CARDIOTECH INTERNATIONAL INC, 10-K, 1996-07-15

CARDIOTECH INTERNATIONAL INC
10-K, 1996-07-15
PHARMACEUTICAL PREPARATIONS

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to __________

Commission File No. 0-28034
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CardioTech International, Inc.
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(Exact name of registrant as specified in its charter)

Massachusetts 04-3186647
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State or other jurisdiction of (I.R.S. Employer
Incorporation or organization Identification No.)

11 State Street, Woburn, Massachusetts 01801
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (617) 933-4772
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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value per share
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(Title of class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 No X
------- -------

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained 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 the Form 10-K. [ ]

The aggregate market value of voting Common Stock held by nonaffiliates
of the registrant was $13,161,516 based on the closing price of the Common
Stock as reported by the American Stock Exchange on June 28, 1996.

The number of shares issued of the registrant's class of Common Stock as
of June 19, 1996 was 4,244,116. No shares are held in treasury.

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Item 1. BUSINESS

The Company

General

CardioTech International, Inc. ("CardioTech" or the "Company") synthesizes,
designs and manufactures medical-grade polymers, particularly polyurethanes that
are useful in the development of vascular graft technology and other implantable
medical devices because they can be synthesized to exhibit compatibility with
human blood and tissue. CardioTech uses proprietary manufacturing technology to
fabricate small bore synthetic vascular grafts made of ChronoFlex, a family of
polyurethanes that has been demonstrated to be biodurable, blood, tissue
compatible and non-toxic. CardioTech owns a number of patents relating to its
vascular graft manufacturing technology. In addition, PolyMedica Industries,
Inc. ("PMI") has granted to CardioTech a non-exclusive perpetual, worldwide,
royalty-free license for the use of ChronoFlex polyurethane patents and related
technology for use in the field consisting of the development, manufactures and
sale of implantable medical devices and biodurable polymer material to third
parties for use in medical applications (the "Implantable Devices and Materials
Field").

CardioTech was established as a separate subsidiary of PMI in March 1993 to
focus on PMI's existing biomaterials business, with a particular emphasis on
accelerating the research, development and commercialization of small bore
vascular graft products through external funding and a more focused and
strategic product development effort. On June 12, 1996 and June 19, 1996
PolyMedica Industries, Inc. distributed (the "Distribution") all of the shares
of common stock of CardioTech that PMI owned to PMI stockholders of record as of
June 3, 1996.

Vascular Grafts

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. However, existing
small bore graft technologies suffer 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.

CardioTech is developing a family of small bore vascular graft devices
using specialized ChronoFlex polyurethane materials that it believes will
provide significantly improved performance in the treatment of arterial
disorders. CardioTech is focusing its efforts on the development of vascular
access grafts, tapered peripheral grafts and coronary artery bypass grafts. The
grafts have three layers similar to that of natural arteries designed to
replicate the physical characteristics of human blood vessels.

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Vascular Access Grafts. Several acute and chronic diseases, including
kidney disease, diabetes and hypertension, attack and may destroy normal kidney
function, resulting in acute renal failure. According to the United States Renal
Data Systems database, there were 187,000 patients in the United States at the
end of 1995 undergoing hemodialysis, which removes blood from the body and
routes it to an artificial kidney machine where it is cleansed and returned to
the patient. Patients with acute renal failure undergoing hemodialysis require
easy routine access to the blood stream. Vascular access grafts must be
punctured in two places three times each week with large gauge needles to
withdraw and replace blood cycled through an artificial kidney machine. The
synthetic vascular access grafts currently marketed by third parties are made
from an expanded polytetrafluoroethylene ("ePTFE") material which loses
integrity after repeated punctures and therefore renders the patient susceptible
to bleeding and infection. If synthetic grafts bleed profusely when needles
used for hemodialysis treatments are removed, then a technician may need to
apply pressure to the graft for up to 20 minutes to expedite clotting.
CardioTech believes that the vascular access graft it is developing offers the
potential of improved clinical performance over the currently available
synthetic ePTFE grafts. CardioTech's patented manufacturing process involves
cold coagulation casting and results in a tear-resistant graft with compressible
walls and an inherent ability to "self-seal." CardioTech believes that using a
self-sealing polyurethane material will minimize blood loss after dialysis
treatment reducing procedure and administrative time per patient and their
associated costs and also lowering infection rates.

CardioTech is currently conducting trials designed to assess the patency
(free blood flow) of the vascular access graft in animals. If the initial
assessment is successful, and if a historical comparison with existing surgical
alternatives provides the justification, CardioTech will seek European
regulatory approval to convert the study into a clinical trial in Europe in late
1996. This trial will compare patency and complication rates of the ChronoFlex-
based vascular access graft with grafts made from ePTFE.

Tapered Peripheral Grafts. CardioTech is currently working to develop a
tapered peripheral graft to be used to treat diabetics plagued with poor
circulation in their legs. Poor circulation is usually the result of a
deteriorated main artery in the leg, a condition which often results in
amputations due to inadequate blood supply to the lower extremities. Currently,
there is no acceptable surgical treatment available to alleviate this condition.
CardioTech's graft is designed to bypass the artery that runs behind the knee.
CardioTech believes it has the expertise and capability to manufacture a graft
that tapers from an inside diameter of approximately 6mm for the portion above
the knee to an inside diameter of approximately 4mm for the portion below the
knee, roughly the same dimensions as the natural artery.

Coronary Artery Bypass Grafts. Currently, obstructed coronary arteries are
either partially cleared through the use of angioplasty or treated surgically
through a coronary bypass operation using a portion of the saphenous vein from
the patient's leg. This surgical procedure requires a graft with an inside
diameter of 6mm or less. To date, CardioTech believes that no commercially
viable synthetic small bore vascular grafts suitable for the bypass of
obstructed coronary arteries have been developed. The American Heart Association
and the National Center for Health Statistics estimated that there were 468,000
coronary artery bypass operations performed in the United States in 1992. The
saphenous veins used today suffer from a series of disadvantages including
thrombosis (either early or late), obstruction by clotting, aneurysm formation,
creep, suture line deterioration, abnormal healing leading to embolism, and
infection. Accordingly, CardioTech perceives a significant market opportunity
for a small-bore biodurable polyurethane vascular graft. In 1993, CardioTech
acquired small-bore vascular graft intellectual property and manufacturing
equipment which is located in its United Kingdom facility.

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CardioTech fabricates its grafts using its ChronoFlex line of polyurethane-
based biomaterials. CardioTech believes that grafts made of ChronoFlex materials
demonstrate radial compliance similar to that of natural arteries, permitting
them to expand and contract with each heartbeat. A compliant graft reduces the
stresses generated at the suture line where the graft is attached to the artery,
thereby minimizing the development of scar tissue, which can occlude small
arteries.

PMI has granted to CardioTech an exclusive, perpetual, world-wide, royalty-
free license for CardioTech to use the patent and all other necessary
intellectual property owned exclusively by PMI, and a non-exclusive perpetual
world-wide, royalty-free license of PMI's rights in the Joint Technology, for
use in the Implantable Devices and Materials Field. Joint technology means one
U.S. patent, one European patent application and three other foreign
applications for Chronoflex polyurethane technology that PMI jointly owns with
Thermatics, Inc.

CardioTech also relies on trade secrets and proprietary know-how. To protect
such information, CardioTech requires all employees and consultants to enter
into confidentiality agreements limiting the disclosure and use of such
information. However, there can be no assurance that confidentiality agreements
will be effective in protecting trade secrets or that third parties will not
independently develop substantially equivalent or better technology.

Biomaterials

CardioTech also develops, manufactures and sells a range of polymer-based
materials customized for use in the manufacture of certain medical devices to
other medical device manufacturers. CardioTech sells these custom premium
polymers under the tradenames ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene,
HydroThane, PolyBlend and PolyWeld. Since 1990, PMI has provided development
services and sold related biomaterials for medical device customers. Such
customers have included Medtronic, Inc. and Vascor, Inc. In 1992, PMI entered
into a long term development and materials supply agreement with Bard Access
Systems, Inc. pursuant to which Bard purchases ChronoFlex for use in the
manufacture of a line of catheters and implantable vascular access ports that
are used to deliver doses of pharmaceuticals over an extended period of time or
to deliver chemotherapy agents to specific organs. PMI assigned this agreement
to CardioTech prior to the Distribution.

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

Research revenues related to biomaterials were approximately $407,510 and
$228,806 for the year ended March 31, 1995 and 1996, respectively. For the year
ended March 31, 1996, 33% and 46% of research revenues were generated from Bard
Access Systems, Inc. and the National Institutes of Health, respectively.

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Manufacturing

CardioTech currently manufactures limited quantities of ChronoFlex and
HydroThane for sale to medical device manufacturers. To date, CardioTech's
manufacturing activities with respect to the specialized ChronoFlex materials
used in vascular grafts have consisted primarily of manufacturing small
quantities of such products for use in clinical trials. CardioTech currently
has the ability to produce quantities of vascular grafts sufficient to support
its current testing needs. CardioTech also has the ability to produce
quantities of vascular grafts sufficient to support its needs for early-stage
clinical trials. However, CardioTech may need to acquire manufacturing
facilities and improve its manufacturing technology in order to meet the volume
and cost requirements for later clinical trials and will require additional
manufacturing facilities in order to undertake commercial production of vascular
grafts if it elects to do so. To achieve profitability, CardioTech's products
must be manufactured in commercial quantities in compliance with regulatory
requirements and at acceptable costs. Production in commercial quantities will
require CardioTech to expand its manufacturing capabilities significantly and to
hire and train additional personnel. CardioTech has no experience in large-
scale manufacturing, and there can be no assurance that CardioTech will be able
to make the transition to commercial production successfully.

The development and manufacture of CardioTech's products are subject to good
laboratory practice ("GLP") and good manufacturing practice ("GMP") requirements
prescribed by the Food and Drug Administration ("FDA") and other standards
prescribed by the appropriate regulatory agency in the country of use. There
can be no assurance that CardioTech will be able to obtain or manufacture
products in a timely fashion at acceptable quality and prices, that it or any
suppliers can comply with GLP or GMP, as applicable, or that it or such
suppliers will be able to manufacture an adequate supply of product. See
"Business Outlook - Limited Manufacturing Capability."

Marketing

CardioTech plans to market its vascular graft products for which it obtains
regulatory approvals either through a small targeted direct sales group or
through licensing arrangements with large medical device companies.
Implementation of this strategy will depend on many factors, including the
market potential for CardioTech's products and financial resources. See
"Business Outlook - Absence of Sales and Marketing Experience."

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.

CardioTech will compete with products offered by W.L. Gore and Associates
("W.L Gore"), Impra, Inc. ("Impra"), Corvita Corporation ("Corvita") and
Thoratec Corporation ("Thoratec"). CardioTech believes that W.L. Gore and
Impra, whose synthetic graft products have been sold in the United States and
worldwide for many years, sell approximately 90% of the intermediate diameter
peripheral synthetic vascular grafts and vascular access grafts used throughout
the world. While CardioTech believes that the attributes of its vascular grafts
will allow it to compete effectively, both W.L. Gore and Impra can be expected
to defend their market positions vigorously, and both have substantially greater
financial, technical and other resources than CardioTech. Corvita is developing
a broad range of polyurethane

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based synthetic vascular grafts, including vascular access grafts and has
commenced clinical trials of certain of its synthetic vascular graft products in
both the United States and Europe. Thoratec has developed a small bore
polyurethane vascular access graft and has begun limited clinical trials in
foreign countries. The Joint Technology may be licensed or otherwise made
available to competitors of CardioTech.

Competition among these products will be based, among other things, on product
efficacy, safety, reliability, availability, price and patent position. An
important factor will be the timing of the market introduction of CardioTech's
or competitive products. Accordingly, the relative speed with which CardioTech
can develop products, complete the clinical trials and approval processes and
supply commercial quantities of the products to the market is expected to be an
important competitive factor. CardioTech's competitive position will also depend
upon its availability 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

CardioTech's research and development efforts are focused on developing its
synthetic vascular graft technologies. CardioTech's development decisions are
based on (1) development costs, (2) product need, (3) third-party interest and
funding availability and (4) regulatory considerations. CardioTech believes it
will need substantial additional financing to conduct human clinical trials, and
produce vascular access graft and other planned products. No assurance can be
given, however, that such financing, or other financing, will be available on
terms attractive to CardioTech, if at all.

Government Regulation

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

The steps required to qualify a medical device for marketing in the United
States are complex. Medical products regulated by the FDA are generally
classified as drugs and/or medical devices. Medical devices are classified as
Class I, II or III devices. CardioTech believes that its synthetic vascular
grafts will be regulated as Class III medical devices. In general, Class I
devices require compliance with labeling and record keeping regulations and are
subject to other general controls. Class II devices may be subject to special
controls, such as market surveillance and are subject to general controls.
Class II devices also may not be subject to clinical testing for purposes of
pre-market notification to the FDA. Class III devices, such as CardioTech's
vascular graft products, require clinical testing to assure safety and
effectiveness prior to marketing and distribution.

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At least 90 days prior to marketing, devices must be subject to pre-market
notification to the FDA to determine the product's classification and regulatory
status. If a product is found to be "substantially equivalent" to a Class I or
Class II device, or a Class III device not subject to a Pre-Marketing
Application (PMA) requirement, it may be marketed without further FDA review.
The FDA may require the submission of clinical data as a basis for determining
whether a device is "substantially equivalent." Such clinical data is often
developed under an Investigational Drug Exemption (IDE). Marketing may commence
only when the FDA issues a written order finding that the device is
"substantially equivalent." If a device is found to be "not substantially
equivalent," the device manufacturer must file a PMA with the FDA based on
testing intended to demonstrate that the product is both safe and effective.
CardioTech believes that its products will require the issuance of a PMA from
the FDA prior to commercial sale.

The PMA process requires the performance of human clinical studies under an
IDE. Upon completion of required clinical studies, results are presented to the
FDA in a PMA application. In addition to the results of clinical
investigations, the PMA applicant must submit other information relevant to the
safety and effectiveness of the device, including the results of pre-clinical
tests; a full description of the device and its components; a full description
of the methods, facilities and controls used for manufacturing; and proposed
labelling. The FDA staff then determines whether to accept the application for
filing. If accepted for filing, the application is further reviewed by the FDA
and then usually reviewed by an FDA scientific advisory panel of physicians and
others with expertise in the relevant field. The FDA will also conduct an
inspection to determine whether an applicant conforms with the FDA's current
GMP. If the FDA's evaluation is favorable, the FDA will subsequently publish an
order granting the PMA for the device. Although the initial PMA review process
is required to be completed within 180 days from the date that the PMA
application is accepted for filing, the FDA routinely raises additional issues
which must be addressed prior to the approval of a PMA, which significantly
extends the review process.

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

Whether or not FDA approval has been obtained, approval of a medical device by
comparable foreign governmental regulatory authorities must be obtained prior to
the commencement of clinical trials and subsequent marketing of such products in
such countries. Under European Community ("EC") Law, the safety, efficacy and
quality of CardioTech's products must be demonstrated prior to marketing,
including extrinsic clinical testing of such products. National laws in each of
the EC member states govern clinical trials of products, adherence to good
manufacturing practice, advertising, promotion and other matters. Certain EC
member countries permit the sale of medical devices based upon approvals
received in other EC member states. There can be no assurance that approvals
will be granted on a timely basis and the failure to receive such approvals
could have a material adverse effect on the business, financial condition and
results of operation of CardioTech.

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Employees

As of July 15, 1996, CardioTech had seven full-time employees, of whom three
are in research and development and four in executive, finance and
administration. Two full-time employees have doctorates. Certain services will
be provided by PMI to CardioTech on a transitional basis pursuant to the
Facilities and Services Agreement between the two companies executed in
connection with the Distribution (the "Facilities and Services Agreement").
CardioTech has no collective bargaining agreement with its employees, and
believes that its employee relations are good.

Business Outlook

This Form 10-K contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements include plans and objectives to develop
products, the potential performance of such products, the timing of the
development of such products, the status of competitors' products, the size of
the market for CardioTech's products and CardioTech's manufacturing
capabilities. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to, the
following:

Early Stage of Development of Implantable Synthetic Vascular Grafts.
Although CardioTech is generally engaged in the business of developing and
marketing uses for its polymer-based biomaterials, its primary focus is on the
development and marketing of small bore implantable synthetic vascular grafts.
CardioTech is in the early stages of pre-clinical testing of its first proposed
synthetic vascular graft product, and, accordingly, has not begun to market or
generate any revenue from the use of its vascular graft technology. These
products will require significant additional investment, research, development,
pre-clinical and clinical testing and regulatory approval prior to
commercialization. A commitment of substantial resources to conduct clinical
trials will be required if CardioTech is to complete the development of its
synthetic vascular grafts. See "Business-Government Regulation." There can be
no assurance that any of these products will be successfully developed and, if
developed, will meet applicable regulatory standards, obtain required regulatory
approvals, be capable of being produced in commercial quantities at reasonable
costs or be successfully marketed. Success in this market is dependent on
CardioTech's ability to complete satisfactorily the development of polyurethane-
based vascular grafts which will be safe and effective and will have benefits
not available in autologous vein grafts or presently available synthetic
vascular grafts and no assurance can be given that it will be successful in
doing so. None of CardioTech's vascular graft or other products is expected to
be commercially available for several years.

Absence of Revenue from Vascular Grafts. CardioTech's future growth will
largely depend on its ability to raise capital to support research and
development activities and commercialize its vascular graft technology. To
date, CardioTech has not generated any revenue from the sale of vascular grafts.
PMI has provided approximately $3.7 million in funding to CardioTech from 1991
through June 11, 1996, the majority of which has been expended for research and
development expenses. CardioTech expects that losses from the development,
testing and manufacture of its vascular graft technology will increase as it
conducts additional animal testing and commences clinical trials and seeks
regulatory approvals. CardioTech expects to continue to incur operating losses
unless and until such time as product sales and/or royalty payments generate
sufficient revenue to fund its continuing operations.

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Limited Revenue From Other Activities. CardioTech is also engaged in the
development, and attempted development, of other uses for its premium polymer-
based biomaterials in collaboration with other medical-device manufacturers.
Although such activities may generate revenues from medical device manufacturers
for development services performed by CardioTech or in connection with the sale
of biomaterials, CardioTech's primary focus will be on small bore vascular graft
technology. Accordingly, revenues from these sources are expected to be
relatively small in the short term.

Additional Financing Requirements and Access to Capital. Prior to the
Distribution, PMI invested approximately $3,830,000 in cash in CardioTech in
connection with the Distribution, which CardioTech believes will be sufficient
to fund its initial working capital and research and product development
activities for approximately two years from June 11, 1996. CardioTech will
require substantial funds for further research and development, future pre-
clinical and clinical trials, regulatory approvals, establishment of commercial-
scale manufacturing capabilities and the marketing of its products. CardioTech
will seek to obtain additional funds for these purposes through public or
private equity or debt financings, collaborative arrangements or from other
sources. There can be no assurance that additional funding will be available at
all or on acceptable terms to permit successful commercialization of
CardioTech's technology and products. If adequate funds are not available,
CardioTech may be required to curtail significantly one or more of its research
or development programs, or obtain funds through arrangements with collaborative
partners or others that may require CardioTech to relinquish rights to certain
of its technologies, product candidates or products.

Limited Rights in Technology; Uncertainty of Patents and Proprietary Rights.
CardioTech owns one United States patent and four patents in various European
countries relating to vascular graft manufacturing technology. In addition, PMI
granted CardioTech a perpetual, worldwide, royalty-free license to use certain
proprietary polyurethane technologies (the "Biomaterial Technology") in the
Implantable Devices and Materials Field. However, PMI and CardioTech each have
rights to use the Biomaterials Technology to fabricate medical products (other
than implantable medical devices) themselves or in joint ventures with third
parties. In addition, PMI has retained the rights to make sales of ChronoFlex
and such biomaterials for non-medical applications. As a result, PMI may
compete with CardioTech if CardioTech decides to commercialize applications of
the Biomaterials Technology in fields other than those in which it has been
granted an exclusive license. Also, Thermedics,Inc., as joint owner with PMI
of a patent and patent applications relating to certain polyurethane technology,
is free to use such rights or license them to others in any field, including the
Implantible Devices and Materials Field.

CardioTech's success will depend, in large part, on its ability to maintain
its existing patents, obtain new patents, maintain trade secret protection and
operate without infringing on the proprietary rights of third parties or having
third parties circumvent CardioTech's rights. PMI has filed and obtained United
States and foreign patents covering aspects of the Biomaterials Technology.
There can be no assurance that any of CardioTech's or PMI's existing patents
will not be challenged or future patent applications will result in the issuance
of patents, that CardioTech will develop additional proprietary products that
are patentable, that any additional patents issued to CardioTech will provide
CardioTech with any competitive advantages or will not be challenged by any
third parties, that the patents of others will not impede the ability of
CardioTech to do business or that third parties will not be able to circumvent
CardioTech's patents and licensed technology. Furthermore, there can be no
assurance that others will not independently develop or duplicate similar
technology or products, or, if patents are issued or licensed to CardioTech,
design around the patents issued or licensed to CardioTech.

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CardioTech may be required to obtain licenses from third parties to avoid
infringing patents or other proprietary rights. No assurance can be given that
any licenses required under any such patents or proprietary rights would be made
available, if at all, on terms acceptable to CardioTech. If CardioTech does not
obtain such licenses, it could encounter delays in product introductions, or
could find that the development, manufacture or sale of products requiring such
licenses could be prohibited. In addition, CardioTech could incur substantial
costs in defending itself in suits brought against it with respect to patents it
might infringe or in filing suits against others to have such patents declared
invalid.

Some of CardioTech's know-how and technology may not be patentable. To
protect its rights, CardioTech requires employees, consultants, advisors and
collaborators to enter into confidentiality agreements. There can be no
assurance, however, that these agreement will provide meaningful protection for
CardioTech's trade secrets, know-how or other proprietary information in the
event of any unauthorized use or disclosure. Further, CardioTech's business may
be adversely affected by competitors who independently develop competing
technologies, especially if CardioTech obtains no, or only narrow, patent
protection.

Technological Change and Competition. The medical device industry is subject
to rapid and substantial technological change. Several companies currently sell
synthetic graft products for certain specific applications in the United States
and worldwide and have done so for many years. Although CardioTech believes
that the attributes of its polyurethane-based grafts will allow its products to
compete effectively, these companies can be expected to defend their market
positions vigorously. Moreover, while CardioTech is aware of only two
competitors developing polyurethane-based vascular grafts currently, potential
competitors of CardioTech in the United States and abroad are numerous and
include, among others, both large and small synthetic materials companies,
medical device firms, universities and other research institutions. There can be
no assurance that CardioTech's potential competitors will not succeed in
developing technologies and products that are more effective than any that are
being developed by CardioTech or that would render CardioTech's technologies and
products obsolete or noncompetitive. Many of these potential competitors have
substantially greater financial and technical resources and production and
marketing capabilities than CardioTech.

Many of CardioTech's competitors have significantly greater experience than
CardioTech in conducting pre-clinical testing and clinical trials of medical
devices and obtaining FDA and other regulatory approvals of products for use in
health care. Moreover, a competitor developing polyurethane-based grafts is
presently conducting clinical trials in both the United States and Europe
relating to such products. Accordingly, CardioTech's competitors may succeed in
obtaining FDA approval for products more rapidly than CardioTech. If CardioTech
commences significant commercial sales of its vascular graft products, it will
also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which it has limited experience. See "Business -
Competition."

Attraction and Retention of Key Employees and Scientific Collaborators.
CardioTech is highly dependent on the principal members of its management and
scientific staff, the loss of whose services could have a material adverse
effect on CardioTech. Furthermore, recruiting and retaining qualified
scientific personnel to perform research and development work in the future will
also be critical to CardioTech's success. Although CardioTech believes it will
be successful in attracting and retaining skilled and experienced scientific
personnel, there can be no assurance that CardioTech will be able to attract and
retain such personnel on acceptable terms given the competition among numerous
medical device companies, universities and non-profit research institutions for
experienced scientists. CardioTech's anticipated growth and expansion into areas
and activities requiring additional expertise

9
<PAGE>

such as clinical testing, governmental approvals, production and marketing, are
expected to place increased demands on CardioTech's resources. These demands
are expected to require the addition of new management personnel and the
development of additional expertise by existing management personnel. The
failure to acquire such services or to develop such expertise could materially
adversely affect CardioTech's business.

Limited Manufacturing Capability. The development and manufacture of
CardioTech's products are subject to current good laboratory practices ("GLP")
and good manufacturing practices ("GMP") requirements prescribed by the FDA or
other standards prescribed by the appropriate regulatory agency in the country
of use. Although CardioTech currently has the ability to produce quantities of
synthetic vascular grafts sufficient to support its current needs and its needs
for early-stage clinical trials, it may need to acquire additional manufacturing
facilities and improve its manufacturing technology in order to meet the volume
and cost requirements for later clinical trials and will require additional
manufacturing facilities in order to undertake commercial production of vascular
grafts if it elects to do so. There can be no assurance that CardioTech will be
able to obtain or manufacture such products in a timely fashion at acceptable
quality and prices, that it or its suppliers can comply with GLP or GMP, as
applicable, or that it or its suppliers will be able to manufacture an adequate
supply of product. See "Business -Manufacturing."

Absence of Sales and Marketing Experience. CardioTech expects to market its
synthetic vascular grafts either through a small, targeted direct sales group or
co-marketing arrangements with third parties, if and when such products approach
FDA marketing approval. To date, CardioTech has had no experience in sales,
marketing or distribution of vascular grafts or other implantable devices. In
order to market vascular grafts directly, CardioTech would need to develop a
marketing staff and sales force with technical expertise. There can be no
assurance that CardioTech will be able to build such a marketing staff or sales
force, that the cost of establishing such a marketing staff or sales force will
not exceed any product revenue or that CardioTech's direct sales and marketing
efforts will be successful. In addition, if CardioTech succeeds in bringing one
or more products to market, it may compete with other companies that currently
have extensive and well-funded marketing and sales operations. There can be no
assurance that CardioTech's marketing and sales efforts would compete
successfully against such other companies. To the extent CardioTech enters into
co-marketing arrangements, any revenue received by CardioTech will be dependent
on the efforts of third parties and there can be no assurance that such efforts
will be successful. See "Business - Marketing."

Reliance on PMI for Administrative Services. Prior to the Distribution,
CardioTech received administrative and other services through its parent, PMI.
The annual expense to CardioTech of operating as a public company after the
Distribution may thus be greater than the cost of management services provided
by PMI. This would be due to the loss of the economies of scale associated with
the provision of accounting, cash management, personnel, regulatory compliance,
employee benefits, insurance and other services by PMI, as compared to the cost
to CardioTech of replacing all of these necessary functions on a stand-alone
basis. Accordingly, although PMI will provide CardioTech with certain
management and administrative services for a limited period of time after the
Distribution, there can be no assurance that CardioTech will develop the
necessary management and administrative depth to successfully operate its
business or that any increased costs to CardioTech of replacing services and
personnel heretofore provided by PMI will not have an adverse effect on
CardioTech's business or results of operations.

10
<PAGE>

Extensive Government Regulation. The production and marketing of CardioTech's
products and ongoing research and development activities are subject to
extensive regulation by numerous governmental authorities in the United States
and other countries. Prior to marketing, any synthetic vascular grafts
developed by CardioTech must undergo rigorous pre-clinical testing and clinical
trials, as well as an extensive regulatory approval process mandated by the FDA
for marketing in the United States or foreign regulatory agencies for marketing
in their respective jurisdictions. FDA approval may take many years and require
the expenditure of substantial resources. In addition, modifications to
regulations and changes in interpretation of regulations occur regularly and can
materially and adversely affect the timing and cost of CardioTech's product
introductions. CardioTech has limited experience in conducting and managing the
pre-clinical and clinical trials necessary to obtain government approvals. There
can be no assurance that the results of such clinical trials will be consistent
with the results obtained in pre-clinical studies or that the results obtained
in later phases of clinical trials will be consistent with those obtained in
earlier phases. There also can be no assurance that polyurethane-based
synthetic vascular grafts or other implantable products will be shown to be safe
and effective or that regulatory approval for any such product will be obtained
on a timely basis, if at all. Delays in obtaining regulatory approvals would
adversely affect the marketing of products developed by CardioTech and
CardioTech's ability to receive product revenue or royalties. Although
CardioTech intends to make use of fast-track regulatory approval programs when
possible, there can be no assurance that CardioTech will be able to obtain the
clearances and approvals necessary for clinical testing or for manufacturing and
marketing its products. Existing or additional government regulation could
prevent or delay regulatory approval of CardioTech's products or affect the
pricing or marketing of such products. See "Business - Government Regulation."

CardioTech's activities relating to the development of uses for its polymer-
based biomaterials and implantable medical devices in collaboration with other
medical-device manufacturers may also be subject to regulatory approval
processes similar to those described above relating to vascular grafts.

Quarterly Fluctuations. CardioTech's quarterly operating results are likely
to vary significantly depending on factors such as the results of pre-clinical
or clinical trials and, if CardioTech is able to commercialize its vascular
graft products, the timing of significant orders for vascular grafts.
CardioTech's expense levels are based in part on its expectations as to future
revenue. If revenue levels are below expectations, operating results will be
adversely affected.

Health Care Reimbursement. CardioTech's ability to commercialize small bore
vascular grafts successfully will depend in part on the extent to which
reimbursement for the cost of such products and related treatment will be
available from government health administration authorities, private health
coverage insurers and other organizations. Third-party payors are increasingly
challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved health care products,
and there can be no assurance that adequate third-party coverage will be
available for CardioTech to maintain price levels sufficient for the realization
of an appropriate return on its investment in product development.

Product Liability. The testing, marketing and sale of human healthcare
products entail an inherent risk of allegations of product liability, and there
can be no assurance that substantial product liability claims will not be
asserted against CardioTech. CardioTech currently has limited product liability
insurance coverage. CardioTech will seek to obtain additional product liability
insurance for human clinical trials if and when its vascular graft products are
commercialized; however, there can be no

11
<PAGE>

assurance that adequate insurance coverage will be available at acceptable
costs, if at all, or that a product liability claim would not materially
adversely affect the business or financial condition of CardioTech.

Absence of Public Market; Possible Volatility of Stock Price; Possible
Delisting. Prior to the Distribution, there had been no public market for the
CardioTech Common Stock. There can be no assurance regarding the prices at which
the CardioTech Common Stock will trade. The market prices for securities of
emerging companies has historically been highly volatile. Announcements of
technological innovations or new commercial products by CardioTech or its
competitors, regulatory developments, disputes concerning patent or proprietary
rights, publicity regarding actual or potential medical results relating to
products under development by CardioTech or its competitors, public concern as
to the safety of CardioTech's products, and economic and other external factors,
as well as period-to-period fluctuations in financial results, may have a
significant impact on the market price of CardioTech Common Stock.

The CardioTech Common Stock is listed on the American Stock Exchange ("AMEX").
CardioTech is subject to AMEX's maintenance requirements. A failure of
CardioTech Common Stock to meet AMEX's maintenance requirements may result in a
delisting of such securities. In particular, CardioTech may have difficulty
maintaining the minimum market capitalization requirements of AMEX because such
capitalization is dependent on the price at which the shares of CardioTech
Common Stock trades from time to time. The liquidity of securities not listed
on an exchange or delisted securities, which would probably trade in the over-
the-counter markets, may be impaired, not only in the number of shares that
could be bought or sold, but also through delays in the timing of transactions,
reductions in securities analysts' and media coverage of CardioTech, and lower
prices than might otherwise be attained.

Absence of Dividends. CardioTech has never paid cash dividends on the
CardioTech Common Stock and does not anticipate paying any cash dividends in the
foreseeable future.

Inflation. The moderate rate of inflation has not had a material effect
on the Company's operations.

12
<PAGE>

Item 2. PROPERTIES

CardioTech's executive offices are located in Woburn, Massachusetts, a
facility owned by PMI. CardioTech leases a total of approximately 7,800 square
feet at PMI's facilities in Woburn, Massachusetts and Tarvin, United Kingdom.
PMI leases these properties to CardioTech pursuant to the Facilities and
Services Agreement. CardioTech believes that its current facilities are adequate
for the next twelve months, after which the Facilities and Services Agreement
will expire and CardioTech may need to seek replacement facilities. Although
CardioTech believes that alternative facilities can be leased on acceptable
terms, there is no assurance that CardioTech will be able to do so.

13
<PAGE>

Item 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

14
<PAGE>

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the last quarter of the
fiscal year ended March 31, 1996.

15
<PAGE>

PART II
Items 5

MARKET INFORMATION FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock began trading on the American Stock Exchange
under the symbol "CTE" on June 12, 1996. Prior to that date there was no
established trading market for the Company's Common Stock. For the quarter ended
June 30, 1996, the AMEX quoted a high sales price of $5.375 and a low sales
price of $3.125. The Company has not paid any cash dividends during the last two
fiscal years. There were approximately 412 stockholders of record as of June 30,
1996. Not included in this number are shares held in nominee or street name.
16
<PAGE>

Item 6. Cardio Tech International, Inc.
Selected Consolidated Financial Data

The financial information set forth below is intended to present management's
estimate of the results of consolidated operations and financial condition of
CardioTech as if it had operated as a stand-alone company since its inception.
Certain of the costs and expenses presented in these consolidated financial
statements represent intercompany allocations and management estimates of the
cost of services provided by PMI and its subsidiaries. As a result, the
consolidated financial statements presented may not be indicative of the results
that would have been achieved had CardioTech operated as a nonaffiliated entity.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------------------------

1992 1993 1994 1995 1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:

Research Revenues.......... $429,123 $422,590 $285,876 $407,510 $228,806
Operating Expenses:
Research and
development(1)....... 369,347 377,231 699,919 708,723 910,676
Selling, general and
administrative....... 214,657 228,680 375,886 297,727 512,926
--------- --------- ---------- ---------- -----------
Total operating
expenses............. 584,004 605,911 1,075,805 1,006,450 1,423,602
--------- --------- ---------- ---------- -----------

Net loss................... (154,881) (183,321) (789,929) (598,940) (2,188,030)
========= ========= ========== ========== ===========

At March 31,
----------------------------------------------------------------------------
1994 1995 1996
----------------------------------------------------------------------------
Balance Sheet Data(2):

Total current assets....... $504 $504 $504
Working capital............ 504 504 504
Total assets............... 52,222 44,150 35,694
Stockholder's equity....... 52,222 44,150 35,694
</TABLE>

(1) Included in research and development expenses for the year ended March 31,
1994 is a $114,000 charge for incomplete technology which was purchased in
connection with the acquisition of Newtec Vascular Products Limited.

(2) Balance sheet data prior to 1994 is not meaningful. All intercompany
activity related to the Company's operations and all amounts receivable to and
payable by the Company are processed by PMI, its former parent, and the net
amount is recorded as Due to Parent in Stockholders Equity.

17
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

CardioTech was incorporated as a majority-owned subsidiary of PMI in
March 1993 under the name PolyMedica Biomaterials, Inc., to continue the
biomaterials and vascular graft business which had been operated as a division
of PMI starting in 1990. It was renamed CardioTech International, Inc. in March
1996 in anticipation of the Distribution.

CardioTech was established as a separate subsidiary to focus on PMI's
existing biomaterials business, with a particular emphasis on accelerating the
research, development and commercialization of vascular graft products and other
proprietary biomaterials. CardioTech's medical device product nearest to
commercialization is a vascular access graft. CardioTech has developed a unique
manufacturing process involving cold coagulation casting that results in a
micropourous compliant graft, with compressible walls and an inherent ability to
"self seal." CardioTech believes that reducing puncture site bleeding by using a
self-sealing polyurethane material may lower morbidity rates. To date, there
have been no sales of CardioTech's vascular grafts.

In addition to the graft research and development program, since 1990
CardioTech has been engaged in various internal and joint venture programs with
corporate partners for the development and sale of ChronoFlex and other
proprietary biomaterials for use in medical devices manufactured by third
parties. This activity has generated research revenues for CardioTech.

CardioTech is headquartered in Massachusetts and operates from
manufacturing and laboratory facilities located in Massachusetts and the
United Kingdom.

As CardioTech is now focusing more of its research and development
resources on the vascular graft program, period to period comparisons of changes
in research revenues are not necessarily indicative of results to be expected
for any future period.

Results of Operations

Fiscal Year Ended March 31, 1996 Compared to the Fiscal Year Ended March 31,
1995

The Company's operating results for the year ended March 31, 1996,
resulted in a net loss of $2,188,030 compared to a net loss of $598,940 for
the year ended March 31, 1995. In fiscal 1996, the Company incurred $993,234
in one time costs related to the Distribution. These costs principally
consisted of outside professional fees.

Research revenues were $228,806 in fiscal 1996, compared to $407,510
in fiscal 1995. The fluctuation in research revenues was attributable to the
completion of one research and development contract and evolution of a
research and development contract into a supply agreement.

Research and development expenses were $910,676 and $708,723 for the
years ended March 31, 1996 and 1995. The increase in these expenses
principally related to higher pre-clinical costs in fiscal 1996 in connection
with the Company's development of a vascular access graft for hemodialysis
patients.

18
<PAGE>

Selling, general and administrative expenses were $512,926 and $297,727
for the years ended March 31, 1996 and 1995. The increase in these expenses
principally related to costs associated with the Distribution and promotion of
advanced biomaterials to potential strategic partners.

Fiscal Year Ended March 31, 1995 Compared to the Fiscal Years Ended March 31,
1994 and 1993

Research revenues were $407,510, $285,876 and $422,590 for the years
ended March 31, 1995, 1994 and 1993. The fluctuations in research revenues were
attributable to changes in the mixture of ongoing development contracts during
each period.

Research and development expenses were $708,723, $699,919 and $377,231
for the years ended March 31, 1995, 1994 and 1993. The increase in fiscal 1994
was principally due to: (i) the recording of a charge of $114,000 for the
purchase of in-process research and development in connection with the September
1993 acquisition of Newtec Vascular Products Limited ("Newtec") and (ii) the
inclusion of research and development expenses for Newtec's ongoing vascular
graft program for the remainder of fiscal 1994. Research and development
expenses in fiscal 1995 include a full year of vascular graft development.

Selling, general and administrative expenses were $297,727, $375,886 and
$228,680 for the years ended March 31, 1995, 1994 and 1993. In fiscal 1994,
CardioTech incurred new operating costs in connection with the Newtec
acquisition, certain legal costs regarding a development agreement and higher
promotional costs for its advanced biomaterials. In fiscal 1995, selling,
general and administrative expenses were lower than fiscal 1994 primarily due to
a decrease in legal fees and promotional expenses.

Liquidity and Capital Resources

CardioTech's future growth will depend on its ability to raise capital
to support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated any revenue from the
sale of vascular grafts, although it has received a minor amount of research
revenues relating to its other biomaterials applications. Since inception,
funding from PMI has been used to finance the development of CardioTech's
technologies. CardioTech expects to continue to incur operating losses unless
and until product sales and/or royalty payments generate sufficient revenue to
fund its continuing operations.

CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTech's capital requirements depend on numerous factors,
including but not limited to, the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.

CardioTech is currently conducting its operations with approximately
$3,830,000 in cash contributed by PMI in connection with the Distribution.
CardioTech estimates such amounts will be sufficient to fund its initial working
capital and research and development activities until approximately June 1998.

Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996, PMI
has funded approximately $4.1 million in operating losses

19
<PAGE>

to support CardioTech's research activities. Future expenditures for product
development, especially relating to outside testing and clinical trials, are
discretionary and, accordingly, can be adjusted to available cash.

20
<PAGE>

CardioTech will seek to obtain additional funds through public or
private equity or debt financings, collaborative arrangements, or from other
sources. There can be no assurance that additional financing will be available
at all or on acceptable terms to permit successful commercialization of
CardioTech's technology and products. If adequate funds are not available,
CardioTech may be required to curtail significantly one or more of its research
and development programs, or obtain funds through arrangements with
collaborative partners or others that may require CardioTech to relinquish
rights to certain of its technologies, product candidates or products.

21
<PAGE>

<TABLE>
<CAPTION>
Item 8. EXHIBIT A
<S> <C>

INDEX OF FINANCIAL STATEMENTS Page

Report of Independent Accountants 23

Consolidated Balance Sheets as of March 31, 1996 and 1995 24

Consolidated Statements of Operations for each of the three years in 25
the period ended March 31, 1996

Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended March 31, 1996 26

Consolidated Statements of Cash Flows for each of the three years in 27
the period ended March 31, 1996

Notes to Consolidated Financial Statements 28-33
</TABLE>

22
<PAGE>

Report of Independent Accountants
To 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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our 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. as of March 31, 1996 and 1995, and results of its operations
and its cash flows for the three years in the period ended March 31, 1996 in
conformity with generally accepted accounting principles.

From inception to June 12, 1996 the Company was a majority-owned subsidiary of
PolyMedica Industries, Inc. As explained in Note B to the financial statements,
certain of the costs and expenses presented in the financial statements
represent intercompany allocations and management estimates of the costs of
services provided by PolyMedica Industries, Inc. As a result, the financial
statements presented may not be indicative of the financial position or results
of operations that would have been achieved had the Company operated as a
nonaffiliated entity.

Boston, Massachusetts Coopers & Lybrand L.L.P
May 29, 1996, except as to the information presented
in Note J, for which the date is June 13, 1996

23
<PAGE>

CardioTech International, Inc.
Consolidated Balance Sheets

March 31, 1995 March 31, 1996
-------------- --------------
ASSETS

Current assets:
<S> <C> <C>
Cash $ 504 $ 504

Property and equipment, net 43,646 35,190
------ ------
Total assets $44,150 $35,694
====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY

Stockholders' equity:
<S> <C> <C>
Preferred stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding
Common stock, $.01 par value, 20,000,000 shares
authorized; 2,831,491 shares issued and outstanding 2,831 2,831
Due to parent 1,884,392 4,063,966
Accumulated deficit (1,843,073) (4,031,103)
--------- ---------

Total stockholders' equity 44,150 35,694
------ ------

Total liabilities and stockholders' equity $44,150 $35,694
====== ======
</TABLE>

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

24
<PAGE>

CardioTech International, Inc.
Consolidated Statements of Operations

Years Ended March 31,
1994 1995 1996
---------------------------------------
<S> <C> <C> <C>

Research revenues $285,876 $ 407,510 $ 228,806

Operating expenses:
Research and development 699,919 708,723 910,676
Selling, general and administrative 375,886 297,727 512,926
------- ------- -------
Total operating expenses 1,075,805 1,006,450 1,423,602
---------- --------- ----------
Other Expenses:
Spin off transaction costs (993,234)
---------- --------- ---------

Net loss $ (789,929) (598,940) (2,188,030)
========== ========= ==========
Loss per common share $ (.28) (.21) (.77)
========== ========= ==========

Weighted average number
of shares outstanding 2,831,941 2,831,941 2,831,941
</TABLE>

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

25
<PAGE>

CardioTech International, Inc.
Consolidated Statements of Stockholders' Equity
For the years ended March 31, 1996, 1995 and 1994

Common stock
------------
<TABLE>
<CAPTION>

Total
Number Due to Accumulated Stockholders'
of shares Amount Parent Deficit Equity
--------- ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1993 2,831,491 $2,831 $451,373 $(454,204) $ ---

Net loss (789,929) (789,929)

Advance from parent 842,151 842,151
--------- ---------- ---------- ----------- -----------

Balance at March 31, 1994 2,831,491 2,831 1,293,524 (1,244,133) 52,222

Net loss (598,940) (598,940)

Advance from parent 590,868 590,868
--------- ---------- ---------- ----------- -----------

Balance at March 31, 1995 2,831,491 2,831 1,884,392 (1,843,073) 44,150

Net loss (2,188,030) (2,188,030)

Advance from parent 2,179,574 2,179,574
--------- ---------- ---------- ----------- -----------

Balance at March 31, 1996
2,831,491 $2,831 $4,063,966 ($4,031,103) $35,694
========= ========== ========== =========== ===========
</TABLE>

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

26
<PAGE>

CardioTech International, Inc.
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
Years Ended March 31,
1994 1995 1996
---- ---- ----
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $(789,929) $(598,940) $(2,188,030)
Adjustments to reconcile net loss
to net cash flows from
operating activities:
Depreciation 4,547 8,912 9,238
Loss on disposal of fixed assets 2,330 3,434 2,082
-------- ------- ---------

Net cash flows from operating
activities (783,052) (586,594) (2,176,710)
<CAPTION>
Cash flows from financing activities:
<S> <C> <C> <C>
Advance from parent 783,556 586,594 2,176,710
-------- ------- ---------

Net increase in cash 504 -- --
-------- ------- ---------

Cash at beginning of period -- 504 504
-------- ------- ---------
Cash at end of period $ 504 $ 504 $ 504
======== ======== =========

Supplemental cash flow information:
Noncash transactions:
Transfer of property and
equipment from parent $ 58,595 -- --

</TABLE>

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

27
<PAGE>

A. Nature of Business:

CardioTech International, Inc. (including its subsidiary,
collectively "CardioTech") develops, manufactures and markets polymer
technologies with particular emphasis on the development of implantable
synthetic grafts for a broad variety of applications, including vascular access
grafts, peripheral grafts and coronary artery bypass grafts. It is
headquartered in Massachusetts and operates from manufacturing and laboratory
facilities located in Massachusetts and the United Kingdom.

Basis of Presentation

CardioTech's business, which is the basis for these financial
statements, is a spinoff (the "Distribution") of a portion of the business of
PolyMedica Biomaterials, Inc. ("Biomaterials"), a majority-owned subsidiary of
PolyMedica Industries, Inc. ("PMI") which was incorporated in March 1993. The
accompanying financial statements, which are derived from the historical books
and records of PMI, include the assets, liabilities, revenues and expenses of
CardioTech at historical cost. The other portion of Biomaterials business,
which includes certain other technology, will be retained by PMI.

CardioTech's spunoff business operated as a division of PMI starting in
1990. In September 1993, it purchased certain assets of Newtec Vascular
Products Limited ("Newtec"), a company that had conducted development work on
small bore vascular grafts. Newtec operated as a division of PMI until June
1995 when it was incorporated as a wholly-owned subsidiary of CardioTech.

These financial statements are intended to present management's
estimates of the results of consolidated operations and financial condition of
CardioTech as if it had operated as a stand-alone company since inception. As
explained below in this note, certain of the costs and expenses presented in
these consolidated financial statements represent intercompany allocations and
management estimates of the cost of services provided by PMI and its
subsidiaries. As a result, the consolidated financial statements presented may
not be indicative of the results that would have been achieved had CardioTech
operated as a nonaffiliated entity.

B. Summary of Significant Accounting Policies:

Future Operations

CardioTech's future growth will largely depend on its ability to raise
capital to support research and development activities and to commercialize its
vascular graft technology. To date, CardioTech has not generated any revenue
from the sale of vascular grafts, although it has received a minor amount of
research revenue related to its other biomaterials applications. Since
inception, funding from PMI has been used to finance the development of
CardioTech's technologies. CardioTech expects to continue to incur operating
losses until vascular graft product sales and/or royalty payments generate
sufficient revenue to fund its continuing operations.

28
<PAGE>

numerous factors, including but not limited to the progress of its
research and development programs, the progress of pre-clinical and clinical
testing, the time and costs involved in obtaining regulatory approvals, the cost
of filing, prosecuting, defending and enforcing any intellectual property
rights, competing technological and market developments, changes in CardioTech's
development of commercialization activities and arrangements, and the purchase
of additional facilities and capital equipment.

In June 1996, CardioTech received approximately $3.8 million in cash
and assets contributed by PMI in exchange for 973,758 shares of CardioTech
stock. CardioTech estimates such amounts will be sufficient to finance its
operations at its current level of development activity for approximately two
years from the Distribution.

Use of Estimtes

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to take certain estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the report
period. Actual results could differ from those estimates.

Due to Parent, Advance from Parent

Certain intercompany charges related to CardioTech's operations and
certain amounts receivable to and payable by CardioTech are processed by PMI,
its former parent, and the net amount is recorded as Advance from Parent in
Stockholders' Equity. Amounts Due to Parent will be permanently invested by the
parent in connection with the Common Stock Subscription Agreement.

Net Loss per Common Share

The net loss per common share is calculated using the number of
outstanding shares (2,831,491) of CardioTech before the Distribution
as described in Note J.

Uncertainties

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

29
<PAGE>

Research Revenue

Research revenue is generated in connection with the development and
sale of ChronoFlex and other proprietary biomaterials for use in medical
devices. In certain instances, exclusivity, royalty and license fees are earned
from various strategic partners with whom CardioTech has contracts. CardioTech
recognizes these fees as revenue in accordance with the terms of the contracts.
Contracted development fees from corporate partners are recognized upon
completion of service or the attainment of technical benchmarks, as
appropriate.

Research and Development Expenses

Research and development expenses are charged to expense as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates expected to be in effect when they are
realized. A valuation reserve against net deferred assets is recorded, if,
based upon weighted available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized. For income purposes,
CardioTech's results have been consolidated with the results of PMI. Therefore,
no estimated income tax benefits have been reflected. After the Distribution,
CardioTech's results of operations will no longer be combined with PMI.
Accordingly, CardioTech will not receive any benefit from net operating losses
incurred through the date of the Distribution.

C. Arrangements with PMI and Subsidiaries:

Since CardioTech's inception, all facilities and support services,
including research and administrative support, have been provided by PMI. For
these services, CardioTech was charged $1,792,500, $591,000, and $842,000, for
the years ended March 31, 1996, 1995 and 1994, respectively. These charges
represent an allocation of CardioTech's proportionate share of PMI's overhead
costs using formulas which management believes are reasonable based upon
CardioTech's use of facilities and services. All other costs for all periods
presented, including payroll costs, are directly attributed to CardioTech and
have been paid by PMI and charged to CardioTech.

In connection with the Distribution, CardioTech entered into the
following agreements with PMI:

Distribution Agreement

This agreement provides for the principal corporate transactions
required to effect the Distribution, including, among other things, the
preparation of a registration statement registering the CardioTech common stock
under the Exchange Act and an undertaking by CardioTech to prepare a
registration statement registering the shares of CardioTech common stock to be
issued upon the exercise of the CardioTech warrants under the Securities Act.

30
<PAGE>

This agreement also allocates the costs related to the implementation
of the Distribution between PMI and CardioTech and provides that each company
will share equally any liabilities under the federal and any state securities
laws incurred as a result of the distribution of the Information Statement.

Facilities and Services Agreement

This agreement provides that PMI will continue to provide certain
administrative services including purchasing, benefits administration,
accounting, management and data processing services to CardioTech and will make
available certain facilities and equipment to CardioTech. PMI will be
reimbursed monthly by CardioTech for the direct costs and expenses incurred in
connection with the provisions of such services. The agreement has a term of
one year. CardioTech is committed to make monthly fixed payments of $15,000, or
$180,000 annually. CardioTech has also agreed to reimburse PMI for 50% of all
expenses incurred in connection with the Distribution. CardioTech expects its
portion of these fees and expenses to be approximately $400,000.

License Agreement

PMI has granted to CardioTech an exclusive, perpetual, world-wide,
royalty-free license for CardioTech to use all of the necessary patent and
other intellectual property owned by PMI in the implantable devices and
materials field (collectively, "PMI Licensed Technology"). PMI, at its own
expense, will file patent or other applications for the protection of all new
inventions formulated, made or conceived by PMI during the term of the license
that related to PMI Licensed Technology and all such inventions will be part of
the technology licensed to CardioTech. CardioTech, at its own expense, will
file patent 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 PMI Licensed Technology and all such inventions shall be
exclusively licensed to PMI for use by PMI in fields other than the implantable
devices and materials field.

Tax Matters Agreement

The Tax Matters Agreement provides, among other things, that PMI will
be responsible for all federal, state, local and foreign tax liabilities of
CardioTech for periods ending on or prior to June 11, 1996 and CardioTech will
be responsible for all tax liabilities of CardioTech subsequent to that time.
The Tax Matters Agreement further provides that for the tax year of PMI that
includes June 11, 1996 and the tax year of CardioTech that commences
immediately following June 11, 1996, PMI will claim on its federal income tax
returns certain specified tax benefits and CardioTech will not claim any of
such tax benefits through June 11, 1996.

D. Property and Equipment:

Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method based on the estimated useful lives of the
various assets which range from five to seven years. Upon retirement or
disposal of fixed assets, the costs and accumulated depreciation are removed
from the accounts, and any gain or loss is reflected in income. Expenditures
for repairs and maintenance are charged to expense as incurred.

31
<PAGE>

Property and equipment consist of the following:
<TABLE>
<CAPTION>
March 31, March 31,
1995 1996
---- ----
<S> <C> <C>

Laboratory equipment $44,796 $44,796

Furniture, fixtures and office equipment 12,330 10,712
------ ------

57,126 55,508

Less accumulated depreciation (13,480) (20,318)
-------- --------

$43,646 $35,190
====== ======
</TABLE>
Depreciation expense for property and equipment for the years ended
March 31, 1996, 1995, and 1994 was approximately $9,238, $8,912, and $4,547
respectively.

E. Stockholders' Equity:

CardioTech was incorporated in March 1993 and issued 67,500 shares of
its common stock, of which 60,000 shares were issued to PMI and 7,500 shares
were issued to certain founders. There were 100,000 shares of Common Stock
authorized for issuance. See Notes H and J.

On March 19 and May 9, 1996, CardioTech amended its Articles of
Organization to : (i) effect a net 41.95 for one stock split of CardioTech
Common Stock (reflecting a 54.7328 for one stock split effected on March 19,
1996 and a 0.76645 for one reverse stock split effected on May 9, 1996), (ii)
increase the number of authorized shares of CardioTech Common Stock to
20,000,000 shares and (iii) authorize a class of 5,000,000 shares of Preferred
Stock. The financial statements have been restated to reflect these amendments.

F. Purchase of Certain Assets from Newtec Vascular Products Limited:

In September 1993, PMI purchased certain assets from Newtec for
$176,500 and transferred the assets to CardioTech. These assets principally
consisted of laboratory equipment, patents and know-how related to vascular
graft technology. The purchase price was allocated to the tangible and
intangible assets based on the fair market value of those assets. At the time
of the purchase, CardioTech evaluated the purchased technology and considered
the additional development work necessary to produce safe, reliable and
effective grafts for commercial sale. Based on CardioTech's evaluation, it was
determined that the purchased technology was incomplete and, because the
technology had no alternative future use (in other research and development
projects or otherwise), the portion of the purchase price allocated to the
patent and related know-how, or $113,600, was charged to research and
development expense in September 1993.

32
<PAGE>

G. Major Customers:

Customers comprising more than 10% of CardioTech's research revenues
are shown as follows:
<TABLE>
<CAPTION>

Year Ended
March 31,
---------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>

Customer A 33% 49% 38%
Customer B -- 19% 28%
Customer C 46% 18% --
</TABLE>

H. Related Party Transactions:

As of March 31, 1996, the following executive officers and directors
of PMI owned a total of 314,623 shares (effected for stock split ) of
CardioTech: Michael Szycher, Ph.D., Steven J. Lee, Arthur A. Siciliano, Ph.D.,
Andrew M. Reed, Ph.D. , Eric G. Walters and Robert J. Zappa. See Note I.

One officer of PMI currently serves on CardioTech's Board of
Directors.

I. Stock Options:

CardioTech's 1996 Employee, Director and Consultant Stock Option Plan
(the "Plan") was approved by CardioTech's Board of Directors and stockholders
in March 1996. A total of approximately 1,167,000 shares of CardioTech Common
Stock have been reserved for issuance under the Plan, of which options
exercisable for approximately 879,000 shares will be granted effective as of
June 11, 1996 to members of CardioTech's Board of Directors and to certain of
its executive officers at the fair market value of CardioTech Common Stock on
the date of the grant. Of such options, options to purchase approximately
424,000 shares of CardioTech Common Stock will be granted to Dr. Szycher
pursuant to the Plan.

J. Subsequent Events:

In June 1996, CardioTech issued 973,758 shares of CardioTech Common
Stock for $3.8 million in cash, equipment having an estimated market value of
$147,000, the transfer of certain vascular graft manufacturing patents, and the
forgiveness of certain amounts due PMI. After PMI acquired these shares, it
owned 3,929,493 shares, or 92.6% of CardioTech Common Stock. CardioTech has
agreed to reimburse PMI for 50% of all expenses incurred in connection with the
Distribution. CardioTech expects its portion of these fees and expenses to be
approximately $400,000.

33
<PAGE>

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

There have been no disagreements on accounting and financial disclosure matters.

34
<PAGE>

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>

Name Age Position
---- --- --------
<S> <C> <C>
Michael Szycher, Ph.D. 57 Chairman of the Board, Chief
Executive Officer and Treasurer

Alan Edwards 48 Director and Executive Vice
President

John E. Mattern 48 Chief Operating Officer and
Chief Financial Officer

Richard J. Zdrahala, Ph.D. 52 Vice President -- Research and
Development

Gene T. Gargiulo 47 Director

Arthur A. Siciliano, Ph.D. 52 Director
</TABLE>

Dr. Szycher is Chairman of the Board, Chief Executive Officer and Treasurer
of CardioTech. Dr. Szycher has served as a director of CardioTech since
1993. He served as Chairman of PMI since October 1989, Chief Technical
Officer of PMI since November 1990 and a director of PMI since its
inception and will resign such positions as of the Distribution Date.

Mr. Edwards is Executive Vice President and a director of CardioTech, a
position he has held since March, 1996. Since September 1993, Mr. Edwards
has served as President of CardioTech's subsidiary. Prior to September
1993, he was the Managing Director and Company Secretary of Newtec. He has
spent the last seventeen years in senior management positions with vascular
graft companies, ten of these with the W.L. Gore. Mr. Edwards has been a
director of CardioTech since March 1996.

Mr. Mattern is Chief Operating Officer and Chief Financial Officer, a
position he has held since June of 1996. From April 1994 to June 1996 Mr.
Mattern was a financial consultant, consulting to bio-tech, pharmaceutical
and not for profit organizations. Mr. Mattern was Vice President of Finance
and Chief Financial Officer of Interneuron Pharmaceuticals, Inc. from
January 1992 to April 1994. In 1991 Mr. Mattern was a financial consultant.

Dr. Zdrahala is Vice President of Research and Development of CardioTech, a
position he has held since March, 1996. From 1992 to September 1995, Dr.
Zdrahala served as the Associate Director of Advanced Development of Mendox
Medicals, Inc., a vascular graft manufacturer.

Mr. Gargiulo has served as Managing Director of Research and Institutional
Sales at Brookehill Equities, Inc. since 1994. Prior to joining Brookehill
in 1994, Mr. Gargiulo was Executive Vice President -Director of Research at
Barington Capital Group, L.P. From 1984 to 1993, Mr. Gargiulo was Vice
President of Equity Research at First Boston Corporation and covered the
hospital supply industry. Mr. Gargiulo has been a director of CardioTech
since March 1996.

Dr. Siciliano has served as Executive Vice President of PMI since July
1994, Senior Vice President of PMI since January 1993 and Vice President,
Pharmaceuticals of PMI since July 1991. Dr. Siciliano served as Vice
President, Manufacturing of PMI from June 1990 to July 1991. From PMI's
inception until June 1990, he served as its Chief Operating Officer. Dr.
Siciliano has been a director of CardioTech since March 1996.

35
<PAGE>

Item 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the cash and noncash compensation paid by
PMI during each of the last three fiscal years to CardioTech's Chief
Executive Officer and the four most highly compensated executive
officers of CardioTech who received compensation in excess of
$100,000 during the year ended March 31, 1996 for services provided to
PMI.

Long-Term
Compensation
Annual Compensation Awards
------------------- --------
Other Securities
Annual Underlying All Other
Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($)(1) ($)(2) (#)(3) ($)(4)
- ----------------------------- ---------- ------------ ---------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael Szycher, Ph.D........
Chairman, Chief 1996 $229,554 $34,000 $2,492 30,000 $2,619
Executive Officer and 1995 231,785 132,500 4,500 131,250 2,421
Treasurer 1994 214,048 120,000 4,620 13,125 2,223

</TABLE>
(1) These amounts were either paid or accrued in the year shown.

(2) Represents PMI's matching cash contribution paid or accrued under
PMI's 401(k) Plan. Other compensation in the form of perquisites and
other personal benefits has been omitted in those instances where
such perquisites and other personal benefits constituted less than
the lesser of $50,000 or 10% of the total salary and bonus the named
executive officer for such year.

(3) Represents options granted under PMI's 1990 Stock Option Plan.

(4) Represents the taxable portion of group term life insurance paid
by PMI.

Compensation of Directors

The Company's policy is to pay no compensation to members of the Board for
attendance at Board meetings. All non-employee directors are reimbursed for
travel and other related expenses incurred in attending meetings of the Board of
Directors. The Company's Stock Option Plan provides for the annual automatic
grant of non-qualified options to purchase 14,854 shares of Common Stock to non-
employee directors of the Company. No options were granted under the Stock
Option Plan during fiscal 1996.

Employment Contracts and Change of Control Arrangements

CardioTech has entered into an employment agreement with Dr. Szycher (the
"Employment Agreement"), pursuant to which Dr. Szycher serves as Chief Execuitve
Officer of the Company. CardioTech will use its best efforts to cause Dr.
Szycher to be elected a member, and Chairman, of the Board of Directors.
Pursuant to the terms of the Employment Agreement, Dr. Szycher receives an
annual base salary, which is initially $150,000 and which will be reviewed
annually by the Board of Directors. Dr. Szycher 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 of Directors. The Employment Agreement
terminates on May 13, 1998. Thereafter, the term of the Employment Agreement
will be deemed to continue on a month-to-month basis if not expressly extended
while Dr. Szycher remains employed by CardioTech. Both Dr. Szycher and
CardioTech have the right to terminate the Employment Agreement at any time,
with or without cause (as defined in the Employment Agreement), upon thirty (30)
days' prior written notice. In the event that CardioTech terminates the
Employment Agreement without cause, or Dr. Szycher terminates his employment for
good reason following a change in control (as such terms are defined in the
Employment Agreement) or CardioTech fails to renew the Employment Agreement
within two (2) years following the occurrence of a change in control, Dr.
Szycher will be entitled to receive 2.99 times his annual base salary at
termination. Dr. Szycher will not compete with CardioTech for one (1) year
following termination of his employment.

The Compensation Committee, as the administrator of the Company's Stock
Option Plan, has authority to accelerate vesting of shares of Common Stock held
by any optionee in connection with certain changes of control of the Company.

36
<PAGE>

Item 12. SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT

Principal Shareholders

The following table sets forth certain information as of June 30, 1996
concerning beneficial ownership of the Company's Common Stock by each
shareholder known by the Company to be the beneficial owner of 5% or more of
its Common Stock as of June 30, 1996, each current member of the Board of
Directors, each executive officer named in the Summary Compensation Table and
all current directors and executive officers as a group.

Shares of CardioTech
Beneficially Owned
--------------------
<S> <C> <C>
Name and Address** Number(1) Percent
---------------- --------- -------

Kennedy Capital Management(2) 227,818 5.4%
425 N. Dallas Road, Suite 181
St. Louis, MO 63141

U.S. Bancorp(3) 249,030 5.9%
111 S.W. Fifth Avenue
Portland, OR 97204

John Hancock Mutual Life Insurance Company(4) 255,100 5.7%
200 Clarendon Street
Boston, MA 02116

Michael Szycher, Ph.D. (5) 402,688 9.1%

Alan Edwards (6) 126,666 2.9%

Gene Gargiulo 0 *

Arthur A. Siciliano, Ph.D. 72,166 1.7%

All directors and executive officers as a group 612,130 13.4%
(6 persons) (7)
</TABLE>
__________________
/*/ Represents beneficial ownership of less than 1% of the Company's
outstanding shares of Common Stock.
/**/ Unless indicated otherwise, the address for each person is c/o the
Company, 11 State Street, Woburn, MA 01801.

(1) The persons named in the table have sole voting and investment power
with respect to all shares shown as beneficially owned by them,
subject to the information contained in the footnotes to this table.
Amounts shown include shares issuable pursuant to the exercise of
options or warrants exercisable within 60 days after June 30, 1996.
The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of those shares. At
June 30, 1996, there were 4,244,116 shares of Common Stock
outstanding.

(2) Based upon oral information provided by Kennedy Capital Management
to the Company. Kennedy Capital Management has shared voting power and
shared investment power with respect to all shares of Common Stock
beneficially owned by them.

(3) Based upon a Schedule 13G filed by U.S. Bancorp pursuant to the
Exchange Act and the rules promulgated thereunder reporting the
beneficial ownership by it of 516,500 shares of PMI Common Stock.
Pursuant to the Distribution, an owner of 515,500 shares of
PMI Common Stock would have received 249,030 shares of CardioTech
Common Stock. U.S. Bancorp

37
<PAGE>

shared voting power and shared investment power with respect to all
shares of Common Stock beneficially owned by them.

(4) Reflects the issuance of 255,100 shares of CardioTech Common Stock
issuable upon the exercise of an immediately exercisable stock
purchase warrant.

(5) Includes 190,228 shares of Common Stock which may be purchased within
60 days of June 30, 1996 upon the exercise of stock options.

(6) Includes 126,566 shares of Common Stock which may be purchased within
60 days of June 30, 1996 upon the exercise of stock options.

(7) See notes 5 and 6. Also includes 10,610 shares of Common Stock which
may be purchased by Richard J. Zdrahala within 60 days of June 30,
1996 upon the exercise of stock options.

COMPLIANCE WITH SECTION 16(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and officers, and persons who own more than 10% of the
Company's Common Stock, to file with the Securities and Exchange Commission (the
"SEC") initial reports of beneficial ownership and reports of changes in
beneficial ownership of the Common Stock and other equity securities of the
Company. Officers, directors and greater than 10% beneficial owners are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. The Company's officers, directors and 10% beneficial owners became
subject to Section 16(a) when the Company became a public company in May 1996
and, accordingly, no reports pursuant to Section 16(a) were due during the
fiscal year ended March 31, 1996.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

None.

38
<PAGE>

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K

(a) 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 22
(2) Financial Statement Schedules:

All schedules are ommitted because they are not applicable, or not
required, or because the required information is included in the Financial
Statements or notes thereto.

(3) Exhibits
<TABLE>
<CAPTION>
Exhibit Number:
<S> <C>
2 Plan and Agreement of Distribution between PMI and CardioTech,
dated May 13, 1996 was filed as Exhibit 2 to CardioTech's Form
10 filed on March 20, 1996, as amended (the "Form 10"), and
is incorporated herein by reference.

3.1 Articles of Incorporation were filed as Exhibit 3.1 of the
Form 10 and are incorporated herein by reference.

3.2 Bylaws were filed as Exhibit 3.2 of the Form 10 and are
incorporated herein by reference.

10.1 Amended and Restated Common Stock Subscription Agreement
between PMI and CardioTech, dated May 9, 1996, was filed as
Exhibit 10.1 of the Form 10 and is 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 Facilities and Service Agreement between PMI and CardioTech,
dated May 13, 1996, was filed as Exhibit 10.3 of the Form 10
and is incorporated herein by reference.

10.4 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.

10.5 CardioTech 1996 Employee, Director and Consultant Opinion Plan
was filed as Exhibit 10.6 of the Form 10 and is incorporated
herein by reference.

10.6 Employment Agreement of Michael Szycher was filed as Exhibit
10.7 of the Form 10 and is incorporated herein by reference.
</TABLE>

39
<PAGE>

<TABLE>
<S> <C>
10.7 Warrant issued by CardioTech to John Hancock Mutual Life
Insurance Company was filed as Exhibit 10.8 of the Form 10 and
is incorporated herein by reference.

10.8 Letter Agreement between CardioTech, PMI and John Hancock
Mutual Life Insurance Company was filed as Exhibit 10.9 of
the Form 10 and is incorporated herein by reference.

10.9 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.

21 Subsidiaries of CardioTech

23 Consent of Coopers & Lybrand L.L.P.

27 Financial Data Schedule
</TABLE>

(b) Reports on Form 8-K
None

(d) See (2) above.

40
<PAGE>

Chrmoflex and Chrmofilm are registered trademarks of PMI. ChrmoThane,
ChrmoPrene, HydroThane, PolyBlend and PolyWeld are tradenames of CardioTech.

41
<PAGE>

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: July 15, 1996 CardioTech International, Inc.

By: /s/ Michael Szycher
-----------------------------
Michael Szycher
Chairman and Chief Executive Officer

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: July 15, 1996 /s/ Michael Szycher
----------------------------------------
Michael Szycher
Chairman, Chief Executive Officer
(Principal Executive Officer)

Dated: July 15, 1996 /s/ John E. Mattern
----------------------------------------
John E. Mattern
Chief Financial Officer, Chief Operating
Officer (Principal Financial and
Accounting Officer)

Dated: July 15, 1996 /s/ Gene T. Gargiulo
----------------------------------------
Gene T. Gargiulo
Director

Dated: July 15, 1996 /s/ Arthur A. Siciliano
----------------------------------------
Arthur A. Siciliano
Director

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF
CARDIOTECH INTERNATIONAL, INC.

State or Other Jurisdiction of
Name
-----
Incorporation or Organization
-----------------------------

CardioTech International Limited United Kingdom

<PAGE>

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statement of
CardioTech International, Inc. on Form S-8 of our report dated May 29, 1996,
except as to the information presented in Note J, for which the date is June 13,
1996, on our audit of the consolidated financial statements of CardioTech
International, Inc. as of March 31, 1996 and 1995 and for each of the three
years in the period ended March 31, 1996, which report is included in this
annual report on Form 10-K.

/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.

Boston, Massachusetts
July 15, 1996

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 504
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 504
<PP&E> 55,508
<DEPRECIATION> 20,318
<TOTAL-ASSETS> 35,694
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 2,831
<OTHER-SE> 32,863
<TOTAL-LIABILITY-AND-EQUITY> 35,694
<SALES> 0
<TOTAL-REVENUES> 228,806
<CGS> 0
<TOTAL-COSTS> 1,423,602
<OTHER-EXPENSES> 993,234
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,188,030)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,188,030)
<EPS-PRIMARY> (.77)
<EPS-DILUTED> (.77)

</TABLE>