Nordicus Partners Corp - Quarter Report: 2005 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2005

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-28034

CardioTech International, Inc.

(Name of small business issuer as specified in its charter)

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

229 Andover Street, Wilmington, Massachusetts		01887
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (978) 657-0075

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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

The number of shares outstanding of the registrant’s class of Common Stock as of February 8, 2006 was 19,776,933.

CARDIOTECH INTERNATIONAL, INC.

PART I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets at December 31, 2005 and March 31, 2005

	Condensed Consolidated Statements of Operations for the three and nine months ended December 31, 2005 and 2004

	Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2005 and 2004

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II -OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.	Exhibits and Reports on Form 8-K

	Signatures

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

CardioTech International, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share and per share amounts)

	December 31, 2005			March 31, 2005
ASSETS

Current assets:
Cash and cash equivalents	$	6,275		$	7,469
Accounts receivable-trade, net	3,157			3,399
Accounts receivable-other	269			231
Inventories	5,420			4,802
Prepaid expenses and other current assets	230			195
Total current assets	15,351			16,096

Property, plant and equipment, net	4,283			4,549
Amortizable intangible assets, net	632			776
Goodwill	1,638			1,638
Other assets	183			198
Investment in CorNova, Inc.	372			505
Total assets	$	22,459		$	23,762

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,576		$	1,664
Accrued expenses	668			652
Deferred revenue	185			263
Total current liabilities	2,429			2,579
Deferred rent	134			173

Stockholders’ equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized; 500,000 shares issued and none outstanding as of December 31, 2005 and March 31, 2005, respectively	—			—
Common stock; $.01 par value; 50,000,000 shares authorized; 19,533,693 and 19,258,989 shares issued and outstanding as of December 31, 2005 and March 31, 2005, respectively	195			192
Additional paid-in capital	35,872			35,263
Accumulated deficit	(16,080		)	(14,270		)
Accumulated other comprehensive loss	(91		)	(175		)
Total stockholders’ equity	19,896			21,010
Total liabilities and stockholders’ equity	$	22,459		$	23,762

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

CardioTech International, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2005			2004			2005			2004

Revenues:
Product sales	$	5,240		$	5,085		$	16,452		$	15,543
Royalties	229			178			692			540
	5,469			5,263			17,144			16,083

Operating expenses:
Cost of product sales	4,463			3,982			13,346			11,554
Research and development	358			436			1,061			976
Selling, general and administrative	1,482			1,492			4,430			4,485
	6,303			5,910			18,837			17,015
Loss from operations	(834		)	(647		)	(1,693		)	(932		)
Other income, net	9			10			99			1
Equity in net loss of CorNova, Inc.	(133		)	(15		)	(216		)	(37		)
Net loss	$	(958	)	$	(652	)	$	(1,810	)	$	(968	)

Net loss per common share, basic and diluted	$	(0.05	)	$	(0.04	)	$	(0.09	)	$	(0.05	)

Shares used in computing net loss per common share, basic and diluted	19,499			17,795			19,369			17,713

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

CardioTech International, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

	Nine Months Ended December 31.
	2005			2004
Cash flows from operating activities:
Net loss	$	(1,810	)	$	(968	)
Adjustments to reconcile net loss to net cash flows:
Fair value ascribed to options granted to nonemployees	5			1
Equity in net loss of CorNova, Inc.	216			37
Depreciation and amortization	752			764
Provision for doubtful accounts	133			—
Changes in assets and liabilities:
Accounts receivable-trade, net	109			161
Accounts receivable-other	(38		)	100
Inventories	(618		)	(23		)
Prepaid expenses and other current assets	(35		)	(167		)
Accounts payable	(88		)	(186		)
Accrued expenses	16			(172		)
Deferred revenue	(78		)	135
Deferred rent	(39		)	(35		)
Net cash flows used in operating activities	(1,475		)	(353		)

Cash flows from investing activities:
Purchase of property, plant and equipment	(342		)	(600		)
Decrease (increase) in other assets	15			(148		)
Net cash flows used in investing activities	(327		)	(748		)

Cash flows from financing activities:
Net repayments on credit line	—			(730		)
Net proceeds from issuance of common stock	616			2,553
Purchase of treasury stock	(8		)	(83		)
Net cash flows provided by financing activities	608			1,740
Net change in cash and cash equivalents	(1,194		)	639
Cash and cash equivalents at beginning of period	7,469			7,117
Cash and cash equivalents at end of period	$	6,275		$	7,756

Supplemental disclosure of cash flow information:
Interest received	$	23		$	29
Interest paid	$	—		$	20
Taxes paid	$	4		$	6

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

CARDIOTECH INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2005

(Unaudited)

1. Description of Business

CardioTech International, Inc. (including its wholly-owned subsidiaries, collectively “CardioTech” or the “Company”) is a medical device company that develops, manufactures and sells advanced products for the treatment of cardiovascular disease. Many of the products sold and under development address annual worldwide markets exceeding $1 billion. The Company’s subsidiaries are Gish Biomedical, Inc. (“Gish”), Catheter and Disposables Technology, Inc. (“CDT”), and Dermaphylyx International, Inc. (“Dermaphylyx”). The Company operates in one segment, medical manufacturing and sales.

The Company is using its proprietary technology to develop and manufacture the CardioPass^TM synthetic coronary artery bypass grafts (“CABG”), made of ChronoFlex^TM. If successfully developed, the Company believes that the CardioPass graft may be used initially to provide an alternative to patients with insufficient or inadequate native vessels for use in CABG surgery as a result of repeat procedures, trauma, disease or other factors. Gish manufactures single use cardiopulmonary bypass products that have a disposable component. CDT is an original equipment manufacturer and supplier of private-label advanced disposable medical devices from concept to finished packaged and sterilized products. Dermaphylyx markets and sells proprietary moist wound dressings available for low exudating and bleeding wounds. The biomaterials division develops, manufactures and sells ChronoFlex, a family of polyurethanes that have been demonstrated to be biocompatible and non-toxic.

CardioTech has partnered to develop a drug-eluting stent. The Company has a 30% ownership interest in the common stock of CorNova, Inc. (“CorNova”), a privately - held, development stage Company focused on the development of a next-generation drug-eluting stent (See Note 13).

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company’s investment in CorNova is accounted for using the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock.”

The Company’s corporate headquarters are located in Wilmington, Massachusetts, with manufacturing operations in California and Minnesota.

Certain accounts in the condensed consolidated financial statements and related notes have been reclassified to conform to current period presentation.

2. Interim Financial Statements

The condensed consolidated financial information for the three and nine months ended December 31, 2005 is unaudited but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial position at such date and of the operating results and cash flows for the period. The results of operations for the three and nine months ended December 31, 2005 are not necessarily indicative of results that may be expected for the entire year. The information contained in this Form 10-Q should be read in conjunction with the Company’s audited financial statements, included in its Form 10-KSB as of and for the year ended March 31, 2005 filed with the Securities and Exchange Commission.

The balance sheet at March 31, 2005 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

3. Revenue Recognition

The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements” and Emerging Issues Task Force (“EITF”) No. 00-21, “Revenue Arrangements with Multiple Deliverables”. The Company recognizes revenue from product sales upon shipment, provided that i) a purchase order has been received or a contract has been executed, ii) there are no uncertainties regarding customer acceptance, iii) the sales price is fixed or determinable and iv) collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. Contracted product design and development fees from corporate partners are recognized upon completion of service or the attainment of technical benchmarks, as appropriate and are included in product sales.

The Company also receives license and royalty fees for the use of its proprietary biomaterials. CardioTech recognizes these fees as revenue in accordance with the terms of the contracts.

Generally, the customer specifies the delivery method and is responsible for delivery costs. However, in certain situations, the customer specifies the delivery method and requests the Company pay the delivery costs and then invoice the delivery costs to the customer or include an estimate of the delivery costs in the price of the product. Delivery costs billed to customers for the three months ended December 31, 2005 and 2004 totaled $100,000 and $105,000, respectively. Delivery costs billed to customers for the nine months ended December 31, 2005 and 2004 totaled $307,000 and $320,000, respectively. Delivery costs billed to customers have been recorded as revenue.

4. Stock-Based Compensation

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

Had compensation cost for the Company’s stock option grants been determined consistent with SFAS No. 123, the Company’s net loss and net loss per share would approximate the pro forma amounts below:

	Three Months Ended December 31,						Nine Months Ended December 31,
(In thousands, except per share data)	2005			2004			2005			2004
Net loss, as reported	$	(958)		$	(652)		$	(1,810)		$	(968)
Add: Stock-based employee compensation expense included in reported net loss	—			—			—			—
Less: Stock-based employee compensation expense determined under fair value based method for all employee awards	(443		)	(914		)	(604		)	(4,285		)
Pro forma net loss	$	(1,401	)	$	(1,566	)	$	(2,414	)	$	(5,253	)
Basic and diluted net loss per share:
As reported	$	(0.05	)	$	(0.04	)	$	(0.09	)	$	(0.05	)
Pro forma	$	(0.07	)	$	(0.09	)	$	(0.12	)	$	(0.30	)

On July 8, 2004, the Board of Directors of the Company accelerated the vesting of all outstanding options, such that at July 8, 2004, all outstanding options were fully vested. The Company accelerated the vesting of the options to avoid compensation expense associated with the adoption of SFAS 123R. This action resulted in the immediate vesting of options to purchase 922,503 shares of the Company’s common stock. No compensation cost was recognized at the date of the acceleration, however, should an optionee realize a benefit from the acceleration that they would not have otherwise been eligible for, then the Company would recognize compensation expense. The compensation expense would be determined by the difference between the closing stock price at July 8, 2004 of $3.92 and the option exercise price, multiplied by the number of shares on which the optionee obtained a benefit from the accelerated vesting. At July 8, 2004 the total potential compensation expense was $149,000. Compensation cost due to the vesting acceleration of $20,000 was recorded for fiscal year 2005 for optionees who were no longer employed as of March 31, 2005. No compensation expense was recognized for the nine months ended December 31, 2005 as a result of the acceleration. At December 31, 2005, the total remaining potential unrecognized compensation cost from the acceleration is approximately $3,000.

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

The fair value of each option granted during the three and nine months ended December 31, 2005 and 2004 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended December 31,				Nine Months Ended December 31,
	2005		2004		2005		2004
Dividend yield	None		None		None		None
Expected volatility	80.00	%	80.00	%	80.00	%	80.00	%
Risk-free interest rate	4.48	%	3.87% - 4.72	%	4.14% - 4.56	%	3.87% - 4.72	%
Expected life	10 years		10 years		10 years		10 years

The weighted average fair value of options granted was $2.35 and $3.79 during the three months ended December 31, 2005 and 2004, respectively, and $2.29 and $3.79 during the nine months ended December 31, 2005 and 2004, respectively.

5. Comprehensive Income or Loss

SFAS No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and displaying of comprehensive income or loss and its components in the consolidated financial statements. Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity including such items as unrealized holding gains (losses) on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. During the three and nine months ended December 31, 2005 and 2004, the Company’s only item of other comprehensive income or loss was its equity in unrecognized holding income or losses on securities classified as available for sale recorded by CorNova.

	Three Months Ended December 31,						Nine Months Ended December 31,
(In thousands)	2005			2004			2005			2004
Net loss	$	(958	)	$	(652	)	$	(1,810	)	$	(968	)
Other comprehensive income (loss)	(58		)	(3		)	84			(22		)

Comprehensive loss	$	(1,016	)	$	(655	)	$	(1,726	)	$	(990	)

6. Related Party Transactions

The Company has an investment in CorNova of which Dr. Eric Ryan is President and a major shareholder. On July 15, 2004, the Company entered into a two-year consulting agreement with Dr. Ryan, which provides for a range of payments, in either cash or common stock, for the achievement of certain milestones related to the manufacturing, commencement of European clinical trials and the receipt of a restricted CE mark of the Company’s CardioPass synthetic coronary artery bypass graft. Total potential payments range from $161,000 to $216,000 based on the timing of the milestone achievements. As part of the agreement, Dr. Ryan has the opportunity to earn up to an additional $41,000 based on the achievement of certain milestones related to other products of the Company. Cumulatively through December 31, 2005, several of the contract milestones had been achieved and, accordingly, costs totaling $73,000 related to performance under this contract have been recognized as a research and development expense, of which $38,000 were recognized in the nine months ended December 31, 2005. There were no such expenses recognized in the three months ended December 31, 2005. The Company has no other long-term research and development commitments.

The Company provides research and development services to CorNova in connection with the development of the drug-eluting stent. In connection with these services, the Company recognized revenues of $46,000 and $58,000 in the three and nine months ended December 31, 2005, respectively. As of December 31, 2005, the Company had $46,000 in accounts receivable – trade from CorNova related to development being conducted at the Company for the drug-eluting stent.

CorNova provides consulting services to the Company in connection with the application for the CE mark for CardioPass. In connection with these services, the Company recognized expenses of $70,000, which were included in research and development expense in the three and nine months ended December 31, 2005. As of December 31, 2005, the Company had $32,000 in accounts payable to CorNova related to these services.

7. Inventories

Inventories are stated at the lower of cost (first-in, first-out) or net realizable value and consist of the following:

(In thousands)	December 31, 2005		March 31, 2005
Raw materials	$	2,810	$	2,343
Work in progress	927		1,182
Finished goods	1,683		1,277

Total inventories	$	5,420	$	4,802

8. Property. Plant and Equipment

Property, plant and equipment consists of the following:

(In thousands)	December 31, 2005			March 31, 2005
Land	$	500		$	500
Building	2,053			2,030
Machinery, equipment and tooling	2,569			2,401
Furniture, fixtures and office equipment	648			541
Leasehold improvements	1,336			1,292
	7,106			6,764
Less: accumulated depreciation and amortization	(2,823		)	(2,215		)

	$	4,283		$	4,549

Depreciation expense for property and equipment was approximately $200,000 and $206,000 for the three months ended December 31, 2005 and 2004, respectively, and approximately $608,000 and $620,000 for the nine months ended December 31, 2005 and 2004, respectively.

9. Earnings Per Share

The Company follows SFAS No. 128, “Earnings Per Share,” where basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share are based upon the weighted average number of common shares outstanding during the period plus additional weighted average common equivalent shares outstanding during the period. Common equivalent shares result from the assumed exercise of outstanding stock options and warrants, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock method.

Options and warrants totaling 7,256,225 and 6,540,674 shares of common stock were excluded from the calculation of diluted earnings per share for the at December 31, 2005 and 2004 respectively, because the effect would be antidilutive.

10. Enterprise and Related Geographic Information

The Company has managed its business in fiscal years 2006 and 2005 on the basis of one reportable operating segment: medical device manufacturing and sales.

Revenues from one customer were approximately $495,000 and $1,311,000 in the three and nine months ended December 31, 2005, respectively.

Revenues from foreign customers (primarily Europe and Asia) comprised approximately $709,000 and $912,000 in the three months ended December 31, 2005 and 2004, respectively, and $2,482,000 and $2,827,000 in the nine months ended December 31, 2005 and 2004, respectively. Revenues from Japan comprised approximately $367,000 and $275,000 in the three months ended December 31, 2005 and 2004, respectively, and $1,044,000 and $275,000 in the nine months ended December 31, 2005 and 2004, respectively.

Product sales are as follows:

	Three Months Ended December 31,				Nine Months Ended December 31,
(In thousands)	2005		2004		2005		2004
Medical devices	$	4,958	$	4,742	$	15,550	$	14,385
Contracted product design and development	282		343		902		1,158

	$	5,240	$	5,085	$	16,452	$	15,543

11. Stockholders’ Equity

During the three and nine months ended December 31, 2005, the Company issued 45,000 and 278,804 shares, respectively, of the Company’s common stock as a result of the exercise of options by employees and a consultant generating cash proceeds of $84,000 and $616,000, respectively. During the three and nine months ended December 31, 2005, the Company purchased 800 and 4,100 shares of its common stock, respectively, at an aggregate cost of $2,000 and $8,000, respectively.

During the three and nine months ended December 31, 2004, the Company issued 29,000 and 77,349 shares of common stock, respectively, as a result of the exercise of options by employees, generating approximate cash proceeds of $32,000 and $101,000, respectively. During the three and nine months ended December 31, 2004, the Company purchased 1,600 and 22,800 shares of its common stock, respectively, at an aggregate cost of $5,000 and $83,000, respectively.

During the three and nine months ended December 31, 2005, the Company granted 225,000 and 330,000 options of its common stock, respectively, of which 10,000 options were issued to a consultant in September 2005. Of the options granted during these periods, 225,000 options were granted under Section 711 of the American Stock Exchange, subject to future registration. These options were fully vested at the date of grant. During the three and nine months ended December 31, 2004, the Company granted 5,000 and 538,500 options of its common stock, respectively.

In January and February 2006 to date, the Company granted 230,000 fully vested options to a consultant, which will result in approximately $175,000 in compensation expense during the quarter ending March 31, 2006.

On December 22, 2004, the Company issued 1,139,586 shares of its common stock at $2.40 per share in a private placement receiving $2,735,000 in gross proceeds, less placement agent fees and related transaction costs of approximately $284,000, resulting in net proceeds to the Company of $2,451,000. In connection with the transaction, the Company issued warrants to the investors to purchase 569,793 shares of common stock at an exercise price of $3.00 per share, which are exercisable until December 22, 2009. Additionally, the investors were provided rights to purchase up to 1,139,586 shares of common stock at a price of $2.40 per share (the “Additional Investment Rights”),

which were exercisable for a period commencing on December 22, 2004 and ending on July 27, 2005. Effective July 28, 2005 these Additional Investment Rights remained unexercised and expired. The Company also issued warrants to the placement agent to purchase 113,959 shares of our common stock at an exercise price of $2.40 per share and 56,979 shares of our common stock at an exercise price of $3.00 per share, which are exercisable until December 22, 2009.

12. Income Taxes

The Company uses the liability method of accounting for income taxes as set forth in SFAS No. 109, “Accounting for Income Taxes.” Under this method, deferred taxes are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Deferred tax assets are recognized and measured based on the likelihood of realization of the related tax benefit in the future. All deferred tax assets have a full valuation allowance, as their realizability is uncertain.

For the three and nine months ended December 31, 2005 and 2004, the Company provided for no income taxes, other than state income taxes, as the Company has significant net loss carryforwards.

13. Investment in CorNova

An Exchange and Venture Agreement (the “Agreement”) was entered into on March 5, 2004 by and among CardioTech, Implant Sciences Corporation (“Implant”), and CorNova. CorNova is a privately-held, development stage company, incorporated as a Delaware corporation on October 12, 2003, which is developing a next-generation drug-eluting stent. On March 5, 2004, CardioTech and Implant each agreed to transfer to CorNova 12,931 shares and 10,344 shares of their common stock (collectively, the “Contributory Shares”), respectively, in exchange for 1,500,000 shares, each, of CorNova’s common stock. The number of Contributory Shares issued reflects the fair market value of CardioTech’s and Implant’s common stock as of November 18, 2003, for an aggregate value of $75,000 each, or, collectively, a total of $150,000, resulting in CardioTech and Implant each receiving a thirty percent (30%) ownership interest in CorNova.

Under the terms of the Agreement, when CorNova secures additional financing in the minimum amount of $1,000,000 and up to a maximum amount of $3,000,000 (the “Series A Financing”), CardioTech and Implant were each required to issue additional shares of their common stock (the “Investment Shares”), where the number of Investment Shares to be issued was equal to twenty-five percent (25%) of the gross proceeds of the Series A Financing divided by the respective five (5) day average of the closing prices of the common stock of CardioTech and Implant as published in the Wall Street Journal on the dates immediately preceding the closing of the Series A Financing.

CorNova completed its Series A Financing transaction on February 4, 2005. At that time, the Company issued 308,642 shares of its common stock valued at $750,000, which represents twenty-five percent (25%) of the approximate $3 million raised. The cumulative investment in CorNova by CardioTech became $825,000. The Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur. In addition to the issuance of its common stock at the completion of a Series A Financing, CardioTech granted to CorNova an exclusive license for the technology consisting of ChronoFlex DES polymer, or any poly (carbonate) urethane containing derivative thereof, for use on drug-eluting stents.

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

The Series A transaction resulted in the issuance by CorNova of 3,050,000 shares of preferred stock. The preferred stock has a liquidation preference equal to $1.00 per share, the original preferred stock purchase price, and the same voting rights as CorNova’s common stock. The CorNova preferred stock can be converted on a share for share basis into CorNova common stock at the discretion of the preferred stockholders. The preferred stock is subject to several mandatory conversion requirements based on future events and subject to redemption at a premium, which varies based on the redemption date. CorNova currently also has outstanding warrants for the purchase of 150,000 shares of its common stock at $1.00 per share, issued in conjunction with its original seed loans and warrants for the purchase 635,000 shares of its common stock at $1.10 per share, issued to an individual as a “finders” fee. Additionally, CorNova’s shareholders have approved the 2004 Qualified Incentive Stock Option Plan (“2004 Plan”) which authorized the Board of Directors of CorNova to grant options to purchase up to 1,000,000 shares of CorNova’s common stock to employees and consultants. At December 31, 2005, CorNova has granted options to purchase 670,000 shares of its common stock to employees and consultants under the 2004 Plan.

CardioTech has a 30% ownership interest in the common stock of CorNova. Upon the event of conversion of the Series A Financing preferred stock to common stock, CardioTech would then have an 18% ownership interest in the common stock of CorNova. The Company uses the equity method of accounting in accordance with APB Opinion No. 18 and records 30% of the net loss of CorNova in its condensed consolidated financial statements for the three and nine month periods ended December 31, 2005 and 2004. During the three and nine month periods ended December 31, 2005, the Company recorded equity in the net loss of CorNova of $133,000 and $216,000, respectively, and equity in comprehensive (loss) income of CorNova of ($58,000) and $84,000, respectively, (related to unrealized holding gains/losses on securities classified as available-for-sale), resulting in a net investment of $372,000 at December 31, 2005. During the three and nine month periods ended December 31, 2004, the Company recorded equity in the net loss of CorNova of $15,000 and $37,000, respectively, and equity in comprehensive losses of CorNova of $3,000 and $22,000, respectively (related to unrealized holding losses on securities classified as available-for-sale).

14. Authorization of Company Buy-Back of Common Stock

In June 2001, the Board of Directors authorized the purchase of up to 250,000 shares of the Company’s common stock, of which 172,777 shares have been purchased as of December 31, 2005. In June 2004, the Board of Directors authorized the purchase of up to 500,000 additional shares of the Company’s common stock. The Company announced that purchases may be made from time-to-time in the open market, privately negotiated transactions, block transactions or otherwise, at times and prices deemed appropriate by management.

15. New Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123(R)”) “Share-Based Payment,” which is a revision of SFAS 123 and supersedes APB 25 and its related implementation guidance. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. SFAS 123(R) is effective for public companies (excluding small business issuers as defined in SEC regulations) at the beginning of the first fiscal year beginning after June 15, 2005.

SFAS 123(R) permits public companies to adopt its requirements using one of two methods. A “modified prospective” method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS 123(R) for all share-based payments granted after the effective date of SFAS 123(R) and (b) the unrecognized compensation cost for awards that remain unvested on the effective date in accordance with the original provisions of SFAS 123. A “modified retrospective” method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The Company has yet to determine which method to use in adopting SFAS 123(R). As permitted by SFAS 123, we currently account for share-based payments to employees using APB 25’s intrinsic value method. Accordingly, the adoption of SFAS 123(R)’s fair value method will have a significant impact on our results of operations. The Company is currently evaluating SFAS 123(R) and have not yet determined the impact in future periods.

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS No. 154, Accounting Changes and Error Corrections (“SFAS 154”) which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. The correction of an error in previously issued financial statements is not an accounting change. However, the reporting of an error correction involves adjustments to previously issued financial statements similar to those generally applicable to reporting an accounting change retroactively. Therefore, the reporting of a correction of an error by restating previously issued financial statements is also addressed by this Statement. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated results of operations and financial condition.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Future Operating Results

This Report on Form 10-Q contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth in this paragraph and below, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop and market its products; the market may not accept the Company’s existing and future products; the Company may be unable to retain existing key management personnel; and there may be other material adverse changes in the Company’s operations or business. Certain important factors affecting the forward-looking statements made herein include, but are not limited to (i) continued downward pricing pressures in the Company’s targeted markets, (ii) the continued acquisition of the Company’s customers by certain of its competitors, and (iii) continued periods of net losses, which could require the Company to find additional sources of financing to fund operations, implement its financial and business strategies, meet anticipated capital expenditures and fund research and development costs. Assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company’s financial position and results of operations. The reader is therefore cautioned not to place undue reliance on forward-looking statements contained herein, which speak solely as of the date of this Form 10-Q. The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise. For further information you are encouraged to review CardioTech’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-KSB for the period ended March 31, 2005, and Quarterly Reports on Form 10-Q for the periods ended June 30, 2005 and September 30, 2005. The Company assumes no obligation to update the information contained in this filing.

Overview

History

CardioTech was founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”). In June 1996, PMI distributed all of the shares of CardioTech’s common stock, par value $.01 per share, that PMI owned, to PMI stockholders of record. The Company’s proprietary ChronoFlex polyurethane materials have been sold since the formation of the Company as biomaterials for the manufacture of medical devices.

In July 1999, Dermaphylyx International, Inc. (“Dermaphylyx”), was formed by certain affiliates of CardioTech to develop advanced wound healing products. Dermaphylyx was merged into CardioTech effective March 2004 and is now a wholly-owned subsidiary of CardioTech.

In April 2001, the Company acquired Catheter and Disposables Technology, Inc. (“CDT”). CDT is an original equipment manufacturer and supplier of private-label advanced disposable medical devices from concept to finished packaged and sterilized products. Certain devices designed, developed and manufactured for customers by CDT include sensing, balloon, and drug delivery catheters; disposable endoscopes; and in-vitro diagnostic and surgical disposables.

In April 2003, a subsidiary of the Company merged with Gish Biomedical, Inc. (“Gish”). Gish manufacturers single use cardiopulmonary bypass products that have a disposable component.

In March 2004, CardioTech joined with Implant Sciences Corporation (“Implant”) to participate in the funding of CorNova. CorNova was formed to develop a novel coronary drug eluting stent using the combined capabilities and technology of CorNova, Implant Sciences and CardioTech. CardioTech currently has an 18% equity interest in the issued and outstanding common and preferred stock of CorNova. CorNova completed its initial funding on February 5, 2005 by obtaining private investments totaling approximately $3,050,000, at which time CardioTech contributed 308,642 shares of its common stock with a market value at the time of contribution of twenty-five percent (25%) of the maximum amount raised ($750,000), as defined in the Exchange and Venture Agreement. Although CorNova is expected to incur operating losses for the next several quarters, the Company has no obligation to fund CorNova.

Technology and Intellectual Property

CardioTech owns a number of patents relating to its vascular graft manufacturing technology. In addition, PMI has granted to CardioTech an exclusive, perpetual, worldwide, royalty-free license for the use of one polyurethane patent and related technology in the field consisting of the development, manufacture and sale of implantable medical devices and biodurable polymer material to third parties for the use in medical applications (the “Implantable Device and Materials Field”). PMI also owns, jointly with Thermedics, Inc., an unrelated company that manufactures medical grade polyurethane, the ChronoFlex polyurethane patents relating to the ChronoFlex technology (“Joint Technology”). PMI has granted to CardioTech a non-exclusive, perpetual, worldwide, royalty-free sublicense of these patents for use in the Implantable Devices and Materials Field.

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

Research and Development

The Company is currently developing new products that address annual worldwide markets exceeding $1 billion. The CardioPass graft is the Company’s proprietary, synthetic coronary artery bypass graft (“CABG”). The Company is developing the CardioPass graft, using specialized ChronoFlex polyurethane materials, to be a synthetic graft of 4mm in diameter specifically designed for use in CABG surgery. If successfully developed, the Company believes that the CardioPass Graft may be used initially to provide an alternative to patients with insufficient or inadequate native vessels for use in bypass surgery as a result of repeat procedures, trauma, disease or other factors. The Company believes, however, that the CardioPass Graft may ultimately be used as a substitute for native saphenous veins, thus avoiding the trauma and expense associated with the surgical harvesting of the vein.

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

The Company has conducted limited clinical trials of the CardioPass graft in Brazil. The Company announced that it is aware that three adult human implants have occurred and, as of December 31, 2005, all three patients and grafts are performing uneventfully. The Company has announced that it is planning the commencement of clinical trials in Europe to obtain European marketing approval and Phase II clinical trials in Brazil, in fiscal 2006.

In January 2006, CardioTech made the strategic decision to apply for an IDE in the U.S., while simultaneously pursuing the CE Mark. The Company has initiated discussions with thought-leaders in the cardiac surgical field for them to become Principal Investigators in a clinical trial. The trial will target “no-option” patients with insufficient autologous blood vessels who face imminent death from end-stage coronary artery disease. CardioTech’s clinical end points are patient survivability, quality of life, freedom from angina, and graft patency.

CardioPass is a Class III (highest risk) device that requires a Pre Manufacturing Approval (PMA) from the FDA. Under the PMA process, it must first obtain an IDE before it can begin clinical trials on humans in the United States to determine the safety and efficacy of the graft.

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

Manufacturing Operations

The Company generates more than 92% of its product sales from manufacturing operations at Gish and CDT,

Critical Accounting Policies

Our significant accounting policies are described in Note A to our consolidated financial statements included in Item 7 of our Annual Report on Form 10-KSB as of March 31, 2005. Our discussion and analysis of our financial condition and results of operations are based upon the financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. However, certain of our accounting policies require the application of significant judgment by our management, and such judgments are reflected in the amounts reported in our consolidated financial statements. In applying these policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of market trends, information provided by our

strategic partners and information available from other outside sources, as appropriate. Actual results may differ significantly from the estimates contained in our consolidated financial statements. There has been no change to our critical accounting policies through the quarter ended December 31, 2005.

Results of Operations

Three Months Ended December 31, 2005 vs. December 31, 2004

Revenues

The following table presents product sales by group expressed as a percentage of total product sales for the three months ended December 31, 2005 and 2004:

	Three Months Ended December 31,
	2005				2004
(In thousands)	Product Sales		% Product Sales		Product Sales		% Product Sales
Medical devices	$	4,958	94.6	%	$	4,742	93.3	%
Contracted product design and development	282		5.4	%	343		6.7	%
	$	5,240	100.0	%	$	5,085	100.0	%

Medical device revenues for the three months ended December 31, 2005 were $4,958,000 as compared to $4,742,000 for the comparable prior year period, an increase of $216,000 or 4.6%. Medical devices are primarily composed of cardiopulmonary bypass products, private-label products, wound dressings, and biomaterials typically used for implantable devices. Medical device revenues increased principally due to increases in the sales of private label products (an increase of approximately $578,000), offset in part by decreases in shipments of cardiopulmonary bypass products (a decrease of approximately $320,000).

In September 2005, the Company announced that it received FDA approval for its heparin coated products for the cardiopulmonary bypass surgery market. The Company is currently applying for CE Mark in Europe for its heparin coated products and anticipates approval in calendar year 2006. Management believes the introduction of our heparin coated products will contribute to improvements in sales of products for the cardiopulmonary surgery market. The Company recently hired a Director of Sales and Marketing-Worldwide, to accelerate product sales overseas, primarily in Japan, where the Company generates higher overall gross margins.

Contracted product design and development revenues for the three months ended December 31, 2005 were $282,000 as compared to $343,000 for the comparable prior year period, a decrease of $61,000 or 17.8%. Contracted product design and development services are provided primarily to OEM suppliers and development companies with the expectation of manufacturing private-label medical devices following the completion of these services. The decrease in contracted product design and development services is a result of a shift towards increases in the manufacture and shipment of private-label medical device products as previously discussed.

Royalties for the three months ended December 31, 2005 were $229,000 as compared to $178,000 for the comparable prior year period, an increase of $51,000 or 28.7%. The Company has agreements to license its proprietary biomaterial technology to medical device manufacturers. Royalties are earned when these manufacturers sell medical devices which use the Company’s biomaterials, accordingly, the increase in royalties during the three months ended December 31, 2005 is a result of increased shipments of product by these manufacturers.

Gross Margin

Gross margin as a percentage of product sales for the three months ended December 31, 2005 was 14.8%, as compared to 21.7% for the comparable prior year period.

The 6.9% decrease in gross margin for the three months ended December 31, 2005 is due to: (i) first-time pilot production during the quarter for new products in the Company’s private-label manufacturing line for a major customer, (ii) a change in product mix to a higher percentage of lower margin, private-label products, (iii) increased raw material costs for the cardiopulmonary products resulting from inflationary pressures on petrochemical-based supplies, and (iv) the $240,000 provision for a voluntary recall of certain cardiopulmonary products equaling approximately 3.9% of gross margin.

Research and Development Expenses

Research and development expenses for the three months ended December 31, 2005 were $358,000 as compared to $436,000 for the comparable prior year period, a decrease of $78,000 or 17.9%. This decrease is primarily a result of the timing of activities associated with the development of and clinical efforts associated with the CardioPass graft, which resulted in decreases in expenditures for the third quarter of fiscal 2006. CardioTech’s research and

development efforts are primarily focused on developing its synthetic vascular graft technologies, including the CardioPass graft, and Gish Biocompatible Surface Coating applications. Research and development expenditures consisted primarily of the salaries of six full time employees and related expenses, and are expensed as incurred. In addition, the Company allocates a portion of the salary and related costs of Michael Szycher, Ph.D., Chairman and CEO, for time spent on research and development activities. These individuals work on a variety of projects, including production support, and the Company believes it is operating at the minimum staffing level to support its operating needs. The staffing level is consistent with prior years and the Company anticipates that it will continue at a similar level in the future.

The Company also entered into a two-year consulting agreement with Dr. Ryan, CEO of CorNova, which provides for a range of payments, in either cash or common stock, for the achievement of certain milestones related to the manufacturing, commencement of European clinical trials and the receipt of a restricted CE mark of the Company’s CardioPass graft (the “Ryan Consulting Agreement”). Total potential payments range from $161,000 to $216,000 based on the timing of the milestone achievements. As part of the agreement, Dr. Ryan has the opportunity to earn up to an additional $41,000 based on the achievement of certain milestones related to other products of the Company. For the three months ended December 31, 2005, several of the contract milestones had been achieved and, accordingly, costs totaling $0 related to performance under this contract have been recognized as a research and development expense. The Company has no other long-term research and development commitments.

Research and development costs will increase significantly when the Company enters into European Union, Brazil or United States of America clinical trials with its CardioPass graft, or other products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended December 31, 2005 were $1,482,000 as compared to $1,492,000 for the comparable prior year period, a decrease of $10,000 or less than 1.0%. The decrease in selling, general and administrative expenses is due primarily to reduced sales and marketing expenditures in the wound care business.

Other Income and Expense

Other income, net for the three months ended December 31, 2005 was $9,000 as compared to $10,000 for the comparable prior year period, a decrease of $1,000.

Nine Months Ended December 31, 2005 vs. December 31, 2004

Revenues

The following table presents product sales by group expressed as a percentage of total product sales for the nine months ended December 31, 2005 and 2004:

	Nine Months Ended December 31,
	2005				2004
(In thousands)	Product Sales		% Product Sales		Product Sales		% Product Sales
Medical devices	$	15,550	94.5	%	$	14,385	92.5	%
Contracted product design and development	902		5.5	%	1,158		7.5	%
	$	16,452	100.0	%	$	15,543	100.0	%

Medical device revenues for the nine months ended December 31, 2005 were $15,550,000 as compared to $14,385,000 for the comparable prior year period, an increase of $1,165,000 or 8.1%. Medical devices are primarily composed of cardiopulmonary bypass products, private-label products, wound dressings, and biomaterials typically used for implantable devices. Medical device revenues increased principally due to increases in the sales of private label products (an increase of approximately $1,700,000), offset in part by decreases in shipments of cardiopulmonary bypass products (a decrease of approximately $600,000).

Contracted product design and development revenues for the nine months ended December 31, 2005 were $902,000 as compared to $1,158,000 for the comparable prior year period, a decrease of $256,000 or 22.1%. Contracted product design and development services are primarily provided to OEM suppliers and development companies with the expectation of manufacturing private-label medical devices following the completion of these services. The decrease in contracted product design and development services is a result of a shift towards increases in the manufacture and shipment of private-label medical device products as previously discussed.

Royalties for the nine months ended December 31, 2005 were $692,000 as compared to $540,000 for the comparable prior year period, an increase of $152,000 or 28.1%. The Company has agreements to license its proprietary biomaterial technology to medical device manufacturers. Royalties are earned when these manufacturers sell medical devices which use the Company’s biomaterials, accordingly, the increase in royalties during the nine months ended December 31, 2005 is a result of increased shipments of product by these manufacturers.

Gross Margin

Gross margin as a percentage of product sales for the nine months ended December 31, 2005 was 18.9%, as compared to 25.7% for the comparable prior year period.

The 6.8% decrease in gross margin for the nine months ended December 31, 2005 is due to: (i) pilot production during the period for new products in our private-label manufacturing line for a major customer, (ii) a change in product mix to a higher percentage of lower margin, private-label products, (iii) increased raw material costs for the cardiopulmonary products resulting from inflationary pressures on petrochemical-based supplies, and (iv) the $240,000 provision for a voluntary recall of certain cardiopulmonary products equaling approximately 1.2% of gross margin.

Research and Development Expenses

Research and development expenses for the nine months ended December 31, 2005 were $1,061,000 as compared to $976,000 for the comparable prior year period, an increase of $85,000 or 8.7%. This increase is primarily a result of increased expenditures in the development of and clinical efforts associated with the CardioPass graft. CardioTech’s research and development efforts are primarily focused on developing its synthetic vascular graft technologies, including the CardioPass graft, and Gish Biocompatible Surface Coating applications. Research and development expenditures consisted primarily of salaries and related expenses, and are expensed as incurred.

For the nine months ended December 31, 2005, several of the contract milestones provided for in the Ryan Consulting Agreement had been achieved and, accordingly, costs totaling $38,000 related to performance under this contract have been recognized as a research and development expense. The Company has no other long-term research and development commitments.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the nine months ended December 31, 2005 were $4,430,000 as compared to $4,485,000 for the comparable prior year period, a decrease of $55,000 or 1.2%. The decrease in selling, general and administrative expenses is due primarily to reduced sales and marketing expenditures in the wound care business.

Other Income and Expense

Other income, net for the nine months ended December 31, 2005 was $99,000 as compared to $1,000 for the comparable prior year period, a net increase in other income of $98,000. The increase is a result of the net recovery of approximately $75,000 related to transaction costs incurred and paid in connection with the proposed acquisition of Cartika Medical, Inc. These transaction costs were expensed in the year ended March 31, 2005.

Liquidity and Capital Resources

During the nine months ended December 31, 2005, the Company had net cash outflows of $1,476,000 from operating activities as compared to net cash outflows of $353,000 for the comparable prior year period. The $1.1 million increase in net cash outflows used in operating activities during the nine months ended December 31, 2005 as compared to the comparable prior year period was primarily a result of: (i) a larger net loss and (ii) increase in inventories. Raw materials inventory increased by approximately $467,000 as of December 31, 2005 when compared to March 31, 2005, primarily due to: (i) increased shipments of private label products during the nine months ended December 31, 2005 and the need for higher levels of materials and (ii) bulk purchases of materials at favorable pricing for cardiopulmonary bypass products during the nine months ended December 31, 2005.

During the nine months ended December 31, 2005, the Company issued 278,804 shares of the Company’s common stock as a result of the exercise of options by employees, generating approximate cash proceeds of $616,000. During the nine months ended December 31, 2005, the Company purchased 4,100 shares of its common stock at an approximate cost of $8,000.

Contractual obligations consist of the following as of December 31, 2005:

	Payment due by period
(In thousands)	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Long-term debt obligations	$	—	$	—	$	—	$	—	$	—
Capital lease obligations	—		—		—		—		—
Operating lease obligations	4,744		873		2,325		1,546		—
Purchase obligations	1,282		1,282		—		—		—
Other long-term liabilities	—		—		—		—		—
Total	$	6,026	$	2,155	$	2,325	$	1,546	$	—

With respect to the Exchange and Venture Agreement with CorNova, the Company has no additional obligation to contribute assets or additional common stock nor to assume any liabilities or to fund any losses that CorNova may incur.

As of December 31, 2005, CardioTech was conducting its operations with approximately $6,275,000 in cash and cash equivalents. At December 31, 2005, the Company had no debt. CardioTech believes its current cash position will be sufficient to fund its working capital and research and development activities for at least the next twelve months.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risks

Interest Rate Risk

The Company’s financial instruments include cash and cash equivalents. Cash and cash equivalents include cash on hand, demand deposits and short-term investments with maturities of three months or less when acquired. Cash equivalents represent a deposit in a money market account. The Company does not utilize derivative financial instruments, derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion. The principal objective of the Company’s asset management activities is to maximize net investment income, while maintaining acceptable levels of interest rate risk and facilitating its funding needs. At December 31, 2005, the carrying values of the Company’s financial instruments approximated fair values based upon current market prices and rates.

Foreign Currency

For the nine months ended December 31, 2005 and the year ended March 31, 2005, the Company purchased approximately $722,000 and $1,000,000, respectively, of polyester wrap thread for its Visionä Oxygenator from Membrana GmbH. Polyester wrap thread purchases are denominated in Euros. As a result, the Company is exposed to potential transaction gains or losses resulting from fluctuations in foreign currency exchange rates (Euro to U.S. Dollar). The Company has not and currently does not hedge or enter into derivative contracts in an effort to address foreign exchange risk.

Item 4. Controls and Procedures

At the end of the period covered by this Form 10-Q, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have determined that such controls and procedures are effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company’s internal controls over financial reporting that were identified during the evaluation that occurred during the Company’s recent quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As reported in Item 6 (b), the Company appointed a new Chief Financial Officer and Principal Accounting Officer in October 2005.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common stock. If any of these risks or uncertainties occurs, our business, financial condition or operating results could be materially harmed. In that case the trading price of our common stock could decline and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we may face. CardioTech believes that this filing contains forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to regulatory risks and clinical uncertainties. Such statements are based on management’s current expectations and are subject to facts that could cause results to differ materially from the forward-looking statements. For further information you are encouraged to review CardioTech’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-KSB for the period ended March 31, 2005, and Quarterly Reports on Form 10-Q for the periods ended June 30, 2005 and September 30, 2005. The Company assumes no obligation to update the information contained in this filing.

Risks Related to Liquidity

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

The Company’s future growth may depend on its ability to raise capital for acquisitions and to support research and development activities, including costs for clinical trials, and to market and sell its vascular graft technology, specifically the coronary artery bypass graft. CardioTech may require substantial funds for further research and development, future pre-clinical and clinical trials, regulatory approvals, establishment of commercial-scale manufacturing capabilities, and the marketing of its products. CardioTech’s capital requirements depend on numerous factors, including but not limited to, the progress of its research and development programs, including costs for clinical trials; 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.

Risks Related to Our Growth Strategy

We could experience rapid growth that could strain our managerial and other resources.

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

While we are not currently considering an acquisition, we may make additional acquisitions of complementary medical manufacturing service providers that bring desired capabilities, customers or geographic coverage and either strengthen our position in our target markets or provide us with a presence in a new market. The risks we may encounter in pursuing these acquisitions, if any, include expenses associated with, and difficulties in identifying, potential targets, costs associated with acquisitions we ultimately are unable to complete and higher prices for acquired companies due to competition for attractive targets. Completing acquisitions also may result in dilution to our existing stockholders and may require us to seek additional capital, if available, including increasing our indebtedness.

Once acquired, the successful integration and operation of a business requires communication and cooperation among key managers, the transition of customer relationships, the management of ongoing projects of acquired companies and the management of new projects across previously independent facilities.

Customer satisfaction or performance problems with an acquired company could also harm our reputation as a whole, and any acquired business could significantly under perform relative to our expectations. For all these reasons, our pursuit of an overall acquisition strategy or any individual completed, pending or future acquisition may adversely affect the realization of our strategic goals.

In addition, while we may obtain cost savings, operating efficiencies and other synergies as a result of possible future acquisitions, the consolidation of functions and the integration of departments, systems and procedures present significant management challenges.

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

If we cannot obtain the additional capital required to fund our operations, if needed, on favorable terms or at all, we may have to delay or abandon our fast growth strategy.

Our growth strategy will require additional capital for, among other purposes, completing acquisitions of companies and customers’ product lines and manufacturing assets, integrating acquired companies and assets, acquiring new equipment and maintaining the condition of existing equipment. If cash generated internally is insufficient to fund capital requirements, or if we desire to make additional acquisitions, we will require additional debt or equity financing. Adequate financing may not be available or, if available, may not be available on terms satisfactory to us. If we raise additional capital by issuing equity or convertible debt securities, the issuance may dilute the share ownership of the existing investors. In addition, we may grant future investors rights that are superior to those of our existing investors. If we fail to obtain sufficient additional capital in the future, we could be forced to curtail our growth strategy by reducing or delaying capital expenditures and acquisitions, selling assets or restructuring or refinancing our indebtedness, or delaying plans for clinical trials.

Risks Related to Our Business

We have incurred substantial operating losses and we may never be profitable.

Our sales were $21,841,000 and $21,799,000 for the years ended March 31, 2005 and 2004, respectively. We had net losses of $1,595,000 and $1,515,000 for the years ended March 31, 2005 and 2004, respectively. Our sales were $17,144,000 and $16,083,000 for the nine months ended December 31, 2005 and 2004, respectively. We had net losses of $1,810,000 and $968,000 for the nine months ended December 31, 2005 and 2004, respectively. There is a risk that we will never be profitable. None of our coronary artery graft products and technologies have ever been utilized on a large-scale commercial basis and it may take several years before these products could be commercialized, if ever. Our ability to generate enough revenues to achieve profits will depend on a variety of factors, many of which are outside our control, including:

• size of market;

• competition and other solutions;

• extent of patent and intellectual property protection afforded to our products;

• cost and availability of raw material and intermediate component supplies;

• changes in governmental (including foreign governmental) initiatives and requirements;

• changes in domestic and foreign regulatory requirements;

• costs associated with equipment development, repair and maintenance; and

• the ability to manufacture and deliver products at prices that exceed our costs.

A substantial amount of our assets comprise goodwill and other intangibles, and our net loss will increase if our goodwill becomes impaired.

As of December 31, 2005, goodwill represented approximately $1,638,000, or 7.3%, of our total assets and net amortizable intangibles represented approximately $632,000, or 2.8%, of our total assets. Goodwill is generated in our acquisitions when the cost of an acquisition exceeds the fair value of the net tangible and identifiable intangible assets we acquire. Goodwill is no longer amortized under generally accepted accounting principles as a result of SFAS No. 142. Instead, goodwill is subject to an impairment analysis, performed at least annually, based on the fair value of the reporting unit. Amortizable intangible assets are subject to SFAS No. 144, and are subject to periodic reviews for impairment, or as events and circumstances indicate that the carrying amount may not be recoverable. We could be required to recognize reductions in our net income caused by the write-down of goodwill and other intangibles, if impaired, that, if significant, could materially and adversely affect our results of operations.

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

• changing demand for our products and services;

• the timing of actual customer orders and requests for product shipment and the accuracy of our customers’ forecasts of future production requirements;

• the reduction, rescheduling or cancellation of product orders and development and design services requested by customers;

• difficulties in forecasting demand for our products and the planning and managing of inventory levels;

• the introduction and market acceptance of our customers’ new products and changes in demand for our customers’ existing products;

• results of clinical trials;

• changes in the relative portion of our revenue represented by our various products, services and customers, including the relative mix of our business across our target markets;

• changes in competitive or economic conditions generally or in our customers’ markets;

• competitive pressures on selling prices;

• the amount and timing of costs associated with product warranties and returns;

• changes in availability or costs of raw materials or supplies;

• fluctuations in manufacturing yields and yield losses and availability of production capacity;

• changes in our product distribution channels and the timeliness of receipt of distributor resale information;

• the impact of vacation schedules and holidays, largely during the second and third fiscal quarters of our fiscal year;

• the amount and timing of investments in research and development;

• difficulties in integrating acquired assets and businesses into our operations;

• charges to earnings resulting from the application of the purchase method of accounting following acquisitions; and

• pressure on our selling prices as a result of healthcare industry cost containment measures.

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

The medical device industry is cyclical, and an industry downturn could adversely affect our operating results.

Business conditions in the medical device industry have rapidly changed between periods of strong and weak demand. The industry is characterized by:

• periods of overcapacity and production shortages;

• cyclical demand for products;

• changes in product mix in response to changes in demand of products;

• variations in manufacturing costs and yields;

• rapid technological change and the introduction of new products by customers;

• price erosion; and

• expenditures for product development.

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

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

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

Before receiving FDA clearance to market our proposed graft, we will have to demonstrate that our grafts are safe and effective on the patient population. While we have done some preliminary animal trials and have seen acceptable

results, there can be no assurance that acceptable results will be obtained in human trials. Clinical trials, manufacturing and marketing of medical devices are subject to the rigorous testing and approval process of the FDA and equivalent foreign regulatory authorities. The Federal Food, Drug and Cosmetic Act and other federal, state and foreign statutes and regulations govern and influence the testing, manufacture, labeling, advertising, distribution and promotion of drugs and medical devices. As a result, clinical trials and regulatory approval of the coronary artery bypass graft can take a number of years or longer to accomplish and require the expenditure of substantial financial, managerial and other resources.

In order to be commercially viable, we must successfully research, develop, obtain regulatory approval, manufacture, market and distribute our grafts. For each device incorporating our artificial grafts, we must successfully meet a number of critical developmental milestones, including:

• demonstrate benefit from the use of our grafts in various contexts such as coronary artery bypass surgery;

• demonstrate through pre-clinical and clinical trials that our grafts are safe and effective; and

• establish a viable Good Manufacturing Process capable of potential scale up.

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

In order to conduct clinical trials that are necessary to obtain approval by the FDA to market a product, it is necessary to receive clearance from the FDA to conduct such clinical trials. The FDA can halt clinical trials at any time for safety reasons or because we or our clinical investigators do not follow the FDA’s requirements for conducting clinical trials. If we are unable to receive clearance to conduct clinical trials or the trials are halted by the FDA, we would not be able to achieve any revenue from such product as it is illegal to sell any medical device for human consumption without FDA approval.

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

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

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

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

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

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

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

Our markets are subject to technological change and our success depends on our ability to develop and introduce new products, primarily in cardiothoracic surgery.

The cardiothoracic market for our products is characterized by:

• changing technologies;

• changing customer needs;

• frequent new product introductions and enhancements;

• increased integration with other functions; and

• product obsolescence.

The Company’s success is dependent in part on the design and development of new products in the medical device industry. To develop new products and designs for our cardiothoracic market, we must develop, gain access to and use leading technologies in a cost effective and timely manner and continue to expand our technical and design expertise. The product development process is time-consuming and costly, and there can be no assurance that product development will be successfully completed, that necessary regulatory clearances or approvals will be granted by the FDA on a timely basis, or at all, or that the potential products will achieve market acceptance. Failure by the Company to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on the Company’s business, financial condition and results of operations.

The number of patients undergoing bypass surgery may continue to decline, resulting in a reduction of our market potential.

Over the past several years, the total number of patients undergoing bypass surgery has decreased as a result of new, less invasive therapies such as pharmacotherapy, angioplasty and stenting. We cannot assure you that the number of patients will not continue to decline as further medical advances are introduced. Any future decline in the total number of patients undergoing bypass surgery could result in lost revenue and therefore could have a material adverse effect on our business, financial condition and results of operations.

We have limited manufacturing experience and if our coronary bypass graft is approved, we may not be able to manufacture sufficient quantities at an acceptable cost.

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

We presently rely on a third party contractor, LeMaitre Vascular Products, Inc., to manufacture all of our coronary grafts for our limited use. This exposes us to the risk of not being able to directly oversee the production and quality of the manufacturing process. This contractor has informed us that it is closing its facility in the United Kingdom where it manufactures our grafts and will be transporting machinery to the United States. They may experience regulatory compliance difficulty, difficulty in re-assembling the machinery, mechanical shut downs, employee strikes, or any other unforeseeable event that may delay production. Furthermore, LeMaitre has developed an expertise in the

manufacturing process with machinery that may not get transferred to us. If we elect to produce the grafts ourselves, this may delay production and adversely affect our business. Pursuant to an agreement, we have requested that LeMaitre act in good faith to transfer the technology to us in exchange for payment of personnel time plus 40% uplift. Such transfer has not yet been requested by the Company.

We depend on outside suppliers and subcontractors, and our production and reputation could be harmed if they are unable to meet our volume and quality requirements and alternative sources are not available.

The Company has various “sole source” suppliers who supply key components for the Company’s products. Our outside suppliers may fail to develop and supply us with products and components on a timely basis, or may supply us with products and components that do not meet our quality, quantity or cost requirements. If any of these problems occur, we may be unable to obtain substitute sources of these products and components on a timely basis or on terms acceptable to us, which could harm our ability to: i) manufacture our own products and components profitably or on time, and ii) ship products to customers on time and generate revenues. In addition, if the processes that our suppliers use to manufacture products and components are proprietary, we may be unable to obtain comparable components from alternative suppliers.

A significant portion of the revenue comes from relatively few large customers, and any decrease in sales to these customers could harm our operating results.

The medical device industry is concentrated, with relatively few companies accounting for a large percentage of sales in the surgical, interventional and cardiovascular markets that are targeted by our disposable medical device and contract manufacturing operations. Accordingly, our revenue and profitability are dependent on our relationships with a limited number of large medical device companies. We are likely to continue to experience a high degree of customer concentration in our disposable medical device and contract manufacturing operations, particularly if there is further consolidation within the medical device industry. We cannot assure you that there will not be a loss or reduction in business from one or more of our large customers. In addition, we cannot assure you that revenues from our customers that have accounted for significant revenues in the past, either individually or as a group, will reach or exceed historical levels in any future period. The loss or a significant reduction of business from any of our major customers would adversely affect our results of operations.

Our ability to grow and sustain growth levels may be adversely affected by slowdowns in the U.S. economy.

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

We could be harmed by litigation involving patents and other intellectual property rights.

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

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

Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, is costly and may divert the efforts and attention of our management and technical personnel.

We may not be able to protect our intellectual property rights adequately.

Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, trade secrets, confidentiality procedures and non-disclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, we cannot be certain that the steps we take to protect our proprietary information will be adequate to prevent misappropriation of our technology, or that our competitors will not independently develop technology that is substantially similar or superior to our technology. More specifically, we cannot assure you that any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties. Nor can we assure you

that, if challenged, our patents will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design their products around any patents that may be issued to us.

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

Our success depends, to a significant extent, upon the efforts and abilities of Dr. Michael Szycher, our chairman and chief executive officer, and other members of senior management. The loss of the services of one or more of our senior management or other key employees could adversely affect our business. We do not maintain key person life insurance on any of our officers, employees or consultants.

There is intense competition for qualified employees in the medical industry, particularly for highly skilled design, applications, engineering and sales people. We may not be able to continue to attract and retain technologists, managers, or other qualified personnel necessary for the development of our business or to replace qualified individuals who could leave us at any time in the future. Our anticipated growth is expected to place increased demands on our resources, and will likely require the addition of new management and engineering staff as well as the development of additional expertise by existing management employees. If we lose the services of or fail to recruit engineers or other technical and management personnel, our business could be harmed.

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

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

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

We are exposed to product liability and clinical and pre-clinical liability risks which could place a substantial financial burden on us, if we are sued. Although we have 5 million dollars in product liability insurance coverage, that amount may not be sufficient to cover all potential claims made against us Additionally, we face the risk of financial exposure to product liability claims alleging that the use of devices that incorporate our products resulted in adverse effects..

While we are not aware of any claim at this time, our business exposes us to potential product liability, recalls and other liability risks that are inherent in the testing, manufacturing and marketing of medical products. We cannot assure you that such potential claims will not be asserted against us. In addition, the use in our clinical trials of medical products that our potential collaborators may develop and the subsequent sale of these products by us or our potential collaborators may cause us to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

We cannot assure you that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against our potential liabilities. Furthermore, our current and potential partners with whom we have collaborative agreements or our future licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims. Claims or losses in excess of any product liability insurance coverage that may be obtained by us could have a material adverse effect on our business, financial condition and results of operations. We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.

Additionally, we currently assist in the development of certain medical products and prototypes for third parties, including components in other products. Our contract manufacturing operation produces components for medical manufacturers used in products such as catheters and disposable devices. Product liability risks may exist even for those medical devices that have received regulatory approval for commercial sale or even for products undergoing regulatory review. We currently carry $5 million in product liability insurance. Any defects in our products used in these devices could result in recalls and/or significant product liability costs to us, which may exceed $5 million. We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.

We may be affected by environmental laws and regulations.

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

If we are unable to complete our assessments as to the adequacy of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the Securities and Exchange Commission adopted rules requiring public companies to include a report of management on the company’s internal control over financial reporting in their annual reports on Form 10-K. This report is required to contain an assessment by management of the effectiveness of such company’s internal controls over financial reporting. In addition, the public accounting firm auditing a public company’s financial statements must attest to and report on management’s assessment of the effectiveness of the company’s internal controls over financial reporting. While we are expending significant resources in developing the necessary documentation and testing procedures required by Section 404, there is a risk that we will not comply with all of the requirements imposed by Section 404. If we fail to implement required new or improved controls, we may be unable to comply with the requirements of Section 404 in a timely manner. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline and make it more difficult for us to finance our operations.

Under current rules, the Company is required to comply with the requirements of Section 404 by March 31, 2007.

Risks Related to Competition

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

Risks Related to Pricing Pressure

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

Risks Related to Our Dependence on International Sales

International net revenues accounted for approximately 17% and 15% of the Company’s total net sales in fiscal 2005 and 2004, respectively. International net revenues accounted for approximately 14% and 18% of the Company’s total net sales in the nine month periods ended December 31, 2005 and 2004, respectively. International sales are subject to a number of inherent risks, including the impact of possible recessionary environments in economies outside the U.S., unexpected changes in regulatory requirements and fluctuations in exchange rates of local currencies in markets where the Company sells its products. While the Company denominates all of its international sales in U.S. dollars, a relative strengthening in the U.S. dollar would increase the effective cost of the Company’s products to

international customers. The foregoing factors could reduce international sales of the Company’s products and could have a material adverse effect on the Company’s business, financial condition and results of operations.

Risks Related to Our Securities

Our stock price is volatile.

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

• variations in our actual or expected quarterly operating results;

• announcements or introductions of new products;

• results of clinical trials;

• technological innovations by our competitors or development setbacks by us;

• the commencement or adverse outcome of litigation;

• changes in analysts’ estimates of our performance or changes in analysts’ forecasts regarding our industry, competitors or customers;

• announcements of acquisition or acquisition transactions; or

• general economic and market conditions.

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

Additional authorized shares of our common stock and preferred stock available for issuance may adversely affect the market.

We are authorized to issue 50,000,000 shares of our common stock. As of December 31, 2005, there were 19,533,693 shares of common stock issued and outstanding, respectively. However, the total number of shares of our common stock issued and outstanding does not include shares reserved in anticipation of the exercise of options and warrants. As of December 31, 2005, we had outstanding stock options and warrants of approximately 7,256,225 shares of our common stock, the exercise price of which range between $0.50 per share to $5.40 per share, and we have reserved shares of our common stock for issuance in connection with the potential exercise thereof. To the extent such options, warrants or additional investment rights are exercised; the holders of our common stock will experience further dilution. Stockholders will also experience dilution upon the exercise of options granted under our stock option plans. In addition, in the event that any future financing or consideration for a future acquisition, should be in the form of, be convertible into or exchangeable for, equity securities investors will experience additional dilution.

The exercise of the outstanding derivative securities will reduce the percentage of common stock held by our current stockholders. Further, the terms on which we could obtain additional capital during the life of the derivative securities may be adversely affected, and it should be expected that the holders of the derivative securities would exercise them at a time when we would be able to obtain equity capital on terms more favorable than those provided for by such derivative securities. As a result, any issuance of additional shares of common stock may cause our current stockholders to suffer significant dilution which may adversely affect the market. In addition to the above referenced shares of common stock which may be issued without stockholder approval, we have 5,000,000 shares of authorized preferred stock, the terms of which may be fixed by our Board, of which 500,000 preferred shares were previously issued, but none are currently outstanding . While we have no present plans to issue any additional shares of preferred stock, our Board has the authority, without stockholder approval, to create and issue one or more series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. The issuance of any of such series of preferred stock may have an adverse effect on the holders of common stock.

Shares eligible for future sale may adversely affect the market.

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) who has satisfied a one year holding period may, under certain circumstances, sell within any three month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our stockholders that are non-affiliates that have satisfied a two year holding period. Any substantial sale of our common stock

pursuant to Rule 144 or pursuant to any resale prospectus may have material adverse effect on the market price of our securities.

Limitation on director and officer liability.

As permitted by Massachusetts law, our Restated Articles of Organization limit the liability of our directors for monetary damages for breach of a director’s fiduciary duty except for liability in certain instances. As a result of our charter provision and Massachusetts law, stockholders may have limited rights to recover against directors for breach of fiduciary duty. In addition, our bylaws provide that we shall indemnify our directors, officers, employees and agents if such persons acted in good faith and reasoned that their conduct was in our best interest.

The anti-takeover provisions of our Restated Articles of Organization and of the Massachusetts corporation law may delay, defer or prevent a change of control.

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

Our stockholders must give substantial advance notice prior to the relevant meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action. In addition, our bylaws and Massachusetts law provide for staggered board members with each member elected for three years. In addition, directors may be removed by stockholders only for cause and by a vote of 80% of the stock.

Risk of Market Withdrawal or Product Recall

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

There can be no assurance that the Company will be able to successfully take corrective actions if required, nor can there be any assurance that any such corrective actions will not force the Company to incur significant costs. In addition, there can be no assurance any future recalls will not cause the Company to face increasing scrutiny from its customers, which could cause the Company to lose market share or incur substantial costs in order to maintain existing market share. We do not currently carry recall insurance and we may be subject to significant recall costs in the event of a recall.

Risks Associated with Healthcare Reform Proposals

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

ISSUER PURCHASES OF EQUITY SECURITIES

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans	Maximum Number of Shares that May Yet Be Purchased Under the Plans
April 1 - 30, 2005	1,300	$	1.84	1,300
May 1 - 31, 2005	100	$	1.94	100
June 1 - 30, 2005	400	$	1.89	400
July 1 - 31, 2005	700	$	1.79	700
August 1 - 31, 2005	600	$	1.84	600
September 1 - 30, 2005	200	$	2.40	200
October 1 - 31, 2005	300	$	2.14	300
November 1 - 30, 2005	500	$	2.49	500
December 1 - 31, 2005	—	—		—
Total	4,100	$	1.97	4,100	577,223

Item 3. Defaults upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K:

(a) Exhibits:

31.1		Certification of Chief Executive Officer pursuant to Section 302 Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 Sarbanes-Oxley Act of 2002

32.1		Certification Pursuant to 18 U.S.C. Section 1350, As adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On October 6, 2005 the Company filed a Form 8-K Item 5.02 to report the appointment of a new Chief Financial Officer and Principal Accounting Officer.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARDIOTECH INTERNATIONAL, INC.


	/s/ Michael Szycher, Ph.D.
	Michael Szycher, Ph.D.
	Chairman and Chief Executive Officer


	/s/ Eric G. Walters
	Eric G. Walters
	Vice President and Chief Financial Officer


Dated: February 13, 2006

Nordicus Partners Corp - Quarter Report: 2005 December (Form 10-Q)

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