Nordicus Partners Corp - Quarter Report: 2006 September (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2006

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 Number: 0-28034

CardioTech International, Inc.
(Exact name of registrant as specified in its charter)

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

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

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

(Former name, former address and former fiscal year, if changed since last report)

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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Act, (Check one):

o Large Accelerated Filer o Accelerated Filer x Non-Accelerated Filer

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

As of November 3, 2006, 19,832,483 shares of the registrant’s Common Stock were outstanding, and the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant (without admitting that such person whose shares are not included in such calculation is an affiliate) was approximately $43,575,233 based on the last sale price as reported by the American Stock Exchange on such date.

CARDIOTECH INTERNATIONAL, INC.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2006 and March 31, 2006	3

	Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2006 and 2005	4

	Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2006 and 2005	5

	Notes to Condensed Consolidated Financial Statements	6-14

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15-24

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25-35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 5.	Other Information	36

Item 6.	Exhibits	37

	Signatures	38

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CardioTech International, Inc.
Condensed Consolidated Balance Sheets
(Unaudited - in thousands, except share and per share amounts)

	September 30,			March 31,
	2006			2006
ASSETS
Current assets:
Cash and cash equivalents	$	5,281		$	6,841
Accounts receivable-trade, net of allowance of $365 and $572 as of September 30, 2006 and March 31, 2006, respectively	2,504			2,851
Accounts receivable-other	279			265
Inventories	5,383			4,786
Prepaid expenses and other current assets	225			210
Total current assets	13,672			14,953
Property, plant and equipment, net	3,878			4,059
Amortizable intangible assets, net	523			584
Goodwill	487			487
Other assets	123			130
Investment in CorNova, Inc.	—			238
Total assets	$	18,683		$	20,451

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,583		$	1,750
Accrued expenses	725			936
Deferred revenue	195			132
Total current liabilities	2,503			2,818
Deferred rent	124			129

Stockholders’ equity:
Preferred stock; $.01 par value; 5,000,000 shares authorized; 500,000 shares issued and none outstanding as of September 30, 2006 and March 31, 2006	—			—
Common stock; $.01 par value; 50,000,000 shares authorized; 19,832,483 and 19,796,833 shares issued and outstanding as of September 30, 2006 and March 31, 2006, respectively	198			198
Additional paid-in capital	36,753			36,685
Accumulated deficit	(20,895		)	(19,339		)
Accumulated other comprehensive loss	—			(40		)
Total stockholders’ equity	16,056			17,504
Total liabilities and stockholders’ equity	$	18,683		$	20,451

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

CardioTech International, Inc.
Condensed Consolidated Statements of Operations
(Unaudited - in thousands, except per share amounts)

	For The Three Months Ended September 30,						For The Six Months Ended September 30,
	2006			2005			2006			2005
Revenues:
Product sales	$	4,993		$	5,763		$	9,674		$	11,200
Royalties	289			271			578			475
	5,282			6,034			10,252			11,675
Cost of sales	3,685			4,410			7,712			8,882
Gross margin	1,597			1,624			2,540			2,793
Operating expenses:
Research and development, regulatory and engineering	391			386			743			703
Selling, general and administrative	1,617			1,538			3,234			2,948
	2,008			1,924			3,977			3,651
Loss from operations	(411		)	(300		)	(1,437		)	(858		)
Interest and other income and expense:
Interest income	39			86			58			96
Other income (expense)	101			(6		)	101			(7		)
Interest and other income, net	140			80			159			89
Equity in net loss of CorNova, Inc.	(75		)	(65		)	(278		)	(83		)
Net loss	$	(346	)	$	(285	)	$	(1,556	)	$	(852	)
Net loss per common share, basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.08	)	$	(0.04	)
Shares used in computing net loss per common share, basic and diluted	19,832			19,350			19,823			19,304

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

CardioTech International, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited - in thousands)

	For The Six Months Ended September 30,
	2006			2005
Cash flows from operating activities:
Net loss	$	(1,556	)	$	(852	)
Adjustments to reconcile net loss to net cash flows:
Depreciation and amortization	391			503
Equity in net loss of CorNova, Inc.	278			83
Provision for doubtful accounts	83			27
Provision for inventory obsolescence	(68		)	—
Share-based compensation	8			—
Deferred rent	(5		)	(26		)
Changes in assets and liabilities:
Accounts receivable-trade	264			(79		)
Accounts receivable-other	(14		)	(78		)
Inventories	(529		)	(679		)
Prepaid expenses and other current assets	(15		)	(68		)
Accounts payable	(168		)	141
Accrued expenses	(209		)	256
Deferred revenue	63			(61		)
Net cash flows used in operating activities	(1,477		)	(833		)
Cash flows from investing activities:
Purchase of property, plant and equipment	(150		)	(145		)
Decrease in other assets	7			15
Net cash flows used in investing activities	(143		)	(130		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	61			532
Purchase of treasury stock	(1		)	(6		)
Net cash flows provided by financing activities	60			526
Net change in cash and cash equivalents	(1,560		)	(437		)
Cash and cash equivalents at beginning of period	6,841			7,469
Cash and cash equivalents at end of period	$	5,281		$	7,032

Supplemental Disclosure of Cash Flow Information:
Interest received	$	59		$	21
Interest paid	$	1		$	4
Taxes paid	$	2		$	—

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

CARDIOTECH INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

CardioTech International, Inc. (including its wholly-owned subsidiaries, collectively “CardioTech” or the “Company”) is a medical device company that designs, develops, manufactures and sells materials and innovative products for the treatment of cardiovascular, orthopedic, oncology and other diseases. The Company’s divisions are Gish Biomedical, Inc. (“Gish”), which manufactures cardiopulmonary products, Catheters and Disposables Technology, Inc. (“CDT”), which designs and manufactures private-label medical devices and its biomaterials division. The Company operates in one segment, medical manufacturing and sales.

The Company is using its proprietary technology to develop and manufacture the CardioPassTM synthetic coronary artery bypass grafts (“SynCAB”) made of ChronoFlexTM. 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 SynCAB 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. 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 31% 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, which represents an 18% interest in the outstanding common and preferred stock of CorNova (See Note 14).

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.

2. Interim Financial Statements

The condensed consolidated financial information for the three and six months ended September 30, 2006 and 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 six months ended September 30, 2006 and 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 Annual Report on Form 10-K as of and for the year ended March 31, 2006 and its Quarterly Report on Form 10-Q as of and for the quarter ended June 30, 2006 filed with the Securities and Exchange Commission.

The balance sheet at March 31, 2006 has been derived from our 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.” The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license and royalty fees for the use of its proprietary biomaterials. CardioTech recognizes these fees as revenue in accordance with the terms of the contracts. Contracted product design and development projects are recognized on a time and materials basis as services are performed.

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 September 30, 2006 and 2005 totaled $87,000 and

$99,000, respectively. Delivery costs billed to customers for the six months ended September 30, 2006 and 2005 totaled $182,000 and $207,000, respectively. Delivery costs billed to customers have been recorded as revenue.

The Company recently announced that it had signed a supply and royalty agreement with a leading developer and manufacturer of orthopedic devices. Under the terms of the in-perpetuity agreement, the Company provides exclusive use and supply of its proprietary ChronoFlex® polymer material that is specifically formulated for the development of orthopedic implant devices. The Company will recognize these royalty fees, which are paid annually, on a straight line basis over the contractual period, beginning in October 2006.

4. Stock Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, Share-Based Payment—An Amendment of FASB Statements No. 123 and 95 (“SFAS No. 123R”), which requires all companies to measure compensation cost for all share-based payments, including employee stock options, at fair value. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No.123”). However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair value over the requisite service period. Pro forma disclosure is no longer an alternative. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB No. 107”), which expressed the views of the SEC regarding the interaction between SFAS No. 123R and certain rules and regulations of the SEC. SAB No. 107 provides guidance related to the valuation of share-based payment arrangements for public companies, including assumptions such as expected volatility and expected term.

Prior to April 1, 2006, the Company applied the pro forma disclosure requirements under SFAS No. 123 and accounted for its stock-based employee compensation plans using the intrinsic value method under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations.

Effective April 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective transition method. Under this transition method, compensation cost recognized in the statement of operations for the three and six months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123; and (b) compensation cost for all share-based payments granted, modified or settled subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective transition method, results for prior periods have not been restated.

For the three and six month periods ended September 29, 2006, the Company recorded share-based compensation expense for options that vested of approximately $3,000 and $5,000, respectively.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to options granted for the three and six months ended September 30, 2005. Since stock-based compensation expense for the three and six months ended September 30, 2006 was calculated under the provisions of SFAS No. 123R, there is no disclosure of pro forma net loss and net loss per share for that period. For purposes of the pro forma disclosure for the three and six months ended September 30, 2005 set forth in the table below, the value of the options is estimated using a Black-Scholes option pricing model.

Had compensation cost for the Company’s stock option grants been determined consistent with SFAS 123, the Company’s net loss and net loss per share would approximate the pro forma amounts below for the three and six months ended September 30, 2005:

(in thousands, except per share data)	Three Months Ended September 30, 2005			Six Months Ended September 30, 2005
Net loss, as reported	$	(285	)	$	(852	)
Less: Stock-based employee compensation expense determined under fair value based method for all employee awards	(152		)	(161		)
Pro forma, net loss	$	(437	)	$	(1,013	)
Basic and diluted loss per share:
As reported	$	(0.01	)	$	(0.04	)
Pro forma	$	(0.02	)	$	(0.05	)

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 because 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. There was no compensation cost related to the acceleration of vesting of stock options recorded for the three and six months ended September 30, 2006 and 2005. At September 30, 2006, there is no remaining unrecognized compensation cost from the acceleration.

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 options granted during the three and six months ended September 30, 2006 and 2005 is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions:

	Three Months Ended September 30,				Six Months Ended September 30,
	2006		2005		2006		2005
Dividend yield	None		None		None		None
Expected volatility	103.00		80.00		103.00		80.00
Risk-free interest rate	4.70	%	4.56	%	4.70	%	4.56	%
Expected life	6.5 years		10 years		6.5 years		10 years

Dividend yield - The Company has never declared or paid any cash dividends on any of its capital stock and does not expect to do so in the foreseeable future. Accordingly, the Company uses an expected dividend yield of zero to calculate the grant-date fair value of a stock option.

Expected volatility - The expected volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate during the expected term of options granted. The Company determines the expected volatility solely based upon the historical volatility of the Company’s Common Stock over a period commensurate with the

option’s expected term. The Company does not believe that the future volatility of its Common Stock over an option’s expected term is likely to differ significantly from the past.

Risk-free interest rate - The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the option’s expected term on the grant date.

Expected life - For option grants subsequent to the adoption of SFAS 123R, the expected life of stock options granted is based on the simplified method prescribed under SAB 107, “Share-Based Payment.” Accordingly, the expected term is presumed to be the midpoint between the vesting date and the end of the contractual term.

The Company recognizes compensation expense on a straight-line basis over the requisite service period based upon options that are ultimately expected to vest, and accordingly, such compensation expense has been adjusted by an amount of estimated forfeitures. Forfeitures represent only the unvested portion of a surrendered option. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Prior to the adoption of SFAS No. 123R, the Company accounted for forfeitures upon occurrence as permitted under SFAS No. 123. However, the estimation of forfeitures requires significant judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. As of September 30, 2006, there are unvested options for approximately 13,752 shares and the Company believes that there is no risk of forfeiture. As all unvested options were held by a member of the Company’s Board of Directors and the Company expects these options to fully vest, a forfeiture rate of zero has been assumed. The weighted average fair value of stock options granted during the three months ended September 30, 2006 and 2005 was $1.51 and $2.16 per share, respectively. The weighted average fair value of stock options granted during the six months ended September 30, 2006 and 2005 was $2.20 and $2.16 per share, respectively.

CardioTech’s 1996 Employee, Director and Consultants Stock Option Plan (the “1996 Plan”) was approved by CardioTech’s Board of Directors and Stockholders in March 1996. A total of 7,000,000 shares have been reserved for issuance under the 1996 Plan. Under the terms of the 1996 Plan the exercise price of Incentive Stock Options issued under the Plan must be equal to the fair market value of the common stock at the date of grant. In the event that Non Qualified Options are granted under the 1996 Plan, the exercise price may be less than the fair market value of the common stock at the time of the grant (but not less than par value). In October 2003, the Company’s shareholders approved the CardioTech International, Inc. 2003 Stock Option Plan (the “2003 Plan” and, together with the 1996 Plan, the “Plans”), which authorizes the issuance of 3,000,000 shares of common stock with terms similar to the 1996 Plan. Substantially all of the stock options granted pursuant to the 1996 Plan provide for the acceleration of the vesting of the shares of common stock subject to such options in connection with certain changes in control of the Company. A similar provision is not included the 2003 Plan. In most cases, options granted under the Plans expire ten years from the grant date. Under Forms S-8 filed by the Company on June 12, 1996 and June 27, 2003, there are a total of 7,489,920 shares of the common stock registered for issuance pursuant to the 1996 Plan. Under a Form S-8 filed by the Company on July 23, 2004, there are a total of 3,000,000 shares of common stock registered for issuance pursuant to the 2003 Plan. As of September 30, 2006, there are 1,593,992 shares remaining available for future grant under the 2003 Plan.

Information regarding option activity for the six months ended September 30, 2006 under the Plan is summarized below:

	Options Outstanding		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term in Years	Aggregate Intrinsic Value
Options outstanding as of April 1, 2006	6,210,880		$	2.21	6.50
Granted	12,918		2.20
Exercised	(36,250	)	1.70
Cancelled	(216,544	)	3.57
Forfeited	(424,412	)	1.94
Options outstanding as of September 30, 2006	5,546,592		2.18		6.43	$	764,885
Options exercisable as of September 30, 2006	5,532,840		2.17		6.43	$	764,885

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the closing price of the common stock on September 29, 2006 of $1.29 and the exercise price of each in-the-money option) that would have been received by the option holders had all option holders exercised their options on September 30, 2006. Total intrinsic value of stock options exercised under the Plan for the three and six months ended September 30, 2006 was $0 and $30,000, 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 Company’s 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 by CorNova, foreign currency translation adjustments and minimum pension liability adjustments. During the three and six months ended September 30, 2006 and 2005, the Company’s only item of other comprehensive income or loss was its equity in unrecognized holding losses on securities classified as available for sale recorded by CorNova.

	Three Months Ended						Six Months Ended
	September 30,						September 30,
(In thousands)	2006			2005			2006			2005
Net loss	$	(346	)	$	(285	)	$	(1,556	)	$	(852	)
Other comprehensive income (loss)	(75		)	121			(40		)	142
Comprehensive loss	$	(421	)	$	(164	)	$	(1,596	)	$	(710	)

6. Related Party Transactions

The Company has an investment in CorNova, Inc., of which Dr. Eric Ryan is Chairman, CEO and a major shareholder. The Company, on July 15, 2004, 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 SynCAB. There were no expenses related to this agreement recognized for the three and six months ended September 30, 2006. There was $38,000 in expenses related to this agreement recognized in the three and six months ended September 30,2005. This agreement expired as of July 15, 2006.

The Company provides research and development services to CorNova in connection with the development of the drug-eluting stent. During the three and six months ended September 30, 2005, the Company recognized $12,000 in connection with these services. As of September 30, 2006, there were no accounts receivable or payables outstanding related to CorNova.

7. Inventories

Inventories consist of the following:

(in thousands)	September 30, 2006		March 31, 2006
Raw materials	$	2,661	$	2,143
Work in progress	1,189		1,033
Finished goods	1,533		1,610
Total inventories	$	5,383	$	4,786

8. Property, Plant and Equipment

Property, plant and equipment consists of the following:

(in thousands)	September 30, 2006			March 31, 2006
Land	$	500		$	500
Building	2,097			2,053
Machinery, equipment and tooling	2,561			2,473
Furniture, fixtures and office equipment	660			651
Leasehold improvements	1,343			1,336
	7,161			7,013
Less: accumulated depreciation and amortization	(3,283		)	(2,954		)
	$	3,878		$	4,059

For the three months ended September 30, 2006 and 2005, depreciation expense was $143,000 and $202,000, respectively. For the six months ended September 30, 2006 and 2005, depreciation expense was $329,000 and $408,000, respectively.

9. Deferred Revenue

Beginning in fiscal 2005 and continuing into fiscal 2006, the Company started shipping branded catheter products in its private label business on a purchase order basis to a major customer (the “Intermediary”), who would then perform additional manufacturing processes and ship these products to the end user (the “End User”). These products were developed previously by the End User who then transferred manufacturing to the Intermediary. The Intermediary then engaged the Company to manufacture the products. In March 2006, the End User sought to directly source products from the Company.

On May 18, 2006, the Company was notified by the End User that the End User had decided to cease using the Company for future production. During this time, the End User also began an alliance with a competitive supplier of branded catheters.

The End User’s decision in May 2006 was due to concerns about supply constraints related to production specifications. The Company’s plans at that time were to (i) identify, inspect and/or rework all products produced for the End User and (ii) to allow the End User to determine, in its sole discretion, whether the Company’s products were consistent with the End User’s specifications. The End User has now determined that it will not order future products from the Company.

The Company had initially deferred the revenue related to shipments to the End User due to the uncertainty regarding customer acceptance of the shipped product. As the contracted period to notify the Company of any defective product passed during the second quarter without further notification from the End User of any defective product, the Company has determined that all revenue recognition criteria have been met and $397,000 of revenue related to shipments to the End User has been recorded in the accompanying condensed consolidated statement of operations for the quarter ended September 30, 2006. The costs associated with this revenue were expensed in prior periods because the net realizable value of the inventory was uncertain due to the likely return and rework of the products.

10. 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. 6,427,323 and 6,919,647, respectively, shares of common stock were excluded from the calculation of diluted earnings per share as of September 30, 2006 and 2005 because the effect would be antidilutive. For the three and six months ended September 30, 2005, the 1,139,586 shares of common stock underlying the additional investment right, which expired in July 2005, were also excluded from the calculation of diluted earnings per share because the effect would be antidilutive (Note 12).

11. Enterprise and Related Geographic Information

The Company acquired Gish Biomedical, Inc. effective April 7, 2003 and subsequent to that date, the Company has managed its business on the basis of one reportable operating segment, Medical Device Manufacturing and Sales, in accordance with the qualitative and quantitative criteria established by SFAS 131, “Disclosures About Segments of an Enterprise and Related Information.”

Sales to foreign customers (primarily Europe and Asia) aggregated approximately $846,000 and $1,080,000 for the three months ended September 30, 2006 and 2005, respectively, and $1,774,000 and $1,770,000 for the six months ended September 30, 2006 and 2005, respectively. The Company has no long-lived assets outside the United States.

Revenues for the presented periods are as follows:

	Three Months Ended September 30,				Six Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Medical devices	$	4,865	$	5,520	$	9,360	$	10,593
Contracted product design and development	128		243		314		607
Royalties	289		271		578		475
	$	5,282	$	6,034	$	10,252	$	11,675

12. Stockholders’ Equity

During the three months ended September 30, 2006 and 2005, the Company issued 0 and 233,804 shares of common stock, respectively, as a result of the exercise of options by employees, generating cash proceeds of $0 and $532,000, respectively. During the six months ended September 30, 2006 and 2005, the Company issued 36,250 and 233,804 shares of common stock, respectively, as a result of the exercise of options by employees, generating cash proceeds of $61,000 and $532,000, respectively.

During the three months ended September 30, 2006 and 2005, the Company repurchased 100 and 1,500 shares of its common stock, respectively, at a cost of $175 and $2,800, respectively. During the six months ended September 30, 2006 and 2005, the Company repurchased 600 and 3,300 shares of its common stock, respectively, at a cost of $1,500 and $6,200, respectively.

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 $314,000. In connection with the transaction, the investors had rights to purchase up to 1,139,586 shares of common stock at a price of $2.40 per share, which were exercisable for a period commencing December 22, 2004 and ending on July 27, 2005. Effective July 28, 2005 these additional investment rights were unexercised and expired.

13. 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.

For the three and six months ended September 30, 2006 and 2005, the Company provided for no income taxes, other than state income taxes, as the Company has significant net loss carryforwards.

14. Investment in CorNova

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

Upon the event of CorNova securing additional financing in the minimum amount of $1,000,000 and up to a maximum amount of $3,000,000 (the “Series A Financing”), CardioTech and Implant 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, Inc. completed its Series A Financing transaction on February 4, 2005. At that time, the Company became obligated to contribute shares of its common stock equal to $750,000. The number of shares was determined to be 308,642. Simultaneous with the issuance and exchange of the Investment Shares, as set forth in the Agreement, 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 (collectively the “Technology”).

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 tailored to the drug(s) specified by CorNova, 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 Financing transactions 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 2,000,000 shares of CorNova’s common stock to employees and consultants. At September 30, 2006, CorNova has granted approximately 900,000 options under the 2004 Plan.

CardioTech has a 31% ownership interest in the common stock of CorNova and, accordingly, CardioTech has used the equity method of accounting in accordance with APB Opinion No. 18, “The Equity Method of Accounting for Investments in Common Stock”, and recorded 31% of the net loss of CorNova in its consolidated financial statements for the three and six months ended September 30, 2006 and 2005. During the three months ended September 30, 2006, the Company recorded equity in the net loss of CorNova of $75,000, and equity in comprehensive loss of CorNova of $0 (related to unrealized holding losses on securities classified as available-for-sale). During the three months ended September 30, 2005, the Company recorded equity in the net loss of CorNova of $65,000, and equity in comprehensive loss of CorNova of $121,000 (related to unrealized holding losses on securities classified as available-for-sale). The Company has invested $825,000 in CorNova, Inc. and has recorded cumulative net losses through September 30, 2006 of $825,000 from CorNova. Therefore, the maximum remaining portion of CorNova’s future losses allocable to the Company is $0. 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.

At September 30, 2006, CorNova had total assets of $1,568,000, of which $346,000 was cash and short-term investments, liabilities totaling $116,000 and Stockholders’ Equity of $1,453,000 of which $2,965,000 is a retained earnings deficit and $722,000 is comprehensive loss related to the decline in market value of the common stock of CardioTech and Implant held by CorNova and which was transferred to CorNova in the transactions discussed above.

15. 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 174,687 shares have been purchased as of September 30, 2006. 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.

16. New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” an interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprise’s financial statements. The Interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than fifty percent (50%) likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The Company does not expect the adoption of FIN 48 to have a material impact on its consolidated financial statements.

17. Subsequent Events

LeMaitre Vascular Products, Inc., a third party contractor, has manufactured coronary grafts for our limited use. In October 2006, the Company purchased proprietary equipment for $350,000 in cash which is designed for the future manufacture of its CardioPass grafts, as well as for the development of additional medical devices. Under the terms of the agreement, the seller of the equipment has rights to a 5% royalty for five years on future net commercial sales of CardioPass grafts.

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

Cautionary Note Regarding Forward-Looking Statements

This Report on Form 10-Q contains certain statements that are “forward-looking” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Litigation Reform Act”). These forward looking statements and other information are based on our beliefs as well as assumptions made by us using information currently available.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “should” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Such statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended or using other similar expressions.

In accordance with the provisions of the Litigation Reform Act, we are making investors aware that such forward-looking statements, because they relate to future events, are by their very nature subject to many important factors that could cause actual results to differ materially from those contemplated by the forward-looking statements contained in this Report on Form 10-Q. For example, 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 not be able to retain its customers; 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 also 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. In addition, assumptions relating to budgeting, marketing, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause 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. For all of these reasons, the reader is cautioned not to place undue reliance on forward-looking statements contained herein, which speak only as of the date hereof. The Company assumes no responsibility to update any forward-looking statements as a result of new information, future events, or otherwise except as required by law. For further information you are encouraged to review CardioTech’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the fiscal year ended March 31, 2006 and its Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006.

Overview

History

CardioTech International, Inc. (“CardioTech’ or the “Company”) was founded in 1993 as a subsidiary of PolyMedica Corporation (“PMI”). In June 1996, PMI distributed all of the shares of CardioTech’s common stock, par value $0.01 per share, that PMI owned, to PMI stockholders of record. The Company’s proprietary ChronoFlex polyurethane materials have been sold through its CT Biomaterials division since the formation of the Company. These premium biomaterials are sold under the tradenames: ChronoFlex, ChronoThane, HydroThane, ChronoFilm, HydroMed and Hydroslip, and are used by the Company’s customers for use in both acute and chronically implanted devices such as stents, artificial hearts, and vascular ports.

In July 1999, Dermaphylyx International, Inc. (“Dermaphylyx”), was formed by certain affiliates of CardioTech to develop advanced wound healing products. Dermaphylyx was merged with and into CardioTech effective March 2004 and is now a wholly-owned subsidiary of CardioTech. In June 2006, the Company’s Board of Directors decided to cease the operations of Dermaphylyx, the costs of which are immaterial to the Company’s operations.

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, 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. Although CorNova is expected to incur operating losses for the next several quarters, the Company has no obligation to fund CorNova.

The Company has one operating segment, medical device manufacturing and sales, and operates as three divisions: (i) biomaterials, (ii) private-label medical device manufacturing and (iii) cardiopulmonary products.

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.

In October 2006, the Company announced that it had signed a supply and royalty agreement with a leading developer and manufacturer of orthopedic devices. Under the terms of the in-perpetuity agreement, the Company provides exclusive use and supply of its proprietary ChronoFlex® polymer material that is specifically formulated for the development of orthopedic implant devices.

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

CardioTech is incorporating its proprietary polymer technology into a wide range of breakthrough medical applications, starting with coronary artery bypass. The Company’s business model calls for vertically leveraging its technological and manufacturing expertise in order to expand royalty income, develop next generation polymers and manufacture new and complex medical devices.

CardioTech’s customers include large medical device companies in the U.S. and abroad. The CardioPass graft is the Company’s proprietary, synthetic coronary artery bypass graft (“SynCAB”). The Company is developing the CardioPass graft, using specialized ChronoFlex polyurethane materials, to produce a synthetic graft of 5mm in diameter specifically designed for use in coronary artery bypass graft (“CABG”) surgery. If successfully developed, the Company believes that the SynCAB may be used initially to provide an alternative to patients with insufficient or inadequate (“suboptimal”) 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.

According to the 2004 report of the American Heart Association, approximately 500,000 bypass operations were performed in the U.S. in 2003. The Company estimates that approximately 750,000 CABG procedures were performed worldwide during the same year. 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 initiated plans in fiscal 2006 to obtain European marketing approvals. In May 2006, the Company received written acknowledgement from its Notified Body in Europe that its clinical trial plan had been accepted. The planned 10 patient clinical trial protocol allows surgeons to intraoperatively decide to use the SynCAB instead of suboptimal autologous vessels.

The Company has hired a European-based contract research organization (“CRO”) to assist in management of the entire clinical process. The CRO has helped the Company review possible sites in the European Union in order to select investigators who will follow the approved protocols. A site has been selected, a Principal Investigator has

signed a letter of agreement to conduct the trial and provide the necessary data for the clinical research report and we have received approval from the Ethics Committee. Our Principal Investigator has participated in a wide range of cardiovascular clinical trials. Achievement of this important milestone fits within the Company’s planned timeline and is an important benchmark in the commencement and completion of the clinical trial. Next steps include a rigorous review by the Ministry of Health and the completion of paperwork for an import license, and preparation for patient selection.

With these steps still ahead, the Company expects that actual selection of patients will begin at the end of 2006. The patient enrollment process is not an easy one for a long-term surgical implant that is designed to improve outcomes for very sick patients. Prior to each surgery, the Company’s investigators must receive patient consent for participation in the trials. The surgeon then decides at the time of the operation whether or not to utilize the graft. The Company plans to review data after a 90-day follow up has been completed on each of the first three (3) patients. This review will help it determine, with a minimal investment of time and money, if the process is as promising as the Company believes.

Patients will be followed for 90 days and assessed for graft patency and quality of life measures. Following the completed clinical trial, the analyzed data will be submitted by CardioTech to the Notified Body in support of the Company’s CE Mark application.

LeMaitre Vascular Products, Inc., a third party contractor, has manufactured coronary grafts for our limited use. In October 2006, the Company purchased proprietary equipment for $350,000 in cash which is designed for the future manufacture of its CardioPass grafts, as well as for the development of additional medical devices. While the production of our own grafts depends on the results of clinical trials, production may be further delayed as a result of the requirement for equipment validation and, therefore may adversely affect our business.

In June 2006, the Company announced that it signed an agreement to develop innovative medical solutions for the treatment of congestive heart failure. Development at the Company’s Gish Biomedical rapid prototype laboratories will utilize proprietary antithrombogenic Gish Biocompatible Surface (“GBS”) technology.

Manufacturing Operations

The Company generates approximately 97% of its product sales from manufacturing operations at Gish and CDT.

Critical Accounting Policies

Our significant accounting policies are summarized in Note A to our consolidated financial statements included in Item 7 of our Annual Report on Form 10-K for the fiscal ended March 31, 2006. 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 fiscal quarter ended September 30, 2006. Our critical accounting policies are as follows:

· Revenue Recognition. The Company recognizes revenue in accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements.” The Company recognizes revenue from product sales upon shipment, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed or determinable and collection is deemed probable. If uncertainties regarding customer acceptance exist, the Company recognizes revenue when those uncertainties are resolved and title has been transferred to the customer. Amounts collected or billed prior to satisfying the above revenue recognition criteria are recorded as deferred revenue. The Company also receives license and royalty fees for the use of its proprietary biomaterials. CardioTech recognizes these fees as revenue in accordance with the terms of the contracts. Contracted product design and development projects are recognized on a time and materials basis as services are performed.

· Accounts Receivable Valuation. We perform various analyses to evaluate accounts receivable balances and record an allowance for bad debts based on the estimated collectibility of the accounts such that the amounts

reflect estimated net realizable value. If actual uncollectible amounts significantly exceed the estimated allowance, the Company’s operating results would be significantly and adversely affected.

· Inventory Valuation. We value our inventory at the lower of our actual cost or the current estimated market value. We regularly review inventory quantities on hand and inventory commitments with suppliers and record a provision for excess and obsolete inventory based primarily on our historical usage for the prior twelve to sixty month period. Although we make every effort to ensure the accuracy of our forecasts of future product demand, any significant unanticipated change in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

· Intangibles. Our long-lived assets include intangible assets and goodwill. In assessing the recoverability of our intangible assets and goodwill, we must make assumptions in determining the fair value of the asset by estimating future cash flows and considering other factors, including our significant changes in the manner or use of the assets, or negative industry reports or economic conditions. If those estimates or their related assumptions change in the future, we may be required to record impairment charges for those assets. Under the provisions of Statement of Financial Accounting Standards, or SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our intangible assets for impairment on a periodic basis thereafter. The Company will be required to continue to perform a goodwill impairment test on an annual basis, or more frequently if indicators of impairment exist, and the next test is scheduled during the quarter ending March 31, 2007.

Results of Operations

Three Months Ended September 30, 2006 vs. September 30, 2005

Revenues

The following table presents revenues and the percent of total change in revenues for the three months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Revenues:
Product sales	$	4,993	94.5	%	$	5,763	95.5	%
Royalties	289		5.5	%	271		4.5	%
	$	5,282	100.0	%	$	6,034	100.0	%

The following table presents product sales by group expressed as a percentage of total product sales for the three months ended September 30,

	2006				2005
(in thousands)	Product sales		% of Product sales		Product sales		% of Product sales
Medical devices	$	4,865	97.4	%	$	5,520	95.8	%
Contracted product design and development	128		2.6	%	243		4.2	%
	$	4,993	100.0	%	$	5,763	100.0	%

Medical device revenues for the three months ended September 30, 2006 were $4,865,000 as compared to $5,520,000 for the comparable prior year period, a decrease of $655,000, or 11.9%. Medical devices are primarily composed of cardiopulmonary bypass products, private-label products, and biomaterials typically used for implantable devices. Medical device revenues decreased primarily due to fewer shipments of cardiopulmonary bypass products of approximately $500,000, principally due to fewer cardiopulmonary bypass procedures being performed and loss of customers. In addition, there were fewer shipments of private-label products of approximately $70,000, primarily due to the loss of a major customer (the “End User”), as described below.

Beginning in fiscal 2005 and continuing into fiscal 2006, the Company started shipping branded catheter products in its private label business on a purchase order basis to a major customer (the “Intermediary”), who would then perform additional manufacturing processes and ship these products to the End User. These products were developed previously by the End User who then transferred manufacturing to the Intermediary. The Intermediary then engaged the Company to manufacture the products. In March 2006, the End User sought to directly source products from the Company.

The Company had initially deferred the revenue related to shipments to the End User due to the uncertainty regarding customer acceptance of the shipped product. As the contracted period to notify the Company of any defective product passed during the second quarter without further notification from the End User of any defective product, the Company has determined that all revenue recognition criteria have been met and $397,000 of revenue related to shipments to the End User have been recorded. The costs associated with this revenue were expensed in prior periods because the net realizable value of the inventory was uncertain due to the likely return and rework of the product.

Contracted product design and development revenues for the three months ended September 30, 2006 were $128,000 as compared to $243,000 for the comparable prior year period, a decrease of $115,000 or 47.3%. 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 the

manufacture and shipment of private-label medical device products.

Royalties for the three months ended September 30, 2006 were $289,000 as compared to $271,000 for the comparable prior year period, an increase of $18,000 or 6.6%. The Company has agreements to license its proprietary biomaterials technology to medical device manufacturers. Royalties are earned when these manufacturers sell medical devices which use the Company’s biomaterials.

The Company recently announced that it had signed a supply and royalty agreement with a leading developer and manufacturer of orthopedic devices. Under the terms of the in-perpetuity agreement, the Company provides exclusive use and supply of its proprietary ChronoFlex® polymer material that is specifically formulated for the development of orthopedic implant devices. The Company will recognize royalty fees, which are paid annually, on a straight line basis over the contractual period, beginning in October 2006.

Gross Margin

The following table presents product sales gross margin and gross margin percentages as a percent of the respective product sales for the three months ended September 30,

	2006				2005
(in thousands)	Gross Margin		% Gross Margin		Gross Margin		% Gross Margin
Product sales	$	1,308	26.2	%	$	1,353	23.5	%

Gross margin on product sales (excluding royalty income) was 1,308,000, or 26.2% as a percentage of product revenue for the three months ended September 30, 2006, as compared to $1,353,000, or 23.5% for the comparable prior year period.

Without the effect of the above described $397,000 in revenues related to the End User, gross margin on product sales (excluding royalty income) was $911,000, or 19.8% as a percentage of product revenue for the three months ended September 30, 2006, as compared to $1,353,000, or 23.5% for the comparable prior year period.

The 3.7% decrease in gross margin as a percentage of product sales for the three months ended September 30, 2006, which excludes the $397,000 in revenues related to the End User, as compared to September 30, 2005 is due to: (i) fixed overhead costs becoming a higher percentage of reduced revenues at private-label manufacturer, (ii) marketplace pricing pressures on revenues in the cardiopulmonary business and (iii) increased raw material costs for the cardiopulmonary products resulting from inflationary pressures on petrochemical-based supplies.

Research and Development, Regulatory, and Engineering Expenses

The following table presents research and development expenses as a percentage of revenues for the three months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Research and development, regulatory and engineering	$	391	7.4	%	$	386	6.4	%

Research and development expenses for the three months ended September 30, 2006 were $391,000 as compared to $386,000 for the comparable prior year period, an increase of $5,000 or 1.3%. CardioTech’s research and development efforts are focused on developing new applications of ChronoFlex, synthetic vascular graft technologies, including the CardioPass graft, and Gish Biocompatible Surface Coating applications. Research and development expenditures consisted primarily of the salaries of full time employees and related expenses, and are expensed as incurred. In addition, the Company allocated a portion of the salary and related costs of Michael Szycher, Ph.D., former 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 Company has an investment in CorNova, Inc., of which Dr. Eric Ryan is Chairman, CEO and a major shareholder. The Company, on July 15, 2004, 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 SynCAB. This agreement expired as of July 15, 2006. For the three months ended

September 30, 2005, $12,000 in expense was recognized related to this agreement.

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses as a percentage of revenues for the three months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Selling, general and administrative	$	1,617	30.6	%	$	1,538	25.5	%

Selling, general and administrative expenses for the three months ended September 30, 2006 were $1,617,000 as compared to $1,538,000 for the comparable prior year period, an increase of $79,000 or 5.1%. This increase is attributable to staff recruitment costs, financial systems implementation expenses, and additional employees.

Interest and Other Income and Expense

Interest and other income and expense, net for the three months ended September 30, 2006 was $140,000 as compared to $80,000 for the comparable prior year period, an increase of $60,000, primarily due to the recovery of approximately $82,000 from one customer’s accounts receivable previously written-off in fiscal 2006. This was partially offset by decreased interest income on lower cash balances.

Equity in Net Loss of CorNova, Inc.

The Company has invested $825,000 in CorNova, Inc. During the three months ended September 30, 2006 the Company recorded and additional $75,000 of equity in net loss in its investment in CorNova and has now incurred the maximum cumulative net loss of $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.

Six Months Ended September 30, 2006 vs. September 30, 2005

Revenues

The following table presents revenues and the percent of total change in revenues for the six months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Revenues:
Product sales	$	9,674	94.4	%	$	11,200	95.9	%
Royalties	578		5.6	%	475		4.1	%
	$	10,252	100.0	%	$	11,675	100.0

The following table presents product sales by group expressed as a percentage of total product sales for the six months ended September 30,

	2006				2005
(in thousands)	Product sales		% of Product sales		Product sales		% of Product sales
Medical devices	$	9,360	96.8	%	$	10,593	94.6	%
Contracted product design and development	314		3.2	%	607		5.4	%
	$	9,674	100.0	%	$	11,200	100.0	%

Medical device revenues for the six months ended September 30, 2006 were $9,360,000 as compared to $10,593,000 for the comparable prior year period, a decrease of $1,233,000, or 11.6%. Medical devices are primarily composed of cardiopulmonary bypass products, private-label products, and biomaterials typically used for implantable devices. Medical device revenues decreased primarily due to fewer shipments of cardiopulmonary bypass products of approximately $1,060,000, principally due to fewer cardiopulmonary bypass procedures being performed and loss of customers. In addition, there were fewer shipments of private-label products of

approximately $70,000, primarily due to the loss of a major customer, as described above.

Contracted product design and development revenues for the six months ended September 30, 2006 were $314,000 as compared to $607,000 for the comparable prior year period, a decrease of $293,000 or 48.3%. 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 the manufacture and shipment of private-label medical device products.

Royalties for the three months ended September 30, 2006 were $578,000 as compared to $475,000 for the comparable prior year period, an increase of $103,000 or 21.7%. The Company has agreements to license its proprietary biomaterials 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 six months ended September 30, 2006 is a result of increased shipments of product by these manufacturers

Gross Margin

The following table presents product sales gross margin and gross margin percentages as a percent of the respective product sales for the six months ended September 30,

	2006				2005
(in thousands)	Gross Margin		% Gross Margin		Gross Margin		% Gross Margin
Product sales	$	1,962	20.3	%	$	2,318	20.7	%

Gross margin on product sales (excluding royalty income) was 1,962,000 or 20.3% as a percentage of product revenue for the six months ended September 30, 2006, as compared to $2,318,000, or 20.7% for the comparable prior year period.

Without the effect of the above described $397,000 in revenues related to the End User, gross margin on product sales (excluding royalty income) was $1,565,000, or 16.9% as a percentage of product revenue for the six months ended September 30, 2006, as compared to $2,318,000, or 20.7% for the comparable prior year period.

The 3.8% decrease in gross margin as a percentage of product sales for the six months ended September 30, 2006, which excludes the $397,000 in revenues related to the End User, as compared to September 30, 2005 is due to: (i) fixed overhead costs becoming a higher percentage of reduced revenues, (ii) marketplace pricing pressures on revenues in the cardiopulmonary business and (iii) increased raw material costs for the cardiopulmonary products resulting from inflationary pressures on petrochemical-based supplies.

Research and Development, Regulatory, and Engineering Expenses

The following table presents research and development expenses as a percentage of revenues for the six months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Research and development, regulatory and engineering	$	743	7.2	%	$	703	6.0	%

Research and development expenses for the six months ended September 30, 2006 were $743,000 as compared to $703,000 for the comparable prior year period, an increase of $40,000 or 5.7%. This increase is primarily a result of the timing of activities associated with the development of and clinical efforts associated with the CardioPass graft and activities for cardiopulmonary products.

The Company has an investment in CorNova, Inc., of which Dr. Eric Ryan is President and a major shareholder. The Company, on July 15, 2004, entered into a 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 SynCAB. This agreement expired as of July 15, 2006. For the six months ended September 30, 2005, several of the contract milestones had been achieved and, accordingly, costs totaling $38,000 related to performance under this contract were recognized as a research and development expense. For the six months ended September 30, 200, $12,000 in expense was recognized related to this agreement

Selling, General and Administrative Expenses

The following table presents selling, general and administrative expenses as a percentage of revenues for the six months ended September 30,

(in thousands)	2006		% of Revenues		2005		% of Revenues
Selling, general and administrative	$	3,234	31.5	%	$	2,948	25.3	%

Selling, general and administrative expenses for the six months ended September 30, 2006 were $3,234,000 as compared to $2,948,000 for the comparable prior year period, an increase of $286,000 or 9.7%. This increase is attributable to staff recruitment costs, financial systems implementation expenses, and the hiring of additional employees.

Interest and Other Income and Expense

Interest and other income and expense, net for the six months ended September 30, 2006 was $159,000 as compared to $89,000 for the comparable prior year period, an increase of $70,000, primarily due to the recovery of approximately $82,000 from one customer’s previously written-off accounts receivable in fiscal 2006. This was partially offset by decreased interest income on lower cash balances.

Equity in Net Loss of CorNova, Inc.

The Company has invested $825,000 in CorNova, Inc. During the six months ended September 30, 2006, the Company recorded an additional $278,000 of equity in net loss in its investment in CorNova and has now incurred the maximum cumulative net loss of $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.

Liquidity and Capital Resources

As of September 30, 2006, the Company had cash and cash equivalents of $5.3 million, a decrease of $1.5 million when compared with a balance of $6.8 million as of March 31, 2006 and a decrease of $355,000 when compared with a balance of $5.6 million as of June 30, 2006.

During the six months ended September 30, 2006, the Company had net cash outflows of $1.5 million from operating activities as compared to net cash outflows of $833,000 for the comparable prior year period. The approximate $650,000 increase in net cash outflows used in operating activities during the six months ended September 30, 2006 as compared to the comparable prior year period was primarily a result of: (i) a larger net loss and (ii) and decreases in accounts payable and accrued expenses.

During the six months ended September 30, 2006, the Company issued 36,250 shares of the Company’s common stock as a result of the exercise of options, generating cash proceeds of approximately $62,000. During the six months ended September 30, 2006, the Company purchased 600 shares of its common stock at an approximate cost of $1,500.

At September 30, 2006, 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.

As of September 30, 2006, the Company had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

Contractual obligations consist of the following as of September 30, 2006:

	Payment Due by Period
(in thousands)	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Operating lease obligations	$	4,207	$	804	$	2,263	$	1,140	$	—
Purchase obligations	$	2,130	2,130		—		—		—
	$	6,337	$	2,934	$	2,263	$	1,140	$	—

Operating lease obligations are for aggregate future minimum rental payments required under operating leases for the California and Minnesota manufacturing facilities. Purchase obligations primarily represent purchase orders issued for inventory used in production.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We own certain money market funds that are sensitive to market risks as part of our investment portfolio. The investment portfolio is used to preserve our capital until it is required to fund operations, investing or financing activities. None of the market-risk sensitive instruments held in our investment portfolio are held for trading purposes. We do not own derivative financial instruments in our investment portfolio. We do not believe that the exposure to market risks in our investment portfolio is material.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the Company’s disclosure controls and procedures as of September 30, 2006. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have determined that such controls and procedures are effective to ensure that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. There have been no changes in the Company’s internal controls over financial reporting that were identified during the evaluation that occurred during the Company’s last fiscal quarter of 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 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-K for the period ended March 31, 2006 and its Quarterly Report on Form 10-Q for the period ended June 30, 2006. 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 five 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 on the American Stock Exchange 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, Inc.; 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 reconsider our growth strategy.

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

Risks Related to Our Business

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

The Company’s revenues were $5,282,000 and $6,034,000 for the three months ended September 30, 2006 and 2005, respectively. We had net losses of $346,000 and $285,000 for the three months ended September 30, 2006 and 2005, 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 September 30, 2006 and 2005, goodwill represented approximately $487,000, or 2.6% and $1,638,000, or 7.1%, respectively, of our total assets and net amortizable intangibles represented approximately $523,000, or 2.8%, and $728,000 and 3.2%, respectively, 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 future 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 facilities at an economically feasible cost, or at all.

LeMaitre Vascular Products, Inc., a third party contractor, has manufactured coronary grafts for our limited use. In October 2006, the Company purchased proprietary equipment for $350,000 in cash which is designed for the future manufacture of its CardioPass grafts, as well as for the development of additional medical devices. While the production of our own grafts depends on the results of clinical trials, production may be further delayed as a result of the requirement for equipment validation and, therefore may adversely affect our business.

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.

were consistent with the End User’s specifications. The End User has now determined that it will not order future products from the Company.

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 members of senior management. Effective August 7, 2006, Dr. Michael Szycher, our former Chairman and CEO, was replaced by Michael F. Adams, who became CEO and President. 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, provided that our market capitalization is greater than $75 million at September 30, 2006. As our market capitalization was below $75 million on that date, we will be required to comply with the requirements at March 31, 2008.

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 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 revenues accounted for approximately 16.0% and 17.9% of the Company’s total net sales for the three months ended September 30, 2006 and 2005, respectively. International revenues 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 quarter, our stock price ranged from $1.13 to $1.90. 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 September 30, 2006, there were 19,832,483 shares of common stock issued and outstanding. However, the total number of shares of our common stock issued and outstanding does not include shares reserved in anticipation of the exercise of options and warrants. As of September 30, 2006, we had outstanding stock options and warrants of approximately 6,427,323 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.

There is a 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. During the third quarter of fiscal 2006, the Company recorded a $240,000 provision for a voluntary recall of certain cardiopulmonary products. 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

The following table summarizes information regarding shares purchased during the three months ended September 30, 2006.

Quarter Ended	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 be purchased under the plans
July 1 - 31, 2006	100	$	1.75	100
August 1 - 31, 2006	—	$	0.00	—
September 1 - 30, 2006	—	$	0.00	—
Total	100	$	1.75	100	575,313

In June 2001, the Board of Directors authorized the purchase of up to 250,000 shares of the Company’s common stock, of which 174,087 shares have been purchased as of March 31, 2006. 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.

Item 3. Defaults Upon Senior Securities

None.

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

On October 11, 2006, the Company held the 2006 Annual Meeting of Stockholders at which stockholders of record as of August 16, 2006 were entitled to vote on the following matters:

(1) To elect two (2) directors to hold office until their successors shall be elected and shall have qualified; and

(2) To ratify the selection of Ernst & Young LLP as CardioTech’s independent accountants for the fiscal year ending March 31, 2007.

As of August 16, 2006, the record date, there were 19,907,170 shares eligible to vote. As of October 11, 2006, votes representing 18,139,890 shares were cast. A majority of the stockholders voted in favor of and a motion was made approving the nomination of the directors and ratification of the independent accountants. The results of the votes are as follows:

Proposal No. 1 - Election of Directors:

	For	Witheld
Michael F. Adams to serve as Class I director	17,918,355	221,535
Anthony J. Armini to serve as Class I director	17,891,246	248,644

Proposal No. 2 - Ratification of Independent Accountants:

		For		Against		Abstain
Ernst & Young LLP to serve as independent accountants for the fiscal year ended March 31, 2007		18,019,393		93,054		27,443

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.

31.1 Certification of Principal Executive Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Principal Financial Officer pursuant to Section 3.02 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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.

	By:	/s/ Michael F. Adams
		Michael F. Adams
		Chief Executive Officer and President


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

Dated: November 6, 2006