<SUBMISSION>
<ACCESSION-NUMBER>0000950137-01-505324
<TYPE>10-K
<PUBLIC-DOCUMENT-COUNT>3
<PERIOD>20010930
<FILING-DATE>20011227
<FILER>
<COMPANY-DATA>
<CONFORMED-NAME>SURMODICS INC
<CIK>0000924717
<ASSIGNED-SIC>2891
<IRS-NUMBER>411356149
<STATE-OF-INCORPORATION>MN
<FISCAL-YEAR-END>0930
</COMPANY-DATA>
<FILING-VALUES>
<FORM-TYPE>10-K
<ACT>34
<FILE-NUMBER>000-23837
<FILM-NUMBER>1823064
</FILING-VALUES>
<BUSINESS-ADDRESS>
<STREET1>9924 W 74TH ST
<CITY>EDEN PRAIRIE
<STATE>MN
<ZIP>55344
<PHONE>6128292700
</BUSINESS-ADDRESS>
<MAIL-ADDRESS>
<STREET1>9924 WEST 74TH ST
<CITY>EDEN PRAIRIE
<STATE>MN
<ZIP>55344
</MAIL-ADDRESS>
<FORMER-COMPANY>
<FORMER-CONFORMED-NAME>BSI CORP
<DATE-CHANGED>19970506
</FORMER-COMPANY>
</FILER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>c66723e10-k.htm
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<HTML>
<HEAD>
<TITLE>Annual Report for Surmodics, Inc.</TITLE>
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<P align="center"><FONT size="2"><B>SECURITIES AND EXCHANGE COMMISSION<BR>
WASHINGTON, DC 20549</B>
</FONT>

<P align="center"><FONT size="2"><B>FORM 10-K</B>
</FONT>

<P align="center"><FONT size="2">Annual report pursuant to Section&nbsp;13 or 15(d) of the Securities Exchange Act of 1934<BR>
For the fiscal year ended September&nbsp;30, 2001
</FONT>
<P align="center"><FONT size="2">Commission file number 0-23837
</FONT>
<P align="center"><FONT size="2"><B>SURMODICS, INC.</B><BR>
(Exact Name of Registrant as Specified in Its Charter)
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="50%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="45%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD align="center" valign="top"><FONT size="2">Minnesota<BR>
(State of Other Jurisdiction of<BR>
Incorporation or Organization)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="center" valign="top"><FONT size="2">
41-1356149<BR>
(IRS Employer<BR>
Identification No.)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">9924 West 74th Street<BR>
Eden Prairie, Minnesota 55344<BR>
(Address of Principal Executive Offices) (Zip Code)
</FONT>
<P align="center"><FONT size="2">(952)&nbsp;829-2700<BR>
(Registrant&#146;s Telephone Number, Including Area Code)
</FONT>
<P><FONT size="2">Securities registered pursuant to Section&nbsp;12(b) of the Act: None
</FONT>
<P><FONT size="2">Securities registered pursuant to Section&nbsp;12(g) of the Act: Common Stock, $.05
par value
</FONT>
<P><FONT size="2">Indicate by check mark whether the registrant: (1)&nbsp;has filed all reports
required to be filed by Section&nbsp;13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12&nbsp;months (or for such shorter period that the
registrant was required by file such reports), and (2)&nbsp;has been subject to such
filing requirements for the past 90&nbsp;days. Yes &#091; X &#093; No &#091; &#093;
</FONT>
<P><FONT size="2">Indicate by check mark if disclosure of delinquent filers pursuant to Item&nbsp;405
of Regulation&nbsp;S-K is not contained herein, and will not be contained, to the
best of registrant&#146;s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form&nbsp;10-K or any amendment to
this Form&nbsp;10-K. &#091; &#093;
</FONT>
<P><FONT size="2">The aggregate market value of the Common Stock held by shareholders other than
officers, directors or holders of more than 5% of the outstanding stock of the
registrant as of December&nbsp;14, 2001 was approximately $446&nbsp;million (based upon
the closing sale price of the registrant&#146;s Common Stock on such date).
</FONT>
<P><FONT size="2">The number of shares of the registrant&#146;s Common Stock outstanding as of
December&nbsp;14, 2001 was 16,782,091.
</FONT>
<P align="center"><FONT size="2">DOCUMENTS INCORPORATED BY REFERENCE
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">1.</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">Portions of the Registrant&#146;s Annual Report to Shareholders for the fiscal
year ended September&nbsp;30, 2001 are incorporated by reference into Part II.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">2.</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">Portions of the Registrant&#146;s definitive Proxy Statement for the
Registrant&#146;s 2002 Annual Meeting of Shareholders are incorporated by
reference into Part III.</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">&nbsp;</FONT>
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<TR><TD colspan="9"><A HREF="#000">PART I</A></TD></TR>
<TR><TD colspan="9"><A HREF="#001">PART II</A></TD></TR>
<TR><TD colspan="9"><A HREF="#002">PART III</A></TD></TR>
<TR><TD colspan="9"><A HREF="#003">PART IV</A></TD></TR>
<TR><TD colspan="9"><A HREF="#004">SIGNATURES</A></TD></TR>
<TR><TD colspan="9"><A HREF="#005">EXHIBIT INDEX TO FORM 10-K</A></TD></TR>
<TR><TD colspan="9"><A HREF="c66723ex13.txt">Portions of Annual Report to Shareholders</A></TD></TR>
<TR><TD colspan="9"><A HREF="c66723ex23.txt">Consent of Arthur Andersen LLP</A></TD></TR>
</TABLE>
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<!-- link1 "PART I" -->
<DIV align="left"><A NAME="000"></A></DIV>
<P align="center"><FONT size="2"><B>PART I</B>
</FONT>

<P><FONT size="2"><B>ITEM 1. BUSINESS</B>
</FONT>
<P><FONT size="2"><B>General</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics, Inc. (&#147;SurModics&#148; or the &#147;Company&#148;) is a leading provider of
surface modification solutions to the medical device industry. The Company&#146;s
primary focus is the commercialization of its patented PhotoLink process
through third-party licensing arrangements. PhotoLink is a versatile, easily
applied, light-activated coating technology that modifies medical device
surfaces by creating covalent bonds between those surfaces and a variety of
chemical agents. Through the PhotoLink process, these chemical agents can
impart many performance-enhancing characteristics, such as lubricity,
hemocompatibility, infection resistance and drug incorporation, onto the
surface of a medical device without materially changing the dimensions or
physical properties of the device. The Company believes that medical device
manufacturers who utilize the Company&#146;s technology are able to significantly
improve the performance of their products and, in many cases, differentiate
their products in a highly competitive marketplace.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company focuses on providing high value-added surface modification
solutions to a variety of medical device markets and product categories.
Examples of products in the market or under development that incorporate the
Company&#146;s coating technology include interventional cardiology catheters,
vascular stents, interventional neurology catheters, guide wires, shunts,
cardiac rhythm management devices, and urological devices. The surface
properties created by the PhotoLink technology have greatly reduced treatment
times in catheter-based vascular procedures and have shown the potential to
enhance the long-term performance of implantable devices by improving infection
resistance and promoting host cell attachment, growth and subsequent tissue
integration. PhotoLink also has applications in the genomics market. The
Company licensed its genomics technology to Motorola Life Sciences in fiscal
2000, which included the rights to a coated glass slide used to orient DNA
strands for analysis.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has commercialized its PhotoLink technology through licensing
arrangements with medical device manufacturers who apply the coatings to their
own products. The Company believes this approach allows it to focus its
resources on further development of its technology and expansion of its
licensing activities, while leveraging the established manufacturing, sales and
marketing capabilities of its licensees. Revenues from these arrangements
include license fees, development revenue, minimum royalties, and earned
royalties based on a percentage of licensees&#146; product sales. The Company also
manufactures and sells the chemical reagents used in the PhotoLink process.
The Company also licenses certain diagnostic technology to Abbott Laboratories
for use with rapid point-of-care diagnostic tests, such as pregnancy and strep
tests. Finally, the Company manufactures and sells coated glass slides to the
genomics market (primarily Motorola) and offers a line of stabilization
products used to extend the shelf life of immunoassay diagnostic tests.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company was organized as a Minnesota corporation in June 1979.
</FONT>
<P align="center"><FONT size="2">1</FONT>
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<P align="left"><FONT size="2"><B>Markets and Need for Surface Modification</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Recent trends in healthcare toward improved patient outcomes and reduced
costs have resulted in intense competition for the development of medical
devices that demonstrate superior product performance, reduced procedure times,
improved outcomes and overall cost effectiveness. Medical device manufacturers
have attempted to address these competitive pressures by developing innovative
medical devices manufactured from a wide variety of synthetic materials,
including many new, expensive and exotic materials. In an effort to further
differentiate their products through improved product performance, a growing
number of medical device manufacturers are turning to the emerging field of
surface modification technology. Surface modification enables device
manufacturers to provide medical devices with desired surface characteristics
including improved lubricity, hemocompatibility and infection resistance, as
well as the ability to deliver drugs and promote cell growth and tissue
integration.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Surface modification has been used to improve medical devices in many
different industry segments. The table below identifies several of these
market segments and the surface properties the Company believes are desired by
each segment.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="34%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="61%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Desired Surface Property and</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Market Segment Served</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Examples of Applications</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Interventional cardiology
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Lubricity</I>: catheters, guide wires</font></div></td>
</tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">
and vascular access</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Hemocompatibility</I>: vascular stents, catheters,
guide wires, distal protection devices</font></div>
</TD>
</tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Therapeutic drug incorporation and release</I>: vascular stents,
catheters</FONT></div></TD>
</tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>

<TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Infection resistance</I>: catheters, implantable ports</FONT></div></TD>
</TR>
<tr><td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Cardiac rhythm management</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Lubricity</I>: pacemaker and defibrillator leads,
electrophysiology devices
</FONT></div></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Hemocompatibility</I>: electrophysiology devices</FONT></div></TD>
</TR>
<tr><td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Cardiothoracic surgery</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Infection resistance</I>: heart valves
</FONT></div></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Hemocompatibility</I>: minimally invasive bypass
devices, vascular grafts, ventricular assist
devices</font></div>
</TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Cell growth and tissue integration</I>: heart valves,
vascular grafts</FONT></div></TD>
</TR>
<tr><td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Interventional neurology
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Lubricity</I>: catheters, guide wires</font></div>
</TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">
and neurosurgery</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Infection resistance</I>: catheters, shunts</FONT></div></TD>
</TR>
<tr><td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Urology and gynecology</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Lubricity</I>: urinary catheters, incontinence
devices, ureteral stents, fertility devices
</FONT></div></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2"></FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Infection resistance</I>: urinary catheters,
incontinence devices, ureteral stents, fertility
devices, penile implants</FONT></div></TD>
</TR>
<tr><td>&nbsp;</td></tr>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Orthopedics</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><div style="margin-left:10px; text-indent:-10px"><FONT size="2">
<I>Cell growth and tissue integration</I>: bone and
cartilage regeneration</FONT></div></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In addition to the above-identified market segments, the Company&#146;s
technology is also very relevant in genomics applications. During fiscal 1999,
SurModics launched its 3D-Link Activated Slide to the genomics market. This
coated glass slide was used by genomics researchers to prepare
</FONT>
<P align="center"><FONT size="2">2</FONT>
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<P><FONT size="2">microarrays for DNA analysis. During fiscal 2000, SurModics formed a
partnership with Motorola Life Sciences. In addition to providing Motorola
exclusive rights to the Company&#146;s genomics technology, the agreement calls for
collaborative research on further technology advances.
</FONT>
<P align="left"><FONT size="2"><B>The PhotoLink Solution</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;PhotoLink is a versatile, easily applied, light-activated coating
technology that modifies medical device surfaces by creating covalent bonds
between those surfaces and a variety of chemical agents. The PhotoLink
solution to surface modification involves the utilization of proprietary, light
sensitive (photochemical)&nbsp;reagents. These reagents can consist of advanced
polymers or active biomolecules having desired surface characteristics and an
attached light-reactive chemical compound (photogroup). When the reagent is
exposed to a direct light source, typically ultraviolet light, a photochemical
reaction creates a covalent bond between the photogroup and the surface of the
medical device, thereby imparting the desired property to the surface. A
covalent bond is a very strong chemical bond which results from the sharing of
electrons between carbon molecules of the substrate and the applied coating.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics&#146; proprietary PhotoLink reagents work directly on most
polymer-based (e.g., plastic) and biological substrates (latex rubber,
cellulose, tissue and natural fibers). Metal and glass substrates generally
require pretreating with polymers to make a carbon-molecule available for
bonding prior to the application of the PhotoLink reagents. The reagents are
easily applied to a clean material surface by dipping, spraying, roll coating,
ink jetting or brushing. SurModics continues to develop proprietary
photochemical reagents providing new product features while expanding the
number and type of substrates on which the reagents can be applied.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company believes that its proprietary PhotoLink process provides its
licensees with a number of benefits.
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Flexibility. </I>PhotoLink coatings can be applied to many
different kinds of surfaces and can immobilize a variety of
chemical, pharmaceutical and biological agents, which allows
licensees to be innovative in the design of their products without
significantly changing the dimensions or physical properties of the
device.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Variety of Surface Properties. </I>The PhotoLink process can be
tailored to provide SurModics&#146; licensees with the ability to improve
the performance of their devices by choosing the specific coating
properties desired for particular applications. The PhotoLink
technology also provides the medical device manufacturer with the
ability to combine multiple surface-enhancing characteristics on the
same device.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Ease of Use. </I>The PhotoLink coating process is a relatively
simple process that does not require expensive special equipment or
the use of hazardous materials, and does not subject the coated
products to harsh chemical, pressure or temperature conditions.
Further, PhotoLink coatings are compatible with all the generally
accepted sterilization processes, so the surface attributes are not
lost when the medical device is sterilized prior to usage.</FONT></TD>
</TR>
</TABLE>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Surface Properties</I></B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics&#146; coating technology has been used by manufacturers of pacemaker
leads, drug infusion catheters, laser and balloon angioplasty catheters,
urinary drainage catheters, vascular closure devices, wound drains, guide
wires, stent delivery catheters, angiography catheters, ureteral stents and
</FONT>
<P align="center"><FONT size="2">3</FONT>
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<P><FONT size="2">hydrocephalic shunts, among other devices. The PhotoLink process can be
used to provide medical device manufacturers with the following surface
properties to improve product performance:
</FONT>
<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Lubricity. </I>Low friction or lubricious coatings reduce the
force and time required for insertion, navigation and removal of
devices in vascular, neurological and urogenital applications.
Lubricity also reduces tissue irritation and damage caused by
products such as catheters, guide wires and endoscopy devices.
Based on Company and licensee testing, when compared to uncoated
surfaces, the PhotoLink process has reduced the friction on surfaces
by as much as 95%, depending on the substrate being coated.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Hemocompatibility. </I>Hemocompatible coatings help reduce
adverse reactions that may be created when a device is inserted into
the body and comes in contact with blood. Heparin has been used for
decades as an injectable drug to reduce blood clotting in patients.
SurModics can immobilize heparin on the surface of medical devices
thereby inhibiting blood clotting on the device surface, minimizing
patient risk and enhancing the performance of the device. PhotoLink
heparin coatings have been shown in Company and licensee testing to
reduce blood clotting by greater than 90% compared to uncoated
surfaces. SurModics has also developed synthetic, non-biological
coatings that provide medical device surfaces with improved blood
compatibility.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Infection Resistance. </I>Antimicrobial coatings are
advantageous for most implantable medical devices where risk of
infection is a concern. PhotoLink technology can apply passive
coatings which significantly reduce bacterial adhesion to the device
or active coatings incorporating antimicrobial agents which kill
bacteria around the device. Testing by the Company has demonstrated
that a PhotoLink coating can reduce the adherence of microorganisms
to biomaterial surfaces by 99% depending on the base material of the
device. In addition, when compared to uncoated products, the
PhotoLink process has been shown to increase the uptake of
antimicrobial agents applied to the device just prior to
implantation and prolong the release of these agents.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Drug Incorporation</I>. PhotoLink technology can be used to
create reservoirs to entrap drugs on the surface of medical devices.
These drugs can then be released from the surface on a controlled
basis by tailoring the polymers, by adjusting the extent of
crosslinking, or by using a barrier coating to control diffusion.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Stent Coating. </I>SurModics provides coatings that address the
two fundamental challenges of coronary stents, restenosis
(progressive narrowing of vessels due to tissue growth) and
thrombosis (blood clot formation which abruptly obstructs blood
flow). To address restenosis, SurModics has developed proprietary
polymer coating reagents and application methods, that do not
require light activation, to create durable stent coatings which
serve as reservoirs for therapeutic drugs. The drugs can then be
released from the coating on a controlled basis. When a stent with
this drug coating is implanted in a patient, the drug diffuses out
from the surface of the stent into the blood vessel wall where it
can act to inhibit tissue growth, thereby reducing the occurrence of
restenosis. Johnson &#038; Johnson&#146;s Cordis division is testing this
coating in human clinical trials and has reported excellent results
to-date in Europe. SurModics also has developed blood compatible
coatings (containing heparin, for example) that are bound to the
surfaces of stents to inhibit thrombosis that can occur as blood
flows over the stent surface. The hemocompatible coating is
designed to remain bound to the surface providing protection</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">4</FONT>
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<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&nbsp;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2">from thrombosis until the natural healing process covers the stent
with a thin layer of tissue, eliminating the exposure of the stent
to flowing blood.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Wettability</I>. PhotoLink hydrophilic coatings have been shown
in tests by the Company and its licensees to accelerate liquid flow
rates on normally hydrophobic (water repelling) materials by 75%.
Some rapid point-of-care diagnostic tests, such as home monitoring
or physician monitoring of glucose levels in diabetics, are
currently done by pricking a patient&#146;s finger and placing a drop of
blood onto a polymer strip which is then inserted into a blood
glucose reader. The Company believes that the time it takes for the
blood to flow up the strip to provide a readout can be dramatically
reduced and the consistency can be greatly improved with PhotoLink
technology.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Tissue Engineering</I>. Studies have shown that attachment of
extracellular matrix proteins and peptides onto surfaces of
implantable medical devices improves host cell attachment, growth
and subsequent tissue integration. Company studies have shown that
biomedical devices (such as vascular grafts and ocular implants)
coated with photoreactive collagen and other proteins have improved
attachment, growth of cells and acceptance by surrounding tissues.
In addition, the Company is also using its PhotoLink technology to
produce three-dimensional scaffolds to promote bone regeneration.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">&#149;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2"><I>Biomolecule Immobilization</I>. During a DNA gene analysis,
typically hundreds of different probes need to be placed in a
pattern on a surface, called a DNA microarray. These microarrays
are used by the pharmaceutical industry to screen for new drugs, by
genome mappers to sequence unknown portions of the human genome, or
by diagnostic companies to search a patient sample for disease
causing bacteria or viruses. However, DNA does not readily adhere
to most surfaces. The Company has demonstrated a versatile method
for the immobilization of DNA on various surfaces which led to the
Motorola contract signed in fiscal 2000.</FONT></TD>
</TR>
</TABLE>
<P align="left"><FONT size="2"><B>Current Licensing Arrangements</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has commercialized its technology through licensing
arrangements with medical device manufacturers who apply the PhotoLink coatings
to their own products in their own facility. The Company believes this
approach allows it to focus its resources on further developing its technology
and expanding its licensing activities, while leveraging the established
manufacturing, sales and marketing capabilities of its licensees for the
marketing of the specific medical device utilizing the PhotoLink technology.
The Company&#146;s licensing agreements are designed to allow manufacturers to
incorporate the process into their own manufacturing processes so they can
control production and quality without the need to send product outside their
facility.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The licensing process begins with the medical device manufacturer
specifying the surface characteristics it desires. Because each surface is
unique, the Company routinely conducts a feasibility study at no charge to the
customer to qualify each new potential product application. Generally this
involves no more than 16 hours of effort by SurModics&#146; personnel. Once the
feasibility has been proven, the customer typically funds further development
by SurModics to optimize the coating formulation to meet the customer&#146;s
technical needs. Once the customer is satisfied with the performance of the
coating, a license agreement is executed granting the licensee the rights to
use the technology. SurModics&#146; technical personnel are then available to
provide assistance in the transfer of the PhotoLink technology into the
licensee&#146;s manufacturing process. Such services can include further coating
optimization, process control and trouble shooting which are billable to the
licensee. The Company also manufactures
</FONT>
<P align="center"><FONT size="2">5</FONT>
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<P><FONT size="2">and sells the chemical reagents used by all licensees in the coating
process, thus creating another source of revenue. The company often supports
its customers by providing coating assistance for parts required in human
clinical trials. However, the customer generally performs all coating work
internally once the product has been approved and is being sold on the market.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The term of a license agreement is generally for a period of 15&nbsp;years or
the life of SurModics&#146; patents, whichever is longer, although an agreement may
be terminated for any reason upon prior written notice, typically required at
least 90&nbsp;days before termination. The worldwide license can be either
exclusive or nonexclusive for a particular medical device, but over 90% of the
Company&#146;s licensed applications are nonexclusive. SurModics requires the
payment of a non-refundable license fee which has historically ranged from
$25,000 to $1,000,000 and quarterly &#147;earned&#148; royalties on the sales of products
incorporating SurModics&#146; technology. The royalty rates on most contracts are
in the 2% to 4% range, but there are certain contracts with lower and higher
rates. The amount of the license fee and the royalty rate are based on various
factors including whether the arrangement is exclusive or nonexclusive, the
perceived value of the coating application to the device and the size of the
potential market. Certain nonrefundable license and research and development
fees are recoverable by the licensees as offsets against a percentage of future
earned royalties. Most of SurModics&#146; agreements also incorporate a minimum
royalty to be paid by the licensee. In most cases, payment of these minimum
royalties will not commence until several months after the execution of an
agreement for a particular application. On a quarterly basis, a client will
pay the greater of earned or minimum royalties to SurModics. The earned
royalties are always paid on a quarter-lag basis, based on the client&#146;s actual
sales of coated products in the prior quarter.
</FONT>
<P><FONT size="2"><B>Other Products</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Stabilization Products</I></B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although the primary focus of the Company is the development and marketing
of its PhotoLink technology, the Company also markets stabilization products
for use by manufacturers of immunoassay diagnostic tests. SurModics&#146;
StabilCoat and StabilZyme Stabilizers are designed to maintain the activity of
biological components of the immunoassays, resulting in a longer shelf life.
These products offer SurModics&#146; customers the benefit of product
differentiation and improvement while providing the ultimate end users the
benefit of a faster test with fewer steps and fewer errors.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Diagnostic Formats</I></B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics also licensed a format for <I>in vitro </I>diagnostic tests developed
during the early years of the Company. This format has found broad application
in the expanding area of rapid point-of-care diagnostic testing, such as
pregnancy and strep tests, and generated $3.3&nbsp;million of royalty revenue to the
Company in fiscal 2001 pursuant to a license agreement with Abbott
Laboratories. Although this revenue is expected to grow in the future with the
increased sales of licensed products, limited additional research and
development is being undertaken in this area.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B><I>Industrial Applications</I></B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;While it is not the Company&#146;s primary focus, SurModics occasionally
pursues industrial applications for its PhotoLink technology. The Company only
pursues those applications that are perceived to be high value applications in
a market that is not considered to be price sensitive. To date, revenue
associated with industrial applications has been immaterial and is not expected
to be significant in the foreseeable future.
</FONT>
<P align="center"><FONT size="2">6</FONT>
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<P align="left"><FONT size="2"><B>Research and Development</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics&#146; research and development personnel support the sales and
marketing staff in performing feasibility studies, providing technical
assistance to potential licensees, optimizing the coating methodologies for
specific licensee applications, assisting in training licensees and integrating
the Company&#146;s technology and know-how into licensee manufacturing processes.
In addition, these personnel work to enhance and expand the PhotoLink
technology through the development of new reagents and new applications.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As medical devices become more sophisticated and complex, the Company
believes the need for surface properties will grow. The Company intends to
continue its development efforts to expand its PhotoLink technology to provide
additional optimized surface properties to meet these needs. The Company&#146;s
technical strategy is to target selected coating characteristics for further
development, in order to facilitate and shorten the license cycle. The Company
continues to perform research into applications for future products both on its
own and in conjunction with some of its licensees. Some of the research and
development projects currently being worked on include coatings for
site-specific drug release, bone and cartilage repair, enhanced tissue growth,
long-term blood compatibility and DNA immobilization methods. In addition to
expanding the number of medical applications that may use PhotoLink technology,
the Company is working on improving the coating process for metals, developing
a process for coating the interior diameter of medical devices and developing
coatings activated with sources other than UV light.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The technical staff of the Company consists of 94 employees, including 13
with Ph.D. degrees, 7 with Masters degrees and over 50 with Bachelor degrees,
with expertise in chemistry, biomedical engineering, biology, microbiology,
cell biology and biochemistry. The technical staff is organized into five
areas of specialization: hydrophilicity, microbiology, hemocompatibility,
biochemistry and tissue engineering. In addition, a chemistry group supports
the synthesis of new reagents needed by the other five groups.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In fiscal 2001 and 2000, the Company&#146;s research and development expenses
were $8.0&nbsp;million and $6.8&nbsp;million, respectively. A portion of these expenses
are billed to customers as the Company performs coating optimization and other
development work on their product applications. Research and development
revenue was approximately $4.2&nbsp;million in fiscal 2001 and $2.0&nbsp;million in
fiscal 2000.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Since its founding, the Company has actively participated in the federal
government&#146;s Small Business Innovative Research (&#147;SBIR&#148;) program to fund
development efforts. Since 1979, 143 research contracts resulting in revenues
of over $26&nbsp;million have been awarded to SurModics, primarily under the SBIR
program. Grant proposals are generally directed toward the commercial
strategies of the Company. The Company retains commercial rights to
discoveries and technologies resulting from the research and development
efforts funded by these grants. Where possible, licensees&#146; products or
substrates are used when performing research under the grant; thus the results
are often directly applicable to SurModics&#146; licensees. Grant funding has also
allowed SurModics to maintain a larger and more technologically diverse
employee base than would otherwise be possible.
</FONT>
<P align="left"><FONT size="2"><B>Patents and Proprietary Rights</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company has taken steps intended to protect PhotoLink related
inventions through a series of patents covering a variety of coating methods,
reagents and formulations, as well as particular medical device applications,
based on or employing the Company&#146;s proprietary photoreactive chemistry. The
Company has 26 issued U.S. patents, 25 pending U.S. patent applications, 54
issued foreign patents, and
</FONT>
<P align="center"><FONT size="2">7</FONT>
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<P><FONT size="2">91 pending foreign patent applications related to its PhotoLink
technology. The Company generally files international patent applications
(primarily in Australia, Canada, Europe, Japan, and Mexico) in parallel with
its U.S. applications. In addition to the patents related to the PhotoLink
technology, SurModics has 7 issued U.S. patents, 22 issued foreign patents and
3 pending foreign patent applications related to its diagnostic technology.
There can be no assurance that any of the pending patent applications will be
allowed.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company also relies heavily upon trade secrets and unpatented
proprietary technology. The Company seeks to maintain the confidentiality of
such information by requiring employees, consultants and other parties to sign
confidentiality agreements and by limiting access by parties outside the
Company to such information. The Company also does not divulge the detailed
chemical structure of its reagent chemical to anyone, including clients. There
can be no assurance, however, that these measures will prevent the unauthorized
disclosure or use of this information or that others will not be able to
independently develop such information. Additionally, there can be no
assurance that any agreements regarding confidentiality and non-disclosure will
not be breached, or, in the event of any breach, that adequate remedies would
be available to the Company.
</FONT>
<P align="left"><FONT size="2"><B>Marketing and Sales</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company markets its PhotoLink technology throughout the world using a
direct sales force consisting of three licensing managers who focus on specific
markets such as cardiology, neurology, urology and orthopedic products. This
specialization fosters an in-depth knowledge of the issues faced by SurModics&#146;
licensees within these markets such as technology changes, biomaterial changes
and the regulatory environment.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because the sales cycle can take several months from feasibility
demonstration to the execution of a license agreement, the Company focuses its
sales efforts on potential licensees with established market positions rather
than those with only development stage products which may never come to market.
Generally, the Company&#146;s technology is licensed on a nonexclusive basis to
medical device manufacturers for use on specific products. This strategy
enables the Company to license its technology to multiple licensees in the same
market. SurModics also targets selling new applications to existing licensees.
The Company believes the sales cycle is much faster in these situations
because the licensee is already familiar with the technology and the general
terms of the license have already been negotiated.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As part of its marketing strategy, the Company publishes technical
literature on each surface capability of the PhotoLink technology (<I>i.e.</I>,
lubricity, hemocompatibility, etc.). In addition, the Company exhibits at
major trade shows and technical meetings, advertises in trade journals and
through its website, and conducts direct mailings to appropriate target
markets.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company also offers ongoing customer service and technical support
throughout a licensee&#146;s relationship with SurModics. This service and support
begins with a coating feasibility study at no charge to the licensee and also
includes additional services such as assistance in the transfer of the
technology to the licensee, further coating optimization, process control and
trouble shooting, and assistance with FDA submissions for coated product
approval. Most of these services are billable to the client.
</FONT>
<P align="left"><FONT size="2"><B>Competition</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Competition in the medical device industry has resulted in an increase in
competition in the surface modification market. The Company&#146;s PhotoLink
technology competes with technologies
</FONT>
<P align="center"><FONT size="2">8</FONT>
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<P><FONT size="2">developed by Carmeda (a division of Norsk Hydro, Inc.), Specialty Coatings
Systems, and STS Biopolymers Inc., among others. In addition, many medical
device manufacturers have developed or are engaged in efforts to develop
surface modification technologies for use on their own products. Most
competitors marketing surface modification to the outside marketplace are
divisions of organizations with businesses in addition to surface modification.
Overall, the Company believes the worldwide market is very fragmented with no
competitor marketing to third parties having more than a 10% market share.
Some of the Company&#146;s existing and potential competitors (especially medical
device manufacturers pursuing coating solutions through their own research and
development efforts) have substantially greater financial, technical and
marketing resources than the Company.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics attempts to differentiate itself from its competition by
providing what it believes is a high value-added solution to surface
modification. The Company believes that the primary factors customers consider
in choosing a particular surface modification technology are performance, ease
of manufacturing, ability to produce multiple properties from a single process,
compliance with manufacturing regulations, customer service and pricing. The
Company believes that its PhotoLink process competes favorably with respect to
these factors, enabling it to charge a premium price. The Company believes
that the cost and time required to obtain the necessary regulatory approvals
significantly reduces the likelihood of a manufacturer changing the coating
process it uses once a device has been approved for sale.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Because a significant portion of the Company&#146;s revenue is dependent on the
receipt of royalties based on sales of medical devices incorporating PhotoLink
coatings, the Company is also affected by competition within the markets for
such devices. The Company believes that the intense competition within the
medical device markets creates opportunities for the Company&#146;s coating
technology as medical device manufacturers seek to differentiate their products
through new enhancements or to remain competitive with enhancements offered by
other manufacturers. Because the Company seeks to license its technology on a
non-exclusive basis, the Company may further benefit from competition within
the medical device markets by offering its technology to multiple competing
manufacturers of a device. However, competition in the medical device markets
could also have an adverse effect on the Company. While the Company seeks to
license its products to established manufacturers, in certain cases the
Company&#146;s licensees may compete directly with larger, dominant manufacturers
with extensive product lines and greater sales, marketing and distribution
capabilities. The Company also is unable to control other factors that may
impact commercialization of PhotoLink-coated devices, such as the marketing and
sales efforts of its licensees or competitive pricing pressures within the
particular device market. There can be no assurance that products coated with
the PhotoLink technology will be successfully commercialized by the Company&#146;s
licensees or that such licensees will otherwise be able to effectively compete.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The primary competition for SurModics&#146; stabilization products is its
customers&#146; internally developed formulations. The consolidation of the
diagnostic industry increases the availability of internally developed
stabilizers to the market. The Company believes that quick market penetration
is the best strategy for addressing these threats. As in the coating market,
the Company also believes that once its stabilization products are accepted in
an FDA-approved diagnostic test, the likelihood of change is reduced because of
the cost and time required to qualify a new component. SurModics&#146; marketing
strategy for its stabilization products is to develop a strong market presence
by offering superior product performance and technical service.
</FONT>
<P align="center"><FONT size="2">9</FONT>
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<P align="left"><FONT size="2"><B>Manufacturing</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In accordance with its licensing strategy, the Company does not coat
medical devices to be sold by its licensees. The Company does often support
its clients by coating for human clinical trials. The Company also
manufactures the reagent chemical used in the coating process, allowing it to
maintain the quality of the reagents and their proprietary nature, while
providing an additional source of revenue. PhotoLink reagents are specialty
photoreactive chemicals that are prepared using a proprietary formula in
relatively small batch processes (as contrasted with commodity chemicals
prepared by large continuous methods). Generally, all PhotoLink reagents share
a similar production process: a water soluble polymer is synthesized in a glass
reactor; reactive photochemical groups are attached to the polymer; the
solution is purified and freeze-dried or spray-dried, thus removing the water
and creating a solid; and the reagents are packaged in standard quantities in
light- and moisture-proof packaging. The reagents are sold dry, requiring the
licensee, in most cases, to simply add water or a water and isopropyl alcohol
mix before application. The Company has developed proprietary testing and
quality assurance standards for manufacturing the reagents and does not
disclose the reagent formulas or manufacturing methods. Although licensees may
purchase the requisite chemical reagents from any source, all have elected to
purchase them from the Company.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company also manufactures its 3D-Link Activated Slides for sale to
Motorola. Standard glass slides are cleaned and pretreated in a multiple-step
process. The Company applies its proprietary PhotoLink coating in a clean
room environment, tests the slides to assure they meet quality standards, and
in the final step, packages 24 slides in a box and seals it in moisture-proof
packaging.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Finally, the Company also produces its stabilization products. These
products are a group of sterile-filtered liquids that generally share a
three-step production process. A standard recipe of chemicals is mixed in high
purity water, these liquids are sterile-filtered into specific container sizes
under aseptic conditions, and the resultant finished goods are bottled and
labeled.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company maintains multiple sources of supply for the key raw materials
used to manufacture its products. The Company does, however, purchase some raw
materials from single sources, but it believes that additional sources of
supply are readily available.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although not required to follow Good Manufacturing Practice quality
procedures, SurModics does follow such procedures in part to respond to
requests of licensees to establish compliance with their criteria. The Company
has not yet sought ISO 9001 certification, but may do so in the future.
</FONT>
<P align="left"><FONT size="2"><B>Government Regulation</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although PhotoLink technology itself is not directly regulated by the FDA,
the medical devices incorporating this technology are subject to FDA
regulation. The burden of demonstrating safety and efficacy of such medical
devices, the ultimate criteria applied by the FDA, rests with the Company&#146;s
licensees (the medical device manufacturers). Medical products incorporating
the PhotoLink technology may generally be marketed only after 510(k) or PMA
applications have been submitted and approved by the FDA, which process can
take anywhere from six months for a 510(k) application, to two or three years
for a PMA application. These applications are prepared by the manufacturer and
contain results of extensive laboratory toxicity, mutagenicity and clinical
evaluations on animals and humans conducted by the manufacturer.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company maintains confidential Device Master Files at the FDA
regarding the nature, chemical structure and biocompatibility of the PhotoLink
reagents. Although the Company&#146;s licensees
<P align="center"><FONT size="2">10</FONT>
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</FONT>
<P><FONT size="2">do not have access to these files, the licensees may, with the permission
of the Company, reference these files in any medical device submission to the
FDA. This process allows the FDA to understand in confidence the details of
the PhotoLink technology without the Company having to share this highly
confidential information with its licensees.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Recent U.S. legislation allows device manufacturers, prior to obtaining
FDA approval to market a medical device in the U.S., to manufacture the device
in the U.S. and export it for sale in international markets. This generally
allows SurModics to realize earned royalties sooner. However, sales of medical
devices outside the U.S. are subject to international requirements that vary
from country to country. The time required to obtain approval for sale
internationally may be longer or shorter than that required by the FDA.
</FONT>
<P align="left"><FONT size="2"><B>Employees</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;As of December&nbsp;1, 2001, SurModics had 143 employees of whom 77 were
engaged in technical and 17 in manufacturing positions, with the remainder in
sales, marketing, quality or administrative positions. Of SurModics&#146;
employees, 14 hold Ph.D. degrees and 14 hold Masters degrees. The Company is
not a party to any collective bargaining agreements and believes that its
employee relations are good.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Management believes that the future success of the Company will depend in
part on its ability to attract and retain qualified technical, management and
marketing personnel. Such experienced personnel are in high demand, and the
Company must compete for their services with other firms which may be able to
offer more favorable benefits.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 2. PROPERTIES</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;In May 1999, SurModics purchased the land and building it currently
occupies in Eden Prairie, Minnesota for approximately $3.2&nbsp;million. The
building has approximately 64,000 square feet of space. In June 2001, the
Company purchased real property for approximately $2.5&nbsp;million for potential
future expansion. The Company now intends to sell this property and expand
into a different location. Subsequent to year-end, the Company purchased a
135,000 square foot facility on 27 acres of land in Bloomington, Minnesota for
approximately $7.1&nbsp;million and intends to move its operations into this
facility in early 2003. The purchases of these properties were internally
funded and remain unencumbered. The Company believes that projected capacity of
the manufacturing area is adequate to service the needs of its licensees for
the foreseeable future.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 3. LEGAL PROCEEDINGS</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Company is not a party to nor is any of its property subject to any
material pending legal proceedings.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2001.
</FONT>
<P align="center"><FONT size="2">11</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<!-- link1 "PART II" -->
<DIV align="left"><A NAME="001"></A></DIV>
<P align="center"><FONT size="2"><B>PART II</B>
</FONT>

<P align="left"><FONT size="2"><B>ITEM 5. MARKET FOR REGISTRANT&#146;S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS</B>
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">(a)</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">The information required by Item&nbsp;5 relating to the Company&#146;s
Common Stock and other shareholder matters is incorporated herein by
reference to the section entitled &#147;Stock Listing and Price History&#148;
which appears on page 33 of the Company&#146;s 2001 Annual Report to
Shareholders.</FONT></TD>
</TR>
<TR>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
<TR valign="top">
        <TD width="1%" align="left" nowrap><FONT size="2">(b)</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">The Company made no sales of unregistered securities during
the quarter-ended 9/30/2001.</FONT></TD>
</TR>
</TABLE>
<P align="left"><FONT size="2"><B>ITEM 6. SELECTED FINANCIAL DATA</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The selected consolidated financial data presented below for the five
fiscal years ended September&nbsp;30 is derived from the audited financial
statements. The financial data set forth below should be read in conjunction
with the Company&#146;s consolidated financial statements and &#147;Management&#146;s
Discussion and Analysis of Financial Condition and Results of Operation&#148;
contained in Item&nbsp;7.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="90%">
<TR valign="bottom">
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="52%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="2%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="18"><FONT size="1"><B>Fiscal Year</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="18"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center" colspan="3"><FONT size="1"><B>(Dollars in thousands, except per share data)</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>2001</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>2000</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>1999</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>1998</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>1997</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD colspan="3"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Income Statement Data:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total revenues</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">22,693</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">18,279</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">13,494</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">9,779</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">7,583</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Operating income</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,566</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,333</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,419</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">948</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">37</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net income</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,109</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,240</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,360*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,637</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">236</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Diluted net income per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.29</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.25</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.27*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.12</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.02</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Pro forma amounts assuming the accounting change was applied
retroactively:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Net income</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,814</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">3,669</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,199*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">1,633</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">136</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Diluted net income per share</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.38</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.22</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.26*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.12</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">.01</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Balance Sheet Data:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Cash and short-term investments</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">14,840</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">17,357</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">5,922</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">4,870</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left"><FONT size="2">$</FONT></TD>
        <TD align="right"><FONT size="2">1,948</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total assets</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">60,583</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">50,749</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">31,958</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">24,305</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">6,450</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Retained earnings (accumulated deficit)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,186</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">2,077</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(2,163</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(6,523</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(8,160</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">55,700</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">48,303</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">29,719</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">22,698</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">5,102</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom">
        <TD colspan="3"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Pro forma amounts assuming the accounting change was applied
retroactively:</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>

<TR valign="bottom" bgcolor="#eeeeee">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Retained earnings (accumulated deficit)</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">7,186</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">372</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(3,297</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(7,496</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">(9,129</FONT></TD>
        <TD nowrap><FONT size="2">)</FONT></TD>
</TR>

<TR valign="bottom">
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD colspan="2"><DIV style="margin-left:10px; text-indent:-10px"><FONT size="2">Total stockholders&#146; equity</FONT></DIV></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">55,700</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">46,598</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">28,585</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">21,725</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right"><FONT size="2">4,133</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<B>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;*</B>Net income for the year ended September&nbsp;30, 1999 includes the reversal of an
income tax valuation reserve totaling $2,074,000. To make the results
comparable between years, excluding the income tax reversal would result in net
income of $2,286,000 and diluted earnings per share of $0.14.
</FONT>
<P align="center"><FONT size="2">12</FONT>
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<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>
<P align="left"><FONT size="2"><B>ITEM 7. MANAGEMENT&#146;S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The Section entitled &#147;Management&#146;s Discussion and Analysis of Financial
Condition and Results of Operations&#148; in the 2001 Annual Report to Shareholders
is incorporated herein by reference.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;SurModics&#146; investment policy requires investments with high credit quality
issuers and limits the amount of credit exposure to any one issuer. The
Company&#146;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&#146;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&#146;s available-for-sale securities as of September&nbsp;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&#146;s
inventory exposure is not material.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Although the Company conducts business in foreign countries, its
international operations consist primarily of sales of reagent and
stabilization chemicals. Additionally, all sales transactions are in U.S.
dollars. Accordingly, SurModics does not expect to be subject to material
foreign currency risk with respect to future costs or cash flows from our
foreign sales. To date, the Company has not entered into any foreign currency
forward exchange contracts or other derivative financial instruments to hedge
the effects of adverse fluctuations in foreign currency exchange.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The balance sheets as of September&nbsp;30, 2001 and 2000 and the statements of
income, stockholders&#146; equity and cash flows for each of the three years in the
period ended September&nbsp;30, 2001 together with the Report of Independent Public
Accountants contained on pages 18 through 31 of the Company&#146;s Annual Report to
Shareholders for the year ended September&nbsp;30, 2001 are incorporated herein by
reference.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</FONT>
<P align="center"><FONT size="2">13</FONT>
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<!-- link1 "PART III" -->
<DIV align="left"><A NAME="002"></A></DIV>
<P align="center"><FONT size="2"><B>PART III</B>
</FONT>

<P align="left"><FONT size="2"><B>ITEM 10.&nbsp; DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The names, ages and positions of the Company&#146;s executive officers are as follows:
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="65%">
<TR valign="bottom">
        <TD width="33%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="1%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="54%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Name</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center" colspan="2"><FONT size="1"><B>Age</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Position</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD colspan="2"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Dale R. Olseth</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
71
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Chairman and Chief Executive Officer</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">James C. Powell</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
52
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">President and Chief Operating Officer</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">Stephen C. Hathaway</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
46
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Vice President and Chief Financial Officer</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">Patrick E. Guire, Ph.D</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
65
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Senior Vice President of Research and
Chief Scientific Officer</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">Walter H. Diers Jr.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
50
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Vice President of Corporate Development</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">Marie J. Versen</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD nowrap align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD align="right" valign="top"><FONT size="2">
40
</FONT></TD>
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">Vice President of Quality Management and
Regulatory Compliance</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Dale R. Olseth </I>joined the Company in 1986 as its President, Chief
Executive Officer and a director of the Company and has served as Chairman
since 1988. Mr.&nbsp;Olseth also serves on the Board of Directors of The Toro
Company. He served as Chairman or President and Chief Executive Officer of
Medtronic, Inc. from 1976 to 1986. From 1971 to 1976, Mr.&nbsp;Olseth served as
President and Chief Executive Officer of Tonka Corporation. Mr.&nbsp;Olseth
received a B.B.A. degree from the University of Minnesota in 1952 and an M.B.A.
degree from Dartmouth College in 1956.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>James C. Powell </I>joined the Company in 1987. He became Vice President of
Technical Operations in 1992 and was elected President and Chief Operating
Officer in 1998. He was employed at Precision-Cosmet Company, Inc., a
manufacturer of contact and intraocular lenses, from 1978 until he joined
SurModics. Mr.&nbsp;Powell received a B.S. degree in wood sciences from Texas A&#038;M
University in 1972 and an M.S. degree in polymer science in 1975 from the
University of Washington.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Stephen C. Hathaway </I>joined the Company as its Vice President and Chief
Financial Officer in September 1996. Prior to joining SurModics, he served as
Director of Finance for Ceridian Employer Services, Ceridian Corporation from
1995 to 1996. Prior to that, Mr.&nbsp;Hathaway was Vice President &#151; Finance &#038;
Operations for Wilson Learning Corporation from 1988 to 1995. He also spent
ten years with Arthur Andersen LLP. Mr.&nbsp;Hathaway received a B.S. degree in
accounting from Miami University in 1977 and became a Certified Public
Accountant in 1980.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Patrick E. Guire, Ph.D. </I>is a co-founder of the Company and has served as
Senior Vice President of Research and Chief Scientific Officer and a director
since 1980. Dr.&nbsp;Guire is responsible for the research affairs of the Company.
Prior to founding SurModics, Dr.&nbsp;Guire was employed by Kallestad Laboratories,
Inc. as a senior scientist from 1978 to 1979 and was a researcher at the
Midwest Research Institute, Inc. in Kansas City, Missouri from 1972 to 1978.
He received a B.S. degree in Chemistry from the University of Arkansas,
Fayetteville in 1958 and a Ph.D. in biochemistry from the University of
Illinois in 1963.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Walter H. Diers, Jr. </I>joined the Company in 1988 and currently serves as
Vice President of Corporate Development. He served as a consultant to several
small, high technology companies from 1984 until he joined SurModics. Prior to
that, he was the Controller of the Laserdyne division of Data
</FONT>
<P align="center"><FONT size="2">14</FONT>
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<P><FONT size="2">Card Corporation. Mr.&nbsp;Diers received a B.S. degree in economics and a
B.S. degree in business in 1977 and an M.B.A. degree in finance in 1979 from
the University of Minnesota.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;<I>Marie J. Versen </I>joined the Company in 1987, and in 1996 became its Vice
President of Quality Management and Regulatory Compliance. She was previously
employed at Precision-Cosmet Company, Inc. from 1983 to 1986. Ms.&nbsp;Versen
received a B.S. degree in chemical engineering from the University of Minnesota
in 1983.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The executive officers of the Company are elected by and serve at the
discretion of the Board of Directors.
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by Item&nbsp;9 relating to directors and compliance
with Section&nbsp;16(a) of the Securities Exchange Act of 1934 is incorporated
herein by reference to the sections entitled &#147;Election of Directors&#148; and
&#147;Section&nbsp;16(a) Beneficial Ownership Reporting Compliance&#148; which appear in the
Company&#146;s definitive proxy statement for its 2002 Annual Meeting of
Shareholders.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 11. EXECUTIVE COMPENSATION</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by Item&nbsp;11 is incorporated herein by reference to
the section entitled &#147;Executive Compensation&#148; which appears in the Company&#146;s
definitive Proxy Statement for its 2002 Annual Meeting of Shareholders.
</FONT>
<P align="left"><FONT size="2"><B>ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;The information required by Item&nbsp;12 is incorporated herein by reference to
the sections entitled &#147;Principal Shareholders&#148; and Management Shareholdings&#148;
which appear in the Company&#146;s definitive Proxy Statement for its 2002 Annual
Meeting of Shareholders.
</FONT>
<P><FONT size="2"><B>ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS</B>
</FONT>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;None.
</FONT>
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<DIV align="left"><A NAME="003"></A></DIV>
<P align="center"><FONT size="2"><B>PART IV</B>
</FONT>

<P align="left"><FONT size="2"><B>ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K</B>
</FONT>

<P>
<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="1%" align="left" nowrap><FONT size="2">(a)</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="93%"><FONT size="2">Exhibits. See &#147;Exhibit&nbsp;Index&#148; on the page following signatures.</FONT></TD>
</TR>
</TABLE>
<P align="center"><FONT size="2">15</FONT>
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<!-- link1 "SIGNATURES" -->
<DIV align="left"><A NAME="004"></A></DIV>
<P align="center"><FONT size="2"><B>SIGNATURES</B>
</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of Section&nbsp;13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="100%">
<TR valign="bottom">
        <TD width="37%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="3%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="50%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">&nbsp;</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">SURMODICS, INC.<BR>
(&#147;Registrant&#148;)</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">Dated: December 21, 2001</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
By:
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">/s/ Dale R. Olseth<BR>
</FONT><HR size="1" noshade width="50%"><FONT size="2">
Dale R. Olseth<BR>
Chairman and Chief Executive Officer</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant, in the capacities, and on the dates indicated.</FONT>


<P align="center"><FONT size="2">(Power of Attorney)</FONT>

<P><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Each person whose signature appears below constitutes and appoints DALE R.
OLSETH and STEPHEN C. HATHAWAY as his true and lawful attorneys-in-fact and
agents, each acting alone, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign
any or all amendments to this Annual Report on Form&nbsp;10-K and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, each acting alone, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all said attorneys-in-fact and agents,
each acting alone, or his substitute or substitutes, may lawfully do or cause
to be done by virtue thereof.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="40%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="30%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="20%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Signature</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Title</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Date</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>

<TR><TD>&nbsp;</TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/  Dale R. Olseth<BR>
</FONT><HR size="1" noshade><FONT size="2">
Dale R. Olseth</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Chairman, Chief<BR>
Executive Officer and<BR>
Director (Chief<BR>
Executive Officer)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 21, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ Stephen C. Hathaway<BR>
</FONT><HR size="1" noshade><FONT size="2">
Stephen C. Hathaway</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Vice President and<BR>
Chief Financial Officer<BR>
(Chief Financial and<BR>
Accounting Officer)
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 21, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ Donald S. Fredrickson<BR>
</FONT><HR size="1" noshade><FONT size="2">
Donald S. Fredrickson, M.D.</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 18, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ James J Grierson<BR>
</FONT><HR size="1" noshade><FONT size="2">
James J. Grierson</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 18, 2001</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">16</FONT>
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<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="40%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="30%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="20%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Signature</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Title</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><FONT size="1"><B>Date</B></FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD nowrap align="center"><HR size="1" noshade></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ Patrick E. Guire<BR>
</FONT><HR size="1" noshade><FONT size="2">
Patrick E. Guire</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 21, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ Kenneth H. Keller<BR>
</FONT><HR size="1" noshade><FONT size="2">
Kenneth H. Keller</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 17, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ David A. Koch<BR>
</FONT><HR size="1" noshade><FONT size="2">
David A. Koch</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 19, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ Kendrick B.  Melrose<BR>
</FONT><HR size="1" noshade><FONT size="2">
Kendrick B. Melrose</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 17, 2001</FONT></TD>
</TR>
<TR><TD><FONT size="2">&nbsp;</FONT></TD></TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">/s/ John A. Meslow<BR>
</FONT><HR size="1" noshade><FONT size="2">
John A.  Meslow</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Director
</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">December 18, 2001</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P align="center"><FONT size="2">17</FONT>
<!-- PAGEBREAK -->
<P><HR noshade><P>
<H5 align="left" style="page-break-before:always"><A HREF="#toc">Table of Contents</A></H5><P>

<P align="center"><FONT size="2">SECURITIES AND EXCHANGE COMMISSION<BR>
WASHINGTON, D.C. 20549
</FONT>
<!-- link1 "EXHIBIT INDEX TO FORM 10-K" -->
<DIV align="left"><A NAME="005"></A></DIV>
<P align="center"><FONT size="2">EXHIBIT INDEX TO FORM 10-K
</FONT>

<P align="center"><FONT size="2">For the Fiscal Year Ended September&nbsp;30, 2001
</FONT>
<P align="center"><FONT size="2">SURMODICS, INC.
</FONT>
<CENTER>
<TABLE cellspacing="0" border="0" cellpadding="0" width="75%">
<TR valign="bottom">
        <TD width="8%">&nbsp;</TD>
        <TD width="5%">&nbsp;</TD>
        <TD width="87%">&nbsp;</TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><FONT size="1"><B>Exhibit</B></FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD nowrap align="center"><HR size="1" noshade></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
        <TD><FONT size="1">&nbsp;</FONT></TD>
</TR>
<TR valign="bottom">
        <TD valign="top"><FONT size="2">3.1</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Restated Articles of Incorporation, as amended&#151;incorporated by reference
to Exhibit&nbsp;3.1 to the Company&#146;s Quarterly Report on Form&nbsp;10-QSB for the
quarter ended December&nbsp;31, 1999, SEC. File No.&nbsp;0-23837</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">3.2</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Bylaws, as amended to date&#151;incorporated by reference to Exhibit&nbsp;3.1 to
the Company&#146;s Quarterly Report on Form&nbsp;10-QSB for the quarter ended
December&nbsp;31, 1998, SEC. File No.&nbsp;0-23837.</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.1*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Company&#146;s Incentive 1987 Stock Option Plan, including specimen of
Incentive Stock Option Agreement&#151;incorporated by reference to Exhibit&nbsp;10.2
to the Company&#146;s Registration Statement on form SB-2, Reg. No.&nbsp;333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.2*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Company&#146;s Incentive 1997 Stock Option Plan, including specimen of
Incentive Stock Option Agreement&#151;incorporated by reference to Exhibit&nbsp;10.3
to the Company&#146;s Registration Statement on form SB-2, Reg. No.&nbsp;333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.3*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Form of Restricted Stock Agreement&#151;incorporated by reference to Exhibit
10.4 to the Company&#146;s Registration Statement on form SB-2, Reg. No.
333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.4*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Form of Non-qualified Stock Option Agreement&#151;incorporated by reference
to Exhibit&nbsp;10.5 to the Company&#146;s Registration Statement on form SB-2, Reg.
No.&nbsp;333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.5</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Form of License Agreement&#151;incorporated by reference to Exhibit&nbsp;10.6 to
the Company&#146;s Registration Statement on form SB-2, Reg. No.&nbsp;333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.6</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
License Agreement with Abbott Laboratories dated November&nbsp;20, 1990, as
amended&#151;incorporated by reference to Exhibit&nbsp;10.7 to the Company&#146;s
Registration Statement on form SB-2, Reg. No.&nbsp;333-43217</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.7</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Purchase and Sale Agreement dated March&nbsp;31, 1999 between the Company and
Prairie View Jack Ltd.&#151;incorporated by reference to Exhibit&nbsp;10.1 to the
Company&#146;s Quarterly Report on Form&nbsp;10-QSB for the quarter ended March&nbsp;31,
1999, SEC. File No.&nbsp;0-23837.</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">10.8*</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
SurModics, Inc. Executive Income Continuation Plan&#151;incorporated by
reference to Exhibit&nbsp;10 to the Company&#146;s Quarterly Report on Form&nbsp;10-QSB
for the quarter ended June&nbsp;30, 1999, SEC. File No.&nbsp;0-23837.</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">13</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Portions of Annual Report to Shareholders for the fiscal year ended
September&nbsp;30, 2001 incorporated by reference in this Form&nbsp;10-K.</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">23</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Consent of Arthur Andersen LLP</FONT></TD>
</TR>

<TR valign="bottom">
        <TD valign="top"><FONT size="2">24</FONT></TD>
        <TD><FONT size="2">&nbsp;</FONT></TD>
        <TD align="left" valign="top"><FONT size="2">
Power of Attorney (included on signature page of this Form&nbsp;10-K)</FONT></TD>
</TR>
</TABLE>
</CENTER>
<P>
<HR size="1" width="18%" align="left" noshade>

<TABLE width="100%" border="0" cellpadding="0" cellspacing="0">
<TR valign="top">
      <TD width="1%" align="left" nowrap><FONT size="2">&nbsp;</FONT></TD>
        <TD width="3%"><FONT size="2">&nbsp;</FONT></TD>
        <TD width="96%"><FONT size="2">&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;
*Management contract or compensatory plan or arrangement</FONT></TD>
</TR>
</TABLE>

<P align="center"><FONT size="2">18</FONT>



</BODY>
</HTML>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>3
<FILENAME>c66723ex13.txt
<DESCRIPTION>PORTIONS OF ANNUAL REPORT TO SHAREHOLDERS
<TEXT>
<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.




</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>4
<FILENAME>c66723ex23.txt
<DESCRIPTION>CONSENT OF ARTHUR ANDERSEN LLP
<TEXT>
<PAGE>
                                   EXHIBIT 23

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation of our
report incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statement File Nos. 333-64171, 333-64173,
333-79741 and 333-54266

Arthur Andersen LLP

Minneapolis, Minnesota,
December 21, 2001

</TEXT>
</DOCUMENT>
</SUBMISSION>
