 15,
2008.
 Name
                
                Age
                
                PositionMichael
      F. Adams
                
                52
                
                President,
      Chief Executive Officer and DirectorEric
      G. Walters
                
                56
                
                Vice
      President & Chief Financial OfficerAndrew
      M. Reed, Ph.D.
                
                55
                
                Vice
      President of Science & TechnologyWilliam
      J. O'Neill, Jr.
                
                66
                
                Chairman
      of the Board of DirectorsMichael
      L. Barretti
                
                63
                
                DirectorAnthony
      J. Armini, Ph.D.
                
                70
                
                DirectorJeremiah
      E. Dorsey
                
                63
                
                Director
 There are
no family relationships between any director, executive officer, or person
nominated or chosen to become a director or executive officer.
  Mr.
Michael F. Adams has been a director of CardioTech since May
1999.  Mr. Adams was appointed as President & Chief Executive
Officer on August 7, 2006.  From April 1, 2006 until August 7, 2006,
Mr. Adams was the Company’s Vice President of Regulatory Affairs and Business
Development.  Prior to April 2006, Mr. Adams was the Vice President of
PLC Systems, Inc.  Prior to joining PLC Systems in September 2000, Mr.
Adams was Vice President of Assurance Medical, Inc.  Prior to joining
Assurance Medical in June 1999, Mr. Adams was the Chief Operating Officer and
Vice President of Regulatory Affairs and Quality Assurance of CardioTech from
June 1998 to May 1999.  From November 1994 through June 1998, Mr.
Adams served as the Vice President of Cytyc Corporation.  Mr. Adams
received a BS from the University of Massachusetts.
  Mr. Eric
G. Walters has been our Vice President & Chief Financial Officer since
October 2005.  Prior to joining us, Mr. Walters from October 2004
through September 2005 served as Vice President and Chief Financial Officer at
Konarka Technologies, Inc., a developer of light-activated plastic
(photovoltaic) material.  Prior to joining Konarka, Mr. Walters served
in various capacities at PolyMedica Corporation during a 13-year period,
including Executive Vice President and Chief Financial Officer.  Mr.
Walters, a CPA, is a Member of the American Institute of Certified Public
Accountants, a Fellow of the Massachusetts Society of Certified Public
Accountants, and a Member in Financial Executives International.  Mr.
Walters serves as a Director and the Chairman of the Audit Committee of the
Board of Directors of Microfluidics International Corporation since November
2005 and as a member of the Board of Directors of CorNova, Inc., a
privately-held development stage company.  Mr. Walters received his BA
degree from Colgate University and a Certificate in Accounting from Bentley
College.
  Dr.
Andrew M. Reed has been our Vice President of Science & Technology since
April 2006.  Prior to April 2006, Dr. Reed was Executive Vice
President of CCS Medical a direct to patient provider of diabetic, respiratory,
ostomy and wound care supplies.  From 1999 to 2005 he was Chief
Operating Officer and Vice President of Gericare Providers, Inc. a supplier of
wound care products for patient in-home use.  He was President of
Innovative Technologies (US), Inc. the US Division of a UK based private label
manufacturer of proprietary wound care products from 1997 through
1999.  From 1990 to 1997, Dr. Reed held management positions of
increasing responsibilities at PolyMedica Corporation, a direct to consumer
diabetic, pharmaceutical and wound care product manufacturer and provider,
including Vice President of Research and Development and President of PolyMedica
Wound Care Company.  Dr. Reed was responsible for research and
development and manufacturing functions.  Earlier in his career, Dr.
Reed was a Senior Research Chemist at Millipore Corporation.  Dr. Reed
is the holder of several U.S. Patents, primarily in the area of polyurethane and
wound dressing technologies, and is the co-inventor of
ChronoFlex®.  Dr. Reed received his Ph.D. in Polymer Chemistry from
the University of Liverpool, UK.  He is the author and co-author of
numerous published scientific papers.
  Mr.
William J. O’Neill, Jr. has been a director of CardioTech since May 2004 and was
appointed as Chairman on August 7, 2006.  Mr. O’Neill is currently the
Dean of the Frank Sawyer School of Management at Suffolk University in Boston,
Massachusetts.  Prior to this appointment, Mr. O’Neill spent thirty
years (1969-1999) with the Polaroid Corporation, where he held the positions of
Executive Vice President of the Corporation, President of Corporate Business
Development, and Chief Financial Officer.  He was also Senior
Financial Analyst at Ford Motor Company.  Mr. O’Neill was a Trustee at
the Dana Farber Cancer Institute, and is currently a member of the Massachusetts
Bar Association, a member of the Board of Directors of the Greater Boston
Chamber of Commerce, and serves on the Board of Directors of Concord Camera and
EDGAR Online, Inc..  He earned a BA at Boston College in mathematics,
a MBA in finance from Wayne State University, and a JD from Suffolk University
Law School.
   -30-
  Mr.
Michael L. Barretti has been a director of CardioTech since January
1998.  Mr. Barretti is the executive in residence and professor of
marketing at Suffolk University in Boston.  Mr. Barretti has been the
President of Cool Laser Optics, Inc., a company which commercializes optical
technology specific to the medical laser industry, since July
1996.  From September 1994 to July 1996, Mr. Barretti was Vice
President of Marketing for Cynosure, Inc., a manufacturer of medical and
scientific lasers.  From June 1987 to September 1994, Mr. Barretti was
a principal and served as Chief Executive Officer of NorthFleet Management
Group, a marketing management firm serving the international medical device
industry.  From January 1991 to May 1994, Mr. Barretti also acted as
President of Derma-Lase, Inc., the U.S. subsidiary of a Glasgow, Scotland
supplier of solid-state laser technologies to the medical field.  Mr.
Barretti received his BA from St. Johns University and an MBA from Suffolk
University.
  Dr.
Anthony J. Armini has been a director of CardioTech since August
2000.  Dr. Armini was the President, Chief Executive Officer, and
Chairman of the Board of Directors of Implant Science Corporation from 1984
through 2007.  From 1972 to 1984, prior to founding Implant Sciences,
Dr. Armini was Executive Vice President at Spire Corporation.  From
1967 to 1972, Dr. Armini was a Senior Scientist at McDonnell Douglas
Corporation.  Dr. Armini received his Ph.D. in nuclear physics from
the University of California, Los Angeles in 1967.  Dr. Armini is the
author of eleven patents, fifteen patents pending and fourteen publications in
the field of implant technology.  Dr. Armini has over thirty years of
experience working with cyclotrons and linear accelerators, the production and
characterization of radioisotopes, and fifteen years experience with ion
implantation in the medical and semiconductor fields.
  Mr.
Jeremiah E. Dorsey has been a director of CardioTech since May,
2004.  Mr. Dorsey retired in 2002.  From 1992 to 2002, Mr.
Dorsey was President and Chief Operating Officer of The West Company (Lionville,
PA), a leading supplier of components to the pharmaceutical, medical device and
dental businesses.  From 1990 to 1992, Mr. Dorsey was President and
Chief Executive Officer of Foster Medical (Waltham, MA), a supplier of hospital
equipment.  From 1988 to 1990, he was President of Towles Housewares
Company (Newburyport, MA), and Vice President and Board Member of J&J Dental
Products Company (East Windsor, NJ), a world leader in composite materials,
dental amalgams, cleaning and polishing products.  Mr. Dorsey received
a BA from Assumption College and an MBA from Fairleigh Dickinson
University.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers,
directors and persons who beneficially own more than 10% of a registered class
of our securities to file reports of ownership and changes in ownership with the
SEC.  Based solely on a review of copies of such forms submitted to
CardioTech, we believe that all persons subject to the requirements of Section
16(a) filed such reports on a timely basis in fiscal 2007, except as
follows.  In fiscal 2008, Mr. Dorsey received 10 option grants to
purchase shares of the Company’s common stock and was late in filing 2 Forms 4
for these option grants.  In fiscal 2008, Messrs. O’Neill, Barretti
and Armini each received one option grant and were late in filing Form
4’s.
  Code
of Conduct and Ethics
  The
Company has adopted a code of ethics that applies to its chief executive
officer, chief financial officer, and vice president of finance.  The
code of ethics is posted on the Company’s website at www.AdvBiomaterials.com.  The
Company intends to include on its website any amendments to, or waivers from, a
provision of its code of ethics that applies to the Company’s chief executive
officer, chief financial officer, or vice president of finance that relates to
any element of the code of ethics definition enumerated in Item 406 of
Regulation S-K.
  Stockholder
Communications with the Board of Directors
  Pursuant
to procedures set forth in our bylaws, our nominating committee will consider
stockholder nominations for directors if we receive timely written notice, in
proper form, of the intent to make a nomination at a meeting of
stockholders.  To be timely, the notice must be received within the
time frame identified in our bylaws, discussed below.  To be in proper
form, the notice must, among other matters, include each nominee’s written
consent to serve as a director if elected, a description of all arrangements or
understandings between the nominating stockholder and each nominee and
information about the nominating stockholder and each nominee.  These
requirements are detailed in our bylaws, which were attached as an exhibit to
our Report on Form 10 filed on May 10, 1996.  A copy of our bylaws
will be provided upon written request.
   -31-
  Stockholder
proposals submitted pursuant to Rule 14a-8 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) for inclusion in the Company’s proxy
materials for its 2009 Annual Meeting of Stockholders must be received by the
Clerk of the Company at the principal offices of the Company no later than May
4, 2009.  The Company has received no stockholder nominations or
proposals for the 2008 Annual Meeting.
  Our
bylaws require advance notice of any proposal by a stockholder intended to be
presented at an annual meeting that is not included in our notice of annual
meeting and proxy statement because it was not timely submitted under the
preceding paragraph, or made by or at the direction of any member of the board
of directors, including any proposal for the nomination for election as a
director.  To be considered for such presentation at the annual
meeting of the Company’s stockholders to be held on or about October 17, 2009,
any such stockholder proposal must be received by us no earlier than July 13,
2009 and no later than August 10, 2009, and discretionary authority may be used
if untimely submitted.
  The Board
will give appropriate attention to written communications that are submitted by
stockholders, and will respond if and as appropriate.  Stockholders
who wish to send communications on any topic to the Board should address such
communications to Board of Directors c/o Vice President and Chief Financial
Officer, CardioTech International, Inc., 229 Andover Street, Wilmington, MA
01887.
  Audit
Committee
  The Audit
Committee was established in accordance with Section 3(a)(58)(A) of the Exchange
Act.  The Board has designated from among its members Mr. William J.
O’Neill, Jr., Dr. Anthony J. Armini, and Mr. Jeremiah E. Dorsey as the members
of the Audit Committee.  The primary functions of the Audit Committee
are to represent and assist the Board of Directors with the oversight
of:
  ·
              appointing,
      approving the compensation of, and assessing the independence of the
      Company’s independent auditors;
  ·
              overseeing
      the work of the Company’s independent auditors, including through the
      receipt and consideration of certain reports from the independent
      auditors;
  ·
              reviewing
      and discussing with management and the independent auditors the Company’s
      annual and quarterly financial statements and related
      disclosures;
  ·
              coordinating
      the Board of Director’s oversight of the Company’s internal control over
      financial reporting, disclosure controls and procedures and code of
      conduct and ethics;
  ·
              establishing
      procedures for the receipt and retention of accounting related complaints
      and concerns;
  ·
              meeting
      independently with the Company’s internal auditing staff, independent
      auditors and management; and
  ·
              preparing
      the audit committee report required by SEC rules (which is included on
      pages 8 and 9 of this proxy
statement).
  The Board
of Directors has determined that Mr. O’Neill is an “audit committee financial
expert” as defined in Item 407(d)(5)(ii) of Regulation S-K and is independent
under Section 121A and 121B of the American Stock Exchange Listing
Guide.  Mr. O’Neill also acts as the Chairman of the Audit
Committee.
  During
the fiscal year ended March 31, 2008, the Audit Committee met five (5)
times.  The responsibilities of the Audit Committee are set forth in
its written charter, which is posted on the Company’s website at
www.advbiomaterials.com under the “Investors – Corporate Governance”
section.
  Compensation
Committee
  The
Compensation Committee consists of Michael L. Barretti, chairman, Jeremiah E.
Dorsey and Anthony J. Armini.  The Compensation Committee is
responsible for implementing the Company's compensation philosophies and
objectives, establishing remuneration levels for executive officers of the
Company and implementing the Company's incentive programs, including the
Company's equity compensation plans.  The Board of Directors has
determined that each of the members of the Compensation Committee is an
“independent” director within the meaning of the Amex listing standards and
meets the independence requirements of Section 162(m) of the Internal Revenue
Code, as amended.  The Compensation Committee met one time in fiscal
2008.
   -32-
  Compensation
is paid to the Company's executive officers in both fixed and discretionary
amounts which are established by the Board of Directors based on existing
contractual agreements and the determinations of the Compensation
Committee.  Pursuant to its charter, the responsibilities of the
Compensation Committee are (i) to assist the Board of Directors in discharging
its responsibilities in respect of compensation of the Company's senior
executive officers; (ii) review and analyze the appropriateness and adequacy of
the Company’s annual, periodic or long-term incentive compensation programs and
other benefit plans and administer those compensation programs and benefit
plans; and (iii) review and recommend compensation for directors, consultants
and advisors.  Except for the delegation of authority to the Chief
Executive Officer to grant certain de minimus equity compensation awards to
non-executive employees of the Company, the Compensation Committee has not
delegated any of its responsibilities to any other person.
  Item 11.
              Executive
      Compensation
  Summary
Compensation Table
  The
following table provides information concerning compensation for services
rendered to the Company in all capacities for the fiscal years ended March 31,
2008 and 2007 by our Chief Executive Officer, Chief Financial Officer, other
most highly compensated executive officers and a former executive officer whose
total compensation exceeded $100,000 in fiscal 2008.
  Name
      and Principal Position
                Fiscal
      Year
                
                Salary($)
                
                
                Bonus($)
                
                
                
                Option
      Awards($)
                  (1)
                
                
                All
      Other Compensation($)
                  (2)
                
                
                Total($)Named
      Executive OfficersMichael
      F. Adams
                  President
      & CEO
                2008
                
                $
                279,231
                
                
                $
                -
                
                
                
                $
                109,374
                
                
                $
                17,075
                
                (3
                )
                
                $
                405,6802007
                
                $
                210,452
                
                
                $
                -
                
                
                
                $
                -
                
                
                $
                9,533
                
                (3
                )
                
                $
                219,985Eric
      G. Walters
                  Vice
      President & CFO
                2008
                
                $
                189,615
                
                
                $
                -
                
                
                
                $
                19,031
                
                
                $
                14,526
                
                (4
                )
                
                $
                223,1722007
                
                $
                173,247
                
                
                $
                -
                
                
                
                $
                -
                
                
                $
                13,600
                
                (4
                )
                
                $
                186,847Andrew
      M. Reed, Ph.D.
                  Vice
      President of Science &Technology
                2008
                
                $
                171,923
                
                
                $
                -
                
                
                
                $
                12,687
                
                
                $
                2,121
                
                
                
                
                $
                186,7312007
                
                $
                138,482
                
                
                $
                -
                
                
                
                $
                -
                
                
                $
                1,519
                
                
                
                
                $
                140,001Former
      Executive OfficerPhilip
      A. Beck (5)
                  Vice
      President & GeneralManager,
      CDT
                2008
                
                $
                188,400
                
                
                $
                70,000
                
                (6)
                
                $
                -
                
                
                $
                50,072
                
                (7
                )
                
                $
                238,4722007
                
                $
                76,085
                
                
                $
                -
                
                
                
                $
                25,115
                
                
                $
                663
                
                
                
                
                $
                101,863
 (1)
              The
      amount reported in this column for the Named Executive Officer represents
      the dollar amount recognized for financial statement reporting purposes in
      fiscal 2008, determined in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Compensation.”  See Note A of Notes to Consolidated
      Financial Statements set forth in our Annual Report on Form 10-K for
      fiscal year 2008 for the assumptions used in determining the value of such
      awards.
  (2)
              All
      other compensation includes, but is not limited to, premiums paid by the
      Company for disability and group term life insurance for all named
      executive officers and a former executive
  officer.
  (3)
              All
      other compensation of Mr. Adams is composed of $2,130 and $1,437 in
      premiums paid by the Company for disability and group term insurance and
      personal use of leased vehicles in the amount of $14,945 and $8,096 for
      the years ended March 31, 2008 and 2007,
  respectively.
   -33-
  (4)
              All
      other compensation of Mr. Walters is composed of $2,521 and $1,595 in
      premiums paid by the Company for disability and group term insurance and
      personal use of leased vehicles in the amount of $12,005 and $12,005 for
      the years ended March 31, 2008 and 2007,
  respectively.
  (5)
              The
      Company entered into an employment agreement with Phil A. Beck on October
      12, 2006 pursuant to which Mr. Beck will serve as Vice President and
      General Manager, CDT.  In connection with the sale of CDT on
      March 28, 2008, Mr. Beck’s employment agreement was assumed by the buyer
      of CDT.  Mr. Beck receives an annual base salary of $180,000,
      plus a car allowance of $8,400.  Mr. Beck may also be entitled
      to receive an annual bonus payment in an amount, if any, to be determined
      by the Compensation Committee of the Board.  Mr. Beck’s
      employment agreement is further described in “Executive Compensation –
      Employment Agreements.”
  (6)
              On
      January 7, 2008, we entered into a letter agreement with Phil Beck which
      provided for (i) the payment of a finder’s fee in the amount of $48,000 as
      compensation for his services locating a purchaser of CDT, which is
      included in “All Other Compensation”, and (ii) a retention bonus of
      $70,000 to ensure his continued service to the Company through the
      completion of the sale of CDT, in each case payable upon the completion of
      the sale of CDT.  The retention bonus was earned on March 28,
      2008, the date that we completed the sale of
  CDT.
  (7)
              Amount
      includes: i) $48,000 finder’s fee as compensation for Mr. Beck’s services
      locating a purchaser of CDT that was earned on March 28, 2008, the date
      that we completed the sale of CDT; and ii) $2,072 in premiums paid by the
      Company for disability and group term
insurance.
  Employment
Agreements; Change in Control and Severance Provisions
  Terms
of Employment Agreement with Named Executive Officers
  The
Company entered into employment agreements (the “Employment Agreement”) with (i)
Michael F. Adams on September 13, 2006, effective August 7, 2006 (the “Adams
Agreement”), (ii) Eric G. Walters on April 2, 2006 (the “Walters Agreement”),
and (iii) Philip A. Beck on October 12, 2006 (the “Beck
Agreement”).
  The Adams
Agreement provides for Mr. Adams to serve as President & Chief Executive
Officer of the Company.  Pursuant to the terms of the Adams Agreement,
as amended on July 10, 2007, Mr. Adams is to receive an annual base salary of
$290,000, effective April 1, 2007.  Mr. Adams’ salary will be reviewed
annually by the Board.  Additionally, Mr. Adams may also be entitled
to receive an annual bonus payment in an amount, if any, to be determined by the
Compensation Committee of the Board.
  The term
of the Adams Agreement is set to expire on August 6, 2008.  After such
time, the term of the Adams Agreement will be deemed to continue on a
month-to-month basis if not expressly extended while Mr. Adams remains employed
by the Company.  Mr. Adams and CardioTech each have the right to
terminate the Adams Agreement at any time, with or without cause, as defined
below, upon thirty (30) days prior written notice.  In the event that
CardioTech terminates the applicable Adams Agreement without cause, or Mr. Adams
terminates his employment for good reason following a change in control, as
defined below, or CardioTech fails to renew the Adams Agreement within two (2)
years following the occurrence of a change in control, Mr. Adams will be
entitled to receive severance equal to 2.0 times his annual base salary at
termination.  In such event, Mr. Adams will be bound by a non-compete
covenant for one (1) year following termination of his employment.
  The
Walters Agreement provides for Mr. Walters to serve as Vice President and Chief
Financial Officer of the Company.  Pursuant to the terms of the
Walters Agreement, as amended on July 10, 2007, Mr. Walters is to receive an
annual base salary of $195,000, effective April 1, 2007.  Mr. Walters’
salary will be reviewed annually by the Board.  Additionally, Mr.
Walters may also be entitled to receive an annual bonus payment in an amount, if
any, to be determined by the Compensation Committee of the Board.
  The term
of the Walters Agreement expired on April 1, 2008.  After such time,
the term of the Walters Agreement will be deemed to continue on a month-to-month
basis if not expressly extended while Mr. Walters remains employed by the
Company.  Mr. Walters and CardioTech each have the right to terminate
the Walters Agreement at any time, with or without cause, as defined below, upon
thirty (30) days prior written notice.  In the event that CardioTech
terminates the applicable Walters Agreement without cause, or Mr. Walters
terminates his employment for good reason following a change in control, as
defined below, or CardioTech fails to renew the Walters Agreement within two (2)
years following the occurrence of a change in control, Mr. Walters will be
entitled to receive severance equal to 2.0 times his annual base salary at
termination.  In such event, Mr. Walters will be bound by a
non-compete covenant for one (1) year following termination of his
employment.
   -34-
  Terms
of Employment Agreement with Former Executive Officer
  The Beck
Agreement provides for Mr. Beck to serve as Vice President and General Manager,
CDT, a wholly-owned subsidiary of the Company.  CDT was sold by the
Company on March 28, 2008.  Pursuant to the terms of the Beck
Agreement, Mr. Beck is to receive an annual base salary of
$180,000.  Mr. Beck will also receive an annual car allowance of
$8,400.  Mr. Beck’s salary will be reviewed annually by the President
& Chief Executive Officer.  Additionally, Mr. Beck may also be
entitled to receive an annual bonus payment in an amount, if any, to be
determined by the Compensation Committee of the Board.
  The term
of the Beck Agreement expired on October 22, 2007.  After such time,
the term of the Beck Agreement was deemed to continue on a month-to-month basis
if not expressly extended while Mr. Beck remained employed by the
Company.  Mr. Beck and CardioTech each have the right to terminate the
Beck Agreement at any time, with or without cause, as defined below, upon thirty
(30) days prior written notice.  In the event that CardioTech
terminates the applicable Beck Agreement without cause, or Mr. Beck terminates
his employment for good reason following a change in control, as defined below,
or CardioTech fails to renew the Beck Agreement within one (1) year following
the occurrence of a change in control, Mr. Beck will be entitled to receive
severance equal to 1.0 times his annual base salary at
termination.  In such event, Mr. Beck will be bound by a non-compete
covenant for one (1) year following termination of his employment.
  In
connection with the sale of CDT on March 28, 2008, the Beck Agreement was
assumed by the buyer and CardioTech obligations under the Beck Agreement
ceased.
  Employment
Agreement Definitions
  Good Reason.“Good
Reason” shall mean, during the nine (9) month period following a Change in
Control, (1) a good faith determination by the named executive officer that as a
result of such Change in Control he is not able to discharge his duties
effectively or (2) without the named executive officer’s express written
consent, the occurrence of any of the following circumstances: (a) the
assignment to the named executive officer of any duties inconsistent (except in
the nature of a promotion) with the position in the Company that he held
immediately prior to the Change in Control or a substantial adverse alteration
in the nature or status of his position or responsibilities or the conditions of
his employment from those in effect immediately prior to the Change in Control;
(b) a reduction by the Company in the Base Salary as in effect on the date of
the Change in Control; (c) the Company’s requiring the named executive officer
to be based more than twenty-five (25) miles from the Company’s offices at which
he was principally employed immediately prior to the date of the Change in
Control except for required travel on the Company’s business to an extent
substantially consistent with his present business travel obligations; or (d)
the failure by the Company to continue in effect any material compensation or
benefit plan in which the named executive officer participates immediately prior
to the Change in Control unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to such plan, or the
failure by the Company to continue the named executive officer’s participation
therein (or in such substitute or alterative plan) on a basis not materially
less favorable, both in terms of the amount of benefits provided and the level
of his participation relative to other participants, than existed at the time of
the Change in Control.  The named executive officer’s continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
  Change in
Control.  A “Change in Control” shall occur or be deemed to
have occurred only if any of the following events occur: (i) any “person,” as
such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”), (other than any majority owned subsidiary
thereof, the Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any trustee or other fiduciary of a trust
treated for federal income tax purposes as a grantor trust of which the Company
is the grantor, or any corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company) is or becomes the “beneficial owner” (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company’s then outstanding securities on any matter which could come
before its stockholders for approval; (ii) individuals who, as of the date
hereof, constitute the Board (the “Incumbent Board”) cease for any reason to
constitute at least a majority of the Board, provided that any person becoming a
director subsequent to the date hereof whose election, or nomination for
election by the Company’s stockholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A under the Exchange Act) shall be, for purposes of this
Agreement, considered as though such person were a member of the Incumbent
Board; (iii) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
“person” (as hereinabove defined) acquires more than 50% of the combined voting
power of the Company’s then outstanding securities; or (iv) the stockholders of
the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
of the Company’s assets.
   -35-
  Cause.  “Cause”
shall mean any of the following:
  ·
              misconduct
      of the named executive officer during the course of his employment which
      is materially injurious to the Company and which is brought to the
      attention of the named executive officer promptly after discovery by the
      Company, including but not limited to, theft or embezzlement from the
      Company, the intentional provision of services to competitors of the
      Company, or improper disclosure of proprietary information, but not
      including any act or failure to act by the named executive officer that he
      believed in good faith to be proper conduct not adverse to his duties
      hereunder;
  ·
              willful
      disregard or neglect by the named executive officer of his duties or of
      the Company’s interests that continues after being brought to the
      attention of the named executive
officer;
  ·
              unavailability,
      except as provided for in Section 3.5 of the Employment Agreement
      (Disability or Death), of the named executive officer to substantially
      perform the duties provided for
herein;
  ·
              conviction
      of a fraud or felony or any criminal offense involving dishonesty, breach
      of trust or moral turpitude during the named executive officer’s
      employment;
  ·
              the
      named executive officer’s breach of any of the material terms of the
      Employment Agreement (including the failure of the named executive officer
      to discharge his duties in a highly competent manner) or any other
      agreements executed in connection with the Employment
      Agreement.
   -36-
  Potential
Payments Upon Termination or Change in Control
  The
following table describes the estimated incremental compensation upon (i)
termination by the Company of the Named Executive Officers without Cause, (ii)
termination for Good Reason by the Named Executive Officer following a Change in
Control, or (iii) failure by the Company to renew the Employment Agreement
within two (2) years following the occurrence of a Change in
Control.  The estimated incremental compensation assumes the
triggering event had occurred on March 31, 2008 .Benefits generally available to
all employees are not included in the table.  The actual amount of
compensation can only be determined at the time of termination or change in
control.
 Named
      Executive Officer
                  
                  Base
      Salary Continuation
                  
                  
                  COBRA
      Premiums (3)
                  
                  
                  Life
      Insurance Premiums (4)
                  
                  
                  OtherMichael
      F. Adams
                  
                  $
                  580,000
                  
                  (1
                  )
                  
                  $
                  -
                  
                  
                  $
                  1,176
                  
                  
                  $
                  -Eric
      G. Walters
                  
                  
                  390,000
                  
                  (2
                  )
                  
                  
                  9,105
                  
                  
                  
                  1,147
                  
                  
                  
                  -Philip
      A. Beck
                  
                  
                  -
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  118,000
                  
                  (5
                  )
 (1)
              Lump-sum
      payment equal to 2.0 times Mr. Adams’ base salary of $290,000 per annum,
      the base salary then in effect as of March 31,
  2008.
  (2)
              Lump-sum
      payment equal to 2.0 times Mr. Walters’ base salary of $195,000 per annum,
      the base salary then in effect as of March 31,
  2008.
  (3)
              Represents
      estimated out-of-pocket COBRA health insurance premium expenses incurred
      by the Named Executive Officers over the six (6) month period following
      termination to be reimbursed by the Company.  Currently, Mr.
      Adams does not subscribe to Company provided health
    benefits.
  (4)
              Represents
      estimated life insurance premiums to be paid by the Company on behalf of
      the Named Executive Officers after termination.  The Company
      shall continue in full force and effect, at its expense, the life
      insurance benefits provided in the Employment Agreement for a period of 12
      months after termination of the Named Executive Officer’s employment or
      until the Named Executive Officer becomes employed, whichever occurs
      first.
  (5)
              Includes
      a $70,000 retention bonus and $48,000 finder’s fee relating to our sale of
      CDT on March 28, 2008.
   -37-
  Outstanding
Equity Awards at 2008 Fiscal Year-End
  The
following table provides information regarding outstanding stock options held by
each Named Executive Officer as of the fiscal year ended March 31,
2008.
 Named
      Executive Officers
                
                Number
      of Securities Underlying Unexercised Options Exercisable
                
                
                Number
      of Securities Underlying Unexercised Options Unexercisable
                
                
                Option
      Exercise Price ($)
                
                Option
      Expiration DateMichael
      F. Adams
                
                
                3,625
                
                
                
                -
                
                
                
                
                $
                0.75
                
                7/28/0914,444
                
                
                
                -
                
                
                
                
                
                0.75
                
                7/28/0924,500
                
                
                
                -
                
                
                
                
                
                0.50
                
                1/2/1019,625
                
                
                
                -
                
                
                
                
                
                2.06
                
                10/25/1060,000
                
                
                
                -
                
                
                
                
                
                0.50
                
                1/2/1025,000
                
                
                
                -
                
                
                
                
                
                1.10
                
                4/29/1125,522
                
                
                
                -
                
                
                
                
                
                1.61
                
                9/30/1127,373
                
                
                
                -
                
                
                
                
                
                1.59
                
                10/27/1210,000
                
                
                
                -
                
                
                
                
                
                5.40
                
                12/30/132,500
                
                
                
                -
                
                
                
                
                
                5.40
                
                12/30/1330,000
                
                
                
                -
                
                
                
                
                
                2.60
                
                2/13/15100,000
                
                
                
                -
                
                (1
                )
                
                
                1.23
                
                10/16/1725,000
                
                
                
                75,000
                
                (2
                )
                
                
                1.23
                
                10/16/17367,589
                
                
                
                75,000Eric
      G. Walters
                
                
                200,000
                
                
                
                -
                
                
                
                
                
                2.32
                
                10/2/1518,750
                
                
                
                56,250
                
                (2
                )
                
                
                1.23
                
                10/16/17218,750
                
                
                
                56,250Andrew
      M. Reed, Ph.D.
                
                
                40,000
                
                
                
                -
                
                
                
                
                
                1.10
                
                4/29/11160,000
                
                
                
                -
                
                
                
                
                
                2.57
                
                3/19/1612,500
                
                
                
                37,500
                
                (2
                )
                
                
                1.23
                
                10/16/17212,500
                
                
                
                37,500798,839
                
                
                
                168,750
 (1)
              Options
      vested 100% on October 16, 2007, the date of
  grant.
  (2)
              Options
      will vest at the rate of 25% on October 16, 2007, the date of grant, and
      25% on each annual anniversary thereafter ending on October 16,
      2010.
  (3)
              Options
      granted in fiscal 2008 are also disclosed in the 2008 Grants of Plan-Based
      Awards Table, including the grant date fair value of these
      options.
   -38-
  The
following table provides information regarding outstanding stock options held by
the Former Executive Officer as of the fiscal year ended March 31,
2008.
 Named
      Executive Officers
                
                Number
      of Securities Underlying Unexercised Options Exercisable
                
                Number
      of Securities Underlying Unexercised Options Unexercisable
                
                
                Option
      Exercise Price ($)
                
                Option
      Expiration DatePhilip
      A. Beck
                
                75,000
                
                75,000
                (1)(2)
                
                1.64
                
                10/22/16
 (1)
              Option
      will vest at the rate of 25% on October 23, 2006, the date of grant, and
      25% on each annual anniversary thereafter ending on October 23,
      2009.
  (2)
              Option
      granted in fiscal 2008 is also disclosed in the 2008 Grants of Plan-Based
      Awards Table, including the grant date fair value of these
      options.  The option may be purchased through June 26, 2008,
      which is the expiration of the exercisability
  period.
  2008
Option Exercises and Stock Vested
  During
the year ended March 31, 2008, there were no exercises of option awards by any
of the Named Executive Officers.
  Directors’
Compensation
  The
following table sets forth the annual compensation of CardioTech non-employee
directors for fiscal 2008, which consisted of annual cash retainers, including
amounts associated with serving as Chairman of the Board and the chair and
member of Board committees, and equity awards in the form of options pursuant to
the 2003 Stock Option Plan.  Employee directors do not receive any
separate compensation for their service on the Board.
 Name
                
                Fees
      Earned or Paid in Cash($)
                
                
                Option
      Awards($)
      (1)
                
                
                All
      Other Compensation($)
                
                
                Total($)William
      J. O'Neill, Jr.
                
                $
                22,500
                
                
                $
                15,312
                
                
                $
                -
                
                
                $
                37,812Michael
      L. Barretti (2)
                
                
                15,500
                
                
                
                15,312
                
                
                
                50,000
                
                
                
                80,812Anthony
      J. Armini, Ph.D.
                
                
                18,500
                
                
                
                15,312
                
                
                
                -
                
                
                
                33,812Jeremiah
      E. Dorsey
                
                
                -
                
                
                
                20,159
                
                
                
                -
                
                
                
                20,159
 (1)
              The
      amount reported in this column for the non-employee director represents
      the dollar amount recognized for financial statement reporting purposes in
      fiscal 2008, determined in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 123R, “Share-Based
      Compensation.”  See Note A of Notes to Consolidated
      Financial Statements set forth in the Company’s Annual Report on Form 10-K
      for fiscal year 2008 for the assumptions used in determining the value of
      such awards.
  (2)
              During
      fiscal 2007, the Company entered into a consulting agreement with Mr.
      Barretti for an annualized fee of $50,000.  During the fiscal
      year ended March 31, 2008, the Company recognized $50,000 of expense
      related to services incurred under this consulting
    agreement.
  Item 12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
  Information
related to securities authorized for issuance under equity compensation plans as
of the end of fiscal 2008 is included in Item 5 of Part II of the Company’s
Annual Report of Form 10-K for the year ended March 31, 2008.
  The
following table sets forth the beneficial ownership of shares of our common
stock, as of June 16, 2008, of (i) each person known by us to beneficially own
five percent (5%) or more of such shares; (ii) each of our directors and
executive officers named in the Summary Compensation Table; and (iii) all of our
current executive officers, directors, and significant employees as a
group.  Except as otherwise indicated, all shares are beneficially
owned, and the persons named as owners hold investment and voting
power.
   -39-
  Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934.  Under this rule, certain shares may be deemed
to be beneficially owned by more than one person, if, for example, persons share
the power to vote or the power to dispose of the shares.  In addition,
shares are deemed to be beneficially owned by a person if the person has the
right to acquire shares, for example, upon exercise of an option or warrant,
within sixty (60) days of June 16, 2008.  In computing the percentage
ownership of any person, the amount of shares is deemed to include the amount of
shares beneficially owned by such person, and only such person, by reason of
such acquisition rights.  As a result, the percentage of outstanding
shares of any person as shown in the following table does not necessarily
reflect the person’s actual voting power at any particular date.
  Name
      and Address of Beneficial Owner (1)
                
                Amount
      and Nature of Beneficial Ownership
                
                
                Percentage
      of Class (2)Executive
      Officers and DirectorsMichael
      F. Adams (3)
                
                
                367,972
                
                
                
                1.7
                %Michael
      L. Barretti (4)
                
                
                223,448
                
                
                
                1.1
                %Anthony
      J. Armini, Ph.D. (5)
                
                
                156,020
                
                
                
                *William
      J. O'Neill, Jr. (6)
                
                
                92,500
                
                
                
                *Jeremiah
      E. Dorsey (7)
                
                
                103,752
                
                
                
                *Eric
      G. Walters (8)
                
                
                218,750
                
                
                
                1.0
                %Andrew
      M. Reed, Ph.D. (9)
                
                
                212,500
                
                
                
                1.0
                %Philip
      A. Beck (10)
                
                
                75,000
                
                
                
                *All
      executive officers and directors as a group (8 persons)
    (11)
                
                
                1,449,942
                
                
                
                6.4
                %
  *      Less
than 1%
  (1)
              Unless
      otherwise indicated, the business address of the stockholders named in the
      table above is CardioTech International, Inc. 229 Andover Street,
      Wilmington, MA 01887.
  (2)
              Based
      on 21,067,313 outstanding shares as of June 16,
  2008.
  (3)
              Includes
      367,589 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (4)
              Includes
      207,243 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (5)
              Includes
      150,020 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (6)
              Includes
      92,500 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (7)
              Includes
      103,752 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (8)
              Includes
      218,750 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (9)
              Includes
      212,500 shares of common stock, which may be purchased within sixty (60)
      days of June 16, 2008 upon the exercise of stock
  options.
  (10)
              Includes
      75,000 shares of commons stock, which may be purchased through June 26,
      2008, which is the expiration of the exercisability period, upon the
      exercise of stock options.
  (11)
              See
      footnotes (3) through (10).
   -40-
  Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
   During
fiscal 2007, the Company entered into a consulting agreement with Michael L.
Barretti, a member of the Board and Chairman of the Compensation Committee, for
an annualized fee of $50,000.  During the fiscal years ended March 31,
2008 and 2007, the Company recognized $50,000 and $13,000, respectively, of
expense related to services incurred under this consulting agreement, which was
recorded as selling, general and administrative expense.
   Transactions
with related parties, including, but not limited to, members of the Board of
Directors, are reviewed and approved by all members of the Board of
Directors.  In the event a transaction with a member of the Board is
contemplated, the Director having a beneficial interest in the transaction is
not allowed to participate in the decision-making and approval
process.  The policies and procedures surrounding the review, approval
or ratification of related party transactions are not in writing, nevertheless,
such reviews, approvals and ratifications of related party transactions are
documented in the minutes of the meetings of the Board of Directors and any such
transactions are committed to writing between the related party and the Company
in an executed engagement agreement.
  Independence
of the Board of Directors
  The Board
of Directors has adopted director independence guidelines that are consistent
with the definitions of “independence” as set forth in Section 301 of the
Sarbanes-Oxley Act of 2002, Rule 10A-3 under the Securities Exchange Act of 1934
and AMEX listing standards.  In accordance with these guidelines, the
Board of Directors has reviewed and considered facts and circumstances relevant
to the independence of each of our directors and director nominees and has
determined that, each of the Company’s non-management directors qualifies as
“independent” under AMEX listing standards.
  The Board
of Directors has an Audit Committee, Compensation Committee and
Nominating/Corporate Governance Committee.  The membership of each, as
of June 16, 2008, is indicated in the table below.
  Directors
              
              Audit
              
              Compensation
              
              Nominating/
                Corporate
      GovernanceWilliam
      J. O'Neill, Jr.
              
              ChairMichael
      L. Barretti
              
              
              
              Chair
              
              XAnthony
      J. Armini
              
              X
              
              XJeremiah
      E. Dorsey
              
              X
              
              X
              
              Chair
  The Board
of Directors has determined that all of the members of each committee are
independent as defined under the AMEX rules, including, in the case of all
members of the Audit Committee, the independence requirements contemplated by
Rule 10A-3 under the Exchange Act.  In addition, all of the members of
the Audit Committee are independent as defined by the AMEX rules that apply to
the Company until the date of the Annual Meeting and otherwise satisfy the AMEX
eligibility requirements for Audit Committee membership.
   -41-
  Item
      14.
              Principal
      Accounting Fees and Services
  The following is a summary of the
fees billed to the Company by Ernst & Young LLP, our independent registered
public accounting firm, for professional services rendered for the fiscal years
ended March 31, 2008 and 2007.  The Audit Committee considered and
discussed with Ernst & Young LLP the provision of non-audit services to the
Company and the compatibility of providing such services with maintaining its
independence as the Company’s auditor.
 Fee
      Category
                
                Years
      Ended March 31,(in
      thousands)
                
                2008
                
                
                2007Audit
      fees
                
                $
                245
                
                
                $
                236Audit-related
      fees
                
                
                -
                
                
                
                7Tax
      fees
                
                
                -
                
                
                
                -All
      other fees
                
                
                -
                
                
                
                -Total
      fees
                
                $
                245
                
                
                $
                243
 Audit Fees.This
category consists of fees billed for professional services rendered for the
audit of our annual financial statements and review of financial statements
included in our quarterly reports and other professional services provided in
connection with regulatory filings.
  Audit-Related
Fees.This category consists of fees billed for assurance and
related services that related to the performance of the audit or review of our
financial statements and are not otherwise reported under “Audit
Fees”.
  Tax Fees.This
category consists of fees billed for professional services for tax compliance,
tax advice and tax planning.  These services include assistance
regarding federal and state tax compliance and acquisitions.
  Pre-Approval Policies and
Procedures.  The Audit Committee has the authority to approve
all audit and non-audit services that are to be performed by the Company’s
independent registered public accounting firm.  Generally, the Company
may not engage its independent registered public accounting firm to render audit
or non-audit services unless the service is specifically approved in advance by
the Audit Committee (or a properly delegated subcommittee thereof).
  All Other
Fees.  This category consists of fees billed for professional
services other than those fees described above.
  
   -42-
  PART
IV
  Item 15.
              Exhibits,
      Financial Statement Schedules
  The
      following are filed as part of this Form
10-K:
  (1)
              Financial
      Statements: For a list of financial statements which are filed as part of
      this Form 10-K, See Page 28.
  (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
              
              Certificate
      of Incorporation of CardioTech International, Inc., filed with the
      Secretary of State of the State of Delaware on October 25, 2007 and
      effective as of October 26, 2007 (Filed as Appendix C to CardioTech’s
      definitive proxy statement on Schedule 14A, filed on August 30, 2007, and
      incorporated herein by reference).3.2
              
              Bylaws
      of CardioTech International, Inc. (Filed as Appendix D to CardioTech's
      definitive proxy statement on Schedule 14A, filed on August 30, 2007, and
      incorporated herein by reference).3.3
              
              Amendment
      No. 1 to the Bylaws of CardioTech International, Inc. (Filed as exhibit
      3.1 to CardioTech’s Current Report on Form 8-K, filed on December 21,
      2007, and incorporated herein by reference).3.4
              
              Certificate
      of Designation of Series A Junior Participating Preferred Stock (Filed as
      exhibit 3.1 to CardioTech’s Current Report on Form 8-K, filed on January
      29, 2008, and incorporated herein by reference).4.1
              
              Form
      of Warrant incorporated by reference to Exhibit 4.1 to 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, 2004.4.4
              
              Rights
      Agreement dated January 28, 2008 by and between CardioTech International,
      Inc. and American Stock Transfer & Trust Company (Filed as exhibit 4.1
      to CardioTech’s Current Report on Form 8-K, filed on January 29, 2008, and
      incorporated herein by reference).4.5
              
              Form
      of Rights Certificate (Filed as exhibit 4.2 to CardioTech’s Current Report
      on Form 8-K, filed on January 29, 2008, and incorporated herein by
      reference).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.
   -43-
  Exhibit
      Number:
              
              Exhibit
      Title:10.5
              
              Employment
      Agreement of Michael Szycher, dated March 26, 1998, was filed as Exhibit
      10.5 to CardioTech’s Form 10-K for the year ended March 31, 1998, filed on
      June 29, 1998, and incorporated herein by reference.10.10
              
              Development,
      Supply and License Agreement between PMI and Bard Access Systems, dated
      November 11, 1992, was filed as Exhibit 10.10 of the Form 10 and is
      incorporated herein by reference.10.11
              
              Lease
      Agreement between CardioTech and Cummings Properties Management, Inc.,
      dated June 26, 1998, was filed as Exhibit 10.11 to CardioTech’s Form 10-K
      for the year ended March 31, 1998, filed on June 29, 1998, and in
      incorporated herein by reference.10.15
              
              Note
      Purchase Agreement dated as of March 31, 1998 between CardioTech and
      Dresdner Kleinwort Benson Private Equity Partners, LP (“Kleinwort Benson”)
      was filed as Exhibit 99.1 to CardioTech’s Form 8-K filed with the
      Securities and Exchange Commission (the “Commission”) on April 15, 1998
      and is incorporated herein by reference.10.15.1
              
              Amendment,
      dated as of November 12, 1998, to Note Purchase Agreement and Registration
      Rights Agreement was filed as Exhibit 10.1 to CardioTech’s Form 10-Q for
      the quarter ended September 30, 1998, filed on November 16, 1998 and is
      incorporated herein by reference.10.18
              
              Form
      of Unit Purchase Agreement between CardioTech and certain individuals was
      filed as Exhibit 99.1 to CardioTech’s Form S-3, filed with the Securities
      and Exchange Commission on February 12, 1999, and is incorporated herein
      by reference.10.19
              
              Form
      of Warrant to Purchase Shares of Common Stock of CardioTech issued to
      certain individuals was filed as Exhibit 99.2 to CardioTech’s Form S-3,
      filed with the Securities and Exchange Commission on February 12, 1999,
      and is incorporated herein by reference.10.20
              
              First
      Amendment Between Duke Realty Limited Partnership and CDT Dated May 1,
      2004 Filed as an Exhibit to CardioTech’s Form 10-K for the year ended
      March 31, 2004.10.21
              
              Exchange
      and Venture Agreement by and among CardioTech International, Inc., Implant
      Sciences, Inc. and CorNova, Inc. dated March 5, 2004 filed as an exhibit
      to CardioTech’s Form 10-KSB for the fiscal year ended March 31,
      2004.10.22
              
              Plan
      and Agreement of Merger and Reorganization dated March 12, 2004 between
      CardioTech International, Inc. and DermaPhylyx, Inc., filed as an exhibit
      to CardioTech’s Form 10-KSB for the year ended March 31,
    2004.10.23
              
              Asset
      Purchase Agreement, dated as of November 19, 2004 by and among CardioTech
      International, Inc., CarTika Medical, Inc., Thomas C. Carlson and Sheila
      A. Carlson, incorporated by reference to Exhibit 99 to CardioTech’s Form
      8-K filed on November 22, 2004.10.24
              
              Securities
      Purchase Agreement between Gryphon Master Fund, L.P., GSSF Master Fund,
      LP, Truk Opportunity Fund, LLC, Truk International Fund, LP, Meadowbrook
      Opportunity Fund LLC, Capital Ventures International, Iroquois Capital,
      L.P. and CardioTech International, Inc. dated as of December 21, 2004 and
      incorporated herein by reference to Exhibit 10.1 to CardioTech’s Form 8-K
      filed on December 23, 2004.10.25
              
              Registration
      Rights Agreement between Gryphon Master Fund, L.P., GSSF Master Fund, LP,
      Truk Opportunity Fund, LLC, Truk International Fund, LP, Meadowbrook
      Opportunity Fund LLC, Capital Ventures International, Iroquois Capital,
      L.P. and CardioTech International, Inc. dated as of December 21, 2004 and
      incorporated herein by reference to Exhibit 10.2 to CardioTech’s Form 8-K
      filed on December 23, 2004.10.26
              
              Lock-Up
      Agreement between CardioTech International, Inc. and certain of its
      officers and directors dated as of December 21, 2004 and incorporated
      herein by reference to Exhibit 10.3 to CardioTech’s Form 8-K filed on
      December 23, 2004.
   -44-
  Exhibit
      Number:
              
              Exhibit
      Title:10.27
              
              Employment
      Agreement of Eric G. Walters, dated April 3, 2006, was filed as Exhibit
      10.27 to CardioTech’s Form 8-K/A, filed on April 4, 2006, and incorporated
      herein by reference.10.28
              
              Transition
      Agreement dated August 11, 2006 between CardioTech International, Inc. and
      Michael Szycher filed as Exhibit 10.1 to CardioTech’s Form 8-K, filed on
      August 11, 2006, and incorporated herein by reference.10.29
              
              Employment
      Agreement of Michael F. Adams, dated September 13, 2006, was filed as
      Exhibit 10.28 to CardioTech’s Form 8-K/A, filed on September 15, 2006, and
      incorporated herein by reference.10.30
              
              CardioTech
      International, Inc. Nonqualified Stock Option Agreement by and between
      CardioTech International, Inc. and Eric G. Walters dated October 3,
      2005  (Filed as exhibit 10.1 to CardioTech’s Registration
      Statement on Form S-8, File No. 333-149343, and incorporated herein by
      reference).10.31
              
              CardioTech
      International, Inc. Nonqualified Stock Option Agreement by and between
      CardioTech International, Inc. and Dr. Andrew M. Reed dated March 20, 2006
      (Filed as exhibit 10.1 to CardioTech’s Registration Statement on Form S-8,
      File No. 333-149342, and incorporated herein by
  reference).10.32**
              
              Employment
      Agreement of Philip A. Beck, dated October 23, 2006.10.33**
              
              Letter
      Agreement between CardioTech International, Inc. and Philip A. Beck dated
      January 7, 2008.10.34
              
              Stock
      Purchase Agreement by and between CardioTech International, Inc. and Medos
      Medizintechnik AG effective as of June 30, 2007 (Filed as exhibit 10.1 to
      CardioTech’s Current Report on Form 8-K , filed on July 10, 2007, and
      incorporated herein by reference).10.35
              
              License
      Agreement by and between CardioTech International, Inc. and Gish
      Biomedical, Inc. effective as of June 30, 2007 (Filed as exhibit 10.2 to
      CardioTech’s Current Report on Form 8-K , filed on July 10, 2007, and
      incorporated herein by reference).10.36
              
              Letter
      of agreement by and between CardioTech International, Inc. and Michael F.
      Adams dated July 10, 2007(Filed as exhibit 10.1 to CardioTech’s Current
      Report on Form 8-K , filed on July 13, 2007, and incorporated herein by
      reference).10.37
              
              Letter
      of agreement by and between CardioTech International, Inc. and Eric G.
      Walters dated July 10, 2007(Filed as exhibit 10.2 to CardioTech’s Current
      Report on Form 8-K , filed on July 13, 2007, and incorporated herein by
      reference).10.38**
              
              Stock
      Purchase Agreement dated March 28, 2008 by and among CardioTech
      International, Inc., Catheter and Disposal Technology, Inc. and TACPRO,
      Inc.21
              **
              Subsidiaries
      of CardioTech23
              **
              Consent
      of Ernst & Young LLP, Independent Registered Public Accounting
      Firm31.1
              **
              Certification
      of Chief Executive Officer pursuant to Section 302 Sarbanes-Oxley Act of
      200231.2
              **
              Certification
      of Chief Financial Officer pursuant to Section 302 Sarbanes-Oxley Act of
      200232.1
              **
              Certification
      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200232.2
              **
              Certification
      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
      Pursuant to Section 906 of the Sarbanes-Oxley Act of
  200299.1
              
              Charter
      of the Compensation Committee of the Board of Directors, effective June 6,
      2006
 ________________
  **
              Filed
      herewith
  -45-
  Report of
Independent Registered Public Accounting Firm
  
  The Board
of Directors and Stockholders of CardioTech International, Inc.:
  We have
audited the accompanying consolidated balance sheets of CardioTech
International, Inc. as of March 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for each of the
two years in the period ended March 31, 2008.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.
  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.  We were
not engaged to perform an audit of the Company’s internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control
over  financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
  In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CardioTech
International, Inc. at March 31, 2008 and 2007 and the consolidated results of
their operations and their cash flows for each of the two years in the period
ended March 31, 2008, in conformity with U.S. generally accepted accounting
principles.
  
  /s/
      Ernst & Young LLP
 
  Boston,
Massachusetts
 June 24,
2008
  F-1
  CardioTech
      International, Inc.Consolidated
      Balance Sheets(In
      thousands, except share and per share amounts)March
      31,2008
                
                
                2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                
                $
                6,733
                
                
                $
                4,066Accounts
      receivable-trade, net of allowance of $6 and
                  $5
      as of March 31, 2008 and 2007, respectively
                
                
                46
                
                
                
                142Accounts
      receivable-other
                
                
                480
                
                
                
                553Inventories
                
                
                149
                
                
                
                109Prepaid
      expenses and other current assets
                
                
                149
                
                
                
                112Current
      assets held for sale
                
                
                -
                
                
                
                7,759Total
      current assets
                
                
                7,557
                
                
                
                12,741Property,
      plant and equipment, net
                
                
                3,339
                
                
                
                2,854Goodwill
                
                
                487
                
                
                
                487Other
      assets
                
                
                178
                
                
                
                3Investment
      in CorNova, Inc.
                
                
                -
                
                
                
                -Non-current
      assets held for sale
                
                
                -
                
                
                
                1,816Total
      assets
                
                $
                11,561
                
                
                $
                17,901LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
                
                $
                370
                
                
                $
                253Accrued
      expenses
                
                
                698
                
                
                
                202Deferred
      revenue
                
                
                148
                
                
                
                158Current
      liabilities held for sale
                
                
                -
                
                
                
                2,325Current
      liabilities of discontinued operations
                
                
                149
                
                
                
                -Total
      current liabilities
                
                
                1,365
                
                
                
                2,938Non-current
      liabilities held for sale
                
                
                -
                
                
                
                116Commitments
      and contingenciesStockholders'
      equity:Preferred
      stock; $.001 par value; 5,000,000 shares authorized;
                  500,000
      shares issued and none outstanding as of
                  March
      31, 2008 and 2007, respectively
                
                
                -
                
                
                
                -Common
      stock; $.001 par value; 50,000,000 shares authorized;
                  21,067,313
      and 20,031,650 shares issued and outstanding as of
                  March
      31, 2008 and 2007, respectively
                
                
                21
                
                
                
                20Additional
      paid-in capital
                
                
                38,566
                
                
                
                37,128Accumulated
      deficit
                
                
                (28,391
                )
                
                
                (22,301
                )Total
      stockholders' equity
                
                
                10,196
                
                
                
                14,847Total
      liabilities and stockholders' equity
                
                $
                11,561
                
                
                $
                17,901
 
 The
accompanying notes are an integral part of these financial
statements.
  F-2
 CardioTech
      International, Inc.Consolidated
      Statements of Operations(In
      thousands, except per share amounts)For
      The Years Ended March 31,2008
                  
                  
                  2007Revenues:Product
      sales
                  
                  $
                  1,283
                  
                  
                  $
                  717Royalties
      and development fees
                  
                  
                  1,924
                  
                  
                  
                  1,5583,207
                  
                  
                  
                  2,275Cost
      of sales
                  
                  
                  1,257
                  
                  
                  
                  629Gross
      profit
                  
                  
                  1,950
                  
                  
                  
                  1,646Operating
      expenses:Research,
      development and regulatory
                  
                  
                  999
                  
                  
                  
                  769Selling,
      general and administrative
                  
                  
                  3,408
                  
                  
                  
                  2,5984,407
                  
                  
                  
                  3,367Loss
      from operations
                  
                  
                  (2,457
                  )
                  
                  
                  (1,721
                  )Interest
      and other income and expense:Interest
      income
                  
                  
                  215
                  
                  
                  
                  70Other
      income, net
                  
                  
                  -
                  
                  
                  
                  19Other
      income, net
                  
                  
                  215
                  
                  
                  
                  89Equity
      in net loss of CorNova, Inc.
                  
                  
                  -
                  
                  
                  
                  (279
                  )Net
      loss from continuing operations
                  
                  
                  (2,242
                  )
                  
                  
                  (1,911
                  )Loss
      from discontinued operations
                  
                  
                  (1,985
                  )
                  
                  
                  (1,051
                  )Loss
      on sale of Gish and CDT
                  
                  
                  (1,863
                  )
                  
                  
                  -Net
      loss from discontinued operations
                  
                  
                  (3,848
                  )
                  
                  
                  (1,051
                  )Net
      loss
                  
                  $
                  (6,090
                  )
                  
                  $
                  (2,962
                  )Net
      loss per common share, basic and diluted:Net
      loss per share, continuing operations
                  
                  $
                  (0.11
                  )
                  
                  $
                  (0.10
                  )Net
      loss per share, discontinued operations
                  
                  
                  (0.19
                  )
                  
                  
                  (0.05
                  )Net
      loss per common share, basic and diluted
                  
                  $
                  (0.30
                  )
                  
                  $
                  (0.15
                  )Shares
      used in computing net loss per common
                    share,
      basic and diluted
                  
                  
                  20,459
                  
                  
                  
                  19,859
  The
      accompanying notes are an integral part of these financial
      statements.
   F-3
  CardioTech
      International, Inc.Consolidated
      Statements of Stockholders' EquityFor
      the Years Ended March 31, 2007 and 2008(In
      thousands, except per share amounts)Common
      Stock(in
      thousands)
                
                Number
      of Shares
                
                Amount
                
                
                Additional Paid-in
Capital
                
                
                Accumulated Deficit
                
                
                Other Comprehensive Income
                
                
                Total Stockholders' Equity
      (Deficit)Balance
      at March 31, 2006
                
                
                19,797
                
                
                $
                18
                
                
                $
                36,865
                
                
                $
                (19,339
                )
                
                $
                (40
                )
                
                $
                17,504Issuance
      of common stock in connection with exercise of stock
    options
                
                
                235
                
                
                
                2
                
                
                
                216
                
                
                
                -
                
                
                
                -
                
                
                
                218Stock-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                48
                
                
                
                -
                
                
                
                -
                
                
                
                48Reclass
      of repurchased stock, at cost
                
                
                (1
                )
                
                
                -
                
                
                
                (1
                )
                
                
                -
                
                
                
                -
                
                
                
                (1
                )Comprehensive
      income from CorNova, Inc.
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                40
                
                
                
                40Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,962
                )
                
                
                -
                
                
                
                (2,962
                )Balance
      at March 31, 2007
                
                
                20,031
                
                
                
                20
                
                
                
                37,128
                
                
                
                (22,301
                )
                
                
                -
                
                
                
                14,847Issuance
      of common stock in connection with exercise of stock
    options
                
                
                1,036
                
                
                
                1
                
                
                
                946
                
                
                
                -
                
                
                
                -
                
                
                
                947Stock-based
      compensation
                
                
                -
                
                
                
                -
                
                
                
                416
                
                
                
                -
                
                
                
                -
                
                
                
                416Fair
      value of warrants issued
                
                
                -
                
                
                
                -
                
                
                
                76
                
                
                
                -
                
                
                
                -
                
                
                
                76Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,090
                )
                
                
                -
                
                
                
                (6,090
                )Balance
      at March 31, 2008
                
                
                21,067
                
                
                $
                21
                
                
                $
                38,566
                
                
                $
                (28,391
                )
                
                $
                -
                
                
                $
                10,196
 
 
 
 The
accompanying notes are an integral part of these financial
statements.
 
  F-4
 CardioTech
      International, Inc.Consolidated
      Statements of Cash Flows(In
      thousands)For
      The Years Ended March 31,2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (6,090
                )
                
                $
                (2,962
                )Less:  Net
      loss from discontinued operations
                
                
                3,848
                
                
                
                1,051Net
      loss from continuing operations
                
                
                (2,242
                )
                
                
                (1,911
                )Adjustments
      to reconcile net loss from continuing operations to net cash
      flows:Depreciation
      and amortization
                
                
                340
                
                
                
                173Equity
      in net loss of CorNova, Inc.
                
                
                -
                
                
                
                279Provision
      for doubtful accounts
                
                
                1
                
                
                
                1Fair
      value of warrants issued
                
                
                76
                
                
                
                -Stock-based
      compensation
                
                
                391
                
                
                
                14Changes
      in assets and liabilities:Accounts
      receivable-trade
                
                
                95
                
                
                
                43Accounts
      receivable-other
                
                
                73
                
                
                
                (289
                )Inventories
                
                
                (40
                )
                
                
                (45
                )Prepaid
      expenses and other current assets
                
                
                (36
                )
                
                
                6Accounts
      payable
                
                
                117
                
                
                
                105Accrued
      expenses
                
                
                496
                
                
                
                (49
                )Deferred
      revenue
                
                
                (10
                )
                
                
                110Net
      cash flows used in operating activities of continuing
      operations
                
                
                (739
                )
                
                
                (1,563
                )Net
      cash flows used in operating activities of discontinued
      operations
                
                
                (2,913
                )
                
                
                (696
                )Net
      cash flows used in operating activities
                
                
                (3,652
                )
                
                
                (2,259
                )Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                
                
                (825
                )
                
                
                (460
                )Proceeds
      from sale of Gish and CDT, net of transaction costs
                
                
                6,747
                
                
                
                -Decrease
      in other assets
                
                
                (177
                )
                
                
                7Net
      cash flows provided by (used in) investing activities of continuing
      operations
                
                
                5,745
                
                
                
                (453
                )Net
      cash flows used in investing activities of discontinued
      operations
                
                
                (373
                )
                
                
                (280
                )Net
      cash flows provided by (used in) investing activities
                
                
                5,372
                
                
                
                (733
                )Cash
      flows from financing activities:Net
      proceeds from issuance of common stock
                
                
                947
                
                
                
                218Repurchase
      of common stock
                
                
                -
                
                
                
                (1
                )Net
      cash flows provided by financing activities of continuing
      operations
                
                
                947
                
                
                
                217Net
      change in cash and cash equivalents
                
                
                2,667
                
                
                
                (2,775
                )Cash
      and cash equivalents at beginning of period
                
                
                4,066
                
                
                
                6,841Cash
      and cash equivalents at end of period
                
                $
                6,733
                
                
                $
                4,066Supplemental
      Disclosure of Cash Flow Information:Interest
      paid
                
                $
                4
                
                
                $
                4
   The
accompanying notes are an integral part of these financial
statements.
  F-5
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  A.
              Nature of
  Business
  CardioTech International, Inc.
(“CardioTech” or the “Company”) develops advanced polymer materials which
provide critical characteristics in the design and development of medical
devices. The Company’s biomaterials are used in devices that are designed for
treating a broad range of anatomical sites and disease states. The Company’s
business model leverages its proprietary materials science technology and
manufacturing expertise in order to expand product sales and royalty and license
fee income.
 
 The
Company’s  leading edge technology, notably products such as
ChronoFlex®, HydroMedTM, and HydroThaneTM, which have been developed to overcome a
wide range of design and functional challenges such as the need for dimensional
stability, ease of manufacturability and demanding physical properties to
overcoming environmental stress cracking (ESC) and providing heightened
lubricity for ease of insertion.  The Company’s new product extensions
customize proprietary polymers for specific customer applications in a wide
range of device categories.
 
 In June
2008, in connection with our re-branding launch, we formed AdvanSource
Biomaterials Corporation, a wholly-owned subsidiary, as an initial step in our
ongoing efforts to better reflect our strategic plan.
  The
Company is conducting a clinical trial in Europe for CardioPassTM, its synthetic
coronary bypass graft.
  The
Company’s fiscal year ends on March 31.  References herein to fiscal
2008 and fiscal 2007 refer to the year ended March 31, 2008 and 2007,
respectively.
  Sale
of Gish
   On July
6, 2007, the Company completed the sale of Gish Biomedical, Inc. (“Gish”), its
former wholly-owned subsidiary that developed and manufactured single use
cardiopulmonary bypass products, pursuant to a stock purchase agreement (the
“Gish Purchase Agreement”) entered into with Medos Medizintechnik AG, a German
corporation (“Medos”), on July 3, 2007.  The Gish Purchase Agreement
provided for the sale of Gish to Medos for a purchase price of approximately
$7.5 million in cash.  The Gish Purchase Agreement also contained
representations, warranties and indemnities that are customary in a transaction
involving the sale of all or substantially all of a company or its
assets.  The indemnifications include items such as compliance with
legal and regulatory requirements, product liability, lawsuits, environmental
matters, product recalls, intellectual property, and representations regarding
the fairness of certain financial statements, tax audits and net operating
losses.
   Pursuant
to the terms of the Gish Purchase Agreement, the Company placed $1.0 million in
escrow as a reserve for certain indemnification obligations to Medos, if any, as
described above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to the Company on July 5,
2008.The realization of the escrow fund is also contingent
upon the realizability of the Gish accounts receivable and inventory that were
transferred to Medos for one year from the sale date.  The $1.0
million of proceeds being held in escrow is not included in the calculation of
the loss on sale of Gish of $1,173,000.
   Medos has
advised the Company that it may assert certain indemnity claims against the
Company relating to certain representations and warranties up to the full amount
of the $1.0 million escrow balance.  The Company has advised Medos
that it believes any such claims, if made, would be without merit under the Gish
Purchase Agreement.  The Company has concluded that a loss resulting
from these potential claims by Medos in excess of the escrow balance is not
probable as of March 31, 2008.
   The
Company has been notified by Medos as to their assertions that the Company may
be liable for up to one year of severance costs related to each of the
terminations of two key Gish employees by Medos, whose terminations were
effected by Medos subsequent to the acquisition date.  The Company has
reviewed the assertions by Medos and has concluded that a loss resulting from
this asserted claim is not probable as of March 31, 2008.
   In
connection with the sale of Gish, the Company entered into a non-exclusive,
royalty-free license (the “License Agreement”) with Gish which provides for our
use of certain patented technology of Gish in the Company’s products and
services, provided such products and services do not compete with the cardiac
bypass product development and manufacturing businesses of Gish or
Medos.  The Company has determined the License Agreement has de
minimus value and, accordingly, no value has been ascribed to the
license.
   F-6
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  After transaction expenses
and certain post-closing adjustments, the Company realized approximately $6.1
million in proceeds from the sale of Gish.  Assuming the disbursement
to the Company of all funds held in escrow after July 5, 2008, up to an
additional $1.0 million may be realized.Under the terms of
the Gish Purchase Agreement, the Company owes Medos $149,000 as a result of the
change in stockholder’s equity of Gish from March 31, 2007 to June 30,
2007.  This amount has not been paid to Medos, and is reflected as a
current liability of discontinued operations in the accompanying consolidated
balance sheet as of March 31, 2008.  This adjustment is included in
the calculation of the loss on sale of Gish through March 31,
2008.  Under the terms of the
Gish Purchase Agreement, the Company retained Gish’s cash assets of
approximately $2.0 million as of June 29, 2007.
  Sale
of CDT
   On March
28, 2008, the Company completed the sale of Catheter and Disposables Technology,
Inc. (“CDT”), its former wholly-owned subsidiary that is a contract manufacturer
and provider of engineering services, pursuant to a stock purchase agreement
(the “CDT Purchase Agreement”) entered into with TACPRO, Inc. (“Tacpro”) on
March 28, 2008.  The CDT Purchase Agreement provided for the sale of
CDT to Tacpro for a purchase price of approximately $1.2 million in
cash.  The CDT Purchase Agreement also contained representations,
warranties and indemnities that are customary in a transaction involving the
sale of all or substantially all of a company or its assets.  The
indemnifications include items such as compliance with legal and regulatory
requirements, product liability, lawsuits, environmental matters, product
recalls, realization of accounts receivable and inventories at specified time
periods, and tax audits. Pursuant to the terms of the CDT Purchase Agreement,
the Company placed $240,000 in escrow as a reserve for its indemnification
obligations to Tacpro if any, as described above.The escrowed
amount, less any agreed upon amount necessary to satisfy any indemnification
obligations, may be made available to the Company on March 28,
2009.The $240,000 of proceeds being held in escrow is not
included in the calculation of the loss on sale of CDT of $690,000.
  After
transaction expenses and certain post-closing adjustments, the Company realized
approximately $696,000 in cash proceeds from the sale of CDT.  The
Company also incurred an additional non-cash expense of $76,000 related to
warrants issued in connection with an investment bank that advised the Company
on the transaction.  Assuming the disbursement to the Company of all
funds held in escrow after March 28, 2009, up to an additional $240,000 may be
realized.
  CorNova
  CardioTech
has partnered with CorNova, Inc. (“CorNova”), a privately-held, development
stage company focused on the development of a next-generation drug-eluting
stent.  The Company owns common stock in CorNova and has a 15%
ownership interest in CorNova, (See Note M).
  The
Company’s corporate, development and manufacturing operations are located in
Wilmington, Massachusetts.
  Summary
of Significant Accounting Policies:
  The
accompanying consolidated financial statements include the accounts of the
Company reflecting its operations in Massachusetts.  As a result of
the July 6, 2007 sale of Gish and March 28, 2008 sale of CDT pursuant to the
respective purchase agreements, the assets and liabilities of Gish and CDT are
presented in the accompanying consolidated balance sheet as assets and
liabilities held for sale as of March 31, 2007 and the operating results of Gish
and CDT are presented in the accompanying consolidated statements of operations
as discontinued operations for the years ended March 31, 2008 and
2007.  Additionally, the following notes to the consolidated financial
statements include disclosures related to the Company’s continuing operations
unless specifically identified as disclosures related to discontinued
operations.
   F-7
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Accounting
Principles
  The
consolidated financial statements and accompanying notes are prepared in
accordance with U.S. generally accepted accounting principles.
  Basis
of Consolidation
  The
consolidated financial statements include the accounts of the Company, and its
wholly-owned subsidiaries.  The Company’s investment in CorNova is
accounted for using the equity method of accounting in accordance with
Accounting Principles Board (“APB”) Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock.”  (See Note M).  The
consolidated financial statements for all periods presented have been restated
to reflect discontinued operations of Gish and CDT.
  Use
of Accounting Estimates
  The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period.  Actual results could differ
from those estimates.
  Uncertainties
  The
Company is subject to risks common to companies in the medical device industry
including, but not limited to, development of new technology innovations by
competitors of the Company, dependence on key personnel, protection of
proprietary technology, and compliance with FDA regulations.
  Cash
and Cash Equivalents
  Cash and
cash equivalents include cash on hand and short-term investments with maturities
of three months or less when acquired.
  Revenue
Recognition
  The
Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”)
No. 104, “Revenue Recognition
in Financial Statements.”  The Company recognizes revenue from
product sales upon shipment, provided that a purchase order has been received or
a contract has been executed, there are no uncertainties regarding customer
acceptance, the sales price is fixed or determinable and collection is deemed
probable.  If uncertainties regarding customer acceptance exist, the
Company recognizes revenue when those uncertainties are resolved and title has
been transferred to the customer.  Amounts collected or billed prior
to satisfying the above revenue recognition criteria are recorded as deferred
revenue.  The Company also receives license and royalty fees for the
use of its proprietary biomaterials.  CardioTech recognizes these fees
as revenue in accordance with the terms of the contracts.
  Generally,
the customer specifies the delivery method and is responsible for delivery
costs.  However, in certain situations, the customer specifies the
delivery method and requests the Company pay the delivery costs and then invoice
the delivery costs to the customer or include an estimate of the delivery costs
in the price of the product.  Delivery costs billed to customers by
the Company for the years ended March 31, 2008 and 2007 of approximately $13,000
and $8,000, respectively, have been recorded as revenue, and the costs have been
recorded in cost of goods sold.
  Research,
Development and Regulatory Expense
  Research,
development and regulatory expenditures for the years ended March 31, 2008 and
2007 were $999,000 and $769,000, respectively, and consisted primarily of
salaries and related costs and are expensed as incurred.  The Company
has four full time employees that work on a variety of projects, including
production support.
   F-8
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Reporting
Comprehensive Loss
  Statement
of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income
(Loss),” establishes standards for the reporting and display of
comprehensive income or loss and its components in the consolidated financial
statements.  Comprehensive income (loss) is the total of net income
(loss) and all other non owner changes in equity including such items as
unrealized holding gains (losses) on securities classified as
available-for-sale, foreign currency translation adjustments and minimum pension
liability adjustments.  For the year ended March 31, 2008,
comprehensive loss has equaled net loss.  For the year ended March 31,
2007, the only component of comprehensive loss was the Company’s equity in the
net loss of CorNova of approximately $40,000.
  Basic
and Diluted Earnings Per Share
  The
Company follows SFAS No. 128, “Earnings Per Share,” where
basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the
period.  Diluted earnings per share are based upon the weighted
average number of common shares outstanding during the period plus additional
weighted average common equivalent shares outstanding during the
period.  Common equivalent shares
result from the assumed exercise of outstanding stock options and warrants, the
proceeds of which are then assumed to have been used to repurchase outstanding
commonstock using the treasury stock method.  In addition, the
numerator is adjusted for any changes in income or loss that would result from
the assumed conversion of potential shares.  At March 31, 2008 and
2007, potentially dilutive shares of 3,736,971 and 6,306,749, respectively, were
excluded from the loss per share calculations because their effect would be
antidilutive.  Shares deemed to be antidilutive include stock options
and warrants.
  Property
and Equipment
  Property
and equipment are stated at cost.  Equipment is depreciated using the
straight-line method over the estimated useful lives of the assets, ranging from
three to seven years, leasehold improvements are amortized using the
straight-line method over the shorter of the estimated life of the asset or the
remaining term of the lease, and the Company’s building is depreciated using the
straight-line method over 40 years.  Expenditures for repairs and
maintenance are charged to expense as incurred.  The Company records
construction in process in the appropriate asset category and commences
depreciation upon completion and commencement of use of the asset.
  Inventories
  Inventories
are stated at the lower of cost (first-in, first-out) or net realizable value
and consist of the following:
 March
      31,(in
      thousands)
                
                2008
                
                
                2007Raw
      materials
                
                $
                74
                
                
                $
                22Work
      in progress
                
                
                3
                
                
                
                4Finished
      goods
                
                
                72
                
                
                
                83Total
      inventories
                
                $
                149
                
                
                $
                109
 Income
Taxes
  The
Company follows SFAS No. 109, “Accounting for Income Taxes,”
where deferred tax assets and liabilities are recognized based on temporary
differences between the financial statement and tax basis of assets and
liabilities using currently enacted tax rates.  A valuation reserve
against the net deferred assets is recorded, if, based upon the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
   F-9
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Intangible
Assets and Impairment of Long-Lived Assets
  The
Company evaluates its long-lived assets, which include property and equipment
and finite-lived intangible assets for impairment as events and circumstances
indicate that the carrying amount may not be recoverable and at a minimum at
each balance sheet date.  The Company evaluates the realizability of
its long-lived assets based on profitability and undiscounted cash flow
expectations for the related asset or subsidiary.  Property and
equipment and amortizable intangibles are subject to SFAS No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets.”  Non-amortizable intangibles,
such as goodwill, are subject to SFAS No. 142, “Goodwill and Other Intangible
Assets.”
  In
assessing the recoverability of goodwill, the Company must make assumptions in
determining the fair value of the asset by estimating future cash flows and
considering other factors, including any significant changes in the manner or
use of the assets or negative industry reports or economic
conditions.  If those estimates or their related assumptions change in
the future, CardioTech may be required to record additional impairment
charges.  Under the provisions of SFAS No. 142, the Company is
required to test its goodwill and other intangible assets for impairment on an
annual basis, or more frequently if indicators of impairment exist. The
Company’s goodwill is related to the biomaterials business.  In the
fourth quarter of the fiscal year ended March 31, 2008, the Company completed
its annual review of goodwill.  As a result of this review, it
determined the fair value of the goodwill exceeded the carrying amount and,
therefore, no goodwill impairment existed as of March 31, 2008.  The
Company will be required to continue to perform a goodwill impairment test on an
annual basis and the next test is scheduled during the quarter ending March 31,
2009.
  Stock-Based
Compensation
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, Share-Based Payment—An
Amendment of FASB Statements No. 123 and 95 (“SFAS No. 123R”), which
requires all companies to measure compensation cost for all share-based
payments, including employee stock options, at fair value. Generally, the
approach in SFAS No. 123R is similar to the approach described in SFAS No. 123,
Accounting for Stock-Based
Compensation (“SFAS No.123”).  However, SFAS No. 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair value
over the requisite service period.  Pro forma disclosure is no longer
an alternative.  In March 2005, the SEC issued Staff Accounting
Bulletin (“SAB”) No. 107 (“SAB No. 107”), which expressed the views of the SEC
regarding the interaction between SFAS No. 123R and certain rules and
regulations of the SEC. SAB No. 107 provides guidance related to the valuation
of share-based payment arrangements for public companies, including assumptions
such as expected volatility and expected term.
  Prior to
April 1, 2006, the Company applied the pro forma disclosure requirements under
SFAS No. 123 and accounted for its stock-based employee compensation plans using
the intrinsic value method under the recognition and measurement provisions of
APB No. 25, Accounting for
Stock Issued to Employees and related interpretations.
  Effective
April 1, 2006, the Company adopted the fair value recognition provisions of SFAS
No. 123R, using the modified prospective transition method.  Under
this transition method, compensation cost recognized in the statement of
operations for the fiscal year ended March 31, 2007 includes: (a) compensation
cost for all share-based payments granted prior to, but not yet vested as of
April 1, 2006, based on the grant-date fair value estimated in accordance with
the original provisions of SFAS No. 123; and (b) compensation cost for all
share-based payments granted, modified or settled subsequent to April 1, 2006,
based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R.  In accordance with the modified prospective transition
method, results for prior periods have not been restated.
  For the
fiscal years ended March 31, 2008 and 2007, the Company recorded stock-based
compensation expense for options that vested of approximately $391,000 and
$15,000, respectively, which would not have been recorded prior to the adoption
of SFAS No. 123R.  As of March 31, 2008, the Company has approximately
$316,000 of unrecognized compensation cost related to stock options that is
expected to be recognized as expense over a weighted average period of
1.77years.
   F-10
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  The
valuation of employee stock options is an inherently subjective process, since
market values are generally not available for long-term, non-transferable
employee stock options.  Accordingly, an option pricing model is
utilized to derive an estimated fair value.  The Black-Scholes option
valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully
transferable.  In calculating the estimated fair value of our stock
options the Company uses the Black-Scholes pricing model, which requires the
consideration of the following six variables for purposes of estimating fair
value:
  ·
              the
      stock option exercise price;
  ·
              the
      expected term of the option;
  ·
              the
      grant price of the Company’s common stock, which is issuable upon exercise
      of the option;
  ·
              the
      expected volatility of the Company’s common
  stock;
  ·
              the
      expected dividends on the Company’s common stock (the Company does not
      anticipate paying dividends in the foreseeable future);
  and
  ·
              the
      risk free interest rate for the expected option
  term.
  Because
the Company’s employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management’s
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
  The fair
value of each option granted during fiscal years 2008 and 2007 is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
 Years
      Ended March 31,2008
                
                2007Dividend
      yield
                
                None
                
                NoneExpected
      volatility
                
                70.00
                
                80.00Risk-free
      interest rate
                
                3.01
      - 5.01%
                
                4.2%
      - 5.2%Expected
      life
                
                6.5
      years
                
                6.5
      yearsFair
      value of options granted
                
                $0.80
                
                $1.24
  Stock Option Exercise Price
and Grant Date Price of Common Stock.  The closing market price
of the Company’s common stock on the date of grant.
  Expected
Term.  For option grants subsequent to the adoption of SFAS
123R, the expected life of stock options granted is based on the simplified
method prescribed under SAB 107, “Share-Based
Payment.”  Accordingly, the expected term is presumed to be the
midpoint between the vesting date and the end of the contractual
term.
  Expected
Volatility.  The expected volatility is a measure of the amount
by which the Company’s stock price is expected to fluctuate during the expected
term of options granted.  The Company determines the expected
volatility solely based upon the historical volatility of its common stock over
a period commensurate with the option’s expected term.  The Company
does not believe that the future volatility of its common stock over an option’s
expected term is likely to differ significantly from the past.
  Expected
Dividends.  The Company has never declared or paid any cash
dividends on any of its capital stock and does not expect to do so in the
foreseeable future.  Accordingly, the Company uses an expected
dividend yield of zero to calculate the grant-date fair value of a stock
option.
   F-11
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Risk-Free Interest
Rate.  The risk-free interest rate is the implied yield
available on U.S. Treasury zero-coupon issues with a remaining term equal to the
option’s expected term on the grant date.
  Upon
adoption of SFAS 123R, the Company was also required to estimate the level of
award forfeitures expected to occur and record compensation expense only for
those awards that are ultimately expected to vest.  This requirement
applies to all awards that are not yet vested.  Due to the limited
number of unvested options outstanding, the majority of which are held by
executives and members of the Company’s Board of Directors, the Company has
estimated a zero forfeiture rate.  The Company will revisit this
assumption periodically and as changes in the composition of our option pool
dictate.
  Changes
in the inputs and assumptions as described above can materially affect the
measure of estimated fair value of share-based compensation.  The
Company anticipates the amount of stock-based compensation will increase in the
future as additional options are granted.
  Fair
Value of Financial Instruments
  The fair
value of cash and cash equivalents, receivables and payables at March 31, 2008
and 2007 approximate their carrying amount due to the short maturities of these
items.  Financial instruments that potentially subject the Company to
a concentration of credit risk principally consist of cash and cash equivalents
and trade receivables.
  All of
the Company’s cash and cash equivalents are maintained at major financial
institutions.
  Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and trade
accounts receivable.  The Company maintains cash and cash equivalents
with high credit, quality financial institutions.
  The
Company performs ongoing credit evaluations of the financial condition of its
customers and generally does not require collateral.  The Company’s
may require new customers to pay a deposit prior to any work being performed,
which is recorded as deferred revenue.  Although the Company is
directly affected by the overall financial condition of the healthcare industry,
management does not believe significant credit risk exists either at March 31,
2008 or 2007.  The Company maintains an allowance for doubtful
accounts based on accounts past due according to contractual terms and
historical collection experience.  Actual losses when incurred are
charged to the allowance.
  Recent
Accounting Pronouncements
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  This new standard provides guidance for using
fair value to measure assets and liabilities.  The FASB believes SFAS
No. 157 also responds to investors’ requests for expanded information about the
extent to which companies measure assets and liabilities at fair value, the
information used to measure fair value, and the effect of fair value
measurements on earnings.  SFAS No. 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value
but does not expand the use of fair value in any new
circumstances.  SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007.  The Company expects to
adopt SFAS No. 157 on April 1, 2008, and does not expect it to have a material
affect onthe Company’s financial position and results of operations.
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities,” which provides companies with an
option to report selected financial assets and liabilities at fair
value.  The objective of SFAS No. 159 is to reduce both complexity in
accounting for financial instruments and the volatility in earnings caused by
measuring related assets and liabilities differently.  SFAS No. 159
establishes presentation and disclosure requirements designed to facilitate
comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities and to more easily understand the effect
of the company’s choice to use fair value on its earnings.  SFAS No.
159 also requires entities to display the fair value of the selected assets and
liabilities on the face of the balance sheet.  SFAS No. 159 does not
eliminate disclosure requirements of other accounting standards, including fair
value measurement disclosures in SFAS No. 157.  This Statement is
effective as of the beginning of an entity’s first fiscal year beginning after
November 15, 2007.  The Company expects to adopt SFAS No. 159 on April
1, 2008, and does not expect it to have a material affect on the Company’s financial
position and results of operations.
   F-12
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements.”  SFAS No. 160 clarifies
that a non-controlling or minority interest in a subsidiary is considered an
ownership interest and accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated financial
statements.  SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008. The Company expects to adopt SFAS No. 160 on April 1,
2009, and does not expect it to have a material affect on the Company’s financial
position and results of operations.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations.”  SFAS No. 141(R) replaces SFAS No. 141, “Business Combinations” and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any non-controlling interests in the acquiree and the
goodwill acquired.  Some of the key changes under SFAS No. 141(R) will
change the accounting treatment for certain specific acquisition related items
including: (1) accounting for acquired in process research and development as an
indefinite-lived intangible asset until approved or discontinued rather than as
an immediate expense; (2) expensing acquisition costs rather than adding them to
the cost of an acquisition; (3) expensing restructuring costs in connection with
an acquisition rather than adding them to the cost of an acquisition; (4)
including the fair value of contingent consideration at the date of an
acquisition in the cost of an acquisition; and (5) recording at the date of an
acquisition the fair value of contingent liabilities that are more likely than
not to occur.  SFAS No. 141(R) also includes a substantial number of
new disclosure requirements.  SFAS No. 141(R) is effective
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  Early adoption of SFAS No. 141(R) is
prohibited.  The Company expects to adopt SFAS No. 160 on April 1,
2009.  The Company believes the adoption of SFAS N0. 141(R) could have
a material impact on how the Company will identify, negotiate, and value future
acquisitions and a material impact on how an acquisition will affect the
Company’s consolidated financial statements.
  B.
              Related Party
      Transactions
  During
fiscal 2007, the Company entered into a consulting agreement with Michael L.
Barretti, a member of its Board of Directors, for an annualized fee of
$50,000.  During the fiscal years ended March 31, 2008 and 2007, the
Company recognized $50,000 and $13,000, respectively, of expense related to
services incurred under this agreement, which was recorded as selling, general
and administrative expense.
  C.
              License
      Agreements
  PolyMedica
Corporation granted to CardioTech an exclusive, perpetual, worldwide,
royalty-free license for CardioTech to use all of the necessary patent and other
intellectual property owned by PLMD in the implantable devices and materials
field (collectively, “Licensed Technology”).  CardioTech, at its own
expense, will file patents or other applications for the protection of all new
inventions formulated, made, or conceived by CardioTech during the term of the
license that related to Licensed Technology and all such inventions shall be
exclusively licensed to PolyMedica for use by PolyMedica in fields other than
the implantable devices and materials field.  There are no financial
commitments of CardioTech related to this license.
  D.
                Property, Plant and
      Equipment
  Property,
plant and equipment consist of the following:
 March
      31,(in
      thousands)
                  
                  2008
                  
                  
                  2007Land
                  
                  $
                  500
                  
                  
                  $
                  500Building
                  
                  
                  2,652
                  
                  
                  
                  2,153Machinery,
      equipment and tooling
                  
                  
                  1,180
                  
                  
                  
                  869Furniture,
      fixtures and office equipment
                  
                  
                  268
                  
                  
                  
                  2534,600
                  
                  
                  
                  3,775Less:  accumulated
      depreciation
                  
                  
                  (1,261
                  )
                  
                  
                  (921
                  )$
                  3,339
                  
                  
                  $
                  2,854
 Depreciation
expense for the fiscal years ended March 31, 2008 and 2007 was approximately
$340,000 and $173,000, respectively.
   F-13
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  E.
              Income
      Taxes
  The
Company adopted the provisions of Financial Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in
Income Taxes,” an interpretation of SFAS No. 109, Accounting for Income Taxes ,
on April 1, 2007.  FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with SFAS No. 109 and prescribes a recognition threshold and measurement process
for financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. At the adoption date and as of March 31,
2008, the Company had no material unrecognized tax benefits and no adjustments
to liabilities or operations were required.
  The
Company may from time to time be assessed interest or penalties by major tax
jurisdictions.  The Company recognizes interest and penalties related
to uncertain tax positions in income tax expense.  No interest and
penalties have been recognized by the Company to date.
  Tax years
2005 through 2008 are subject to examination by the federal and state taxing
authorities.  There are no income tax examinations currently in
process.
  Reconciliation between the Company’s effective tax
rate and the United States statutory rate is as
follows:
 For
      The Years Ended March 31,2008
                
                
                2007Expected
      federal tax rate
                
                
                34.0
                %
                
                
                34.0
                %State
      income taxes, net of federal tax benefit
                
                
                13.6
                %
                
                
                6.0
                %Non-deductible
      expenses
                
                
                -2.4
                %
                
                
                -0.9
                %Book
      versus tax loss on sale of subsidiaries
                
                
                45.4
                %
                
                
                0.0
                %Change
      in valuation allowance
                
                
                -27.7
                %
                
                
                -39.1
                %Effective
      tax rate
                
                
                0.0
                %
                
                
                0.0
                %
 Deferred
tax assets and liabilities are determined based on the differences between the
financial statement carrying amounts and the tax basis of the assets and
liabilities using the enacted tax rate in effect in the years in which the
differences are expected to reverse.  A valuation allowance has been
recorded against the deferred tax asset as it is more likely than not, based
upon the analysis by the Company of all available evidence, that the tax benefit
of the deferred tax asset will not be realized.
   F-14
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Significant
components of the Company’s deferred tax assets and deferred tax liabilities as
of March 31, 2008 and 2007 consisted of the following:
 March
      31,(in
      thousands)
                
                2008
                
                
                2007Deferred
      Tax Assets:Net
      operating loss carryforwards
                
                $
                5,669
                
                
                $
                5,035Capital
      loss carry forward
                
                
                4,022
                
                
                
                -Tax
      credits
                
                
                164
                
                
                
                138Inventory
      and receivable allowances
                
                
                8
                
                
                
                -Accrued
      expenses deductible when paid
                
                
                123
                
                
                
                129Depreciation
      and amortization
                
                
                38
                
                
                
                32Deferred
      tax assets held for sale
                
                
                -
                
                
                
                7,334Deferred
      tax assets
                
                
                10,024
                
                
                
                12,668Deferred
      Tax Liabilities:Deferred
      tax liabilities held for sale
                
                
                -
                
                
                
                (154
                )Deferred
      tax liabilities
                
                
                -
                
                
                
                (154
                )Sub-total
                
                
                10,024
                
                
                
                12,514Valuation
      allowance
                
                
                (10,024
                )
                
                
                (12,514
                )Net
      deferred tax asset
                
                $
                -
                
                
                $
                -
 A
valuation allowance has been recorded to offset substantially all net deferred
tax assets due to uncertainty of realizing the tax benefits of the underlying
operating loss and tax credit carry forwards over their carry forward
periods.  During the year ended March 31, 2008, the valuation allowance
decreased by $2,490,000.
  As of
March 31, 2008, the Company has the following unused net operating loss and tax
credit carry forwards available to offset future federal and state taxable
income, both of which expire at various times as noted below:
 (in
      thousands)
                    
                    Net
      Operating Losses
                    
                    
                    Investment
      & Research Credits
                    
                    Expiration
      DatesFederal
                    
                    $
                    14,782
                    
                    
                    $
                    64
                    
                    2009
      to 2028State
                    
                    $
                    10,263
                    
                    
                    $
                    151
                    
                    2009
      to 2013Capital
      loss carry forward
                    
                    $
                    9,987
                    
                    
                    
                    
                    
                    2013
 The
Company’s net operating loss carry forwards are subject to review and possible
adjustment by the Internal Revenue Service and state tax
authorities.
  The
Company also has approximately $1,367,000 of net operating loss carryforwards
related to stock compensation.  The related tax benefit of
approximately $550,000 will be credited to additional paid-in capital upon
realization.
  F.
              Contingencies
  Medos has
advised the Company that it may assert certain indemnity claims against the
Company relating to certain representations and warranties up to the full amount
of the $1.0 million escrow balance.  The Company has advised Medos
that it believes any such claims, if made, would be without merit under the
Purchase Agreement.  The Company has concluded that a loss resulting
from these potential claims by Medos in excess of the escrow amount is not
probable as of March 31, 2008.
  The
Company has been notified by Medos as to their assertions that the Company may
be liable for up to one year of severance costs for each termination related to
the terminations of two key Gish employees by Medos whose terminations were
effected by Medos subsequent to the acquisition date.  The Company has
reviewed the assertion by Medos and has concluded that a loss resulting from
these asserted claims in excess of the escrow balance is not probable as of
March 31, 2008.
   F-15
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  G.
              Concentration
      of Credit Risk and Major Customers
  For the
year ended March 31, 2008, two customers represented 65% and 16% of revenues,
respectively.  For the year ended March 31, 2007, one customer
represented 72% of revenues.
  H.
              Stockholders’
  Equity
  Preferred
Stock
  The
Company has authorized 5,000,000 shares, $0.001 par value, Preferred Stock (the
Preferred Stock”) of which 500,000 shares have been issued but none are
outstanding.  In addition, 500,000 shares of Preferred Stock have been
designated as Series A Junior Participating Preferred Stock (the “Junior
Preferred Stock”) with the designations and the powers, preferences and rights,
and the qualifications, limitations and restrictions specified in the
Certificate of Designation of the Junior Preferred Stock filed with the Delaware
Department of State on January 28, 2008.  Such number of shares may be
increased or decreased by resolution of the Board of Directors; provided, that
no decrease shall reduce the number of shares of Junior Preferred Stock to a
number less than the number of shares then outstanding plus the number of shares
reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Company convertible into Junior Preferred Stock.
  Common
Stock Options and Warrants
  In
connection with a financing transacted in December 2004, the Company issued
warrants to investors to purchase 569,793 shares of common stock at an exercise
price of $3.00 per share, which are exercisable until December 22,
2009.  In addition, the placement agent was issued warrants to
purchase 113,959 shares of our common stock at an exercise price of $2.40 per
share and 56,979 shares of our common stock at an exercise price of $3.00 per
share, which are exercisable until December 22, 2009.  Warrants for
140,000 shares of common stock have an exercise price of $2.40 and expire on
July 11, 2008.  On March 31, 2008, the Company issued warrants to the
investment bankers who assisted in the sale of CDT to purchase 219,298 shares of
common stock at an exercise price of $0.874 per share, which are exercisable
until March 31, 2015.  The warrants were valued at $76,000 using the
Black-Scholes model and treated as permanent equity.
  At March
31, 2008, warrants issued to purchase 1,100,029 shares of common stock were
outstanding.  If all warrants are exercised, the Company would receive
gross proceeds of approximately $2,681,500, less related transaction costs, if
any.
  The
Company issued 1,035,663 shares of common stock during the year ended March 31,
2008, as a result of the exercise of options by employees and consultants,
generating cash proceeds of approximately $947,000.  The Company
issued 235,417 shares of common stock during the year ended March 31, 2007, as a
result of the exercise of options by employees and consultants, generating cash
proceeds of $218,000.
  Treasury
Stock and Other Transactions
  In June
2001, the Board of Directors authorized the purchase of up to 250,000 shares of
the Company’s common stock.  In June 2004, the Board of Directors
authorized the purchase of up to 500,000 additional shares of the Company’s
common stock.  The Company announced that purchases may be made from
time-to-time in the open market, privately negotiated transactions, block
transactions or otherwise, at times and prices deemed appropriate by
management.  Since June 2001, the Company has purchased a total of
174,687 shares.  During the year ended March 31, 2008 the Company
repurchased no shares of the Company’s common stock.  During the year
ended March 31, 2007, the Company repurchased 600 shares of the Company’s common
stock at an approximate cost of $1,000.
   F-16
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Stockholder
Rights Plan
  The
Company’s board of directors approved the adoption of a stockholder rights plan
(the “Rights Plan”) under which all stockholders of record as of February 8,
2008 will receive rights to purchase shares of the Junior Preferred Stock (the
“Rights”).  The Rights will be distributed as a
dividend.  Initially, the Rights will attach to, and trade with, the
Company’s common stock.  Subject to the terms, conditions and
limitations of the Rights Plan, the Rights will become exercisable if (among
other things) a person or group acquires 15% or more of the Company’s common
stock.  Upon such an event, and payment of the purchase price, each
Right (except those held by the acquiring person or group) will entitle the
holder to acquire shares of the Company’s common stock (or the economic
equivalent thereof) having a value equal to twice the purchase
price.  The Company’s board of directors may redeem the Rights prior
to the time they are triggered.  In the event of an unsolicited
attempt to acquire the Company, the Rights Plan is intended to facilitate the
full realization of stockholder value in the Company and the fair and equal
treatment of all Company stockholders.  The Rights Plan will not
prevent a takeover attempt.  Rather, it is intended to guard against
abusive takeover tactics and encourage anyone seeking to acquire the Company to
negotiate with the board of directors.  The Company did not adopt the
Rights Plan in response to any particular proposal.
  I.
              Stock
      Based Compensation
  CardioTech’s 1996 Employee,
Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by
CardioTech’s Board of Directors and Stockholders in March 1996.  A
total of 7,000,000 shares have been reserved for issuance under the
Plan.  Under the terms of the Plan the exercise price of Incentive
Stock Options issued under the Plan must be equal to the fair market value of
the common stock at the date of grant.  In the event that Non
Qualified Options are granted under the Plan, the exercise price may be less
than the fair market value of the common stock at the time of the grant (but not
less than par value).  In October 2003, the Company’s shareholders
approved the CardioTech International, Inc. 2003 Stock Option Plan (the “2003
Plan”), which authorizes the issuance of 3,000,000 shares of common stock with
terms similar to the 1996 Plan.  In January 2006, the Company filed
Form S-8 with the Securities and Exchange Commission registering an additional
489,920 total shares of common stock in the 1996 Plan and 2003
Plan.  Total shares of common stock registered under the 1996 Plan and
2003 Plan (collectively, the “Plans”) are 10,489,920. Substantially all of the
stock options granted pursuant to the 1996 Plan provide for the acceleration of
vesting of the shares of Common Stock subject to such options in connection with
certain changes in control of the Company.  A similar provision is not
included in the 2003 Plan.  In February 2008, the Company filed two
Forms S-8 to register 360,000 shares of common stock in connection with
previously granted stock options to two executives who received grants of
unregistered shares under Rule 711 of AMEX.  Normally, options granted
expire ten years from the grant date.
  F-17
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  Activity
under the Plans for the year ended March 31, 2008 is as
follows:
 Options
      Outstanding
                
                
                Weighted
      Average Exercise Price per Share
                
                
                Weighted
      Average Remaining Contractual Term in Years
                
                
                Aggregate
      Intrinsic ValueOptions
      outstanding as of April 1, 2007
                
                
                5,426,018
                
                
                $
                2.16
                
                
                
                6.15
                
                
                $
                -Granted
                
                
                783,250
                
                
                
                1.17
                
                
                
                
                
                
                
                -Exercised
                
                
                (1,035,663
                )
                
                
                0.91
                
                
                
                -
                
                
                
                363,410Cancelled
                
                
                (2,536,663
                )
                
                
                2.57
                
                
                
                -
                
                
                
                -Options
      outstanding as of March 31, 2008
                
                
                2,636,942
                
                
                
                1.96
                
                
                
                6.51
                
                
                
                4,480Options
      exercisable as of March 31, 2008
                
                
                2,171,464
                
                
                
                2.14
                
                
                
                5.96
                
                
                
                4,480Options
      vested or expected to vest as of March 31, 2008
                
                
                2,636,942
                
                
                
                1.96
                
                
                
                6.51
                
                
                
                4,480
 The
aggregate intrinsic value in the table above represents the total pre-tax
intrinsic value (the difference between the closing price of the common stock on
March 31, 2008 of $0.54 and the exercise price of each in-the-money option) that
would have been received by the option holders had all option holders exercised
their options on March 31, 2008.  Total intrinsic value of stock
options exercised under the Plan for the fiscal years ended March 31, 2008 and
2007 was $363,000 and $246,000, respectively.  The total fair value of
stock options that vested during the fiscal years ended March 31, 2008 and 2007
were $219,000 and $92,000, respectively.
  At March
31, 2008, there were no shares remaining to be granted under the 1996 Stock
Option Plan and 3,268,812 shares were available for grant under the 2003 Stock
Option Plan.
  J.
              Discontinued
      Operations
  Gish
Biomedical, Inc.
   In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying consolidated balance
sheets and statements of operations present the results of Gish as discontinued
operations.  As noted above, the Company’s Board of Directors approved
a plan to sell Gish in June 2007.  The Company executed the Gish
Purchase Agreement on July 3, 2007, effective as of June 30, 2007, and closedon July 6, 2007.  The Company has (i) eliminated
Gish’s financial results from its ongoing operations, (ii) determined that Gish,
which operated as a separate subsidiary, was a separate component of its
aggregated business as, historically, management reviewed separately the Gish
financial results and cash flows apart from its ongoing continuing operations,
and (iii) determined that it will have no further continuing involvement in the
operations of Gish or cash flows from Gish after the
sale.  Accordingly, the assets and liabilities of Gish are classified
as held for sale as of March 31, 2007.
  Revenues related
   F-18
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
   The
assets and liabilities of Gish as of March 31, 2007 are as
follows:
 Assets
      of Discontinued Operations
                
                (in
      thousands)Current
      assets of discontinued operations:Accounts
      receivable-trade
                
                $
                2,120Inventories
                
                
                4,752Prepaid
      expenses and other current assets
                
                
                91Total
      current assets of discontinued operations
                
                
                6,963Non-current
      assets of discontinued operations:Property,
      plant and equipment, net
                
                
                840Other
      assets
                
                
                120Intangible
      assets
                
                
                468Total
      non-current assets of discontinued operations
                
                
                1,428Total
      assets of discontinued operations
                
                $
                8,391Liabilities
      of Discontinued OperationsCurrent
      liabilities of discontinued operations:Accounts
      payable
                
                $
                1,447Accrued
      expenses
                
                
                410Total
      current liabilities of discontinued operations
                
                
                1,857Non-current
      liabilities of discontinued operations:Deferred
      rent
                
                
                116Total
      liabilities of discontinued operations
                
                $
                1,973
  Catheter
and Disposables Technology, Inc.
  In
accordance with SFAS No.144, “Accounting for the Impairment or
Disposal of Long-Lived Assets”, the accompanying consolidated balance
sheets and statements of operations present the results of CDT as discontinued
operations.  As noted above, the Company executed the CDT Purchase
Agreement and simultaneously closed the transaction on March 28,
2008.  The Company has (i) eliminated CDT’s financial results from its
ongoing operations, (ii) determined that CDT, which operated as a separate
subsidiary, was a separate component of its aggregated business as,
historically, management reviewed separately the CDT financial results and cash
flows apart from its ongoing continuing operations, and (iii) determined that it
will have no further continuing involvement in the operations of CDT or cash
flows from CDT after the sale.
  Revenues
related to CDT for fiscal 2008 and 2007 were $3,646,000 and $3,666,000,
respectively.  Net loss related to CDT for fiscal 2008 and 2007 was
$1,666,000 and $1,325,000, respectively.
 F-19
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  The
assets and liabilities of CDT as of March 31, 2007 are as
follows:
 Assets
      of Discontinued Operations
                
                (in
      thousands)Current
      assets of discontinued operations:Accounts
      receivable-trade
                
                $
                449Inventories
                
                
                343Prepaid
      expenses and other current assets
                
                
                4Total
      current assets of discontinued operations:
                
                
                796Non
      current assets of discontinued operations:Property,
      plant and equipment, net
                
                
                388Total
      assets of discontinued operations
                
                $
                1,184Liabilities
      of Discontinued OperationsCurrent
      liabilities of discontinued operations:Accounts
      payable
                
                $
                179Accrued
      expenses
                
                
                250Deferred
      revenue
                
                
                39Total  current
      liabilities of discontinued operations
                
                $
                468
 K.
              Valuation and Qualifying
      Accounts
  (in
      thousands)
                  
                  Balance
      at beginning of period
                  
                  
                  Charged
      to costs and expenses
                  
                  
                  Other
                  
                  
                  Write-off
                  
                  
                  Balance
      at end of periodYear
      ended March 31, 2008:Deducted
      from assets accounts:Allowance
      for doubtful accounts
                  
                  $
                  5
                  
                  
                  $
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  6Excess
      and obsolescence reserve
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15Total
                  
                  $
                  20
                  
                  
                  $
                  1
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  21Year
      ended March 31, 2007:Deducted
      from assets accounts:Allowance
      for doubtful accounts
                  
                  $
                  4
                  
                  
                  $
                  5
                  
                  
                  $
                  -
                  
                  
                  $
                  4
                  
                  
                  $
                  5Excess
      and obsolescence reserve
                  
                  
                  15
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  15Total
                  
                  $
                  19
                  
                  
                  $
                  5
                  
                  
                  $
                  -
                  
                  
                  $
                  4
                  
                  
                  $
                  20
 L.
              Benefit Plans and Employment
      Agreements of Executive
Officers
  The
Company has the CardioTech International, Inc. 401(k) Retirement Savings Plan
established under Section 401(k) of the Internal Revenue
Code.   All full-time employees who are twenty-one years of age
are eligible to participate on the beginning of the first month after 30 days of
employment.  The Company’s contributions are discretionary and the
Company made no matching contributions during either fiscal 2008 or
2007.
  The
Company has entered into an employment agreement with Eric G. Walters (the
“Walters Agreement”), pursuant to which said individual serves as Vice President
and Chief Financial Officer of the Company.  Pursuant to the terms of
the Walters Agreement, Mr. Walters is to receive an annual base salary
of $195,000, as amended.  Mr. Walters’ salary will be reviewed
annually by the
Board.  Additionally, Mr. Walters may also be entitled to receive an
annual bonus payment in an amount, if any, to be determined by the Compensation
Committee of the Board.
   F-20
 CARDIOTECH
INTERNATIONAL, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
  On August
7, 2006, the Board of Directors of CardioTech International, Inc. (the
“Company”) accepted the resignation of Dr. Michael Szycher as Chief Executive
Officer, President and Treasurer of the Company, effective as of that
date.  Dr. Szycher also resigned as a member of the Company’s Board of
Directors.  He remained an employee of the Company in a non-executive
capacity as Senior Scientific Advisor for a period of one year.  On
August 11, 2006 the Company entered into a transition agreement (the “Transition
Agreement”) with Dr. Szycher.  The Transition Agreement provides for
Dr. Szycher to serve in a non-executive capacity as Senior Scientific Advisor to
the Company at his then current annual base salary of $325,000 for a period of
one year, at which time his employment terminated.  The Company agreed
(i) to continue Dr. Szycher’s current life insurance coverage for 12 months
following his separation date and (ii) to pay Dr. Szycher’s COBRA medical
insurance premiums for a period of 6 months following his separation
date.
  On August 7, 2006, the
Company appointed Michael F. Adams as Chief Executive Officer and President of
the Company. Mr. Adams has been a director of the Company since May 1999 and
joined the Company as its Vice President of Regulatory Affairs and Business
Development on April 1, 2006.  The Company entered into an employment
agreement with Mr. Adams (the “Adams Agreement”) on September 13,
2006.Under the terms of the Adams Agreement, Mr. Adams will
be employed by the Company for two years and receive an annual base salary of
$290,000, as amended, which is subject to annual review by the Company’s Board
of Directors.  During the Employment Period, as defined in the Adams
Agreement, Mr. Adams may receive an annual bonus to be determined at the sole
discretion of the Compensation Committee of the Board of
Directors.  The Company may renew the Adams Agreement at the end of
the initial term, however, lacking any express agreement between the parties at
the end of the Employment Period, the Adams Agreement shall be deemed to
continue on a month-to-month basis.  Either party has the right to
terminate the Adams Agreement upon thirty (30) days written
notice.  Mr. Adams is eligible for participation in all executive
benefit programs, including health insurance, life insurance, and stock-based
compensation.  If Mr. Adams’ employment is terminated without cause,
the Company is obligated to (i) pay Mr. Adams an amount equal to two (2) times
his base salary upon such termination, (ii) provide Mr. Adams with health
insurance benefits for a period of 18 months after such termination, of which
the premiums for the first six (6) months after such termination shall be paid
by the Company, and (iii) provide Mr. Adams life insurance benefits for one (1)
year after such termination at the Company’s expense.
  M.
              Investment in CorNova,
      Inc.
  As of
March 31, 2007, CardioTech had a 30% ownership interest in the common stock of
CorNova and, accordingly, CardioTech has used the equity method of accounting in
accordance with APB Opinion No. 18, “The Equity Method of Accounting for
Investments in Common Stock”, and recorded 30% of the net loss of CorNova
in its consolidated financial statements for the fiscal year ended March 31,
2007.  During the fiscal year ended March 31, 2007, the Company
recorded equity in the net loss of CorNova of $279,000, and equity in
comprehensive income of CorNova of $40,000 (related to unrealized holding gains
on securities classified as available-for-sale), which reduced the Company’s
investment in CorNova to $0.  Therefore, no additional losses were
recorded from the Company’s equity ownership in CorNova in fiscal
2008.  The Company has no additional obligation to contribute assets
or additional common stock nor to assume any liabilities or to fund any losses
that CorNova may incur.
  
   F-21
  SIGNATURES
  Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
  Dated:
      June 27, 2008
              CardioTech
      International, Inc.By:
              /s/
      Michael F. AdamsMichael
      F. Adams
                Chief
      Executive Officer and President
 
  Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
  Dated:
      June 27, 2008
              
              /s/
      Michael F. AdamsMichael
      F. Adams
                Chief
      Executive Officer and President
                (Principal
      Executive Officer)Dated:
      June 27, 2008
              
              /s/
      William J. O’NeillWilliam
      J. O’Neill, Jr.
                ChairmanDated:
      June 27, 2008
              
              /s/
      Anthony J. ArminiAnthony
      J. Armini
                DirectorDated:
      June 27, 2008
              
              /s/
      Michael L. BarrettiMichael
      L. Barretti
                DirectorDated:
      June 27,2008
              
              /s/
      Jeremiah DorseyJeremiah
      Dorsey
                DirectorDated:
      June 27, 2008
              
              /s/
      Eric G. WaltersEric
      G. Walters
                Vice
      President and Chief Financial Officer
                (Principal
      Financial Officer and Principal Accounting Officer)