<PAGE>
                                                                      EXHIBIT 13

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS

GENERAL

         SurModics is a leading provider of surface modification solutions to
medical device manufacturers. The Company's revenues are derived from four
primary sources: fees from licensing its patented technology to customers;
royalties received from licensees; the sale of photoreactive chemical compounds
to licensees, stabilization products to the diagnostics industry and coated
glass slides to the genomics market; and research and development fees generated
on projects for commercial customers and government grants.

         Fiscal 2001 was another record year for SurModics. Total revenue
increased 24% to $22.7 million from $18.3 million in fiscal 2000.
PhotoLink-related revenue increased 31% to a record $15.9 million from $12.1
million in 2000. All PhotoLink categories showed double-digit growth, but
commercial development revenue was especially strong.

         Commercial development revenue jumped to $3.6 million from $1.4 million
in 2000, a 152% increase. PhotoLink royalties increased 15% to $7.8 million and
reagent sales, those chemicals used by licensees in the coating process,
increased 10% to $2.6 million. Operating income rose 42% to $7.6 million from
$5.3 million in fiscal 2000. Net income was $5.1 million, or $.29 per diluted
share, compared to $4.2 million, or $.25 per diluted share, in fiscal 2000.
Fiscal 2001 results included a charge of $1.7 million, or $.09 per diluted
share, for the cumulative effect of a change in accounting principle related to
the adoption of the SEC's Staff Accounting Bulletin No. 101.


RESULTS OF OPERATIONS

                     YEARS ENDED SEPTEMBER 30, 2001 AND 2000

         Revenue. The Company's revenue was $22.7 million in fiscal 2001, an
increase of 24% over fiscal 2000. The revenue components were as follows:

<TABLE>
<CAPTION>
                                                                                       Increase         % Increase
(Dollars in thousands)                           Fiscal 2001       Fiscal 2000        (Decrease)        (Decrease)
                                                 -----------       -----------        ----------        ----------
<S>                                              <C>               <C>                <C>               <C>
PhotoLink revenue:
    Royalties                                          $7,781            $6,763            $1,018           15%
    License fees                                        1,794             1,470               324           22%
    Reagent sales                                       2,638             2,393               245           10%
    Commercial development                              3,648             1,445             2,203          152%
                                                        -----             -----             -----
        Total PhotoLink revenue                        15,861            12,071             3,790           31%
Diagnostic royalties                                    3,253             2,917               336           12%
Stabilization & other products                          3,047             2,687               360           13%
Government research                                       532               604              (72)          (12%)
                                                          ---               ---              ----
             Total revenue                            $22,693           $18,279            $4,414           24%
                                                      =======           =======            ======           ===
</TABLE>

         The revenue growth in fiscal 2001 was mostly due to a 31% increase in
total PhotoLink revenue, especially commercial development and royalty revenue.
An increase in customer-funded development activity resulted in a 152% rise in
commercial development revenue. The two largest components of this were
collaborative work performed with Johnson & Johnson's Cordis division on its
drug-coated stent and


                                       1
<PAGE>

Motorola Life Sciences on genomics projects. A single customer accounted for
approximately 66% of the commercial development revenue in 2001 and 63% in
fiscal 2000. PhotoLink royalties increased 15% due to sales growth of previously
introduced coated products by licensees, new coated products introduced in 2001,
and increased minimum royalties. The top 10 product applications accounted for
84% of the PhotoLink royalties received in fiscal 2001. SurModics' clients now
have 57 coated products on the market compared to 47 one year ago.

         Reagent sales increased 10% due to additional coated products on the
market and increased production of previously introduced devices by PhotoLink
clients. A single customer purchased 38% of the reagents sold during fiscal
2001, down from 55% in fiscal 2000. More importantly, reagent sales to all other
customers increased 53% between years. During fiscal 2001, SurModics signed 10
new license agreements resulting in a 22% increase in license fee revenue to
$1.8 million. Included in both years were $1.0 million in license fees from
Motorola Life Sciences. The Company now has license agreements with 50 companies
covering over 100 product applications.

         In total, non-PhotoLink revenue sources increased 10% in fiscal 2001.
Diagnostic royalties increased 12%, most of which was due to proceeds from
patent infringement settlements. Sales of stabilization and other products grew
13% between years. A 31% decrease in stabilization chemical sales was more than
offset by a 141% increase in sales of 3D-Link Activated Slides; however, slide
sales were down in the fourth quarter. Finally, revenue from government grants
decreased 12% as the Company continues to de-emphasize its reliance on the
government to fund its research projects.

         In fiscal 2002, management expects revenue growth in the 20 to 25%
range. A significant event impacting this rate of growth will be the timing of
Johnson & Johnson's launch of its drug-coated stent. If European regulatory
approval is received around April 1, 2002, SurModics will receive royalties in
only the fourth quarter of fiscal 2002. If European approval is received sooner,
royalties will also be generated in the third quarter. Royalties will also be
positively impacted by the 12 new coated products that clients are expected to
launch in fiscal 2002. Several of these products have the potential to generate
significant annual royalties. With respect to license revenue, the
implementation of SAB 101 will require license fees to be deferred and
recognized over an average of 15 years.

         Revenue will fluctuate from quarter to quarter depending on, among
other factors: success by clients in selling coated medical devices; the timing
of introductions of coated products by clients; the number and size of
development projects that are entered into; the number of new license agreements
that are finalized; one significant contract that generates lower royalty rates
as the client's sales increase; and the impact of most medical device clients
generating lower sales during the summer months, which results in relatively
lower royalty revenue to SurModics in the first quarter of each fiscal year.

         Product costs. The Company's product costs were $2.4 million for fiscal
2001, an increase of $500,000, or 28%, over fiscal 2000. Overall product margins
averaged 57%, a decrease from 63% in fiscal 2000. Reagent margins increased in
2001, while stabilization and slide margins declined. A portion of this decrease
was due to a 15% reduction in stabilization product pricing. In addition, the
Company completed additional manufacturing capacity in the first quarter, which
added to certain of the overhead cost allocations. In fiscal 2002, management
expects overall product margins to improve by one or two percentage points.

         Research and development expense. Research and development expense was
$8.0 million for fiscal 2001, an increase of $1.2 million, or 18%, over fiscal
2000. Most of this increase was due to compensation and benefit expenses
associated with the technical personnel hired by the Company during the year. In
addition, the Company incurred increased legal fees associated with patents and
increased depreciation from the full-year impact of the build-out of additional
lab space in the prior year. In fiscal 2002, management


                                       2
<PAGE>

expects research and development expenses to increase 18 to 20% over fiscal
2001, as the Company continues to invest in expanding its coating technology.

         Sales and marketing expense. Sales and marketing expense was $1.7
million for fiscal 2001, an increase of $125,000, or 8%, over fiscal 2000.
Increased compensation and benefit expenses, travel, and consulting fees were
partially offset by a decrease in recruiting costs associated with sales and
marketing positions filled in the last quarter of fiscal 2000. In fiscal 2002,
management expects sales and marketing expenses to increase in a similar range
to fiscal 2001.

         General and administrative expense. General and administrative expense
was $3.0 million for fiscal 2001, an increase of $300,000, or 12%, over fiscal
2000. The increase was primarily due to higher compensation and benefit costs,
increased professional fees and higher utility costs. In addition, the Company
expanded its operation within the current facility, eliminating tenant rental
income that previously offset a portion of operating costs. In fiscal 2002,
management expects general and administrative expenses to increase 8 to 10% over
fiscal 2001.

         Other income, net. The Company's net other income was $3.1 million for
fiscal 2001, an increase of $1.6 million, or 116%, over fiscal 2000. Interest
earned on the Company's investments amounted to $2.3 million, an increase of 66%
from fiscal 2000. The increase was due to the additional $7.8 million of cash
provided by operating activities during the year, and the full year impact of
the $13.0 million in proceeds from the issuance of Common Stock in the fourth
quarter of fiscal 2000. The remaining $701,000 of net other income represented
capital gains on investment sales to take advantage of an expiring tax capital
loss carryforward. In fiscal 2002, management expects other income to decrease
significantly due to a lower interest rate environment and, now that the tax
capital loss has been fully utilized, no need to generate capital gain income
for tax purposes.

         Income tax expense. The Company's income tax provision was $3.8 million
in fiscal year 2001 versus $2.5 million in fiscal 2000. The effective tax rate
was 36% in fiscal 2001, a slight decrease from 37% in fiscal 2000 due to the
utilization of the capital loss carryforward discussed above.



                     YEARS ENDED SEPTEMBER 30, 2000 AND 1999

         Revenue. The Company's revenue was $18.3 million in fiscal 2000, an
increase of 35% over fiscal 1999. The revenue components were as follows:

<TABLE>
<CAPTION>
                                                                                       Increase         % Increase
(Dollars in thousands)                           Fiscal 2000       Fiscal 1999        (Decrease)        (Decrease)
                                                 -----------       -----------        ----------        ----------
<S>                                              <C>               <C>                <C>               <C>
PhotoLink revenue:
    Royalties                                          $6,763            $3,912            $2,851           73%
    License fees                                        1,470               645               825          128%
    Reagent sales                                       2,393             1,876               517           28%
    Commercial development                              1,445             1,122               323           29%
                                                        -----             -----               ---
        Total PhotoLink revenue                        12,071             7,555             4,516           60%
Diagnostic royalties                                    2,917             2,758               159            6%
Stabilization & other products                          2,687             2,261               426           19%
Government research                                       604               920             (316)          (34%)
                                                          ---               ---             -----
             Total revenue                            $18,279           $13,494            $4,785           35%
                                                      =======           =======            ======           ===
</TABLE>

                                       3
<PAGE>

         The revenue growth in fiscal 2000 was largely due to the 60% increase
in total PhotoLink revenue between years. PhotoLink royalties increased 73% due
primarily to sales growth of previously introduced coated products by licensees.
SurModics' clients had 47 coated products on the market. Reagent sales increased
28% due to increased production of coated devices by PhotoLink clients. A single
customer purchased 55% of the reagents sold during fiscal 2000, down from 57% in
fiscal 1999. More importantly, reagent sales to all other customers increased
32% between years. During fiscal 2000, SurModics signed 10 new license
agreements, compared to 14 new agreements executed in fiscal 1999. Revenue from
license fees increased 128% from fiscal 1999 due to the receipt of a $1.0
million license fee from Motorola Life Sciences during the fourth quarter of
fiscal 2000. Customer-funded development projects to optimize the PhotoLink
coatings for each customer's specific application resulted in a 29% increase in
commercial development revenue. Approximately 63% of the commercial development
revenue resulted from work on a project for a single customer. This same
customer accounted for 34% of the commercial development revenue in fiscal 1999.

         Non-PhotoLink revenue sources also grew in fiscal 2000; however, this
growth was offset by a reduction in government revenue. Diagnostic royalties
increased 6% between years. Most of this growth occurred in the first half of
the year, as FDA manufacturing issues at the sole licensee impacted royalties in
the second half. Sales of stabilization and other products grew 19%. A 9%
decrease in stabilization chemical sales was more than offset by large growth in
3D-Link Activated Slides. Stabilization sales suffered from the loss of a single
large customer. Finally, revenue from government grants decreased 34% between
years, as the Company has de-emphasized its reliance on grants and has
internally funded more of its research projects.

         Product costs. The Company's product costs were $1.9 million for fiscal
2000, an increase of $400,000, or 26%, over fiscal 1999. Overall product margins
averaged 63% during both years. Efficiencies gained through increased sales
volumes were offset by additional scrap and labor costs.

         Research and development expense. Research and development expense was
$6.8 million for fiscal 2000, an increase of $1.5 million, or 30%, over fiscal
1999. Most of this increase was due to compensation and benefit expenses
associated with the additional technical personnel hired by the Company during
the year. In addition, the Company incurred increased costs due to the build-out
of additional lab space within the current facility early in the year and the
associated costs to furnish the new space with equipment and supplies.

         Sales and marketing expense. Sales and marketing expense was $1.6
million for fiscal 2000, a decrease of $200,000, or 11%, over fiscal 1999. This
decrease was due primarily to compensation and benefit expenses associated with
unfilled sales and marketing positions throughout the year. Some of these
positions were filled during the fourth quarter.

         General and administrative expense. General and administrative expense
was $2.7 million for fiscal 2000, an increase of $100,000, or 5%, over fiscal
1999. The increase was primarily due to inflation, resulting in higher
compensation and benefit costs, and increased legal and professional fees.

         Other income, net. The Company's net other income was $1.4 million for
fiscal 2000, an increase of $300,000, or 22%, over fiscal 1999. This income
primarily represents interest earned on the Company's investments. The level of
investments increased due to the $7.4 million of cash provided by operating
activities, $13.2 million from the issuance of Common Stock and higher yields
due to an increase in interest rates.

         Income tax expense. The Company's income tax provision was $2.5 million
for fiscal year 2000 versus a $783,000 income tax benefit in fiscal 1999. The
Company's effective tax rate was 37% in fiscal


                                       4
<PAGE>

2000. The income tax benefit in fiscal 1999 resulted from the reversal of an
income tax valuation allowance of approximately $2.5 million, reducing the
Company's tax provision at statutory rates to a net credit of $783,000.




LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 2001, the Company had working capital of $17.7
million and cash, cash equivalents and investments totaling $44.4 million. The
Company generated positive cash flows from operating activities of $7.8 million
in fiscal 2001, $7.4 million in fiscal 2000, and $4.4 million in fiscal 1999.
The increase in cash flows in fiscal 2001 was primarily due to the increased net
income generated during the year and tax benefits generated from the exercise of
employee stock options.

         The significant increase in investing activities over the last year was
primarily due to the activity in the Company's available-for-sale investment
portfolio as managed by an independent investment manager. Due to the desire to
fully utilize an expiring tax capital loss carryforward, investing activities
increased as certain investments were sold to generate gains and the proceeds
were then reinvested.

         SurModics' investment policy requires investments with high credit
quality issuers and limits the amount of credit exposure to any one issuer. The
Company's investments principally consist of U.S. government and government
agency obligations and investment-grade, interest-bearing corporate debt
securities with varying maturity dates, the majority of which are five years or
less. Because of the credit criteria of the Company's investment policies, the
primary market risk associated with these investments is interest rate risk.
SurModics does not use derivative financial instruments to manage interest rate
risk or to speculate on future changes in interest rates. A 10% increase in
interest rates would result in an approximate $350,000 decrease in the fair
value of the Company's available-for-sale securities as of September 30, 2001,
but no material impact on the results of operations or cash flows. Management
believes that a reasonable change in raw material prices would not have a
material impact on future earnings or cash flows because the Company's inventory
exposure is not material. Also, the Company's foreign currency exposure is not
significant.

         The Company purchased $2.1 million of personal property and equipment
in fiscal 2001, and $3.0 million in fiscal 2000. In addition, in June 2001, the
Company used $2.5 million to purchase real property for potential future
expansion. The property was classified as an other asset at September 30, 2001,
as the Company now intends to sell the property and expand into a different
location. Subsequent to year-end, the Company purchased a facility on 27 acres
of land for approximately $7.1 million and intends to move its operations into
this facility towards the end of 2002.

         The most significant financing activity over the last three years was
the sale of almost 800,000 shares of Common Stock to Motorola, Inc. in a private
placement that generated $13.0 million in August 2000. Proceeds from stock
option exercises generated an additional $700,000 and $200,000 during fiscal
2001 and 2000, respectively.

         As of September 30, 2001, the Company had no debt, nor did it have any
credit agreements. The Company believes that its existing capital resources will
be adequate to fund SurModics' operations into the foreseeable future.



                                       5
<PAGE>

NEW ACCOUNTING PRONOUNCEMENTS

         In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 requires that license and other up-front fees be recognized
over the term of the agreement unless the fee is in exchange for products
delivered or services performed that represent the culmination of a separate
earnings process. The Company adopted SAB 101 effective October 1, 2000. As a
result, the Company reported a charge to fiscal 2001 earnings of $1.7 million,
net of taxes, or $.09 per diluted share, for the cumulative effect of a change
in accounting principle. Had the accounting change been applied retroactively,
net income would have decreased by $600,000 to $3.7 million, or $.22 per diluted
share, in the year ended September 30, 2000 and decreased by $200,000 to $4.2
million, or $.26 per diluted share, in the year ended September 30, 1999. The
Company now has $2.6 million in additional deferred revenue, net of deferred
costs, that will be recognized as revenue in the future.

FORWARD-LOOKING STATEMENTS

         Certain statements contained in this Annual Report and other written
and oral statements made from time to time by the Company do not relate strictly
to historical or current facts. As such, they are considered "forward-looking
statements" that provide current expectations or forecasts of future events.
These forward-looking statements are made pursuant to the safe harbor provisions
of the Private Securities Reform Act of 1995. Such statements can be identified
by the use of terminology such as "anticipate," "believe," "estimate," "expect,"
"intend," "may," "could," "possible," "plan," "project," "will," "forecast" and
similar words or expressions. The Company's forward-looking statements generally
relate to its growth strategy, financial results, product development programs,
sales efforts, and the impact of the Motorola and Johnson & Johnson agreements.
One must carefully consider forward-looking statements and understand that such
statements involve a variety of risks and uncertainties, known and unknown, and
may be affected by inaccurate assumptions. Consequently, no forward-looking
statement can be guaranteed and actual results may vary materially. The Company
undertakes no obligation to update any forward-looking statement.

         Although it is not possible to create a comprehensive list of all
factors that may cause actual results to differ from the Company's
forward-looking statements, such factors include, among others: (i) the trend of
consolidation in the medical device industry, resulting in more significant,
complex and long-term contracts than in the past and potentially greater pricing
pressures; (ii) the Company's ability to attract new licensees and to enter into
agreements for additional product applications with existing licensees, and the
willingness of potential customers to sign license agreements under the terms
offered by the Company; (iii) the success of existing licensees in selling
products incorporating SurModics' technology and the timing of new product
introductions by licensees; (iv) the difficulties and uncertainties associated
with the lengthy and costly new product development and foreign and domestic
regulatory approval processes, such as delays, difficulties or failures in
achieving acceptable clinical results or obtaining foreign or FDA marketing
clearances, which may result in lost market opportunities or postpone or
preclude product commercialization by licensees; (v) efficacy or safety concerns
with respect to products marketed by SurModics and its licensees, whether
scientifically justified or not, that may lead to product recalls, withdrawals
or declining sales; (vi) the development of new products or technologies by
competitors, technological obsolescence and other changes in competitive
factors; and (vii) economic and other factors over which the Company has no
control, including changes in inflation and consumer confidence. Investors are
advised to consult any further disclosures by the Company on this subject in its
filings with the Securities and Exchange Commission.


                                       6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To SurModics, Inc.:

         We have audited the accompanying balance sheets of SurModics, Inc. (a
Minnesota corporation) as of September 30, 2001 and 2000, and the related
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended September 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SurModics, Inc. as
of September 30, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 2001 in
conformity with accounting principles generally accepted in the United States.

         As explained in Note 2 to the financial statements, effective October
1, 2000, the Company changed its method of accounting for revenue recognition of
license fees.


Arthur Andersen LLP



Minneapolis, Minnesota,

October 23, 2001

<PAGE>

<TABLE>
<CAPTION>
SurModics, Inc.
Balance Sheets
As of September 30
(thousands, except share data)                                               2001           2000
                                                                           --------       --------
<S>                                                                        <C>            <C>
ASSETS

Current Assets
   Cash and cash equivalents                                               $  9,044       $  1,510
   Short-term investments                                                     5,796         15,847
   Accounts receivable, net of allowance for doubtful accounts of $40         3,245          1,406
   Inventories                                                                  724            500
   Deferred tax asset                                                           297            912
   Prepaids and other                                                           877            911
                                                                           --------       --------
               Total current assets                                          19,983         21,086

Property and Equipment, net                                                   7,672          7,166
Long-Term Investments                                                        29,565         22,293
Deferred Tax Asset                                                              646             --
Other Assets, net                                                             2,717            204
                                                                           --------       --------
                                                                           $ 60,583       $ 50,749
                                                                           ========       ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities
   Accounts payable                                                        $    553       $    379
   Accrued liabilities-
      Compensation                                                              874          1,110
      Income taxes                                                              356             --
      Other                                                                     442            474
   Deferred revenue                                                             303            433
                                                                           --------       --------
               Total current liabilities                                      2,528          2,396

Deferred Revenue, less current portion                                        2,355             50
                                                                           --------       --------
               Total liabilities                                              4,883          2,446
                                                                           --------       --------
Commitments and Contingencies (Note 6)

Stockholders' Equity
   Series A preferred stock- $.05 par value, 450,000 shares
      authorized, no shares issued and outstanding                               --             --
   Common stock- $.05 par value, 45,000,000 shares authorized
      16,760,501 and 16,556,002 shares issued and outstanding                   838            828
   Additional paid-in capital                                                47,777         45,740
   Unearned compensation                                                       (376)          (289)
   Stock purchase notes receivable                                               --             (7)
   Accumulated other comprehensive income (loss)                                275            (46)
   Retained earnings                                                          7,186          2,077
                                                                           --------       --------
               Total stockholders' equity                                    55,700         48,303
                                                                           --------       --------
                                                                           $ 60,583       $ 50,749
                                                                           ========       ========
</TABLE>

The accompanying notes are an integral part of these balance sheets.

<PAGE>

<TABLE>
<CAPTION>
SurModics, Inc.
Statements of Income
For the Years Ended September 30
(thousands, except net income per share)                        2001           2000           1999
                                                              --------       --------       --------
<S>                                                           <C>            <C>            <C>
Revenue
   Royalties                                                  $ 11,034       $  9,680       $  6,670
   License fees                                                  1,794          1,470            645
   Product sales                                                 5,685          5,080          4,137
   Research and development                                      4,180          2,049          2,042
                                                              --------       --------       --------
               Total revenue                                    22,693         18,279         13,494
                                                              --------       --------       --------
Operating Costs and Expenses
   Product                                                       2,440          1,903          1,511
   Research and development                                      7,997          6,797          5,248
   Sales and marketing                                           1,698          1,573          1,769
   General and administrative                                    2,992          2,673          2,547
                                                              --------       --------       --------
               Total operating costs and expenses               15,127         12,946         11,075
                                                              --------       --------       --------
Income from Operations                                           7,566          5,333          2,419
                                                              --------       --------       --------
Other Income
   Investment income                                             2,354          1,418          1,069
   Gain (loss) on sale of investments                              701             (2)            89
                                                              --------       --------       --------
               Other income, net                                 3,055          1,416          1,158
                                                              --------       --------       --------
Income Before Income Taxes                                      10,621          6,749          3,577

Income Tax Provision (Benefit)                                   3,807          2,509           (783)
                                                              --------       --------       --------
Income before cumulative effect of a change in
 accounting principle                                            6,814          4,240          4,360
Cumulative effect of a change in accounting principle,
   net of tax                                                   (1,705)            --             --
                                                              --------       --------       --------
Net income                                                    $  5,109       $  4,240       $  4,360
                                                              ========       ========       ========
Basic net income per share before cumulative effect of a
   change in accounting principle                             $    .41       $    .27       $    .30
 Cumulative effect of a change in accounting principle            (.10)            --             --
                                                              --------       --------       --------
 Basic net income per share                                   $    .31       $    .27       $    .30
                                                              ========       ========       ========
Diluted net income per share before cumulative effect of
   a change in accounting principle                           $    .38       $    .25       $    .27
 Cumulative effect of a change in accounting principle            (.09)            --             --
                                                              --------       --------       --------
 Diluted net income per share                                 $    .29       $    .25       $    .27
                                                              ========       ========       ========
Weighted Average Shares Outstanding
     Basic                                                      16,692         15,699         14,708
     Dilutive effect of outstanding stock options                1,158          1,119          1,376
                                                              --------       --------       --------
          Diluted                                               17,850         16,818         16,084

Proforma amounts assuming the accounting change was
   applied retroactively
     Net income                                               $  6,814       $  3,669       $  4,199
     Basic net income per share                               $   0.41       $   0.23       $   0.29
     Diluted net income per share                             $   0.38       $   0.22       $   0.26
</TABLE>


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

<PAGE>
<TABLE>
<CAPTION>
SurModics, Inc.
Statements of Stockholders' Equity
For the Years Ended September 30, 2001, 2000 and 1999
(in thousands)

                                                                          Common Stock
                                                                     -----------------------      Additional      Unearned
                                                                      Shares         Amount   Paid-In Capital   Compensation
                                                                     --------       --------  ---------------   ------------
<S>                                                                 <C>            <C>        <C>               <C>
Balance, September 30, 1998                                            14,428       $    721       $ 28,574       $   (170)
   Components of comprehensive income, net of tax:
     Net income                                                            --             --             --             --
     Unrealized holding losses on available-for-sale securities
     arising during the period                                             --             --             --             --

       Total comprehensive income

   Common stock options exercised, net                                    966             48          1,286             --
   Tax benefit from exercise of stock options                              --             --          1,650             --
   Restricted stock activity                                               17              1            170           (171)
   Net loan activity                                                       (7)            --            (56)            --
   Amortization of unearned compensation                                   --             --             --             74
                                                                     --------       --------       --------       --------
Balance, September 30, 1999                                            15,404            770         31,624           (267)
   Components of comprehensive income, net of tax:
     Net income                                                            --             --             --             --
     Unrealized holding gains on available-for-sale securities
     arising during the period                                             --             --             --             --

       Total comprehensive income

   Issuance of common stock                                               794             40         12,960             --
   Common stock options exercised, net                                    360             18            220             --
   Tax benefit from exercise of stock options                              --             --            818             --
   Restricted stock activity                                               (2)            --            118           (118)
   Net loan activity                                                       --             --             --             --
   Amortization of unearned compensation                                   --             --             --             96
                                                                     --------       --------       --------       --------
Balance, September 30, 2000                                            16,556            828         45,740           (289)
   Components of comprehensive income, net of tax:
     Net income                                                            --             --             --             --
     Unrealized holding gains on available-for-sale securities
     arising during the period                                             --             --             --             --
     Less reclassification for gains included in net income                --             --             --             --

       Total comprehensive income

   Issuance of common stock                                                22              1            279             --
   Common stock options exercised, net                                    177              9            168             --
   Tax benefit from exercise of stock options                              --             --          1,392             --
   Restricted stock activity                                                6             --            198           (198)
   Net loan activity                                                       --             --             --             --
   Amortization of unearned compensation                                   --             --             --            111
                                                                     --------       --------       --------       --------
Balance, September 30, 2001                                            16,761       $    838       $ 47,777       $   (376)
                                                                     ========       ========       ========       ========

<CAPTION>
SurModics, Inc.
Statements of Stockholders' Equity
For the Years Ended September 30, 2001, 2000 and 1999
(in thousands)
                                                                       Stock      Accumulated      Retained
                                                                     Purchase        Other         Earnings         Total
                                                                       Notes     Comprehensive   (Accumulated   Stockholders'
                                                                    Receivable    Income (Loss)     Deficit)       Equity
                                                                     --------       --------       --------       --------
<S>                                                                 <C>          <C>             <C>            <C>
Balance, September 30, 1998                                          $   (182)      $    278       $ (6,523)      $ 22,698
   Components of comprehensive income, net of tax:
     Net income                                                            --             --          4,360          4,360
     Unrealized holding losses on available-for-sale securities
     arising during the period                                             --           (465)            --           (465)
                                                                                                                  --------
       Total comprehensive income                                                                                    3,895
                                                                                                                  --------
   Common stock options exercised, net                                     --             --             --          1,334
   Tax benefit from exercise of stock options                              --             --             --          1,650
   Restricted stock activity                                               --             --             --             --
   Net loan activity                                                      124             --             --             68
   Amortization of unearned compensation                                   --             --             --             74
                                                                     --------       --------       --------       --------
Balance, September 30, 1999                                               (58)          (187)        (2,163)        29,719
   Components of comprehensive income, net of tax:
     Net income                                                            --             --          4,240          4,240
     Unrealized holding gains on available-for-sale securities
     arising during the period                                             --            141             --            141
                                                                                                                  --------
       Total comprehensive income                                                                                    4,381
                                                                                                                  --------
   Issuance of common stock                                                --             --             --         13,000
   Common stock options exercised, net                                     --             --             --            238
   Tax benefit from exercise of stock options                              --             --             --            818
   Restricted stock activity                                               --             --             --             --
   Net loan activity                                                       51             --             --             51
   Amortization of unearned compensation                                   --             --             --             96
                                                                     --------       --------       --------       --------
Balance, September 30, 2000                                                (7)           (46)         2,077         48,303
   Components of comprehensive income, net of tax:
     Net income                                                            --             --          5,109          5,109
     Unrealized holding gains on available-for-sale securities
     arising during the period                                             --            762             --            762
     Less reclassification for gains included in net income                --           (441)            --           (441)
                                                                                                                  --------
       Total comprehensive income                                                                                    5,430
                                                                                                                  --------
   Issuance of common stock                                                --             --             --            280
   Common stock options exercised, net                                     --             --             --            177
   Tax benefit from exercise of stock options                              --             --             --          1,392
   Restricted stock activity                                               --             --             --             --
   Net loan activity                                                        7             --             --              7
   Amortization of unearned compensation                                   --             --             --            111
                                                                     --------       --------       --------       --------
Balance, September 30, 2001                                          $     --       $    275       $  7,186       $ 55,700
                                                                     ========       ========       ========       ========
</TABLE>

The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
SurModics, Inc.
Statements of Cash Flows
For the Years Ended September 30
(in thousands)

                                                                                  2001           2000           1999
                                                                                --------       --------       --------
<S>                                                                             <C>            <C>            <C>
Operating Activities
   Net income                                                                   $  5,109       $  4,240       $  4,360
   Adjustments to reconcile net income to net cash provided by
      operating activities-
         Depreciation and amortization                                             1,547          1,126            709
         Loss (gain) on sale of investments                                         (701)             2            (89)
         Amortization of unearned compensation, net                                  111             96             74
         Tax benefit from exercise of stock options                                1,392            818          1,650
         Deferred tax provision                                                      (31)         1,553         (2,465)
         Cumulative effect of a change in accounting principle, net of tax
                                                                                   1,705             --             --

         Change in operating assets and liabilities:
            Accounts receivable                                                   (1,839)            27           (377)
            Inventories                                                             (224)           (41)           (79)
            Accounts payable and accrued liabilities                                 (94)            (8)           716
            Accrued income taxes                                                     356             --             --
            Deferred revenue                                                         470            215            (53)
            Prepaids and other                                                        10           (651)           (34)
                                                                                --------       --------       --------
               Net cash provided by operating activities                           7,811          7,377          4,412
                                                                                --------       --------       --------
Investing Activities
   Purchases of property and equipment, net                                       (2,053)        (2,994)        (4,721)
   Purchases of available-for-sale investments                                   (81,907)       (52,862)       (24,436)
   Sales/maturities of available-for-sale investments                             85,708         34,725         23,972
   Repayment of stock purchase notes receivable                                        7             51             68
   Purchase of other assets                                                       (2,489)            --              3
                                                                                --------       --------       --------
               Net cash used in investing activities                                (734)       (21,080)        (5,114)
                                                                                --------       --------       --------
Financing Activities
   Issuance of common stock, net                                                     457         13,238          1,334
                                                                                --------       --------       --------
               Net cash provided by financing activities                             457         13,238          1,334
                                                                                --------       --------       --------
               Net increase (decrease) in cash and cash equivalents                7,534           (465)           632

Cash and Cash Equivalents
   Beginning of year                                                               1,510          1,975          1,343
                                                                                --------       --------       --------
   End of year                                                                  $  9,044       $  1,510       $  1,975
                                                                                ========       ========       ========
Supplemental Information
   Cash paid for taxes                                                          $  1,232       $     67       $     95
</TABLE>


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



<PAGE>

SurModics, Inc.
Notes to Financial Statements
September 30, 2001 and 2000


1.   DESCRIPTION

         SurModics, Inc. (the Company) develops, manufactures and markets
innovative surface modification solutions to the medical device industry. The
Company's revenue is derived from the following: fees from licensing its
patented technology to customers; royalties received from licensees; the sale of
photoreactive chemical compounds to licensees, stabilization products to the
diagnostic industry and coated glass slides to the genomics market; and research
and development fees generated on projects for commercial customers and
government grants. The Company markets its products through a direct sales force
primarily in the United States and certain international markets.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents consist principally of money market
instruments with original maturities of three months or less and are stated at
cost which approximates fair value.Cash and cash equivalents consist principally
of money market instruments with original maturities of three months or less and
are stated at cost which approximates fair value.

INVESTMENTS

         Investments consist principally of U.S. government and government
agency obligations and mortgage-backed securities and are classified as
available-for-sale as of September 30, 2001 and 2000. Available-for-sale
investments are reported at fair value with unrealized gains and losses excluded
from operations and reported as a separate component of stockholders' equity,
except for other-than-temporary impairments, which are reported as a charge to
current operations and result in a new cost basis for the investment.

         The amortized cost, unrealized holding gains and losses, and fair value
of investments as of September 30 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                                         2001
                                          ---------------------------------------------------------------------
                                          Amortized Cost     Unrealized         Unrealized        Fair Value
                                                                Gains             Losses
                                          ---------------------------------------------------------------------
<S>                                       <C>              <C>                <C>               <C>
     U.S. government obligations          $       11,210    $            82    $          (5)    $       11,287
     Mortgage-backed securities                   11,204                266               (5)            11,465
     Municipal bonds                               6,022                254                 -             6,276
     Corporate bonds                               3,268                 17             (220)             3,065
     Asset-backed securities                       3,221                 52               (5)             3,268
                                          ---------------------------------------------------------------------
                   Total                  $       34,925    $           671    $        (235)    $       35,361
                                          =====================================================================
</TABLE>



<PAGE>
<TABLE>
<CAPTION>
                                                                         2000
                                          ---------------------------------------------------------------------
                                          Amortized Cost     Unrealized         Unrealized        Fair Value
                                                                Gains             Losses
                                          ---------------------------------------------------------------------
<S>                                     <C>               <C>                <C>               <C>
     U.S. government obligations          $       14,039    $            52    $         (74)    $       14,017
     Corporate bonds                               9,095                  2              (14)             9,083
     Mortgage-backed securities                    9,003                 35              (33)             9,005
     Asset-backed securities                       3,598                 10               (7)             3,601
     Municipal bonds                               2,451                  3              (20)             2,434
                                          ---------------------------------------------------------------------
                   Total                  $       38,186    $           102    $        (148)    $       38,140
                                          =====================================================================
</TABLE>

         The amortized cost and fair value of investments by contractual
maturity at September 30, 2001, were as follows:

<TABLE>
<CAPTION>
                                               Amortized Cost          Fair Value
                                               -----------------------------------
<S>                                            <C>                     <C>
     Debt securities due within:
          One year                             $        6,010          $     5,829
          One to five years                            22,488               22,989
          Five years or more                            6,427                6,543
                                               -----------------------------------
             Total                             $       34,925          $    35,361
                                               ===================================
</TABLE>

INVENTORIES

         Inventories are stated at the lower of cost or market using the
specific identification method and include direct labor, materials and overhead.
Inventories consisted of the following components as of September 30 (in
thousands):

<TABLE>
<CAPTION>
                                   2001      2000
                                   ----      ----
<S>                               <C>       <C>
            Raw materials          $269      $197
            Finished products       455       303
                                   ----      ----
            Total                  $724      $500
                                   ====      ====
</TABLE>

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost and are depreciated using the
straight-line method over 3 to 20 years, the estimated useful lives of the
assets. Upon completion, construction-in-progress will begin depreciation over
the estimated useful lives of the assets. Property and equipment consisted of
the following components as of September 30 (in thousands):

<TABLE>
<CAPTION>
                                                                       2001               2000        Useful life(in years)
                                                                    ---------          --------       ---------------------
<S>                                                               <C>                <C>              <C>
   Laboratory fixtures and equipment                                $   5,718          $  4,651               3 to 5
   Office furniture and equipment                                       2,401             1,790               3 to 5
   Building and improvements                                            6,213             5,811               5 to 20
   Construction-in-progress                                                --                52
   Less-Accumulated depreciation and amortization                      (6,660)           (5,138)
                                                                    ---------          --------
                 Property and equipment, net                        $   7,672          $  7,166
                                                                    =========          ========

</TABLE>


<PAGE>

OTHER ASSETS

         Other assets consist principally of real property and patents. The real
property represents land that was purchased in fiscal 2001 for approximately
$2.5 million and is currently held for resale. The cost of the patents is
amortized over 7 to 12 years. Accumulated amortization was $113,000 and $87,000
as of September 30, 2001 and 2000, respectively.

IMPAIRMENT OF LONG-LIVED ASSETS

         The Company periodically evaluates whether events and circumstances
have occurred which may affect the estimated useful life or the recoverability
of the remaining balance of its long-lived assets. If such events or
circumstances were to indicate that the carrying amount of these assets would
not be recoverable, the Company would estimate the future cash flows expected to
result from the use of the assets and their eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) were
less that the carrying amount of the assets, the Company would recognize an
impairment loss. No such impairment losses were required to be recorded in the
years ended September 30, 2001, 2000, and 1999.

REVENUE RECOGNITION

         Revenue on product sales is recognized as products are shipped. Revenue
for research and development is recorded as performance progresses under the
applicable contract. Royalties are recognized as third-party licensees report
sales of the licensed product or as minimum royalties become due. Cash received
prior to performance is recorded as deferred revenue in the accompanying balance
sheets.

         Historically, the Company recognized initial license fees as revenue
upon receipt, after a license agreement transferring the technology was executed
and all significant obligations had been performed. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 required
that license and other up-front fees be recognized over the term of the
agreement unless the fee is in exchange for products delivered or services
performed that represent the culmination of a separate earnings process.

         Effective October 1, 2000, the Company adopted SAB 101. The Company now
recognizes initial license fees over the term of the related agreement. As a
result of adopting SAB 101, the Company recorded a cumulative effect of a change
in accounting principle related to license fees recognized in prior years in the
amount of $1,705,000, net of tax of $1,000,000, or $.09 per diluted share.
Revenue related to performance milestones is recognized based on the achievement
of the milestone, as defined in the respective agreements.

         Prior period financial statements have not been restated to
retroactively apply SAB 101; however, the pro forma amounts included in the
statements of income show the net income and net income per share assuming the
Company had retroactively applied SAB 101 to all prior periods.

         Certain non-refundable license and research and development fees are
recoverable by the licensees as offsets against a percentage of future earned
royalties.

USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the


<PAGE>

reported amounts of revenue and expenses during the reporting period. Estimates
are used for such items as depreciable lives and uncollectible accounts.
Ultimate results could differ from those estimates.

NEW ACCOUNTING PRONOUNCEMENTS

         In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("SFAS No. 141") and No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 supercedes
Accounting Principles Board ("APB") Opinion No. 16 and requires that all
business combinations initiated after June 30, 2001 be accounted for by the
purchase method. SFAS 141 also changes the requirements for recognizing
intangible assets as assets apart from goodwill in business combinations
accounted for by the purchase method for which the date of acquisition is July
1, 2001, or later. SFAS 142 addresses how intangible assets that are acquired
individually or with a group of other assets (but not in a business combination)
should be accounted for upon their acquisition. SurModics will adopt SFAS 141
and 142 on October 1, 2002, and management expects no material impact on its
financial statements.

3.   STOCKHOLDERS' EQUITY

2000 EMPLOYEE STOCK PURCHASE PLAN

         Under the 1999 Employee Stock Purchase Plan ("Stock Purchase Plan") the
Company is authorized to issue up to 200,000 shares of Common Stock. All
full-time and part-time employees can choose to have up to 10% of their annual
compensation withheld to purchase the Company's Common Stock at purchase prices
defined within the provisions of the Stock Purchase Plan. The Company issued
21,764 shares under the Stock Purchase Plan during fiscal 2001, the first full
year of the Plan. As of September 30, 2001, there was approximately $209,000 of
employee contributions included in accrued liabilities in the accompanying
balance sheets.

RESTRICTED STOCK AWARDS

         The Company has entered into restricted stock agreements with certain
key employees, covering the issuance of Common Stock ("Restricted Stock"). The
Restricted Stock will be released to the key employees if they are employed by
the Company at the end of a five-year waiting period. Unearned compensation has
been recognized for the estimated fair value of the applicable common shares,
reflected as a reduction of stockholders' equity, and is being charged to income
over the five-year term.

         Transactions in restricted stock were as follows:

<TABLE>
<S>                                               <C>
            Outstanding at September 30, 1998       128,000
               Granted                               25,000
               Canceled                              (8,000)
                                                   --------
            Outstanding at September 30, 1999       145,000
               Granted                               11,000
               Canceled                             (12,500)
               Exercised                            (48,000)
                                                   --------
            Outstanding at September 30, 2000        95,500
               Granted                                5,500
                                                   --------
            Outstanding at September 30, 2001       101,000
                                                   ========
</TABLE>


<PAGE>

STOCK PURCHASE NOTES RECEIVABLE

         The Company established a loan program during fiscal 1997 to assist
employees in purchasing shares of the Company's Common Stock. The loans were
collateralized by the employees' purchased shares and required annual interest
payments at a rate equal to prime at the date of issuance. All loans have been
repaid in full. This program has been discontinued, with no additional loans
granted since fiscal 1997.

4.   STOCK-BASED COMPENSATION PLAN

         Under the Company's 1997 Incentive Stock Option Plan (the Plan), 1.2
million shares of Common Stock were reserved for issuance to employees and
officers. The Plan requires that the option price per share must be at least
100% of the fair market value of the Common Stock on the date of the grant or
110% with respect to optionees who own more than 10% of the total combined
voting power of all classes of stock. Options expire in five to seven years or
upon termination of employment and are exercisable at a rate of 20% per year
from the date of grant or 20% per year commencing one year after the date of
grant. In addition, options representing a total of 112,800 shares remain
outstanding from the Company's 1987 Incentive Stock Option Plan that was
replaced by the 1997 Plan.

         Under the Company's Nonqualified Stock Option Plan, 1,944,480 shares of
Common Stock were reserved for issuance to outside directors, employees and
officers. The options are granted at fair market value. Options expire in 5 to
10 years and are exercisable at a rate of 20% per year from the date of grant or
20% per year commencing two years after the date of grant.

         As of September 30, 2001, there were 596,850 additional shares
available for grant under the stock plans. Information regarding stock options
under all plans is summarized as follows:

<TABLE>
<CAPTION>
                                        2001                               2000                              1999
                            ---------------------------       -----------------------------    --------------------------------
                                              Weighted                           Weighted                           Weighted
                                              Average                            Average                             Average
                                              Exercise                           Exercise                           Exercise
         Options               Shares          Price             Shares           Price           Shares              Price
------------------------    ------------    -----------       -------------    ------------    -------------      -------------
<S>                         <C>             <C>               <C>              <C>             <C>                <C>
Outstanding,
  beginning of year           1,565,560          $7.45           1,748,580          $3.76         2,539,280             $2.43
      Granted                    16,550          42.29             267,800          23.96           367,400              7.87
      Exercised                (191,510)          3.26            (417,720)          2.56        (1,082,060)             2.08
      Canceled                   (7,340)         15.50             (33,100)          4.83           (76,040)             2.91
                            ------------    -----------       -------------    ------------    -------------      -------------
Outstanding, end of
  year                        1,383,260          $8.41           1,565,560          $7.45         1,748,580             $3.76
                            ============    ===========       =============    ============    =============      =============
Exercisable, end of
  year                          851,190          $4.80             727,280          $3.19           878,820             $2.59
                            ============    ===========       =============    ============    =============      =============
Weighted average
   fair value of
   options granted               $31.11                             $16.92                            $5.73
                            ============                      =============                    =============
</TABLE>


<PAGE>

         The options outstanding at September 30, 2001 have exercise prices
ranging between $2.50 and $53.00, with a weighted average exercise price of
$8.41 and a weighted average remaining contractual life of 3.21 years.

         The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: risk-free
interest rates of 4.51%, 5.95% and 6.01%; expected lives of 7.0, 7.2 and 7.3;
and expected volatility of 77%, 72% and 71%.

         The Company accounts for the options under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for the
options been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income would have been the
following pro forma amounts for the years ended September 30 (in thousands,
except per share data):

<TABLE>
<CAPTION>
                                      2001           2000           1999
                                   ---------      ---------      ---------
<S>                                <C>            <C>            <C>
Net income:
   As reported                     $   5,109      $   4,240      $   4,360
   Pro forma                       $   3,496      $   3,565      $   4,120
Diluted net income per share:
   As reported                     $     .29      $     .25      $     .27
   Pro forma                       $     .20      $     .21      $     .26
</TABLE>

         Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to October 1, 1995, the resulting pro forma information
may not be representative of that to be expected in future periods.

5.   INCOME TAXES

         The Company utilizes the liability method to account for income taxes.
Deferred taxes are based on the estimated future tax effects of differences
between the financial statement and tax basis of assets and liabilities given
the provisions of the enacted tax laws.

         The deferred income tax provision (benefit) reflects the net change
during the year in deferred tax assets and liabilities. Income taxes in the
accompanying statements of income for the years ended September 30 were as
follows (in thousands):

<TABLE>
<CAPTION>
                                                       2001          2000         1999
                                                     -------       -------      -------
<S>                                                  <C>           <C>          <C>
Current provision:
   Federal                                           $ 2,672       $   904      $    --
   State and foreign                                     362            77           17
                                                     -------       -------      -------
             Total current provision                   3,034           981           17

Deferred provision:
   Federal                                               832         1,528         (735)
   State                                                 (59)           --          (65)
                                                     -------       -------      -------

             Total deferred provision (benefit)          773         1,528         (800)
                                                     -------       -------      -------

             Total provision (benefit)               $ 3,807       $ 2,509      $  (783)
                                                     =======       =======      =======
</TABLE>


<PAGE>

         The reconciliation of the difference between amounts calculated at the
statutory federal tax rate of 34% and the Company's effective tax rate was as
follows (in thousands):

<TABLE>
<CAPTION>
                                                    2001          2000         1999
                                                  -------       -------      -------
<S>                                               <C>           <C>          <C>
Amount at statutory federal income tax rate       $ 3,605       $ 2,500      $ 1,323

Change due to:
     Reversal of tax valuation allowance             (161)           --       (2,466)
     State taxes                                      201            --           --
     Rate difference for deferred tax assets           --            --          180
     Other                                            162             9          180
                                                  -------       -------      -------
             Income tax provision (benefit)       $ 3,807       $ 2,509      $  (783)
                                                  =======       =======      =======
</TABLE>

         The components of deferred income taxes consisted of the following as
of September 30 and result from differences in the recognition of transactions
for income tax and financial reporting purposes (in thousands):

<TABLE>
<CAPTION>
                                                            2001          2000
                                                          -------       -------
<S>                                                       <C>           <C>
Depreciation                                              $   455       $   319
Deferred revenue                                              996           129
Accruals and reserves                                         297           297
Net operating loss carryforwards                               --           167
Capital loss carryforwards                                     --           149
Equity items                                                 (169)           --
Other                                                        (636)           --
                                                          -------       -------
         Total deferred tax assets                            943         1,061

Less- valuation allowance                                      --          (149)
                                                          -------       -------
               Net deferred tax assets                        943           912
Current deferred tax assets                                   297            --
                                                          -------       -------
                      Noncurrent deferred tax assets      $   646       $   912
                                                          =======       =======

</TABLE>

6.   COMMITMENTS AND CONTINGENCIES

         Under provisions contained in the government research contracts,
representatives of the government agencies have the right to access and review
the Company's underlying records of contract costs. The government retains the
right to reject expenses considered unallowable under the terms of the contract.
The Defense Contract Audit Agency has reviewed the contracts through 1989. In
the opinion of management, future amounts due, if any, with respect to open
contract years will not have a material impact on the financial position or
results of operations of the Company.

         The Company entered into an agreement to purchase a 135,000-square-foot
laboratory facility on 27 acres of land in Bloomington, Minnesota, for $7.1
million. The purchase was completed in October 2001. It is the Company's intent
to transfer its operations into the facility towards the end of 2002.


<PAGE>
7.   DEFINED CONTRIBUTION PLAN

         The Company has a 401(k) retirement and savings plan for the benefit of
qualified employees. Under the plan, qualified employees may elect to defer up
to 20% of their compensation, subject to a maximum limit determined by the
Internal Revenue Service. The Company matches 50% of each dollar of the first 6%
of the tax deferral elected by each employee. Company contributions totaling
$166,000, $138,000 and $122,000 have been charged to income for the years ended
September 30, 2001, 2000 and 1999, respectively.

8.   OPERATING SEGMENTS (DOLLARS IN THOUSANDS)

         Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated regularly by
the chief operating decision maker, or decision making group, in deciding how to
allocate resources and in assessing performance.

         The Company manages its business on the basis of three business
segments: licensing, manufacturing, and research and development. The licensing
segment includes all license fees and royalty revenue generated from the
transfer of the Company's technology. No expenses are allocated to the licensing
segment. The manufacturing segment includes revenue from the sale of PhotoLink
reagents, stabilization products and DNA slides. The expenses include all
production costs, including analytical costs to verify quality of the finished
products and certain technical support. The research and development segment
includes the revenue generated from development projects for commercial
customers and research revenue received from government grants. The expenses
include all costs of the Company's technical personnel. Corporate includes all
administrative, sales and marketing costs of the Company. These costs, along
with interest income and income taxes, are not allocated to the other business
segments. The Company's assets are not reviewed by business segment. The
accounting policies for segment reporting are the same as for the Company as a
whole (see Note 2).

<TABLE>
<CAPTION>
                                                            Research &
                                 Licensing   Manufacturing  development   Corporate   Consolidated
                                 ---------   -------------  -----------   ---------   ------------
<S>                              <C>         <C>            <C>           <C>         <C>
Year Ended September 30, 2001
Revenues:
    PhotoLink                      $ 9,575      $ 2,638      $ 3,648       $    --       $15,861
    Diagnostic                       3,253           --           --            --         3,253
    Stabilization & other               --        3,047           --            --         3,047
    Government                          --           --          532            --           532
                                   -------      -------      -------       -------       -------
Total revenues                      12,828        5,685        4,180            --        22,693
Operating expenses                      --        2,440        7,997         4,690        15,127
                                   -------      -------      -------       -------       -------
Operating income (loss)             12,828        3,245       (3,817)       (4,690)        7,566
Other income                                                                 3,055         3,055
Income tax provision                                                        (3,807)       (3,807)
                                                                                         -------
Income before cumulative effect of
a change in accounting principle                                                           6,814
                                                                                         =======

Year Ended September 30, 2000
Revenues:
    PhotoLink                      $ 8,233      $ 2,393      $ 1,445       $    --       $12,071
    Diagnostic                       2,917           --           --            --         2,917
    Stabilization & other               --        2,687           --            --         2,687
    Government                          --           --          604            --           604
                                   -------      -------      -------       -------       -------
Total revenues                      11,150        5,080        2,049            --        18,279
Operating expenses                      --        1,903        6,797         4,246        12,946
                                   -------      -------      -------       -------       -------
Operating income (loss)             11,150        3,177       (4,748)       (4,246)        5,333
Other income                                                                 1,416         1,416
Income tax expense                                                          (2,509)       (2,509)
                                                                                         -------
Net income                                                                               $ 4,240
                                                                                         =======

Year Ended September 30, 1999
Revenues:
    PhotoLink                      $ 4,557      $ 1,876      $ 1,122       $    --       $ 7,555
    Diagnostic                       2,758           --           --            --         2,758
    Stabilization & other               --        2,261           --            --         2,261
    Government                          --           --          920            --           920
                                   -------      -------      -------       -------       -------
Total Revenues                       7,315        4,137        2,042            --        13,494
Operating expenses                      --        1,511        5,248         4,316        11,075
                                   -------      -------      -------       -------       -------
Operating income (loss)              7,315        2,626      (3,206)        (4,316)        2,419
Other income
                                                                             1,158         1,158
Income tax expense                                                             783           783
                                                                                         -------
Net income                                                                               $ 4,360
                                                                                         =======
</TABLE>
<PAGE>

MAJOR CUSTOMERS

         Revenue from customers that exceed 10% of total revenue was as follows
for the years ended September 30:

<TABLE>
<CAPTION>
                                 2001     2000     1999
                                 ----     ----     ----
<S>                             <C>      <C>      <C>
                    Company A      19%      20%      20%
                    Company B      16%      24%      12%
                    Company C      16%       9%       7%
                    Company D      15%       7%      --
</TABLE>

         The revenues from each of the customers are derived from all three
revenue segments.

GEOGRAPHIC REVENUE

         Geographic revenues were as follows for the years ended September 30:

<TABLE>
<CAPTION>
                                 2001     2000     1999
                                 ----     ----     ----
<S>                             <C>      <C>      <C>
                    Domestic       89%      89%      87%
                    Foreign        11%      11%      13%
</TABLE>


<PAGE>
9.   QUARTERLY FINANCIAL DATA

         The following is a summary of the unaudited quarterly results for the
years ended September 30, 2001 and 2000 (in thousands, except per share data).
The results for 2001 reflect the Company's adoption of SAB 101 in the fourth
quarter of 2001 (see Note 2). The effect of the change on results previously
reported for the first three quarters of 2001 are presented below. The pro forma
effect assuming retroactive treatment of SAB 101 on each quarter of 2000 is also
presented.

<TABLE>
<CAPTION>
                                        First Quarter  Second Quarter  Third Quarter  Fourth Quarter
                                        -------------  --------------  -------------  --------------
<S>                                     <C>            <C>             <C>            <C>
Fiscal 2001
Revenue                                    $ 4,757       $ 5,443         $ 5,675          $ 6,818
Income from operations                       1,256         1,698           1,884            2,728
Net income (loss)                             (380)        1,610           1,675            2,204
Net income (loss) per share:
    Basic                                     (.02)          .10             .10              .13
    Diluted                                   (.02)          .09             .09              .12
Net income originally reported               1,366         1,566           1,618
Cumulative effect to
September 30, 2000                          (1,705)           --              --
    Effect of change                           (41)           44              57
                                                         -------         -------
Diluted net income (loss) as restated         (380)        1,610           1,675
Diluted net income per share
originally reported                            .08           .09             .09
Cumulative effect to September 30, 2000       (.10)           --             --
Effect of change                                --            --              --
                                           -------       -------         -------
Diluted net income per share as
restated                                      (.02)          .09             .09

Fiscal 2000
Revenue                                    $ 4,149       $ 4,441         $ 4,165          $ 5,524
Income from operations                       1,206         1,151           1,039            1,937
Net income                                     944           904             861            1,531
Net income per share:
    Basic                                      .06           .06             .06              .10
    Diluted                                    .06           .05             .05              .09

Pro forma to reflect SAB 101:
Net income                                     995           848             868              958
Diluted net income per share                   .06           .05             .05              .06
</TABLE>


<PAGE>

STOCK LISTING AND PRICE HISTORY

         SurModics' stock is traded on the Nasdaq National Market under the
symbol "SRDX." The table below sets forth the range of high and low closing sale
prices for the Company's Common Stock, as reported by Nasdaq, since the date of
the Company's Initial Public Offering in March 1998.

<TABLE>
<CAPTION>
                 FISCAL QUARTER ENDED:            HIGH             LOW
                 ---------------------            ----             ---
<S>                                               <C>             <C>
                 September 30, 2001               59.00           35.37
                 June 30, 2001                    59.37           35.37
                 March 31, 2001                   37.06           23.25
                 December 31, 2000                36.81           20.81
                 September 30, 2000               28.46           14.44
                 June 30, 2000                    18.66           9.56
                 March 31, 2000                   17.31           11.25
                 December 31, 1999                16.06           6.75
                 September 30, 1999               9.38            7.06
                 June 30, 1999                    8.38            6.38
                 March 31, 1999                   7.25            4.94
                 December 31, 1998                7.75            3.25
                 September 30, 1998               7.06            3.59
                 June 30, 1998                    5.88            4.13
                 March 31, 1998                   4.50            3.88
</TABLE>

         According to the records of the Company's transfer agent, as of
November 26, 2001, the Company had 262 holders of record of the Company's Common
Stock and approximately 5,000 beneficial owners of shares registered in nominee
or street name.

         The Company has never paid any cash dividends on its Common Stock and
does not anticipate doing so in the foreseeable future.




