<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  Form 10-KSB
(Mark One)

              [X]  ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
              For the fiscal year ended June 30, 1997

            [ ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
              For the transition period from ___________ to ____________

                  Commission file number 0-9570

                         LUTHER MEDICAL PRODUCTS, INC.
--------------------------------------------------------------------------------
                (Name of small business issuer in its charter)

                California                                33-0468235
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       (State or other jurisdiction of                 (I.R.S. Employer
       incorporation or organization)                 Identification No.)

   14332 Chambers Road, Tustin, California                  92680
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   (Address of principal executive offices)               (Zip Code)

Issuer's telephone number   (714) 544-3002
                          ------------------------------------------------------

Securities registered under Section 12(g) of the Exchange Act:

                      Common Stock, No Par Value Per Share
--------------------------------------------------------------------------------
                               (Title of class)

   Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.  
Yes  X   No
    ---     ---

   Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information state ments incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB.  [_]

State issuer's revenues for its most recent fiscal year.$5,476,569
                                                        ----------

   The aggregate market value of registrant's common stock held by non-
affiliates of the registrant is $9,702,614 based upon the average bid and asked
price of the common stock on October 8, 1997.

   Number of shares of Common Stock outstanding as of October 8, 1997:
3,212,786 shares.

                                      -1-
<PAGE>
 
                                    Part I

Item 1.   Description of Business.

     Luther Medical Products, Inc., a California corporation (the "Company"),
since its organization in 1980 has been primarily engaged in the design,
development, manufacture, sale, and licensing of intra-vascular catheters and
split, peel-away needles. The Company's L-Cath(TM) peel-away needle catheter
placement system and the OneCath(R) protected needle catheter placement
systems are used when soft, flexible catheters must be inserted for short- and
long-term intravenous therapy. The L-Cath(TM) for Ports is used to insert a
soft, flexible catheter into an implanted port as an alternative to a steel
Huber needle.

Products
--------

Peripherally Inserted Central Catheters ("PICCs").

     PICCs provide venous access and typically reach into the superior vena cava
to serve as a "central line." The Company's patented peel-away needle has been
central to the Company's PICC products. A PICC is indicated for the following
clinical reasons: (i) lack of peripheral venous access, (ii) infusion of
vesicant/irritant drugs, (iii) long-term intravenous therapy in the home,
hospital, or clinic setting, (iv) administration of blood/blood products, or 
(v) infusion of intermittent drug therapy.

     The Company believes that PICCs provide certain non-economic advantages
over conventional intravenous catheters, e.g., reliable vascular access
throughout the course of therapy and decrease in patient pain and discomfort
associated with frequent venipuncture.  In addition, the Company believes that
certain economic advantages also exist.  For example, PICCs may be left in place
for two to six weeks or more as compared to traditional over-the-needle
catheters that must be changed every 48 hours.  One PICC may substitute for up
to 20 short-term catheters, saving up to 19 short-term procedures.

Peripherally Inserted Midline Catheters ("Midlines")

     Midlines provide venous access with the tip of the catheter located in the
upper arm.  A Midline is indicated for the following clinical reasons:  (i)
certain types of peripheral IV solutions, (ii) two to six week short-term IV
therapy, or (iii) providing venous access when a PICC is contra-indicated.
Midlines provide similar economic advantages as PICCs.

Peripherally Inserted Long-Term Peripheral Catheters ("Long-Term Peripherals")

     Long-Term Peripherals are similar to Midlines, except that they are more
likely to be used for shorter time frames.  Long-Term Peripherals are an
alternative to traditional, short, hard IV catheters that must be replaced every
48 to 72 hours.  Long-Term Peripherals, which can remain in place for more than
30 days, if required, bridge the time gap between such traditional IV catheters
and Midlines.

                                      -2-
<PAGE>
 
L-Cath(TM) PICC, Midline, and Long-Term Peripheral Catheter Placement Systems.

     The Company's patented peel-away needle catheter placement system consists
of a stainless steel needle (the "cannula") through and by which a flexible
catheter is inserted.  The cannula is sharpened to a fine point on one end and
has an extremely narrow slit along its entire length.  Once a cannula has been
inserted into a blood vessel, the catheter is inserted into the cannula and
advanced into the vessel.  After the catheter has been advanced to the desired
level of insertion, the needle is withdrawn.  Rather than attempting to thread
the needle back over the length of the catheter outside the body and off the end
(an end that may have a large connecting adapter rendering removal impossible),
the needle is peeled or split lengthwise in two and is removed from the
catheter.

     The L-Cath catheter placement systems may be used in a variety of
biomedical applications.  In the medical market, for example, catheters are
advanced into a vein, thereby allowing the clinician to administer plasma,
blood, chemotherapy, intravenous drugs, or feeding solutions.

     The L-Cath catheter placement system are currently manufactured and sold in
a variety of sizes and configurations for applications ranging from neonatal
(infants) to adult to veterinary.  The L-Cath catheter system is available in
either polyurethane or silicone materials.

OneCath/(R)/ Catheter.

     The OneCath catheter placement system has been designed as a new generation
of PICCs or Midlines.  The OneCath catheter placement system incorporates the
advantages of many of the Company's earlier developments and certain protection
against accidental needle sticks.  The OneCath allows for the insertion of
central venous catheters or Midlines made from soft biocompatible material using
conventional "over-the-needle" techniques with a protected needle that is
designed to give protection from AIDS and other infectious diseases.

L-Cath Catheter for Port Access.

     The L-Cath for Ports is a soft catheter utilized in the infusion of fluids
into the blood stream through a small implanted chamber (a port) inserted under
the skin of a patient's chest.  In August of 1994, the FDA granted the Company
clearance to market the L-Cath for Ports, a market currently served only by
steel needle manufacturers.  Management believes that the L-Cath for Ports
offers certain advantages in comparison with traditional steel needles,
including increased comfort for the patient and reduced inventory levels for the
healthcare provider.  The L-Cath for Ports catheter will bend in response to
external forces applied to it, or to its connections, e.g., a patient rolling
over in bed; whereas, a steel needle would not bend, but would cause the patient
noticeable pain.  Because the distance under the skin at which ports have been
implanted will vary depending on the patient and the surgeon's preference,
healthcare providers typically maintain many lengths of steel needles in
inventory.  The L-Cath for Ports can satisfy virtually any length requirement
simply by bending the soft catheter outside of the skin.

                                      -3-
<PAGE>
 
Stickless Technology.

     Currently, the Company's OneCath catheter placement system incorporates
stickless technology.  See Item 1. Description of Business -- Research and
Development.  When placing a catheter into a patient, the health care worker is
at significant risk of receiving an accidental needle stick.  The needle may be
contaminated by any one of a variety of potentially infectious diseases.  The
degree to which the health care worker is at risk of becoming infected is
directly dependent upon the degree to which the disease is transmittable.

     AIDS and other infectious diseases have been shown to be transmittable from
patient to health care worker via contaminated needles.  Management believes
that (a) health care workers and hospital administrators are highly motivated to
reduce the possibility of transmission of such diseases and (b) the insurance
industry is also highly motivated to reduce the risks (and associated costs) of
such infectious diseases.  Furthermore, management believes that nurses' unions
and government agencies, e.g., Occupational Safety and Health Administration,
may require that needle guards be used when treating potentially infectious
patients.  The present directive of the Centers for Disease Control and
Prevention in Atlanta, Georgia, is that hospital workers treat all patients as
potentially infectious; hence, care-givers must take certain necessary
precautions.  Those precautions do not currently include the mandated use of
needle guards and there can be no assurance that any union or government agency
will require the use of needle guards.  However, the design of the OneCath
catheter placement system incorporates technology that provides increased
protection against accidental needle sticks to health care workers.

Pertrach Technology.

     The Pertrach tracheostomy device (the "Pertrach Tracheostomy Product")
provides a means of rapidly and safely inserting a breathing tube into a
patent's trachea (through their crico-thyroid membrane or trachea) in certain
clinical situations.  It provides an adequate airway through which the patient
can receive airflow.  The method of inserting the device is dilating a needle
puncture.  Because of the small size of the puncture, a patient typically
suffers minimal bleeding and the chance of infection is reduced.  Deploying the
Pertrach Tracheostomy Product has been demonstrated to take 30 seconds or less
to perform.

ACTIV(TM) Catheter and Material.

     In April of 1987 the Company executed a License and Sales Agreement 
(the "L & S Agreement") with Tyndale Plains-Hunter, Ltd. ("TPH"), in respect of
a polymer that the Company used in early versions of its OneCath catheters. As
a result of experience gained in the marketplace through the Company's specialty
distribution network, the Company and TPH modified the L & S Agreement, in April
of 1996. As modified, the L & S Agreement permits the Company to make, use,
sell, and sublicense products that utilize the Company's OneCath technology
covered by certain patents owned by TPH in the field of intravenous catheters,
exclusive of use in the fields of cardio-vascular diagnosis and treatment, blood
sensing, and enteral feeding tubes, for the original term of 25 years. The
amendment eliminates the Company's $60,000 minimum annual royalty requirement.
The Company remains obligated to pay royalties to TPH of a minimum of 2% to a
maximum of 3.5% of net sales of products incorpo-

                                      -4-
<PAGE>
 
rating the patented rights, and a royalty of 40% of all income that the Company
receives from sublicenses, if any.

Marketing and Customers
-----------------------

     The Company's marketing strategy is to distribute its catheter products
through a specialty distribution network.  The Company may develop and
manufacture products, some of which may incorporate the Company's patented
technology for distribution on an OEM basis.  The Company may also license
portions of its technology.

     For several years, the Company had indirectly participated in the PICC and
Midline markets by selling its patented peel-away needle to two firms offering
complete patient PICC kits.  In late 1990, the Company decided that it would
discontinue the supply of patented peel-away needles to one such firm and would
market complete patient PICC and Midline catheter kits under its own label.  In
1994, the Company determined to discontinue the supply of peel-away needles to
the other firm and to sell the peel-away needles for PICC and Midline use
exclusively through its own distribution network.

     In March of 1992, the Company entered into an exclusive distribution
agreement with Pharmacia Deltec Inc. ("Pharmacia") for the Company's PICC and
Midline products.  In 1994 the Company and Pharmacia agreed to terminate the
exclusive nature of the agreement.  In March 1994, Pharmacia became a non-
exclusive distributor for a broad range of the Company's products and the
Company commenced the establishment of a distribution network through specialty
distributors.  Effective March of 1995, Pharmacia was permitted only to
distribute the Company's neonatal products.

     Management believes that the current size of the markets for PICCs and
Midlines in the United States is approximately $40 million annually and that it
is expanding at an annual rate of 15%.  The Company believes that the market
will continue its growth due to the continued efforts of the medical insurance
industry to reduce health care costs and the collateral movement of health care
delivery from the hospital to the outpatient setting.  The Company believes that
its products are lower cost alternatives to established therapy.

     Management believes that the current size of the market for implanted port
catheters in the United States is approximately $150 million annually.  The
Company believes that its distribution network is properly positioned to address
this market and to gain certain market share for the Company, as the market is
currently served only by Huber steel needle manufacturers.  Many of the
Company's distributors also sell Huber needles.

National Accounts Marketing.

     Certain observers of the healthcare industry believe that as much as 70% of
materials purchased by hospitals are purchased under group contracts.  Group
purchasing organizations represent large groups of hospitals or healthcare
agencies and negotiate with manufacturers for scheduled deliveries of products
at predetermined, competitive prices.  In May of 1995, the Company entered into
a two-year consulting agreement with National Contracts, Inc. ("NCI"), pursuant
to which NCI will provide national account services for the Company.  NCI

                                      -5-
<PAGE>
 
represents approximately ten companies in respect of national accounts into
which it has historically gained access and from which it has historically
received purchase contracts for its clients.  The Company paid approximately
$200,000 annually to NCI in consideration of its consulting services.

     In furtherance of the Company's desire to sell its products through group
purchasing organizations, the Company entered into agreements with various
national group purchasing organizations, e.g., Apria Healthcare, Inc. ("Apria"),
Teamcare, the institutional pharmacy subsidiary of Atlanta-based GranCare, Inc.
("TeamCare"), and Mid Atlantic Group Network of Shared Services, Inc.
("Magnet").  The Company is the principal nationwide supplier of intermediate
and long-term intravenous catheters to Apria and to TeamCare.  The Company sup-
plies its catheter products through Magnet, which is comprised of 11 regional
shared services/group purchasing organizations representing more than 1,100
acute care hospitals, 1,350 long-term care facilities, and a range of extended
care and related healthcare facilities.  Sales through such national accounts
commenced during the 1996 fiscal year.  In December of 1995, the Company was
awarded the rights to use the Alliance of Children's Hospitals "Seal of
Acceptance" for the Company's pediatric and neonatal products, which products
the Company supplies to members of the Alliance.

Distribution Network.

     In March of 1994, the Company commenced the establishment of a network of
specialty distributors to encompass the United States and Canadian markets.  In
addition, the Company has appointed a number of international distributors.  As
of the date of this Annual Report, the Company has full coverage of the United
States and Canadian marketplace through approximately 21 distributors, resulting
in more than 150 sales personnel engaged in sales efforts for the Company's
products.

     In August of 1994, the Company entered into a five-year distribution
agreement for the states of California, Arizona, Nevada, and New Mexico with
Kentec Medical, Inc. ("Kentec").  The Company granted Kentec certain pricing
accommodations during a transition period.  The agreement provides certain
termination criteria for the Company and for Kentec.  The Company may terminate
the agreement if Kentec fails to purchase sufficient quantities of the Company's
products.  Kentec may terminate the agreement if, during the term of the
agreement and under certain circumstances, the Company (i) commences direct
sales into Kentec's territory without its written consent or (ii) is a party to
a business combination transaction, the resulting enterprise of which chooses
not to assume the agreement.  Kentec shall be entitled to a fee if it terminates
the agreement upon the occurrence of either such event.  For each year remaining
of the then-unexpired term of the agreement, such fee (to be paid annually)
shall be a sum equivalent to 30% of the aggregate transfer price for products
sold by the Company to Kentec during the immediately preceding 12 months.  In
the case of such a termination, Kentec is to receive the initial annual payment
of such fee within 30 days.

     In August of 1997, the Company entered into a five-year distribution
agreement with Alaris Medical Systems, Inc. ("Alaris"), for the EEC and certain
other foreign countries.  The agreement contains certain termination provisions
that may come into effect in the event that the Company and Alaris are unable to
reach agreement regarding Alaris's performance goals

                                      -6-
<PAGE>
 
for the second through fifth years of the agreement.  In addition, the agreement
may be terminated, and payment of a termination fee will be required, in the
event that the Company is a party to a business combination transaction, the
resulting enterprise of which chooses to terminate the agreement.  If the
agreement is terminated either because of the parties' inability to agree on
performance goals or because of the actions of the Company's successor, Alaris
shall retain rights to continue to distribute such products for a period of up
to two years.

Licensed Technology.

     In October of 1993, the Company signed an exclusive "life of the patents"
agreement with The Kendall Company ("Kendall") for North and South America,
pursuant to which the Company licensed Kendall to use certain of the Company's
patent rights and technology relating to the Company's peel-away needles.
Kendall may utilize such patent rights and technology in research and
development, manufacturing, marketing, and selling peel-away needles used in
connection with epidural and/or spinal anesthesia (the "Kendall Licensed
Products").  Kendall tendered to the Company an initial licensing fee of
$10,000.  Kendall is obligated to tender to the Company a royalty on the sale of
Kendall Licensed Products, which royalty shall be the greater of three percent
of net sales of the Kendall Licensed Products or 75c for each sale of Kendall
Licensed Products.  If the Company manufactures for, or supplies to, Kendall
peel-away needles during the first 12 months following the date on which the FDA
issues a 510(k) clearance to market, Kendall shall pay to the Company its
proportional direct labor, direct material, and direct overhead costs, plus one
dollar for each such needle.  In order to maintain exclusivity under the license
agreement, Kendall shall be required to sell a minimum of 6,000 needles during
the first year of production and, during each of the four subsequent years, the
greater of 15,000 needles or an amount equivalent to 80% of the needles sold
during the previous year.  If Kendall desires to maintain exclusivity under the
license agreement, but has not attained such minimum sales levels, it shall
make a payment to the Company at the end of each year in an amount equivalent
to the royalty that would have been due on the relevant minimum sales levels.
If Kendall does not maintain exclusivity under the license agreement, the
royalty rate shall be reduced by 50%.

     In March of 1992, the Company and Pharmacia entered into a five-year
distribution and development arrangement, pursuant to which Pharmacia became the
virtually exclusive distributor (world-wide, except for Japan) of certain of the
Company's catheter products (both currently available and under development) and
undertook to provide certain funding related to the development of the OneCath
products.  In March of 1994, the Company and Pharmacia modified their
relationship as follows:  (i) the March of 1992 agreements were terminated,
other than certain confidentiality provisions, and Pharmacia was released from
all minimum purchase obligations; (ii) the Company executed a replacement 8%
promissory note (with an initial principal balance of $625,000) due in June of
1997; (iii) the Company granted to Pharmacia a world-wide (except for Japan)
non-exclusive license to distribute the Company's PICC and Midline products that
use a peel-away needle for adults for a 12-month period and, for a five-year
period, certain neonatal catheter products; and (iv) the Company granted to 
Pharmacia a non-exclusive license to use certain of the Company's patents, as
partial consideration for which Pharmacia paid $100,000 to the Company in May
of 1994.  The Company utilized such payment as its initial $100,000 principal
payment on the March 1994 promissory

                                      -7-
<PAGE>
 
note and, thereafter, commenced quarterly principal and interest payments.  In
November of 1995, the Company paid to Sims Deltec, Inc. ("Sims"), the corporate
successor to Pharmacia, $400,000, as payment in full of such promissory note.

     In November of 1987, the Company signed a world-wide "life of the patents"
agreement with Critikon, Inc., a Johnson & Johnson company ("Critikon"), that
licensed Critikon to manufacture, market, and distribute the Company's patented
guarded intravenous catheter under the trademarked name of PROTECTIV.  In March
of 1995, the Company assigned the licensed patents to Johnson & Johnson Medical,
Inc. ("JJMI"), the corporate successor to Critikon, for $4.7 million.

Interventional Radiology.

     In September of 1995, the Company entered into a product development and
supply agreement with Boston Scientific Corporation ("BSC"), pursuant to which
the Company undertook to manufacture (to BSC's specifications) and BSC
undertook to sell (on an exclusive basis) a jointly developed range of PICCs to
be used exclusively in the interventional radiology market for patients who
require percutaneous access to the vascular system.

Order Backlog
-------------

     The amount of backlog orders believed by the Company to be firm, as of 
June 30, 1997, for catheter production was $558,000. The Company expects that
all of such backlog will be filled within the current fiscal year. As of 
June 30, 1996, such backlog orders were approximately $402,000 for catheter
production.

Production and Supplies
-----------------------

     Many of the components of the catheter product lines can have more than one
source of supply, although the Company has not traditionally multi-sourced its
components.  The Company believes that it would be able to switch its sources of
supply without causing significant disruption to its manufacturing or marketing
operations.  The Company owns the designs and molds for the components that are
proprietary to the Company and can relocate the molds at its discretion to
numerous alternative molders in its local area.

Government Regulation
---------------------

     The FDA classified the Company's catheter placement systems as Class II
medical devices under the Federal Food, Drug and Cosmetic Act (the "FFD&C
Act").  This classification requires the Company to obtain clearance from the
FDA prior to marketing its catheter products.  The Company has had and will
continue to have its products clinically tested in hospitals and other
institutions to ensure the fitness for, and ease of, use of the catheter 
placement systems. Under the FFD&C Act and applicable FDA regulations, the FDA
may periodically inspect the manufacturing facilities of the Company, and the
Company must comply with certain methods, facilities, controls, labeling,
recordkeeping, and reporting requirements in manufacturing and marketing its
catheter placement systems. During the 1997 fiscal year, the Company expended
$317 thousand to modify its internal quality assurance and regulatory

                                      -8-
<PAGE>
 
affairs system.  Of such sum, $49 thousand was included in the Company's cost of
revenues, $262 was included in the Company's general and administrative
expenditures, and six thousand dollars was included in the Company's research
and development expenditures.  See "Item 6. Management's Discussion and Analysis
or Plan of Operation -- Results of Operations."

     The manufacture and sale of medical devices are also regulated by some
states, including California, and most foreign countries.  The Company has
obtained its manufacturing license from California and is not aware of any other
state approvals necessary at this time. The Company will require each foreign
distributor to obtain all necessary regulatory approvals to market the Company's
catheter placement system in the countries in which the distributor intends to
market the product.  Management believes that the Company's distributors have
obtained all necessary international approvals for products currently being
sold.

Patents
-------

Peel-Away Cannula Patent.

     In July of 1980, Mr. Luther and one other then-current executive officer
and director of the Company assigned the cannula patent to the Company in
exchange for a royalty of 6% of net sales of products utilizing that patent.
Through December of 1987, royalties of $83,000 had been paid and an additional
$70,000 had been accrued.  In March of 1988, the parties agreed to terminate the
royalty agreement; in consideration thereof and of the accrued but unpaid
royalties, 24,858 shares of the Company's Common Stock were issued to such
individuals.

OneCath Patents.

     The Company has filed applications for six patents for the OneCath catheter
and its manufacturing process.  To date, four letters patent have issued.

Pertrach Patents.

     The Company is the assignee of three patents utilized in the Pertrach
Tracheostomy Product.  See "Item 1.  Description of Business -- Products --
Pertrach Technology."

Other Patents.

     During the fiscal years ended June 30, 1997, 1996, and 1995, six patent
applications, in addition to those referenced above, were filed, five of which
are in the issuance process and one of which is pending as of the date of this
Annual Report.

General Patent Protection.

     To date, no court has ruled on the enforceability of any of the Company's
patents.  There is no assurance that the Company's patents or any future patents
will afford protection broad enough to prevent competitors from manufacturing
systems similar to the Company's.  In defense of its intellectual property
rights, the Company was successful in compelling Gesco

                                      -9-
<PAGE>
 
International, Inc. ("Gesco") to cease its infringement of one of the Company's
split-needle patents.  The Company has purchased a policy of patent insurance to
supplement its financial resources in the prosecution of infringement of its
major patents.

Competition
-----------

     Many larger medical companies, e.g., Baxter Healthcare Corp., Becton-
Dickinson and Co., Abbott Laboratories, and Sims, dominate the general catheter
and port access segments of the medical device industry and compete with the
Company on the basis of product performance.  Management believes that PICCs
and Midlines typically offer a lower cost alternative to the surgically placed
central catheter lines that are offered by such larger companies.  See Products
-- Peripherally Inserted Central Catheters.

     Management believes that such larger companies neither offer a range of
products that better suit the needs served by PICCs and Midlines nor utilize
appropriate channels of distribution to service the PICC and Midline markets.
Although the Company does not have the financial or distribution resources to
supplant the market position of such larger companies with respect to the
specific catheter products manufactured and marketed by them, management
believes that the Company can be successful in manufacturing and supplying PICCs
and Midlines to the markets that can utilize such products.  Accordingly, the
Company has adopted a strategy of marketing its products through its network of
specialty distributors, as well as through selective licensing arrangements.

     Management believes that the major manufacturers of PICCs and Midlines are:

 .    Gesco, which was acquired by Bard Access Systems, offers only silicone
     PICCs as an extension to Bard's established product line, the range of
     which the Company's management believes to be more limited and more
     expensive than the Company's.

 .    HDC Corporation, which currently only offers silicone PICCs and Midlines.

Research and Development
------------------------

     In May of 1987, the Company introduced a new catheter product designed to
minimize the transmission of infectious diseases such as AIDS and hepatitis
through accidental needle sticks.  Management believes that the Company was the
first to develop and market a product of this type.  That product became the
PROTECTIV catheter, licensed by the Company to Critikon, Inc., a Johnson &
Johnson company ("Critikon").  Since the introduction of stickless technology
with PROTECTIV, the Company's catheter research and development efforts
continued to concentrate on stickless product designs, as well as the OneCath
catheter, L-Cath for Ports, high flow-rate catheters, dual lumen products, and 
closed-end, slit-valve intravenous catheters.

     Since completion of the PROTECTIV design, the Company has concentrated on
the development of additional products for its distribution network.  Current
areas on which the Company is concentrating its efforts include needle stick
protection for healthcare workers, reduced exposure to blood, increased dwell
time (the time that a catheter may remain in a vein before it must be removed),
ease of use with a related reduction in training time, and

                                      -10-
<PAGE>
 
improved patient comfort.  As a result of such development efforts, the L-Cath
for Ports design has been upgraded to offer reduced blood exposure and greater
ease of use. Other products offering such upgrades are currently in development.
There can be no assurance that any commercially feasible products will result
from such research and development activities. During the fiscal years ended
June 30, 1997, and 1996, the Company expended an aggregate of approximately
$521,000 and $395,000, respectively, on catheter research and development
efforts.

Employees
---------

     The Company employs 62 individuals.  The Company's employees are not
covered by any collective bargaining agreement, and management believes its
relationship with its employees is good.

Item 2.   Description of Property.

     The Company's executive offices and manufacturing facilities are located in
leased premises at 14332 Chambers Road, Tustin, California.  The property
comprises approximately 20,000 square feet of light industrial space.  The
leasehold improvements include approximately 4,350 square feet of a controlled
manufacturing environment suitable for medical device manufacturing, as well as
air, vacuum, and electrical systems.  The Company believes that its facilities,
as improved, are suitable and adequate for its business, as currently conducted
and for the foreseeable future.  The Company believes that the facilities
provide it with productive capacity sufficient to enable it to meet its current
production goals and requirements, and those for the foreseeable future.
Management believes that the facilities, as currently situated, could support a
tripled level of production of current catheter products.  The lease terminates
April 30, 1998.

Item 3.   Legal Proceedings.

     The Company is not a party to any legal proceedings and management is not
aware of any threatened legal proceedings.

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

     There were no matters submitted during the fourth quarter of the year ended
June 30, 1997, to a vote of security holders through the solicitation of proxies
or otherwise.

                                      -11-
<PAGE>
 
                                 PART II

Item 5.   Market for Common Equity and Related Stockholder Matters.

     The Company's Common Stock is publicly traded in the over-the-counter
market and is quoted on the Nasdaq Stock Market (SmallCap) under the trading
symbol "LUTH".  The following table sets forth the high and low quotations for
the Common Stock of the Company during the calendar periods indicated, as
reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
 
Calendar Year         Quarter       High   Low
----------------   --------------   ----   ----
<S>                <C>              <C>    <C>
 
     1995          First Quarter    3.00   2.50
                   Second Quarter   2.68   2.50
                   Third Quarter    3.19   2.25
                   Fourth Quarter   5.38   2.75
 
     1996          First Quarter    5.13   3.25
                   Second Quarter   7.25   4.31
                   Third Quarter    5.87   3.93
                   Fourth Quarter   5.25   3.00
 
     1997          First Quarter    4.87   3.00
                   Second Quarter   4.12   2.87
</TABLE>

     The closing price of the Company's Common Stock as of October 8, 1997, was
$3.03.  At October 8, 1997, the Company had approximately 3,100 record holders
of its Common Stock.

     The Company did not declare or pay any dividends during either of its
fiscal years ended June 30, 1997, and 1996.  Payment of dividends, if any, on
the Common Stock, is dependent upon the amounts of future after-tax earnings, if
any, of the Company and is subject to the discretion of its Board of Directors.
The Board of Directors is not legally obligated to declare dividends, even if
the Company is profitable.  To date, the Company has not declared or paid any
dividends.  The Company intends to employ all available funds to finance the
growth of its business and, accordingly, does not intend to declare or pay any
dividends in the foreseeable future.

Item 6.   Management's Discussion and Analysis or Plan of Operation.

Results of Operations
---------------------

     The Company commenced business operations in 1980 (as the successor to a
partnership organized in 1979) to develop, manufacture, and market a
proprietary catheter placement system and related products.  The Company has
financed its development activities and operations since inception primarily
with the net proceeds of an initial public offering in 1980 and with proceeds
from subsequent sales of securities (both public and private issuances), funds
received under a research and development agreement funded by a limited
partnership

                                      -12-
<PAGE>
 
to develop certain small catheter systems, and the proceeds of a sale by the
Company of five of its patents to JJMI.

     Development continues on new models of catheter systems for various
applications.  Since its inception, the Company has developed and introduced
numerous versions of its catheter placement products and systems, and additional
catheter products are in development.  There can be no assurance that any
commercially feasible products will result from such development activities.

     Historically, the Company focused on research and development, rather than
marketing.  In November of 1987, a significant private label agreement was
entered with Critikon, under which the Company manufactured its PROTECTIV
catheter product for distribution by Critikon; in March of 1990, Critikon
commenced to manufacture the product and paid the Company a sales-based royalty;
and in March of 1995, the Company assigned to JJMI the PROTECTIV patents for
$4.4 million, net of expenses.  In 1990, the Company commenced the marketing of
a PICC product line utilizing its L-Cath catheter placement system.  In March of
1992, the Company entered into an exclusive distribution agreement with
Pharmacia for the Company's PICC and Midline products that use a peel-away
needle, including catheters for adults and certain neonate catheters, which
agreements became non-exclusive in March of 1994.  Effective March of 1995,
Pharmacia was permitted only to distribute the Company's neonatal products for
an additional four years.  See Item 1. Description of Business.

     In March of 1994, the Company commenced the establishment of a network of
specialty distributors to encompass the United States and Canadian markets.  In
addition, the Company has appointed a number of international distributors.  As
of the date of this Annual Report, the Company has approximately 21
distributors, resulting in more than 150 sales personnel engaged in sales
efforts for the Company's products.  As of the date of this Annual Report,
substantially all of the distributors have received training in the use of the
products.

Fiscal Year Ended June 30, 1997, Compared To Fiscal Year Ended June 30, 1996.

     Total revenues for 1997 increased 36% to $5.5 million from $4.0 million in
1996.  Domestic product sales revenues for 1997 increased 86% to $3.9 million
from $2.1 million in 1996, primarily as a result of adding new distributors and
additional products during the year.  International product sales revenues for
1997 increased 30% to $1 million from $774 thousand, primarily as a result of
adding new distributors during the year.  OEM sales revenues for 1997 decreased
54% to $457 thousand from $993 thousand in 1996, primarily as a result of
decreased sales to a major OEM customer as a result of a product design
modification.  The modifications were completed during the third quarter and
nominal shipments to the customer resumed in March.  Additionally, the Company's
changed relationship with Pertrach Inc. ("Pertrach"), a former OEM customer of
the Company, affected the classification of certain revenues derived from sales
of Pertrach Tracheostomy Product.  For many years, the Company had manufactured
tracheostomy products for Pertrach on an OEM basis.  In March of 1996, the
Company purchased Pertrach's intellectual property rights and certain other
assets.  Pursuant to the purchase agreement, the Company now markets those
products and pays Pertrach a sales-based royalty.  Currently, the Company is
utilizing a distributor for such marketing efforts.  Revenues from the Pertrach
Tracheostomy Product for 1997 were $177 thousand

                                      -13-
<PAGE>
 
(which were included in the Company's domestic product sales) compared to $75
thousand for 1996 (which were included in OEM sales).  Interest and royalty
income decreased 46% to $76 thousand from $139 thousand in 1996, primarily as a
result of a decrease in interest earned on available cash which was invested in
U.S. treasury bills.  There were no production costs associated with any royalty
income.

     Cost of revenues for 1997 increased to $3.3 million from $2.4 million in
1996.  Cost of revenues as a percentage of product sales decreased to 61% from
62%, attributable to increased sales and slightly lower per-unit manufacturing
costs.

     Selling expenses for 1997 increased 29% to $1.2 million from $902 thousand
in 1996, as a result of increased marketing efforts, such as an expansion of the
Company's extensive training programs, distribution of a greater number of
promotional units, and attendance at a greater number of conventions in support
of the Company's growing distributor network.  General and administrative
expenses for 1997 increased to $1.0 million from $869 thousand in 1996, as a
result of a non-recurring expenditure of $262 thousand for modification of the
Company's internal quality assurance and regulatory affairs system more than
offsetting a $32 thousand reduction in shareholders' relations expense and a
reduction in indirect patent expenses charged to general and administrative.
Patent expenses for 1997 totalled $75 thousand.  Research and development
expenses for 1997 increased 32% to $521 thousand from $395 thousand in 1996, as
a result of increased direct patent expenses of $75 thousand, increased project
expenditures for new products under development, and a reduction in billable
hours to a major OEM customer due to a product design modification.
Depreciation and amortization expenses increased in 1997 to $234 thousand from
$181 thousand in 1996.  Depreciation accounted for $25 thousand and amortization
accounted for $28 thousand of such increase.  The Company recorded no interest
expense in 1997 compared with $13 thousand in 1996.  The Company recorded a
provision for minimum income taxes of $800 for 1997 and 1996.  At June 30, 1997,
the Company had net operating loss carryforwards of approximately $4.2 million
and $571 thousand available to offset future taxable federal and state income,
respectively.  The carryforwards amounts expire in varying amounts between 2001
and 2012.

Liquidity and Capital Resources
-------------------------------

     At June 30, 1997, the Company had working capital of $3.05 million and its
principal sources of liquidity consisted of $812 thousand in cash and cash
equivalents.  The Company used cash for operations of $750 thousand during 1997,
mainly as the result of the net loss for the year and an increase in inventories
resulting from higher sales levels. With respect to investing activities, the
Company made purchases of property and equipment totaling $134 thousand.
Financing activities provided $98 thousand, resulting from the collection of a
note receivable from a shareholder and proceeds from sales of common stock from
the exercise of stock options.

     The Company has no long-term capital commitments other than an annual lease
obligation of $130,000 for its facilities through 1998.

                                      -14-
<PAGE>
 
     The Company believes that available cash and cash equivalents, as well as
funds expected to be generated from operations, will be sufficient to meet the
Company's operating expenses and cash requirements for the next fiscal year.  As
of the date of this Annual Report, the Company does not have any credit
facilities in place.

Item 7.   Financial Statements.

     See Index to Financial Statements at page 31.

Item 8.   Changes In and Disagreements With Accountants on Accounting and
          Financial Disclosure.

     There have been no events or conditions requiring reporting under the
requirements of this item.

                                    PART III

Item 9.   Directors, Executive Officers, Promoters and Control Persons;
          Compliance with Section 16(a) of the Exchange Act.

     The directors and executive officers of the Company are:
<TABLE>
<CAPTION>
 
                                                                        Director
Name of Individual             Age               Position                Since
----------------------------   ---   --------------------------------    -----
<S>                            <C>   <C>                                <C>
 
David Rollo                     56   President, Chief Executive           1993
                                      Officer, Chief Financial
                                      Officer, and a Director
Ronald B. Luther                65   Vice President, Director of
                                      Research and Development              -
George C. Brdlik                43   Vice President of Quality
                                      Assurance and Regulatory Affairs      -
Petra Darling                   53   Secretary                              -
Mark S. Isaacs                  33   Director                             1991
Jack W. Payne                   67   Director                             1992
D. Ross Hamilton                59   Director                             1993
William R. Dahlman              55   Director                             1995
Barry W. Hall                   49   Director                             1995
</TABLE>

     Each of the Company's directors has been elected to serve until the next
meeting of shareholders.  Except as described below, there are no arrangements
or understandings between any director and any other person pursuant to which
any person was elected or nominated as a director.  The Company's executive
officers serve at the discretion of the Board of Directors.

     Mr. Rollo has served as President, Chief Executive Officer, and as a
director of the Company since December of 1993, as its Chief Financial Officer
since January of 1994, and as

                                      -15-
<PAGE>
 
its Chairman of the Board since June of 1995.  From 1976 to 1993, he was
employed by Telectronics Inc. (or by certain of its affiliates), a Denver,
Colorado, based heart pacemaker manufacturer, in various positions, including
President and Chief Executive Officer.

     Mr. Luther is the founder of the Company and, since September of 1995 has
served as its Vice President, Director of Research and Development.  From the
Company's organization in 1980, until December of 1995, he served as a director;
until June of 1995, as the Company's Chairman of the Board; until December of
1993, as its Chief Executive Officer; and, between 1980 and 1990 and during 1992
and 1993, as its President.  From 1978 to 1980, Mr. Luther was the President and
sole shareholder of Luther Medical Systems, Inc., a research and consulting
company.  From 1975 to 1978, he was the President of William Harvey Research
Corporation, a manufacturer of blood oxygenators for open heart surgery.

     Mr. Brdlik has served as Vice President of Quality Assurance and Regulatory
Affairs of the Company since January of 1997.  From 1994 to 1996, he was
employed as the Regulatory Affairs Manager of the Perfusion Services of Baxter
Healthcare Corporation.  From 1985 to 1994, Mr. Brdlik held several positions at
IVAC Corporation, ranging from Senior Quality Engineer to Regulatory/Clinical
Affairs Manager.  From 1980 to 1985, he held several positions, including
Biomedical Engineer, at the FDA.

     Ms. Darling has served as Secretary of the Company since November of 1992.
Since 1981, she has been employed by the Company in various administrative, non-
policy making capacities, including the Company's assistant secretary (between
1988 and 1992) and its controller (from 1981 to the present), reporting to the
Company's principal accounting officer.

     Mr. Isaacs has served as a director of the Company since September of 1991.
From April of 1995 until December of 1995, he also served as a consultant to the
Company.  Since May of 1996, Mr. Isaacs has served as the Chairman of the Board
of VenzCoal, Inc., a private Nevada corporation formed to be engaged in the
production and marketing of coal in Guarico State Venezuela.  From March of 1991
to October of 1994, Mr. Isaacs was engaged in the acquisition of silver mining
properties under the name SilTex Resources.  In August of 1992, SilTex Resources
was incorporated in Nevada as "SilTex Resources, Inc."  Mr. Isaacs served as its
Chairman of the Board and Chief Executive Officer until October of 1994, as a
director until December of 1994, and as a consultant through April of 1995.
From February of 1993 until October of 1994, Mr. Isaacs served as President,
Chief Executive Officer, and Chairman of the Board of Belcor Inc. ("Belcor"),
whose business consists of natural resource related activities.

     Mr. Payne has served as a director of the Company since March of 1992.
From January of 1993 to the present, he has served as the Executive Vice
President and a director of Sequin Hospital Bed Corporation, a Denver, Colorado,
durable medical equipment company of which he is a co-founder.  From June of
1992 to the present, Mr. Payne has also served as President and Chief Executive
Officer of FerroMagnetic Therapeutics Corp., a Denver, Colorado, biotechnology
company.  Mr. Payne was with Baxter International from 1958 until 1977 where he
was employed in various sale and executive positions.  Thereafter, he continued
his career in that industry with executive positions at R.P. Scherer Corporation
and Terumo Medical Products, Inc.

                                      -16-
<PAGE>
 
     Mr. Hamilton has served as a director of the Company since March of 1993.
For not less than the previous five years through the present, he has served as
President of Hamilton Research, Inc., a Maryland-based financial consulting
firm.  Mr. Hamilton is a director of Altris Software, Inc., an electronic
document management software company; from January through July of 1997, he
served as its Chairman of the Board.  Since December of 1989 through June of
1997, Mr. Hamilton served as a director of Incstar Corporation, a medical
diagnostics company (52% of which was owned by Fiat S.p.A. until the sale of
the company to American Standard in June of 1997), and between January of 1993
and June of 1996, he served as a director of Belcor.  Between 1968 and 1980, Mr.
Hamilton served as a Vice President of Dean Witter Reynolds and, for the six
previous years, an officer of Chemical Bank.

     Mr. Dahlman has served as a director of the Company since December of 1995.
From November of 1996 to the present, he has served as the president and chief
executive officer of the Employers Group, a non-profit association providing
human resources support to 5,000 California companies.  From January of 1991 to
November of 1996, he served as a principal of WRD & Associates, a Los Angeles,
California, contract management and consulting group.  From 1987 until forming
WRD & Associates, Mr. Dahlman was the President and Chief Executive Officer of
Suntory Water Group in Atlanta, Georgia.

     Mr. Hall has served as a director of the Company since December of 1995.
From January of 1996 to September of 1997, he served as Vice President, Finance
and Administration and Chief Financial Officer of EarthLink Network, Inc., a
Pasadena, California, internet service provider.  Currently, Mr. Hall is an
independent management consultant to the internet and online industry.  From
April of 1994 to December of 1995, Mr. Hall was an independent management
consultant.  For the five years commencing March of 1989, he served as Chief
Executive Officer and Chairman of the Board of California Amplifier, Inc., a
publicly traded manufacturer of microwave amplifiers headquartered in Camarillo,
California.

Committees; Meetings.

     The Company has a standing audit committee, the members of which are
Messrs. Isaacs, Hamilton, and Hall; a standing compensation committee, the
members of which are Messrs. Payne and Hamilton; and a standing nominating
committee, the members of which are Rollo, Isaacs, and Dahlman.

     The Company's Board of Directors met a total of six times during the fiscal
year ended June 30, 1997.

                                      -17-
<PAGE>
 
Item 10.  Executive Compensation.

Employment Agreements
---------------------

David Rollo.

     The Company employs Mr. Rollo as its Chief Executive Officer and President
pursuant to a series of employment agreements, the most current of which is
effective as of December of 1995.  Mr. Rollo's annual base compensation
thereunder currently is $150,000, subject to cost of living increases and
periodic review and increase upon the recommendation of the Company's
compensation committee.  Mr. Rollo is also entitled to receive bonus payments in
their discretion.

     Upon execution of the initial employment agreement in December of 1993, the
Company granted to Mr. Rollo warrants to purchase 150,000 shares of the
Company's common stock, of which 50,000 warrants vested in December of 1994,
50,000 vested in December of 1995, and 50,000 vested in December of 1996.  The
exercise price of the warrants (the average of the closing bid and asked prices
as quoted on the Nasdaq Stock Market (SmallCap) on December 6, 1993) is $2.94.

     If Mr. Rollo's employment by the Company should terminate for any reason,
all of such warrants shall immediately vest and become exercisable.  Vesting of
all of Mr. Rollo's unvested warrants shall be accelerated to the date on which
a sale of all or substantially all of the Company's assets closes or a change of
control of the Company occurs.

     Under certain circumstances, a termination of Mr. Rollo's employment
agreement will cause the Company to pay to Mr. Rollo (i) his full base
compensation through the date of termination at the rate in effect at the time
of such termination and (ii) a lump sum equal to 100% of his annual base
compensation at the highest rate in effect during the 12 months immediately
preceding the date of termination.

     A "change in control of the Company" means a change in control of a nature
that would be required to be reported in response to Item 5(f) of Schedule 14A
of Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"); provided, however, that such "person" (as such
term is used in Section 13(d) and 14(d) of the Exchange Act), other than the
Company or any "person" who on the date hereof is a director or officer of the
Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the Company representing
80% or more of the combined voting power of the Company's then outstanding
securities.

George C. Brdlik.

     The Company has employed Mr. Brdlik as its Vice President of Quality
Assurance and Regulatory Affairs of the Company since January of 1997, pursuant
to an employment agreement that provides for the "at will" employment of Mr.
Brdlik, subject to the occurrence of two specified events.  Mr. Brdlik reports
directly to Mr. Rollo, as the Company's president, and his duties emphasize
daily review and analysis of the Company's operations in respect of

                                      -18-
<PAGE>
 
quality assurance and regulatory affairs compliance in connection with the good
manufacturing practices requirements of the FDA and analogous international
regulatory agencies.

     Mr. Brdlik's annual base compensation currently is $100,000.
Notwithstanding the at will status of Mr. Brdlik's employment, if the Company
sells all or substantially all of its assets or a change of control of the
Company occurs, the Company may become obligated to pay to him (i) his full base
compensation through the date of termination at the rate in effect at the time
of such termination and (ii) a lump sum equal to 100% of his annual base
compensation at the highest rate in effect during the 12 months immediately
preceding the date of termination.  The definition of "change in control of the
Company" is the same for Messrs. Brdlik and Rollo.

Ronald B. Luther.

     Effective in September of 1995, the Company and Mr. Luther entered into an
agreement (the "September 1995 Agreement"), pursuant to which the Company
employs Mr. Luther as its Vice President, Director of Research and Development.
Mr. Luther's annual base compensation thereunder is $115,000, subject to
periodic review.  Mr. Luther may receive bonus payments in the discretion of the
Company's compensation committee.  The September 1995 Agreement supersedes an
earlier employment agreement entered in November of 1993 (the "November 1993
Agreement").

     Upon execution of the November 1993 Agreement, the Company granted to Mr.
Luther warrants to purchase 100,000 shares of the Company's common stock, of
which warrants, 60,000 of which are currently vested and the remainder vest
annually in November of 1997 and 1998, in two equal allotments of 20,000 each.
The exercise price of the warrants, as determined by the Company's board of
directors (with Mr. Luther abstaining), is $2.63.

     During each of the five years following the earlier of (i) termination of
the agreement for any reason (other than if Mr. Luther has been convicted of
committing a felony) or (ii) November 19, 1998, the Company shall pay to Mr.
Luther compensation ("Royalties") equivalent to two percent of the "net sales
price" of all products manufactured by, or on behalf of, the Company for which
the Company received a 510(k) notification from the United States Food and Drug
Administration that bears a date on or after November 19, 1993.  No Royalties
shall accrue in favor of Mr. Luther during the period that the Company is
responsible to pay to him base compensation.  Royalties shall be paid in cash,
quarterly, in arrears.  Any successor to the Company may limit Royalties (i) to
the amount paid by the Company prior to such event of succession, if, as of the
date of such event, Mr. Luther had received Royalties in an aggregate amount of
not less than $2,000,000 or (ii) to a maximum aggregate amount of $2,000,000,
if, as of such event of succession, Mr. Luther had not received Royalties in
such amount.  In lieu of the second limitation, a successor to the Company may
pay to Mr. Luther the then net present value of Royalties remaining to be paid,
to a maximum aggregate payment of $2,000,000.

     "Net sales price" means all revenues from sales of relevant royalty
products received by the Company in arms-length transactions for commercial
purposes, whether a sale, lease, or other transaction, less sales, excise, and
use taxes; export or import duties; freight; credits for

                                      -19-
<PAGE>
 
claims; and allowances for returns from, and samples to, purchasers.  If the
Company grants licenses or otherwise transfers to unaffiliated third parties
certain patent rights to sell relevant royalty products, sales or leases
thereof by such third parties shall be deemed to be sales or leases by the
Company, although the calculation of such "third-party generated" Royalties
would be reduced from two percent to one percent of the royalty revenues
received by the Company.

     During the period that Royalties are to be paid by the Company, Mr. Luther
shall not, without the Company's prior written consent, engage in business
activities that are the same or substantially similar to the businesses,
products, services, or markets of the Company.  The Company's termination of Mr.
Luther's employment pursuant to the at will employment provisions of the
September 1995 Agreement shall be deemed to be such written consent.  
Additionally, Mr. Luther may elect to compete by voluntarily terminating the
Company's Royalties obligation.

     If Mr. Luther's employment agreement is terminated due to his death or
disability, the Company will be required to pay to Mr. Luther, his designee, or
his estate, as appropriate, (i) his full base compensation to the date of
termination, (ii) a sum equivalent to one month's salary for each year
commencing November 12, 1980, payable monthly for the relevant number of
months, and (iii) the Royalties.  If Mr. Luther's employment agreement is
terminated pursuant to the at will employment provisions of the September 1995
Agreement, the Company will be required to pay to Mr. Luther (i) his full base
compensation to the date of termination, (ii) a sum equivalent to 16 months'
salary in 16 equal monthly installments, and (iii) the Royalties.

                          SUMMARY COMPENSATION TABLE
<TABLE> 
<CAPTION> 
                                                                                          Long Term Compensation
                                                                              ----------------------------------------------------- 
                                             Annual Compensation                         Awards             Payouts
                                     ----------------------------------------------------------------------------------------------
                                                                   Other
     Name                                                          Annual     Restricted                              All Other
     and                                                           Compen-      Stock                        LTIP      Compen-
   Principal                                                       sation      Award(s)       Options/      Payouts     sation
   Position                  Year    Salary($)     Bonus($)          ($)         ($)           SARs(#)        ($)        ($)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                          <C>     <C>           <C>             <C>        <C>             <C>           <C>       <C>
 
David Rollo                  1997    $150,000        --               --         --              - 0 -        --          -- 
(President,                  1996    $150,000        --               --         --              - 0 -        --          -- 
 CEO, and CFO)               1995    $141,437        --               --         --              - 0 -        --          -- 
                                                                                                                             
Ronald Luther                1997    $114,049        --               --         --              - 0 -        --          -- 
(Vice President,             1996    $115,300        --               --         --            100,000        --          -- 
 Director - R&D)             1995    $107,690        --               --         --              - 0 -        --          -- 

All executive                                                                                                                
officers as a group                                                                                                          
(4 persons)                  1997    $380,208        --               --         --              - 0 -        --          -- 
(3 persons)                  1996    $326,870        --               --         --            100,000        --          -- 
(3 persons)                  1995    $308,383        --               --         --              9,286        --          --  
</TABLE>

                                      -20-
<PAGE>
 
                     OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE> 
<CAPTION> 
                                                        Individual Grants
------------------------------------------------------------------------------------------------------------------------------------
                                         Percent of Total
                                           Options/SARs
                          Options/          Granted to                             Market Price
                           SARs            Employees in     Exercise or Base         on Date           Expiration
Name                     Granted(#)        Fiscal Year         Price($/Sh)        of Grant($/Sh)          Date
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>             <C>                <C>                   <C>                  <C>
 
David Rollo                 - 0 -               N/A                N/A                  N/A                N/A
 
Ronald Luther               - 0 -               N/A                N/A                  N/A                N/A
</TABLE>

                                      -21-
<PAGE>
 
            LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR

<TABLE>
<CAPTION> 
                                                                                          Value of
                                                                       Number of         Unexercised
                                                                      Unexercised       In-the-Money
                                                                     Options/SARs at    Options/SARs at
                                                                       FY-End (#)         FY-End ($)
 
                        Shares Acquired                              Exercisable/       Exercisable/
  Name                   on Exercise(#)    Value Realized($)        Unexercisable      Unexercisable
----------------------------------------------------------------------------------------------------------- 
<S>                     <C>                <C>                      <C>                <C>  
David Rollo                  -0-                  --                   150,000 / 0         27,000 / 0
 
Ronald Luther              70,000              17,500                    166,429 /           39,200 /
                                                                          40,000             20,400
</TABLE>

     Effective in December of 1995, Directors who are not officers of the
Company receive a fee of $900 per meeting attended in person, or $500 per
meeting attended by telephone, as compensation for their services, an increase
from $600 and $400, respectively.

Item 11.  Security Ownership of Certain Beneficial Owners and Management.

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock at October 8, 1997, (except as otherwise indicated by
footnote) by (i) each person (including any "group" as that term is used in
Section 13(d)(3) of the Securities Exchange Act of 1934) known by management to
own beneficially more than 5% of the Company's outstanding Common Stock, (ii)
each of the Company's directors, and (iii) all executive officers and directors
of the Company as a group:
<TABLE>
<CAPTION>
 
                                  Shares of Common Stock
                                   Beneficially Owned (2)
Name of Individual                  Amount (1)                  %
------------------                  ----------                ------
<S>                               <C>                         <C>
 
David Rollo                            153,175(3)              4.02
Mark S. Isaacs                         101,211(4)              2.65
Jack W. Payne                           65,000(5)              1.70
D. Ross Hamilton                       151,500(6)              3.97
William R. Dahlman                      12,000(7)                 *
Barry W. Hall                           12,000(8)                 *
Ronald B. Luther                       356,132(9)              9.35
 
All executive officers
and directors as a
group (9 persons)                      873,661(10)            22.94
 
</TABLE>
-------------------
*    Represents less than one percent.

                                      -22-
<PAGE>
 
(1)  The persons named in the table have sole voting and investment power with
     respect to all shares of Company Common Stock shown to be beneficially
     owned by them, subject to community property laws where applicable and the
     information contained in the footnotes to this table.

(2)  Assumes the exercise of options and warrants to purchase 491,644 shares
     held by executive officers and directors of the Company, which options and
     warrants are, or become, exercisable within the 60 days of the date of this
     Annual Report.

(3)  Includes 3,175 shares beneficially owned by Mr. Rollo, plus warrants to
     purchase 150,000 shares at an exercise price of $2.94 per share, expiring
     at various dates from December 5, 1999, to December 5, 2001, of which
     150,000 warrants are exercisable as of, or within 60 days of, the date of
     this Annual Report.  Mr. Rollo's address is 14332 Chambers Road, Tustin,
     California 92680.

(4)  Includes 19,711 shares beneficially owned by Mr. Isaacs, plus warrants to
     purchase 5,000 shares at an exercise price of $3.50 per share, expiring on
     January 15, 1998; warrants to purchase 25,000 shares at an exercise price
     of $2.75 per share, expiring on July 23, 1998; warrants to purchase 5,000
     shares at an exercise price of $2.50 per share, expiring on January 21,
     1999; warrants to purchase 13,500 shares at an exercise price of $2.55 per
     share, expiring on January 27, 2000; warrants to purchase 12,000 shares at
     an exercise price of $2.56 per share, expiring at various times during the
     period of April 30 through September 30, 2000; warrants to purchase 9,000
     shares at an exercise price of $3.85 per share, expiring on December 8,
     2000; warrants to purchase 6,000 shares at an exercise price of $4.81 per
     share, expiring on December 8, 2001; and warrants to purchase 6,000 shares
     at an exercise price of $4.81 per share, expiring on December 8, 2002.  Mr.
     Isaacs' address is 14332 Chambers Road, Tustin, California 92680.

(5)  Includes warrants to purchase 5,000 shares at an exercise price of $3.50
     per share, expiring on January 15, 1998; warrants to purchase 25,000 shares
     at an exercise price of $2.75 per share, expiring on July 23, 1998;
     warrants to purchase 5,000 shares at an exercise price of $2.50 per share,
     expiring on January 21, 1999; warrants to purchase 9,000 shares at an
     exercise price of $2.55 per share, expiring on January 27, 2000; warrants
     to purchase 9,000 shares at an exercise price of $3.85 per share, expiring
     on December 8, 2000; warrants to purchase 6,000 shares at an exercise price
     of $4.81 per share, expiring on December 8, 2001; and warrants to purchase
     6,000 shares at an exercise price of $4.81 per share, expiring on December
     8, 2002.  Mr. Payne's address is 4515 S. Meadow Drive, Boulder, Colorado
     80301.

(6)  Includes 7,500 shares beneficially owned by Mr. Hamilton and 74,000 shares
     owned by a partnership, of which Mr. Hamilton and two unaffiliated third
     parties each own 33.3%; warrants to purchase 35,000 shares at an exercise
     price of $2.75 per share, expiring on July 23, 1998; warrants to purchase
     5,000 shares at an exercise price of $2.50 per share, expiring on January
     21, 1999; warrants to purchase 9,000 shares at an exercise price of $2.55
     per share, expiring on January 27, 2000; warrants to purchase 9,000 shares
     at an exercise price of $3.85 per share, expiring on December 8,

                                      -23-
<PAGE>
 
     2000; warrants to purchase 6,000 shares at an exercise price of $4.81 per
     share, expiring on December 8, 2001; and warrants to purchase 6,000 shares
     at an exercise price of $4.81 per share, expiring on December 8, 2002.  Mr.
     Hamilton's address is 9440 Gregory Road, Easton, Maryland 21601.

(7)  Includes warrants to purchase 6,000 shares at an exercise price of $4.81
     per share, expiring on December 8, 2001; and warrants to purchase 6,000
     shares at an exercise price of $4.81 per share, expiring on December 8,
     2002.  Mr. Dahlman's address is 215 N. Marengo Avenue, Pasadena, California
     91101.

(8)  Includes warrants to purchase 6,000 shares at an exercise price of $4.81
     per share, expiring on December 8, 2001; and warrants to purchase 6,000
     shares at an exercise price of $4.81 per share, expiring on December 8,
     2002.  Mr. Hall's address is 355 S. Madison Avenue, #327, Pasadena,
     California 91101.

(9)  Includes 166,438 shares beneficially owned by Mr. Luther, 5,622 shares
     owned by Mr. Luther's spouse, as to which shares Mr. Luther disclaims
     beneficial ownership, warrants to purchase 15,000 shares at an exercise
     price of $3.50 per share, expiring April 23, 1998; warrants to purchase
     7,143 shares at an exercise price of $3.50 per share, expiring on June 24,
     1998; warrants to purchase 4,286 shares at an exercise price of $3.25 per
     share, expiring on April 22, 1999; warrants to purchase 100,000 shares at
     an exercise price of $2.63 per share, expiring at various dates from
     November 19, 1998, to November 19, 2002, of which 80,000 warrants are
     exercisable as of, or within 60 days of, the date of this Annual Report;
     and warrants to purchase 100,000 shares at an exercise price of $3.63 per
     share, expiring September 18, 2000, of which 60,000 warrants are
     exercisable as of, or within 60 days of, the record date.  Also includes 
     options, issued to Mr. Luther's spouse, to purchase 1,000 shares at an
     exercise price of $4.25 per share, expiring on November 13, 1997; options
     to purchase 8,500 shares at an exercise price of $3.07 per share, expiring
     on April 23, 1998; options to purchase 2,143 shares at an exercise price of
     $3.25 per share, expiring on April 22, 1999; and options to purchase 6,000
     shares at an exercise price of $2.82 Per share, expiring on July 22, 1999,
     as to all of which options and the underlying shares Mr. Luther disclaims
     beneficial ownership.  Mr. Luther's address is 14332 Chambers Road, Tustin,
     California 92680.

(10) Includes all shares, options, and warrants described in notes (3) through
     (6), inclusive, and (9), above; 2,214 shares beneficially owned by an
     executive officer who is not a director, plus options to purchase 1,000
     shares at an exercise price of $4.25 per share, expiring on November 13,
     1997; options to purchase 6,000 shares at an exercise price of $3.07 per
     share, expiring on April 23, 1998; options to purchase 2,143 shares at an
     exercise price of $3.25 per share, expiring on April 22, 1999; options to
     purchase 2,000 shares at an exercise price of $2.82 per share, expiring on
     July 22, 1999; and options to purchase 9,286 shares at an exercise price of
     $3.19 per share, expiring on January 27, 2000.

Item 12.  Certain Relationships and Related Transactions.

                                      -24-
<PAGE>
 
     As of June 30, 1997, two officers or directors were indebted to the Company
in the aggregate amount of $235,409.  Each such indebtedness was incurred in
connection with the exercise of warrants previously granted to such individuals.
During the 1997 fiscal year, Mr. Luther's maximum obligation to the Company was
$262,500, of which $52,091 was repaid to the Company during such year and an
additional $187,500 was offset against such obligation (at a price equivalent to
the warrant exercise price) through the return by Mr. Luther of 50,000 of the
shares that had served as security for such obligation.  As of the date of this
Annual Report, Mr. Luther's obligation to the Company is $22,909.  Mr. Isaacs'
maximum obligation to the Company, during such year, was $25,000, none of which
has been repaid.

Item 13.  Exhibits and Reports on Form 8-K.

     The following documents are filed as a part of this report:

(a)  Exhibits

     * Exhibits filed herewith.  Other exhibits are incorporated by reference to
previous filings.

     2.1  Asset Purchase Agreement, dated July 1, 1994, among Luther Medical
          Products, Inc., a California corporation, Neuro Diagnostics, Inc., a
          California corporation, and Bio-Logic Systems Corp., a Delaware
          corporation, relating to the acquisition of certain assets and the
          assumption of certain liabilities of Neuro Diagnostics, Inc., by a
          wholly-owned subsidiary of Bio-Logic Systems Corp., filed as Exhibit
          2.1 to the Registrant's Annual Report on Form 10-KSB for the Fiscal
          Year Ended June 30, 1994, (the "1994 10-KSB") and is incorporated
          herein by reference.

     3.1  Articles of Incorporation of the Registrant as filed with the
          Secretary of State of California on February 22, 1991, filed as
          Exhibit B to the Registrant's Proxy Statement for the Annual Meeting
          of Stockholders, May 24, 1991, and is incorporated herein by
          reference.

     3.1a Certificate of Determination of Preferences of Preferred Shares, filed
          as Exhibit 3.1a to the Registrant's Annual Report on Form 10-KSB for
          the Fiscal Year Ended June 30, 1993, and is incorporated herein by
          reference.

     3.2  By-Laws of the Registrant as currently in effect, filed as Exhibit 3.2
          to the Registrant's Annual Report on Form 10-K for the Fiscal Year
          Ended June 30, 1991, (the "1991 10-K") and is incorporated herein by
          reference.

     10.1 Assignment dated July 21, 1980, and Amendment to Assignment dated
          September 2, 1980, pursuant to which Ronald B. Luther and Marshall F.
          Sparks assigned to the Registrant a patent relating to the catheter
          placement system, filed as Exhibit 10.1 to the Registrant's
          Registration Statement on Form S-2, as amended (the "Registration
          Statement") (File No. 33-12557) and are incorporated herein by
          reference.

                                      -25-
<PAGE>
 
     10.2  Supplemental Assignment dated July 1, 1981, pursuant to which Ronald
           B. Luther and Marshall F. Sparks expanded the applicability of the
           Assignment dated July 21, 1980, to include all subsequent technology
           related to the catheter placement system on the same terms and
           conditions, filed as Exhibit 10.2 to the Registration Statement and
           is incorporated herein by reference.

     10.4  License and Sales Agreement, dated April 1, 1987, and Amendment to
           License and Sales Agreement, dated December 4, 1987, between the
           Registrant and Tyndale Plains-Hunter, Ltd., relating to an exclusive
           license to make, use, and sell certain patented hydrophilic polymers,
           filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K
           for the Fiscal Year Ended June 30, 1988, (the "1988 10-K") and are
           incorporated herein by reference.

     10.4a Amendment, dated April 11, 1996, to License and Sales Agreement,
           dated April 1, 1987, between the Registrant and Tyndale Plains-
           Hunter, Ltd., relating to modifications of the field of the Agreement
           and the Registrant's royalty obligations, filed as Exhibit 10.4a to
           the to the Registrant's Annual Report on Form 10-KSB for the Fiscal
           Year Ended June 30, 1996, (the "1996 10-KSB") and is incorporated
           herein by reference.

     10.5  License Agreement, dated June 17, 1985, between the Registrant and
           Medtronic, Inc., granting Medtronic a license to utilize the
           Registrant's patents on split needle technology for certain product
           applications, filed as Exhibit 10.6 to the Registration Statement and
           is incorporated herein by reference.

     10.6  Agreement, dated November 11, 1987, and Amendment to Agreement, dated
           February, 1988, between the Registrant and Critikon, Inc., relating
           to the Registrant's stickless needle technology, filed as Exhibit
           10.10 to the 1988 10-K and are incorporated herein by reference.

     10.6a Agreement dated as of March 28, 1995, between the Registrant and
           Johnson & Johnson Medical, Inc., relating to the assignment by the
           Company of five certain catheter patents to JJMI, filed as Exhibit
           2.1 to the Registrant's Current Report on Form 8-K dated March 28,
           1995.

     10.7  Lease dated December 9, 1992, between the Registrant and the Beecher
           Family Trust, as lessor, as to facilities located at 14332 Chambers
           Road, Tustin, California, filed as Exhibit 6(a) to the Quarterly
           Report on Form 10-QSB for the Quarter Ended December 31, 1992, and
           is incorporated herein by reference.

     10.8  Adoption Agreement for Prototype Defined Contribution Plan #02
           Sponsored By IDS Financial Services, filed as Exhibit 10.12 to the
           Registrant's Annual Report on Form 10-K for the Fiscal Year Ended
           June 30, 1990, (the "1990 10-K") and is incorporated herein by
           reference.

                                      -26-
<PAGE>
 
     10.9   Loan and Security Agreement dated September 17, 1990, between the
            Regis trant and Johnson & Johnson Finance Corporation, filed as
            Exhibit 10.13 to the 1990 10-K and is incorporated herein by
            reference.

     10.10  Loan and Security Agreement dated May 12, 1994, (and Addendum
            thereto) between the Registrant and Johnson & Johnson Finance
            Corporation, filed as Exhibit 10.10 to the 1994 10-KSB and is
            incorporated herein by reference.

     10.11  Loan and Security Agreement dated August 15, 1994, between the
            Registrant and Johnson & Johnson Finance Corporation, filed as
            Exhibit 10.11 to the 1994 10-KSB and is incorporated herein by
            reference.

     10.12  Research and Development Agreement, dated March 24, 1992, between
            the Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.1 of
            the Registrant's Current Report on Form 8-K filed on April 1, 1992,
            and is incorporated herein by reference.

     10.13  Distribution Agreement, dated March 24, 1992, between the Registrant
            and Pharmacia Deltec Inc., filed as Exhibit 10.2 of the Registrant's
            Current Report on Form 8-K filed on April 1, 1992, and is
            incorporated herein by reference.

     10.13a Distribution and License Agreement, dated as of March 9, 1994,
            between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
            10.13a to the 1994 10-KSB and is incorporated herein by reference.

     10.14  Loan and Security Agreement, dated March 24, 1992, between the
            Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.3 of the
            Registrant's Current Report on Form 8-K filed on April 1, 1992, and
            is incorporated herein by reference.

     10.14a Amendment to Loan and Security Agreement, dated as of March 9, 1994,
            between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
            10.14a to the 1994 10-KSB and is incorporated herein by reference.

     10.15  8% Convertible Note, dated March 24, 1992, of the Registrant in
            favor of Pharmacia Deltec Inc., filed as Exhibit 10.4 of the
            Registrant's Current Report on Form 8-K filed on April 1, 1992, and
            is incorporated herein by reference.

     10.15a Replacement Note, dated as of January 1, 1994, of the Registrant in
            favor of Pharmacia Deltec Inc., filed as Exhibit 10.15a to the 1994
            10-KSB and is incorporated herein by reference.

     10.15b Payment Agreement, dated as of November 3, 1995, between the
            Registrant and Pharmacia Deltec Inc., in respect of Replacement
            Note, dated as of January 1, 1994, of the Registrant in favor of
            Pharmacia Deltec Inc, filed as Exhibit 10.15B to the to the 1996 10-
            KSB and is incorporated herein by reference.

                                      -27-
<PAGE>
 
     10.16  Registration Rights Agreement, dated March 24, 1992, between the
            Registrant and Pharmacia Deltec Inc., filed as Exhibit 10.5 of the
            Registrant's Current Report on Form 8-K filed on April 1, 1992, and
            is incorporated herein by reference.

     10.17  Release and Termination Agreement, dated as of March 9, 1994,
            between the Registrant and Pharmacia Deltec Inc., filed as Exhibit
            10.17 to the 1994 10-KSB and is incorporated herein by reference.

     10.18  Non-U. S. Distributor Agreement, dated May 18, 1983, between the
            Registrant and Medical Japan, Ltd., filed as Exhibit 10.19 of the
            Registrant's Annual Report on Form 10-KSB for the Fiscal Year Ended
            June 30, 1992, and is incorporated herein by reference.

     10.19  Registrant's Incentive Employee Stock Option Plan - 1984, filed as
            Exhibit 10.14 to the Registration Statement and is incorporated
            herein by reference.

     10.20  Amendments to Registrant's Incentive Employee Stock Option Plan -
            1984, filed as Exhibit 10.14A to the Registration Statement and is
            incorporated herein by reference.

     10.21  Registrant's Employee Stock Option Plan - 1986, filed as Exhibit
            10.15 to the Registration Statement and is incorporated herein by
            reference.

     10.22  Amendments to Registrant's Employee Incentive Stock Option Plan -
            1986, filed as Exhibit 10.15A to the Registration Statement and is
            incorporated herein by reference.

     10.23  Registrant's Employee Stock Option Plan - 1987, filed as Exhibit 4.1
            to the Registrant's Registration Statement on Form S-8 (File No. 33-
            48850) (the "1987 S-8") and is incorporated herein by reference.

     10.24  Registrant's Incentive Stock Compensation Plan - 1987, filed as
            Exhibit 4.2 to the 1987 S-8 and is incorporated herein by reference.
 
     10.25  Intentionally omitted.

     10.26  Intentionally omitted.

     10.27  Patent and Technology License and Supply Agreement, dated as of
            October 31, 1993, between the Registrant and The Kendall Company,
            filed as Exhibit 10.27 to the 1994 10-KSB and is incorporated herein
            by reference.

     10.28  Agreement for Transfer of License, dated as of March 1, 1994,
            between the Registrant and Medikit Co., Ltd., filed as Exhibit 10.28
            to the 1994 10-KSB and is incorporated herein by reference.

                                      -28-
<PAGE>
 
     10.29  Distribution Agreement, dated as of August 4, 1994, between the
            Registrant and Kentec Medical, Inc., filed as Exhibit 10.29 to the
            1994 10-KSB and is incorporated herein by reference.

     10.30  Employment Agreement, dated November 19, 1993, between the
            Registrant and Ronald B. Luther, filed as Exhibit 10.30 to the 1994
            10-KSB and is incorporated herein by reference.

     10.30a Employment Agreement, dated September 25, 1995, between the
            Registrant and Ronald B. Luther, filed as Exhibit 10.30a to the 
            1996 10-KSB and is incorporated herein by reference.

     10.31  Employment Agreement, dated December 6, 1993, between the Registrant
            and David Rollo, filed as Exhibit 10.31 to the 1994 10-KSB and is
            incorporated herein by reference.

     10.31a Employment Agreement, dated May 31, 1995, between the Registrant
            and David Rollo, filed as Exhibit 10.31a to the Registrant's Annual
            Report on Form 10-KSB for the Fiscal Year Ended June 30, 1995, (the
            "1995 10-KSB") and is incorporated herein by reference.

     10.32  Consulting Agreement, dated April 1, 1995, between the Registrant
            and Mark S. Isaacs, filed as Exhibit 10.32 to the 1995 10-KSB and is
            incorporated herein by reference.

     10.33  National Account Consulting Agreement, dated May 19, 1995, between
            the Registrant and National Contracts, Inc., filed as Exhibit 10.33
            to the 1995 10-KSB and is incorporated herein by reference.

     10.34  Purchase Agreement, dated September 12, 1995, between the Registrant
            and Apria Healthcare, Inc., filed as Exhibit 10.34a to the 1996 10-
            KSB and is incorporated herein by reference.

     10.35  Intentionally omitted.

     10.36  Standard Proposal, dated November 9, 1995, between the Registrant
            and Mid Atlantic Group Network of Shared Services, Inc., filed as
            Exhibit 10.36 to the 1996 10-KSB and is incorporated herein by
            reference.

     10.37  National Contract, dated July 1, 1996, between the Registrant and
            Teamcare, the institutional pharmacy subsidiary of GranCare, Inc.,
            filed as Exhibit 10.37 to the 1996 10-KSB and is incorporated herein
            by reference.

     10.38  License Agreement for Use of Alliance of Children's Hospitals' Seal
            of Acceptance by the Manufacturer, dated December 1, 1995, between
            the Registrant and Alliance of Children's Hospitals., filed as
            Exhibit 10.38 to the 1996 10-KSB and is incorporated herein by
            reference.

                                      -29-
<PAGE>
 
     10.39   Distributorship Agreement, dated September 21, 1995, between the
             Registrant and Boston Scientific Corporation, filed as Exhibit
             10.39 to the 1996 10-KSB and is incorporated herein by reference.

     10.40*  Employment Agreement, dated December 2, 1996, between the
             Registrant and George Brdlik.

     10.40a* Amendment No. 1, dated July 16, 1997, to Employment Agreement,
             dated December 2, 1996, between the Registrant and George Brdlik.

     10.41*  Distribution Agreement, dated August 11, 1997, between the
             Registrant and ALARIS Medical Systems, Inc.

     23.1*   Consent of Thelen, Marrin, Johnson & Bridges.

     23.2*   Consent of Arter & Hadden.

     23.3*   Consent of Robert L. Pike, Esq.

     23.4*   Consent of Ernst & Young LLP.

     23.5*   Consent of Corbin & Wertz.

     27.1*   Financial Data Schedule.

(b)  Reports on Form 8-K

     During the last quarter of the period covered by this Annual Report, the
Company did not file any Current Reports on Form 8-K.

                                      -30-
<PAGE>
 
                         INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
 
                                                                  Page Reference
<S>                                                             <C>
 
  - Report of Independent Auditors - Ernst & Young LLP                  F-1

  - Report of Independent Auditors - Corbin & Wertz                     F-2

  - Balance sheet as of June 30, 1997                                   F-3
 
  - Statements of operations for each of the years
      in the two-year period ended June 30, 1997                        F-4
 
  - Statements of stockholders' equity for each of
      the years in the two-year period ended June 30, 1997              F-5
 
  - Statements of cash flows for each of the years
      in the two-year period ended June 30, 1997                        F-6
 
  - Notes to financial statements for each of the
      years in the two-year period ended June 30, 1997          F-7 -- F-19
</TABLE>

<PAGE>
 
                         Report of Independent Auditors

To the Board of Directors of
Luther Medical Products, Inc.

We have audited the accompanying balance sheet of Luther Medical Products, Inc.
as of June 30, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free 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 audit provides 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 Luther Medical Products, Inc.
as of June 30, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.


                                         ERNST & YOUNG LLP


Irvine, California
August 29, 1997

                                      F-1
<PAGE>

                         Independent Auditors' Report
                         ----------------------------

To the Board of Directors of 
Luther Medical Products, Inc.

We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Luther Medical Products, Inc. and
subsidiary (the "Company") for the year ended June 30, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Luther Medical Products, Inc. and subsidiary for the year ended June 30, 1996 in
conformity with generally accepted accounting principles.

                        
                                                /s/ CORBIN & WERTZ 
                                                ----------------------------
                                                CORBIN & WERTZ 


Irvine, California 
August 8, 1996

                                      F-2
<PAGE>

                         Luther Medical Products, Inc.

                                 Balance Sheet

                                 June 30, 1997

<TABLE>
<CAPTION>
ASSETS
Current assets:
<S>                                                                           <C>
 Cash and cash equivalents                                                    $   811,974
 Accounts receivable, less allowance for doubtful accounts of $13,666             825,364
 Inventories                                                                    1,843,425
 Prepaid expenses and other assets                                                 59,577
                                                                              -----------
Total current assets                                                            3,540,340

Property and equipment:
 Production equipment                                                             940,211
 Office equipment                                                                 194,275
 Leasehold improvements                                                           120,833
 Automobiles                                                                        4,706
                                                                              -----------
                                                                                1,260,025
Less accumulated depreciation and amortization                                   (921,022)
                                                                              -----------
Property and equipment, net                                                       339,003
Intangible assets, net                                                             89,730
Deposits                                                                           10,199
                                                                              -----------
                                                                              $ 3,979,272
                                                                              ===========


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable                                                             $   291,560
 Accrued payroll and related expenses                                             115,538
 Other accrued liabilities                                                         83,284
                                                                              -----------
Total current liabilities                                                         490,382

Commitments and contingencies

Stockholders' equity:
 Preferred stock - no stated par value; 10,000,000 shares authorized;
  none issued
 Common stock - no stated par value; 25,000,000 shares authorized;
  3,262,786 shares issued and outstanding                                      10,487,478
 Common stock purchase warrants                                                    50,000
 Note receivable from shareholders                                               (235,409)
 Accumulated deficit                                                           (6,813,179)
                                                                              -----------
Net stockholders' equity                                                        3,488,890
                                                                              -----------
                                                                              $ 3,979,272
                                                                              ===========
</TABLE>

See accompanying notes to Financial Statements. 


                                      F-3
<PAGE>

                         Luther Medical Products, Inc.

                            Statements of Operations


<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30
                                                            1997             1996
                                                        ----------------------------
<S>                                                     <C>               <C>
Revenues:
 Product sales                                          $5,400,907        $3,882,950
 Royalties                                                  16,488            13,445
 Interest income and other                                  59,174           125,706
                                                        ----------------------------
Total revenues                                           5,476,569         4,022,101

Costs and expenses:
 Costs of revenues                                       3,273,322         2,393,065
 Research and development                                  520,834           395,073
 General and administrative                              1,017,995           868,862
 Selling                                                 1,159,886           901,593
 Depreciation and amortization                             233,758           181,084
 Interest expense                                              -              13,237
                                                        ----------------------------
Total costs and expenses                                 6,205,795         4,752,914

Loss before taxes and extraordinary gain                  (729,226)         (730,813)
Income tax expense                                             800               800
                                                        ----------------------------
Loss before extraordinary items                           (730,026)         (731,613)
Extraordinary gain on debt forgiveness, net of income
 taxes of $0                                                    -            122,958
                                                        ----------------------------
Net loss                                                $ (730,026)       $ (608,655)
                                                        ============================
Per share amounts:
 Loss before extraordinary item                         $     (.23)       $     (.24)
 Extraordinary gain                                             -                .04
                                                        ----------------------------
Net loss                                                $     (.23)       $     (.20)
                                                        ============================
Weighted average shares outstanding                      3,206,615         3,070,974
                                                        ============================
</TABLE>

See accompanying notes to Financial Statements. 


                                      F-4
<PAGE>

                         Luther Medical Products, Inc.

                       Statements of Stockholders' Equity


<TABLE>
<CAPTION>
                                                            COMMON
                                   COMMON STOCK             STOCK              NOTES
                           --------------------------      PURCHASE          RECEIVABLE-       ACCUMULATED
                             SHARES           AMOUNT       WARRANTS         STOCKHOLDERS         DEFICIT         TOTAL
                           ----------------------------------------------------------------------------------------------
<S>                        <C>             <C>             <C>              <C>                <C>             <C>
Balance at June 30, 1995   2,985,636       $ 9,580,713     $50,000          $(183,444)         $(5,474,498)    $3,972,771
Common stock issued -                                                                 
 exercise of stock                                                                    
 options and warrants        187,464           573,289          -                  -                    -         573,289
Collection of notes                                                                   
 receivable from                                                                      
 stockholder                      -                 -           -             183,444                   -         183,444
Net loss                          -                 -           -                                 (608,655)      (608,655)
                           ----------------------------------------------------------------------------------------------
Balance at June 30, 1996   3,173,100        10,154,002      50,000                 -            (6,083,153)     4,120,849
Common stock issued for                                                               
 cash                         12,543            45,976          -                  -                    -          45,976
Common stock issued for                                                               
 notes receivable             77,143           287,500          -            (287,500)                  -              -
Collection of notes                                                                   
 receivable from                                                                      
 stockholder                      -                 -           -              52,091                   -          52,091
Net loss                                                                                          (730,026)      (730,026)
                           ----------------------------------------------------------------------------------------------
Balance at June 30, 1997   3,262,786       $10,487,478     $50,000          $(235,409)         $(6,813,179)    $3,488,890
                           ==============================================================================================
</TABLE>                                                            
See accompanying notes to Financial Statements. 


                                      F-5
<PAGE>

                         Luther Medical Products, Inc.

                            Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                            YEAR ENDED JUNE 30
                                                                         1997               1996
                                                                     ------------------------------
<S>                                                                  <C>                 <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                             $ (730,026)        $  (608,655)
Adjustments to reconcile net loss to net cash
  used in operating activities:
   Depreciation                                                         202,098             177,474
   Amortization                                                          31,660               3,610
   Gain on forgiveness of debt                                                             (122,958)
   Changes in operating assets and liabilities:
     Accounts receivable                                                 (1,079)           (496,896)
     Inventories                                                       (256,103)           (398,930)
     Prepaid expenses and other assets                                   12,642              16,202
     Accounts payable                                                   (38,987)            189,354
     Other accrued liabilities                                           29,459            (225,316)
                                                                     ------------------------------
Net cash used in operations                                            (750,336)         (1,466,115)
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities                                   -           (1,974,826)
Proceeds from sale of available-for-sale securities                          -            4,729,259
Purchases of property and equipment                                    (133,898)           (104,636)
Purchases of intangible assets                                               -             (125,000)
                                                                     ------------------------------
Net cash (used in ) provided by investing activities                   (133,898)          2,524,797
 
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock                                                 45,976             573,289
Collections of notes receivable from stockholder                         52,091             183,444
Principal payments on debt                                                   -             (400,000)
                                                                     ------------------------------
Net cash provided by financing activities                                98,067             356,733
                                                                     ------------------------------
Net (decrease) increase in cash and cash equivalents                   (786,167)          1,415,415
 
Cash and cash equivalents, beginning of year                          1,598,141             182,726
                                                                     ------------------------------
Cash and cash equivalents, end of year                               $  811,974         $ 1,598,141
                                                                     ==============================
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Cash paid during the year for:
 Interest                                                            $       -          $        -
                                                                     ==============================
 Income taxes                                                        $      800         $       800
                                                                     ==============================
</TABLE>

                See accompanying notes to Financial Statements. 


                                      F-6
<PAGE>

                         Luther Medical Products, Inc.

                         Notes to Financial Statements

                                 June 30, 1997


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Luther Medical Products, Inc. (the Company) was organized in 1980 for the
purpose of engaging in the design, development, manufacture and sale of catheter
placement systems. The Company holds numerous patents for a wide variety of
catheter placement systems. The Company sells its products world-wide primarily
through independent distributors. Approximately 81% and 80% of product sales
during 1997 and 1996, respectively, were domestic. The Company considers its
business to be in the medical devices industry.

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 the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

REVENUE RECOGNITION

Revenues on product sales are recognized at the time of shipment. Royalty fees
are recognized as earned.

CERTAIN CONCENTRATIONS

The Company provides credit in the normal course of business to customers
throughout the United States and foreign markets. During 1997, two customers
accounted for approximately 12% and 9%, respectively, of total product sales,
and during 1996 two customers accounted for approximately 15% and 12%,
respectively, of total product sales. At June 30, 1997, two customers accounted
for approximately 21% and 9%, respectively, of accounts receivable. The Company
performs ongoing credit evaluations of its customers. The Company does not
obtain collateral with which to secure its accounts receivable. The Company
provides for potential credit losses based upon the Company's historical
experience related to credit losses. 


                                      F-7
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CERTAIN CONCENTRATIONS (CONTINUED)

During 1997, two of the Company's vendors accounted for approximately 26% and
9%, respectively, of material and supply purchases, and during 1996, two vendors
accounted for approximately 25% and 14% of the Company's material and supply
purchases. At June 30, 1997, two vendors accounted for approximately 36% and
11%, respectively, of accounts payable. The Company believes that it could
purchase such materials and supplies from other vendors without a material
adverse effect to the Company.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has financial instruments whereby the fair value of the financial
instruments could be different than that recorded on a historical basis on the
accompanying balance sheet. The Company's financial instruments consist of cash
and cash equivalents, accounts receivable and accounts payable. The carrying
amounts of the Company's financial instruments generally approximate their fair
values at June 30, 1997.

CASH AND CASH EQUIVALENTS

For financial statement purposes, cash and cash equivalents are defined as
highly liquid holdings which have remaining maturities of three months or less
when purchased. The Company has $650,565 in U.S. Treasury bills which are
considered to be cash equivalents at June 30, 1997.

INVESTMENTS

The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards No. 115, (SFAS 115), Accounting for Certain
Investments in Debt and Equity Securities, which requires that investments be
classified as "held-to-maturity", "available-for-sale" or "trading securities".
The Company has no investments which qualify for such treatment under SFAS 115
at June 30, 1997. 


                                      F-8
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       


1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost or net realizable value. Cost is
determined under the first-in, first-out method. Costs include materials, direct
labor, and an allocable portion of direct and indirect manufacturing overhead
based upon standard rates derived from historical trends and experience factors.
The industry in which the Company operates is characterized by technological
changes. Should demand for the Company's products prove to be significantly less
than anticipated, the ultimate realizable value of such products could be less
than the amount shown in the accompanying balance sheet.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the respective assets of
five years. Leasehold improvements are amortized over the lesser of the
estimated useful lives of the improvements or the related lease term.

INTANGIBLE ASSETS

Intangible assets consist of the following at June 30, 1997 and are being
amortized using the straight-line method over three and five years for license
and manufacturing rights, respectively:

<TABLE>
<S>                                                  <C>
   Licensing rights                                  $ 65,000
   Manufacturing rights                                60,000
                                                     --------
                                                      125,000
   Less accumulated amortization                      (35,270)
                                                     --------
                                                     $ 89,730
                                                     ========
</TABLE>

LONG-LIVED ASSETS

The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. No impairment losses were recorded in 1997
or 1996. 


                                      F-9
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       



1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

ADVERTISING

The Company expenses all advertising as incurred. Advertising expense was
$28,801 and $31,273 in 1997 and 1996, respectively.

INCOME TAXES

The Company provides for income taxes under the liability method. Accordingly,
deferred tax assets and liabilities are determined based on differences between
the financial reporting and the tax basis of assets and liabilities that will
result in taxable or deductible amounts in the future based on enacted tax laws
and rates applicable to the period in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized. The provision for income taxes represents the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.

PER SHARE AMOUNTS

Per share amounts are computed based on the weighted average number of common
and, if applicable, common equivalent shares outstanding during each of the
respective years. Common equivalent shares which relate to shares issuable upon
the exercise of stock options and warrants, have been excluded from the
calculation in 1997 and 1996 as the effect of their inclusion would be
antidilutive. Net loss per share is the same on a primary and fully diluted
basis for both years presented.

STOCK-BASED COMPENSATION

The Company grants options for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25") and , accordingly,
recognizes no compensation expense for the stock option grants. However, the
Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-based Compensation ("SFAS No.
123"). 


                                      F-10
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       


2. INVENTORIES

Inventories at June 30, 1997 consist of the following:

<TABLE>
   <S>                                     <C>
   Raw materials                           $  877,671
   Work in process                            403,796
   Finished goods                             561,958
                                           ----------
                                           $1,843,425
                                           ==========
</TABLE>

3. INCOME TAXES

The provision from income taxes for 1997 and 1996 consists of minimum state
taxes.

Differences between the Company's income tax expense and an amount computed by
using the federal statutory rate of 34 percent are as follows:

<TABLE>
<CAPTION>
                                                            1997        1996
                                                         ----------------------
<S>                                                      <C>          <C>
 Income tax benefit at statutory rate                    $(247,900)   $(248,500)
 Change in valuation allowance for deferred tax assets     201,400      246,000
 Meals and entertainment                                    46,800        2,800
 State taxes, net of benefit                                   500          500
                                                         ----------------------
                                                         $     800    $     800
                                                         ======================
</TABLE>

Significant components of the Company's deferred tax assets at June 30, 1997 are
presented below:

<TABLE>
<CAPTION>
Deferred tax assets:
<S>                                                        <C>
 Allowance for doubtful accounts                           $     5,900
 Reserve for obsolete inventory                                 62,800
 Compensated absences                                           21,200
 Depreciation methods                                           89,000
 Net operating loss carryforwards                            1,498,900
 Research tax credit carryforwards                              92,000
 Alternative minimum tax credit carryforwards                   50,400
                                                           -----------
Total gross deferred tax assets                              1,820,200
Less valuation allowance                                    (1,820,200)
                                                           -----------
Net deferred tax assets                                    $        - 
                                                           ===========
</TABLE> 


                                      F-11
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       



3. INCOME TAXES (CONTINUED)

At June 30, 1997 the Company had net operating loss carryforwards of
approximately $4,252,300 and $571,300 available to offset future taxable Federal
and state income, respectively. The carryforward amounts expire in varying
amounts between 2001 and 2012. The Company also has research and development
credits of $92,000 which begin to expire in 2001.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.

4. STOCKHOLDERS' EQUITY

STOCK COMPENSATION PLANS

The Company has various stock-based compensation plans, which are described
below. The Company applies the provisions of APB No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation
expense has been recognized upon granting of options under its fixed stock
option and warrant plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method prescribed by SFAS No.
123, the Company's net loss and loss per share would have been increased to the
pro forma amounts indicated below. The provisions of SFAS No. 123 have been
applied to awards with grant dates in 1997 and 1996 only. Therefore, until the
new rules are applied to all outstanding, nonvested awards, the compensation
cost reflected in the pro forma amounts presented below is not indicative of
future amounts.

<TABLE>
<CAPTION>
                                      1997              1996
                                   ----------        ----------
<S>                                <C>               <C>
Net loss:
     As reported                   $(730,026)        $(608,655)
     Pro forma                     $(924,500)        $(658,100)
Net loss per share:
     As reported                   $    (.23)        $    (.20)
     Pro forma                     $    (.29)        $    (.21)
</TABLE> 


                                      F-12
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       


4. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLANS

The Company has various fixed stock option plans that provide for the granting
of incentive or non-statutory options to its key employees, non-employee members
of the Board of Directors, consultants and independent contractors. In the case
of incentive stock options, the exercise price may not be less than the fair
market value of the Company's stock on the date of the grant, and may not be
less than 110% of the fair market value of the Company's stock on the date of
the grant for any individual possessing 10% or more of the voting power of all
classes of stock of the Company. The options are generally exercisable
immediately upon grant and expire not later than 10 years from the date of
grant. Approximately 850,000 shares of common stock are reserved for future
issuance upon exercise of fixed options.

For purposes of pro forma disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1997 and 1996:
risk-free interest rate of 6.5%; dividend yield of 0%; volatility of 47%; and a
weighted average expected life of the option of 4 years.

A Summary of the status of the Company's fixed stock option plans as of December
31, 1997 and 1996, and the activity during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                                      1997                                           1996
                                     ------------------------------------------     ------------------------------------------
                                                            Weighted-average                               Weighted-average
                                        Number of            exercise price             Number of           exercise price
                                         shares                per share                 shares                per share
                                     ------------------------------------------     ------------------------------------------
<S>                                  <C>                    <C>                     <C>                    <C>
 Outstanding - beginning of year        162,057                  $3.07                  200,949                  $2.96        
 Granted                                 58,300                  $4.56                      714                  $2.69        
 Exercised                               (5,400)                 $3.32                  (38,606)                 $2.50        
 Expired                                 (7,429)                 $4.15                   (1,000)                 $2.82        
                                     -----------------                              -----------------                         
 Outstanding - end of year              207,528                  $3.44                  162,057                  $3.07        
                                     =================                              =================                         
 Exercisable at end of year              98,462                  $3.30                   62,515                  $3.31         
                                     =================                              =================                      
 Weighted-average fair value of                                                                                            
  options granted during the year                                $2.02                                           $1.19     
                                                    
</TABLE> 


                                      F-13
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       


4. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK OPTION PLANS (CONTINUED)

Options outstanding at June 30, 1996 have exercise prices ranging from $2.56 to
$4.56 and a weighted average remaining contractual life of 2.5 years.

STOCK WARRANT PLANS

The Company has an officers and directors warrant compensation plan (the Plan)
under which warrants are granted at exercise prices established by the Board of
Directors. Warrants have historically been granted for a period of five years
with immediate vesting. Such terms, however, are at the discretion of the
Company's Board of Directors and may vary.

On December 8, 1995, the Company's board of directors established a five-year
warrant program (the Program), pursuant to which each of the Company's outside
directors was granted warrants to purchase 30,000 shares of the Company's common
stock at fair market value as of the date of grant. The warrants vest, ratably
over a five year period commencing one year following the date of grant and
ending upon cessation of the grantee's services as a director of the Company. In
the event of a sale of the Company while the grantee is a director, the warrants
immediately vest and become exercisable.

The following table summarizes warrant transactions under the Plan and the
Program for each of the years in the two-year period ended June 30, 1997:

<TABLE>
<CAPTION>
                                                      1997                                           1996
                                      -----------------------------------------     ------------------------------------------
                                                            Weighted-average                               Weighted-average
                                         Number of           warrant price             Number of             warrant price
                                           shares              per share                shares                 per share
                                      -----------------------------------------     ------------------------------------------
<S>                                   <C>                   <C>                        <C>                 <C>
 Outstanding - beginning of year           965,457                $3.63                  813,615                 $3.41
 Granted                                                                                 300,700                 $4.20
 Exercised                                 (84,286)               $3.74                 (148,858)                $3.20
 Expired                                  (122,500)               $5.13                       -         
                                      ------------                                     ---------
 Outstanding - end of year                 758,671                $3.38                  965,457                 $3.63
                                      ============                                     =========
 Exercisable at end of year                558,672                $3.12                  695,458                 $3.48
                                      ============                                     =========
 Weighted-average fair value of
  warrants granted during the year                                                                               $1.93
</TABLE> 


                                      F-14
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       


4. STOCKHOLDERS' EQUITY (CONTINUED)

STOCK WARRANT PLANS (CONTINUED)

Warrants outstanding at June 30, 1996 have exercise prices ranging from $2.25 to
$4.81 and a weighted average remaining contractual life of 3.4 years.

In connection with a private placement offering in 1992, warrants were granted
to a group of investors to purchase 100,000 shares of the company's common stock
at $12.50 per share. No value was ascribed to such warrants. During 1995, the
Company canceled the warrants and issued new warrants to purchase 50,000 shares
of common stock at $5.00 per share. The warrants expire in 1997. No value was
ascribed to such warrants.

5. PROFIT SHARING PLAN

The Company has a 401(k) profit sharing plan covering all employees who have
completed one year of service, consisting of at least 1,000 hours of service,
and have attained the age of 21 years, unless otherwise excluded. The plan
permits eligible employees to contribute to the plan up to 20% of their pre-tax
earnings, up to the annual maximum. The Company may make qualified non-elective
contributions to employees not classified as highly compensated. Additionally,
the Company may make profit sharing contributions to qualifying participants on
a pro-rata basis. Qualified participants become fully vested in the profit
sharing contribution over a period of six years of service. The Company did not
make contributions to the plan in 1997 and 1996.

6. COMMITMENTS AND CONTINGENCIES

LICENSE AGREEMENT

During 1987, the Company entered into an agreement whereby it acquired an
exclusive worldwide license to make, use and sell products covered by certain
patents owned by the licensor. Under the agreement, the Company was obligated to
pay the licensor minimum annual royalties of $60,000 for a period of 25 years,
earned royalties each year of 2% to 3.5% of net sales of products incorporating
the patented rights, and a royalty of 40% of all income the Company receives
from sublicensees, if any. For the year ended June 30, 1996, net royalties of
$45,000 were charged to operations. During April 1996, the agreement was amended
resulting in the Company paying a one-time fee of $65,000 to purchase the rights
to use the products covered by the above mentioned patents on a 


                                      F-15
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

LICENSE AGREEMENT (CONTINUED)

more limited scale than that which was previously in effect. These licensing
rights are included in intangible assets in the accompanying consolidated
balance sheet at June 30, 1997. No further minimum royalty payments are required
though the remaining term of the agreement.

EMPLOYMENT AGREEMENT

During 1996, the Company entered into an employment agreement with an officer of
the Company. In addition to base salary, bonus plan participation and
termination benefits, the agreement provides for the unlimited payment of
royalties by the Company to the officer subsequent to December 1998. Such
royalties are calculated at 1 to 2 percent of the "net sales price" of products
for which the Company had received a 510(k) notification from the United States
Food and Drug Administration subsequent to November 19, 1993.

CONSULTING AGREEMENT

During March 1995, the Company entered into a consulting agreement with an
unrelated third party, under which the consultant has been engaged to promote
and develop a national accounts program for the Company's products for sale to
certain hospital groups, organizations and health care delivery systems. The
agreement required the Company to pay the consultant $396,000 over a two-year
period.

DISTRIBUTION AGREEMENTS

During September 1995, the Company entered into a distributorship agreement (the
Distributorship Agreement) with an unrelated company (Distributor), thereby
appointing the Distributor as the Company's exclusive world-wide distributor in
the field of interventional radiology and to supply the Distributor with
peripherally inserted central catheters (PICC Products). The transfer price to
the Distributor for PICC Products has been fixed for the first two years of the
Distributorship Agreement and may be revised thereafter by either party in
accordance with the terms of said agreement. The distributorship may become non-
exclusive in certain circumstances. The Distributorship Agreement is effective
through September 2000, at which time it may be renewed for an additional three
years unless sooner terminated. The Distributor Agreement also grants


                                      F-16
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)
 

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

DISTRIBUTION AGREEMENTS (CONTINUED)

the Distributor a three-year option to purchase certain property, plant and
equipment used in the development, manufacture and preparation of the PICC
Products and a paid-up irrevocable license to all related patent rights and
know-how related to the PICC Products at a purchase price equal to a percentage
of one year's sales of the PICC Products (as defined in the Distributorship
Agreement). The Distributor can exercise its purchase option in 1998 or upon
certain events.

During August 1994, the Company entered into an exclusive five-year distribution
agreement for the sale of intra-vascular catheters in certain western U.S.
states. The agreement provides certain termination privileges for the Company
and for the distributor. The Company's sales to this distributor represented 9%
of total product sales for each of 1997 and 1996.

MANUFACTURING AGREEMENT

During March 1996, the Company entered into a product development and supply
agreement (the Agreement) with an unrelated company (Seller), to manufacture and
sell tracheostomy and cricothyroidotomy products. The Agreement provided for the
assignment to the Company of certain patents issued to the former owners of the
Seller.

The Agreement requires the payment of certain royalties based on amounts derived
from the application of the then-relevant royalty percentage to the "gross sales
price" for all products utilizing the patented technology. The royalty
percentages are as follows:

<TABLE>
<CAPTION>
PERIOD                                                                   PERCENTAGE
-------------------------------------------------------------------------------------
   <S>                                                                   <C>
   March 1996 through February 1997                                         15%
   March 1997 through expiration of patents (ranging from December
    1999 through December 2007)                                             10%
</TABLE>

Under the Agreement, royalty payments of 3% of the "gross sales price" shall
continue if a certain former owner of the Seller survives the expiration of the
patents and shall cease upon the death of the former owner. Royalty expense
relating to this agreement amounted to $3,293 in 1997. 


                                      F-17
<PAGE>

                         Luther Medical Products, Inc.

                   Notes to Financial Statements (continued)       



6. COMMITMENTS AND CONTINGENCIES (CONTINUED)

MANUFACTURING AGREEMENT (CONTINUED)

The purchase price for the assignment of the patents was $60,000, which is
included in intangible assets at June 30, 1997.

OPERATING LEASE

The Company leases its corporate and manufacturing facility under a non-
cancelable operating lease which expires in 1998. The agreement reflects
periodic rental payment increases, provides that the Company pay operating costs
such as taxes, insurance and maintenance, and certain renewal options among
other items. Rent expense is being recognized on a straight-line basis over the
lease term. The excess of rent expense recognized over the payment made is
included in other accrued liabilities in the accompanying consolidated balance
sheet. Future minimum lease payments under the lease amount to $130,000 for
1998.

Rent expense was $144,408 in each of 1997 and 1996.

7. ROYALTY, LICENSE AND DEBT FORGIVENESS AGREEMENT

During March 1992, the Company entered into agreements with Sims Deltec, Inc.,
formerly Pharmacia Deltec, Inc., (PDI) related to certain of the Company's
catheter products, minimum purchase obligations and credit facilities. Effective
March 9, 1994, the Company and PDI entered into a release and termination
agreement, which, among other things, provided for the termination of all prior
agreements between the parties, execution of a promissory note payable to PDI in
the principal amount of $625,000, and the granting by the Company to PDI of
certain nonexclusive licenses for the distribution and sale of certain of the
Company's products, and the use of certain of the Company's patents. The product
license terms were one year for non-neonate products and five years for neonate
products.

On November 3, 1995, PDI agreed to accept a payment from the Company in the
amount of $400,000 in full satisfaction of the promissory note balance of
$481,250 and accrued interest of $41,708. The resulting gain from the
forgiveness of debt of $122,958 was reflected as an extraordinary item in the
accompanying consolidated statement of operations for the year ended June 30,
1996.

                                     F-18
<PAGE>

                        Luther Medical Products, Inc.

                  Notes to Financial Statements (continued)

7. ROYALTY, LICENSE AND DEBT FORGIVENESS AGREEMENT (CONTINUED)

Royalties ranging from 3 and 7 percent were to be paid by PDI to the Company 
based on net sales of licensed products. The Company did not earn any royalties 
under this agreement in 1997 and 1996.

8. FOURTH QUARTER ADJUSTMENT

In the fourth quarter of 1997, based on management's review of inventory
quantities, the Company recorded an adjustment in the amount of $154,000 to
increase its reserves for excess and obsolete inventory.


                                     F-19
<PAGE>
 
                                   SIGNATURES

     In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

Dated:  October 8, 1997             LUTHER MEDICAL PRODUCTS, INC.



                                    By:  /s/ DAVID ROLLO
                                         ---------------
                                         David Rollo
                                         President

     In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
<TABLE> 
<CAPTION> 
          Signature                   Title                      Date
          ---------                   -----                      ----
<S>                           <C>                              <C> 


/s/ DAVID ROLLO               Chairman of the Board            October 8, 1997
---------------------         President, Chief Executive 
David Rollo                   Officer, Principal Financial  
                              Officer, Principal Accounting 
                              Officer, and a Director        


/s/ MARK ISAACS               Director                         October 8, 1997
---------------------                                   
Mark S. Isaacs



/s/ JACK PAYNE                Director                         October 8, 1997
---------------------                                                 
Jack Payne


/s/ D. ROSS HAMILTON          Director                         October 8, 1997
---------------------                                   
D. Ross Hamilton


/s/ BARRY W. HALL             Director                         October 8, 1997
---------------------                                                 
Barry W. Hall


/s/ WILLIAM R. DAHLMAN        Director                         October 8, 1997
----------------------                                                
William R. Dahlman
</TABLE> 
                                     F-20
<PAGE>
 
                               INDEX TO EXHIBITS

<TABLE> 
<CAPTION> 
                                                                                     PAGE
<C>             <S>                                                                  <C> 
10.40           Employment Agreement, dated December 2, 1996, between the 
                Registrant and George Brdlik.

10.40a          Amendment No. 1, dated July 16, 1997, to Employment Agreement, 
                dated December 2, 1996, between the Registrant and George Brdlik.

10.41           Distribution Agreement, dated August 11, 1997, between the 
                Registrant and ALARIS Medical Systems, Inc.

23.1            Consent of Thelen, Marrin, Johnson & Bridges.

23.2            Consent of Arter & Hadden.

23.3            Consent of Robert L. Pike, Esq.

23.4            Consent of Ernst & Young LLP.

23.5            Consent of Corbin & Wertz.

27.1            Financial Data Schedule.
</TABLE>