<PAGE>
 
                                   FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   (Mark One)

 [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                                  ACT OF 1934
                    For the fiscal year ended March 31, 1997

                                       or

 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
                 For the transition period from       to 
                                                -----    -----
                          Commission File No. 0-28034
                         CardioTech International, Inc.
                   ------------------------------------------
             (Exact name of registrant as specified in its charter)

         Massachusetts                                   04-3186647
         -------------                                   ----------
       State or other jurisdiction of                 (I.R.S. Employer
       Incorporation or organization                 Identification No.)
 
       11 State Street, Woburn, Massachusetts                 01801     
       --------------------------------------                 -----     
       (Address of principal executive offices)             (Zip Code)
 
Registrants telephone number, including area code         (617) 933-4772
                                                          --------------

         Securities registered pursuant to Section 12 (b) of the Act:

         Securities registered pursuant to Section 12 (g) of the Act:

                    Common Stock, $.01 par value per share
                    --------------------------------------
                               (Title of Class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes       No    X
                                              ------   ---------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]

     As of June 25, 1997, 4,272,916 shares of the registrant's Common Stock were
outstanding, and the aggregate market value of the registrant's Common Stock
held by non-affiliates of the registrant was $6,231,546.

     The number of shares issued of the registrants class of Common Stock as of
June 25, 1997 was 4,272,916. No shares are held in treasury.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The registrant hereby incorporates by reference into Part III of this
report portions of its proxy statement for the 1997 annual meeting of
stockholders, which will be filed within 120 days of the registrants fiscal year
ended  March 31, 1997.
<PAGE>
 
                        CardioTech International, Inc.

                                    PART I

Item 1. Business

General

     CardioTech International, Inc. (CardioTech or the Company) is using its
proprietary manufacturing technology to develop and manufacture small bore
vascular grafts, or synthetic blood vessels, made of ChronoFlex, a family of
polyurethanes that has been demonstrated to be biocompatible and non-toxic.
Vascular grafts are used to replace, bypass or provide a new lining or arterial
wall for occluded, damaged, dilated or severely diseased arteries and are used
to provide access for patients undergoing hemodialysis treatments. The Company
is developing three types of layered, microporous small bore vascular grafts:
(i) a vascular access graft, called the VascuLink Access Graft; (ii) a
peripheral graft, called the MyoLink Peripheral Graft, and (iii) a coronary
artery bypass graft, called the CardioPass Coronary Artery Bypass Graft.

     Blood is pumped from the heart throughout the body via arteries.  Blood is
returned to the heart at relatively low pressure via veins, which have thinner
walls than arteries and have check valves which force blood to move in one
direction.  Because a specific area of the body is often supplied by a single
main artery, rupture, severe narrowing or occlusion of the artery supplying
blood to that area is likely to cause an undesirable or catastrophic medical
outcome.

     Vascular grafts are used to replace or bypass occluded, damaged, dilated or
severely diseased arteries and are sometimes used to provide access to the
bloodstream for patients undergoing hemodialysis treatments. Existing small bore
graft technologies suffer from a variety of disadvantages in the treatment of
certain medical conditions, depending upon the need for biodurability,
compliance (elasticity) and other characteristics necessary for long-term
interface with the human body.

    CardioTech is developing its grafts using specialized ChronoFlex
polyurethane materials that it believes will provide significantly improved
performance in the treatment of arterial disorders.  The grafts have three
layers similar to that of natural arteries designed to replicate the physical
characteristics of human blood vessels.

     Additionally, through its CT Biomaterials division, the Company develops,
manufactures and markets polyurethane-based biomaterials for use in both acute
and chronically implanted devices such as stents, artificial hearts, and
vascular ports. These premium biomaterials are sold under the tradenames:
ChronoFlex, ChronoThane, HydroThane and ChronoFilm.

                                       1
<PAGE>
 
     CardioTech owns a number of patents relating to its vascular graft
manufacturing technology. In addition, PolyMedica Industries, Inc. ("PMI") has
granted to CardioTech an exclusive, perpetual, worldwide, royalty-free license
for the use of one polyurethane patent and related technology in the field
consisting of the development, manufacture and sale of implantable medical
devices and biodurable polymer material to third parties for the use in medical
applications (the "Implantable Device and Materials Field"). PMI also owns,
jointly with Thermedics, Inc., the ChronoFlex polyurethane patents. PMI has
granted to CardioTech a non-exclusive, perpetual, worldwide, royalty-free
sublicense of these patents for use in the Implantable Devices and Materials
Field.

     The Company was founded in 1993 as a subsidiary of PMI. In June 1996, PMI
distributed (the "Spin Off") all of the shares of CardioTech's common stock, par
value $.01 per share (the "Common Stock"), that PMI owned to PMI stockholders of
record as of June 3, 1996. The Company is headquartered in Woburn, Massachusetts
and also has production facilities in Tarvin, U.K.

     ChronoFlex and ChronoFilm are registered trademarks of PMI. ChronoThane,
ChronoPrene, HydroThane, PolyBlend and PolyWeld are tradenames of CardioTech.
DuraGraft, VascuLink, MyoLink, CardioPass are trademarks of CardioTech for which
a registration application has been filed.
 
Products in Development
VascuLink Vascular Access Graft

     Patients suffering from end-stage renal disease may be required to undergo
hemodialysis. The majority of these patients require long-term vascular access
to facilitate treatment. A point of access for dialysis needles may be created
by connecting an artery and a vein in the patient's arm. However, because kidney
dialysis therapy typically requires patients to undergo hemodialysis treatment
three times per week, these natural shunts often become unusable over time.
Other methods of vascular access for kidney dialysis, such as transcutaneous
catheters, are only designed for temporary use.

     A synthetic graft is implanted in hemodialysis patients to provide routine
vascular access. The vast majority of these synthetic grafts are presently made
of polytetafluoroethylene ("ePTFE"). The use of ePTFE grafts is often
accompanied by excessive bleeding when the dialysis needle is withdrawn,
requiring a nurse to apply pressure to help stop the bleeding and requiring the
patient to remain in the treatment area until the bleeding has stopped. In
addition, to limit the risk of graft infection following implant, at least a
four- to six-week healing period following implantation is required to allow for
tissue in-growth into the graft before initiating dialysis.

                                       2
<PAGE>
 
    The Company believes that the VascuLink Graft that it is developing may
offer advantages over currently used synthetic grafts because of its needle-
hole-sealing-capability. The Company believes that this characteristic will be
effective in sealing puncture sites in its grafts with minimal compression time
and bleeding as compared with ePTFE grafts and, as a result, will reduce
dialysis procedure and administrative time per patient and their associated
costs. In addition, the Company believes, based on animal studies, that patients
who receive the VascuLink Graft will be able to be dializied in a shorter period
of time than four-to-six weeks.

    The Company believes that approximately 185,000 patients in the United
States undergo kidney dialysis each year, of which approximately 140,000 undergo
vascular access surgeries using either natural vessel grafts or synthetic access
grafts. The Company estimates that of these patients, approximately 55,000 are
implanted with synthetic grafts. The Company believes that a comparable market
exists overseas.

    The Company is currently conducting Phase I clinical trials of the VascuLink
Graft in Holland and France with patients undergoing routine hemodialysis
treatment. The Company's clinical trials will compare patency and complication
rates of the Company's VascuLink Graft with ePTFE grafts. The clinical trial in
Holland began in November 1996 at one site and will involve up to 20 patients.
The clinical trial in France began in June 1997 at three sites and will involve
up to 40 patients. There can be no assurance that the Companys clinical trials
will be successful.

MyoLink Peripheral Graft

    In the United States, an estimated 16 million people suffer from diabetes,
which is often further complicated by atherosclerosis, or the blockage of
arteries. Eventually, many atherosclerosis patients require vascular grafts to
bypass severely occluded leg arteries, which impede circulation to the lower
extremities and can ultimately lead to amputation. Lack of adequate circulation
to the lower limbs and toes results in 54,000 yearly amputations in the United
States alone. Current techniques of surgical intervention rely on autologous
saphenous veins from the leg for use as substitute vessels.

    However in over 40% of all atherosclerosis patients, the saphenous veins are
deemed unsuitable, making it necessary to use a vein constructed from artificial
materials. The Company is designing the MyoLink Peripheral Graft that it is
developing to be suitable for providing needed circulation from the upper thigh,
across the knee and into the mid calf. In order to accommodate the bend at the
knee, CardioTech is designing the MyoLink graft to be "non-kinking." Further,
CardioTech believes that it has the expertise and capability to manufacture a
graft that tapers from an inside diameter of approximately 6mm for the portion
above the knee to an inside diameter of approximately 4mm for the portion below
the knee, roughly the same dimensions as the natural artery. The Company is
currently conducting pre-clinical development studies of the MyoLink Graft at
its Tarvin, UK facility.

CardioPass Coronary Artery Bypass Graft

    Coronary artery bypass graft ("CABG") surgery is performed to treat the
impairment of blood flow to portions of the heart. CABG surgery involves the
addition of one or more new vessels to the heart to re-route blood around
blocked coronary arteries.

                                       3
<PAGE>
 
    Autogenous grafts (using the patient's own saphenous vein or mammary artery)
have been successfully used in CABG procedures for a number of years and have
shown a relatively high patency rate (80% to 90% for saphenous veins and over
90% for mammary arteries one year after surgery) with no risk of tissue
rejection.  However, the surgical harvesting of vessels for autogenous grafts
involves significant trauma and expense.  In addition, not all patients
requiring CABG surgery have sufficient native vessels as a result of previous
bypass surgeries, or their vessels may be of inferior quality due to trauma or
disease.  Cryopreserved saphenous veins are available, but these veins often
deteriorate due to attack by the body's immune system.

    The Company is developing the CardioPass Coronary Artery Bypass Graft to be
a synthetic graft of 3mm in diameter specifically designed for use in CABG
surgery. If successfully developed, the Company believes that the CardioPass
Graft may be used initially to provide an alternative to patients with
insufficient or inadequate native vessels for use in bypass surgery as a result
of repeat procedures, trauma, disease or other factors. The Company believes,
however, that the CardioPass Graft may ultimately be used as a substitute for
native saphenous veins, thus avoiding the trauma and expense associated with the
surgical harvesting of the vein.

    The Company believes that in 1995, approximately 700,000 CABG procedures
were performed worldwide, of which nearly 500,000 were performed in the United
States. The Company believes that approximately 20% of these CABG procedures
were performed on patients who had previously undergone bypass surgery, and that
the number of repeat procedures will continue to increase as a percentage of
procedures performed, as the number of patients who have the procedure
increases. Currently, approximately 70% of CABG procedures are performed
utilizing the saphenous vein.

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

Biomaterials

    CardioTech also develops, manufactures and sells a range of polymer-based
materials customized for use in the manufacture of certain medical devices to
other medical device manufacturers. CardioTech sells these custom polymers under
the tradenames ChronoFilm, ChronoFlex, ChronoThane, ChronoPrene, HydroThane,
PolyBlend and PolyWeld. The Company also provides development services relating
to biomaterials to medical device customers. In 1992, PMI entered into a long
term development and materials supply agreement with Bard Access Systems, Inc.
pursuant to which Bard purchases ChronoFlex for use in the manufacture of a line
of catheters and implantable vascular access ports that are used to deliver
doses of pharmaceuticals over an extended period of time or to deliver
chemotherapy agents to specific organs. PMI assigned this agreement to
CardioTech prior to the Spin Off.

                                       4
<PAGE>
 
    CardioTech also currently manufactures and sells its proprietary HydroThane
biomaterials to medical device manufacturers that are evaluating HydroThane for
use in their products.  HydroThane is a thermoplastic, water-absorbing,
polyurethane elastomer, that posses properties that CardioTech believes make it
well suited for the complex requirements of a variety of catheters.  In addition
to its physical properties, CardioTech believes HydroThane exhibits an inherent
degree of bacterial resistance, clot resistance and biocompatibility.  When
hydrated, HydroThane has elastic properties similar to living tissue.

    During the fiscal year ended March 31, 1997, the Company was the recipient
of two Small Business Innovation Research grants awarded by National Institute
of Health ("NIH") to support the Company's research and development programs.

    Research revenues related to biomaterials were approximately $228,806 and
$570,676 for the year ended March 31, 1996 and 1997, respectively.  For the year
ended March 31, 1997, 18% and 73% of research revenues were generated from Bard
Access Systems, Inc. and the NIH, respectively.

Manufacturing

    CardioTech currently manufactures limited quantities of ChronoFlex and
HydroThane for sale to medical device manufacturers.  To date, CardioTech's
manufacturing activities with respect to the specialized ChronoFlex materials
used in vascular grafts have consisted primarily of manufacturing small
quantities of such products for use in clinical trials.  CardioTech currently
has the ability to produce quantities of vascular grafts sufficient to support
its current testing needs.  CardioTech also has the ability to produce
quantities of vascular grafts sufficient to support its needs for early-stage
clinical trials.  However, CardioTech may need to acquire manufacturing
facilities and improve its manufacturing technology in order to meet the volume
and cost requirements for later clinical trials and will require additional
manufacturing facilities in order to undertake commercial production of vascular
grafts, if it elects to do so.  To achieve profitability, CardioTech's products
must be manufactured in commercial quantities in compliance with regulatory
requirements and at acceptable costs.  Production in commercial quantities will
require CardioTech to expand its manufacturing capabilities significantly and to
hire and train additional personnel.  CardioTech has no experience in large-
scale manufacturing, and there can be no assurance that CardioTech will be able
to make the transition to commercial production successfully.

    The development and manufacture of CardioTech's products are subject to good
laboratory practice ("GLP") and good manufacturing practice ("GMP") requirements
prescribed by the Food and Drug Administration ("FDA") and other standards
prescribed by the appropriate regulatory agency in the country of use.  There
can be no assurance that CardioTech will be able to obtain or manufacture
products in a timely fashion at acceptable quality and prices, that it or any
suppliers can comply with GLP or GMP, as applicable, or that it or such
suppliers will be able to manufacture an adequate supply of product.

Marketing

    CardioTech plans to market its vascular graft products for which it obtains
regulatory approvals either through a small targeted direct sales group or
through licensing arrangements with large medical device companies.
Implementation of this strategy will depend on many 

                                       5
<PAGE>
 
factors, including the market potential for CardioTech's products and financial
resources. There can be no assurance that CardioTech will be able to
successfully market its products.



Competition

    Competition in the medical device industry in general is intense and based
primarily on scientific and technological factors, the availability of patent
and other protection for technology and products, the ability to commercialize
technological developments and the ability to obtain governmental approval for
testing, manufacturing and marketing products.

    CardioTech will compete with products offered by W.L. Gore and Associates
("W.L Gore"), Impra, Inc. ("Impra"), Corvita Corporation ("Corvita") and
Thoratec Corporation ("Thoratec").  CardioTech believes that W.L. Gore and
Impra, whose synthetic graft products have been sold in the United States and
worldwide for many years, sell approximately 90% of the intermediate diameter
peripheral synthetic vascular grafts and vascular access grafts used throughout
the world.  While CardioTech believes that the attributes of its vascular grafts
will allow it to compete effectively, both W.L. Gore and Impra can be expected
to defend their market positions vigorously, and both have substantially greater
financial, technical and other resources than CardioTech.  Corvita is developing
a broad range of polyurethane based synthetic vascular grafts, including
vascular access grafts and has commenced clinical trials of certain of its
synthetic vascular graft products in both the United States and Europe.
Thoratec has developed a small bore polyurethane vascular access graft and has
begun limited clinical trials in foreign countries.  The Joint Technology may be
licensed or otherwise made available to competitors of CardioTech.

    Competition among these products will be based, among other things, on
product efficacy, safety, reliability, availability, price and patent position.
An important factor will be the timing of the market introduction of
CardioTech's or competitive products. Accordingly, the relative speed with which
CardioTech can develop products, complete the clinical trials and approval
processes and supply commercial quantities of the products to the market is
expected to be an important competitive factor. CardioTech's competitive
position will also depend upon its availability to attract and retain qualified
personnel, to obtain patent protection or otherwise develop proprietary products
or processes, and to secure sufficient capital resources for the often
substantial period between technological conception and commercial sales.

Research and Development

    CardioTech's research and development efforts are focused on developing its
synthetic vascular graft technologies.  CardioTech's development decisions are
based on (1) development costs, (2) product need, (3) third-party interest and
funding availability and (4) regulatory considerations.  CardioTech believes it
will need substantial additional financing to conduct human clinical trials, and
produce vascular access graft and other planned products.  No assurance can be
given, however, that such financing, or other financing, will be available on
terms attractive to CardioTech, if at all.

                                       6
<PAGE>
 
Government Regulation

    CardioTech's research and development activities are subject to regulation
for safety, efficacy and quality by numerous governmental authorities in the
United States and other countries. In the United States, the development,
manufacturing and marketing of synthetic vascular grafts are subject to
regulation for safety and efficacy by the FDA in accordance with the Food, Drug
and Cosmetic Act. Synthetic vascular grafts are subject to rigorous FDA
regulation, including pre-clinical and clinical testing. The process of
completing clinical trials and obtaining FDA approvals for a medical device is
likely to take a number of years, requires the expenditure of substantial
resources and is often subject to unanticipated delays. There can be no
assurance that any product will receive such approval on a timely basis, if at
all.

    The steps required to qualify a medical device for marketing in the United
States are complex.  Medical products regulated by the FDA are generally
classified as drugs and/or medical devices.  Medical devices are classified as
Class I, II or III devices.  CardioTech believes that its synthetic vascular
grafts will be regulated as Class III medical devices.  In general, Class I
devices require compliance with labeling and record keeping regulations and are
subject to other general controls.  Class II devices may be subject to special
controls, such as market surveillance and are subject to general controls.
Class II devices also may not be subject to clinical testing for purposes of
pre-market notification to the FDA.  Class III devices, such as CardioTech's
vascular graft products, require clinical testing to assure safety and
effectiveness prior to marketing and distribution.

    At least 90 days prior to marketing, devices must be subject to pre-market
notification to the FDA to determine the product's classification and regulatory
status.  If a product is found to be "substantially equivalent" to a Class I or
Class II device, or a Class III device not subject to a Pre-Marketing
Application (PMA) requirement, it may be marketed without further FDA review.
The FDA may require the submission of clinical data as a basis for determining
whether a device is "substantially equivalent."  Such clinical data is often
developed under an Investigational Drug Exemption (IDE).  Marketing may commence
only when the FDA issues a written order finding that the device is
"substantially equivalent."  If a device is found to be "not substantially
equivalent," the device manufacturer must file a PMA with the FDA based on
testing intended to demonstrate that the product is both safe and effective.
CardioTech believes that its products will require the issuance of a PMA from
the FDA prior to commercial sale.

    The PMA process requires the performance of human clinical studies under an
IDE.  Upon completion of required clinical studies, results are presented to the
FDA in a PMA application.  In addition to the results of clinical
investigations, the PMA applicant must submit other information relevant to the
safety and effectiveness of the device, including the results of pre-clinical
tests; a full description of the device and its components; a full description
of the methods, facilities and controls used for manufacturing; and proposed
labeling.  The FDA staff then determines whether to accept the application for
filing.  If accepted for filing, the application is further reviewed by the FDA
and then usually reviewed by an FDA scientific advisory panel of physicians and
others with expertise in the relevant field.  The FDA will also conduct an
inspection to determine whether an applicant conforms with the FDA's current
GMP.  If the 

                                       7
<PAGE>
 
FDA's evaluation is favorable, the FDA will subsequently publish an order
granting the PMA for the device. Although the initial PMA review process is
required to be completed within 180 days from the date that the PMA application
is accepted for filing, the FDA routinely raises additional issues which must be
addressed prior to the approval of a PMA, which significantly extends the review
process.

    There can be no assurance that the FDA will approve any of CardioTech's
products currently under research for marketing, or if they are approved, that
they will be approved on a timely basis.  Furthermore, CardioTech or the FDA may
suspend clinical trials at any time upon a determination that the subjects or
patients are being exposed to an unacceptable adverse health risk ascribable to
CardioTech's products.  If clinical studies are suspended, CardioTech may be
unable to continue the development of the investigational products affected.

    Whether or not FDA approval has been obtained, approval of a medical device
by comparable foreign governmental regulatory authorities must be obtained prior
to the commencement of clinical trials and subsequent marketing of such products
in such countries. Under European Community ("EC") Law, the safety, efficacy and
quality of CardioTech's products must be demonstrated prior to marketing,
including extrinsic clinical testing of such products. National laws in each of
the EC member states govern clinical trials of products, adherence to good
manufacturing practice, advertising, promotion and other matters. Certain EC
member countries permit the sale of medical devices based upon approvals
received in other EC member states. There can be no assurance that approvals
will be granted on a timely basis and the failure to receive such approvals
could have a material adverse effect on the business, financial condition and
results of operation of CardioTech.

Employees

    As of July 25, 1997, the Company has 9 full-time employees. Of these full-
time employees, 4 are in research and development, 2 are in manufacturing and
production, and 3 are in management or administrative positions. None of the
Company's employees is covered by a collective bargaining agreement, and
management considers its relations with its employees to be good.

                                       8
<PAGE>
 
Item 2.  Properties

         CardioTech leases a total of approximately 9,300 square feet at PMI's
facilities in Woburn, Massachusetts and Tarvin, United Kingdom. CardioTech
believes that its current facilities are adequate for the next 15 months, after
which the lease relating to these facilities will expire and CardioTech may need
to seek replacement facilities. Although CardioTech believes that alternative
facilities can be leased on acceptable terms, there is no assurance that
CardioTech will be able to do so.

 

                                       9
<PAGE>
 
Item 3.  Legal Proceedings

         The Company is not a party to any legal proceedings.

                                       10
<PAGE>
 
Item 4.  Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of security holders of the Company,
through solicitations of proxies or otherwise, during the last quarter of the
fiscal year ended March 31, 1997.

                                       11
<PAGE>
 
                                    PART II

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

         The Common Stock began trading on the American Stock Exchange under the
symbol CTE on June 12, 1996. Prior to that date, there was no established
trading market for the  Common Stock.

         The following table sets forth the high and low sales prices of the
Common Stock for each of the quarterly periods since June 12, 1996, as reported
on the American Stock Exchange.
<TABLE>
<CAPTION>
 
Fiscal Year Ended March 31, 1997     High    Low
                                    ------  ------
<S>                                 <C>     <C>
 
June 30                              5 3/8   3 1/8
September 30                         5 3/8   1 1/2
December 31                          3 1/16  1 9/16
March 31                             2 9/16  1 3/4
</TABLE>



         As of June 30, 1997, there was approximately 510 stockholders of record
and 4,500 additional beneficial stockholders (stockholders holding Common Stock
in brokerage accounts). The Company has never paid a cash dividend on its Common
Stock and does not anticipate the payment of cash dividends in the foreseeable
future.

                                       12
<PAGE>
 
Item 6.  CardioTech International, Inc. Selected Consolidated Financial
         Data

         The following are selected consolidated (i) statements of operations
data for the Company for the fiscal years ended March 31, 1997, 1996, 1995, 1994
and 1993 and (ii) balance sheet data for the Company at March 31, 1997, 1996,
1995 and 1994. The Company became a stand-alone company on June 12, 1996 as a
result of the Spin Off from PMI. The financial information set forth below for
the periods prior to June 12, 1996, is intended to present management's estimate
of the results of consolidated operations and financial condition of CardioTech
as if it had operated as a stand-alone company since its inception. Certain of
the costs and expenses presented in these consolidated financial statements
represent inter-company allocations and estimates of the costs of services
provided by PMI and its subsidiaries. As a result, the consolidated financial
statements presented may not be indicative of the results that would have been
achieved had CardioTech operated as a non-affiliated entity. The selected
consolidated statement of operations data for the fiscal year ended March 31,
1997 includes the period June 12, 1996 through March 31, 1997 during which the
Company operated as a separate stand-alone company.
<TABLE>
<CAPTION>
 
 
                                                        Year Ended March 31,
                          ------------------------------------------------------------------------------
                                 1993            1994             1995             1996            1997 
                          ------------------------------------------------------------------------------ 
<S>                         <C>           <C>               <C>             <C>             <C>           
Statement of Operations
Data
Research Revenues           $ 422,590      $  285,876       $  407,510      $   228,806     $   570,676
Operating Expenses:
 Research and
 Development (1)              377,231         699,919          708,723          910,676       1,031,605 
Selling, general and                                                                                    
 administrative               228,680         375,886          297,727          512,926         903,016 
                          ------------------------------------------------------------------------------
 
Total operating expenses      605,911       1,075,805        1,006,450        1,423,602       1,934,621
                          ------------------------------------------------------------------------------
 
                          ------------------------------------------------------------------------------
Net Loss                    $(183,321)     $ (789,929)      $ (598,940)     $(2,188,030)    $(1,655,572)
                          ==============================================================================
Loss Per Common Share       $   (0.06)     $    (0.28)      $    (0.21)     $     (0.77)    $     (0.42)
                          ==============================================================================


                                                        At March 31,
                          --------------------------------------------------------------------
                                 1994             1995               1996              1997
                          --------------------------------------------------------------------
Balance Sheet Data (2)                                                              
Total current assets           $     504       $      504        $       504       $ 2,535,285
Working capital                      504              504                504         2,356,349
Total assets                      52,222           44,150             35,694         2,782,787
Stockholder's equity              52,222           44,150             35,694         2,597,851
</TABLE>

                                       13
<PAGE>
 
1. Included in research and development expenses for the fiscal year ended March
   31, 1994 is a $114,000 charge for incomplete technology that was purchased in
   connection with the Company's acquisition of Newtec Products Limited.

2. Balance sheet data prior to 1994 is not meaningful. Prior to June 12, 1996,
   all inter-company activity related to the Company's operations and all
   amounts receivable to and payable by the Company were processed by PMI, and
   the net amount was recorded as Due to Parent in Stockholders Equity, for the
   years 1994, 1995 and 1996.

                                       14
<PAGE>
 
Item 7.  Managements Discussion and Analysis of Financial Conditions and results
         of Operations

Revenue

     Research revenue consists of revenues from the sale of medical grade
polyurethanes, research grants from the NIH and royalties from Bard Access
Systems. Research revenue increased $341,870, or 149%, to $570,676 for the
fiscal year ended March 31, 1997. This increase was primarily due to an increase
in revenue derived from NIH grants, an increase in royalty revenues, and an
increase the in Company's sale of medical grade polyurethanes. Research revenues
for the fiscal year ended March 31, 1996 decreased $178,704, or 44%, to $228,806
from $407,510 for the 1995 fiscal year. This decrease in research revenues was
attributable to the completion of one research and development contract during
the 1996 fiscal year.
 
Operating Expenses

Research and Development

     Research and development expenses consist principally of employment-related
costs for scientific staff, facility costs, pre-clinical and clinical testing
costs, costs related to on-going development efforts and NIH grant expenses. To
date, all of the Company's research and development expenses have been charged
to operations as incurred. Research and development expenses increased $120,929,
or 13%, to $1,031,685 in the 1997 fiscal year and $201,953, or 28%, to $910,676
in the 1996 fiscal year. The increase in the 1997 fiscal year was primarily the
result of expenditures related to clinical trials of the VascuLink Grafts in
Europe and the NIH grants. Some expenses related to the NIH grants were incurred
by the Company as a result of the Company contracting work to outside
laboratories and hospitals. The increase in the 1996 fiscal year in these
expenses principally related to higher pre-clinical testing costs in connection
with the Company's development of the VascuLink Graft. The Company intends to
increase its clinical trials sites and therefore, anticipates that the cost of
research and development will continue to increase in the 1998 fiscal year.

Selling, General and Administrative

     Selling, general and administrative expenses consist principally of
employment-related cost for executive, selling and administrative personnel,
professional fees, consulting fees, system support costs and other general and
administrative expenses. Selling, general and administrative expenses increased
$390,090, or 76%, to $903,016 in the 1997 fiscal year and $215,199, or 72%, to
$512,926 in the 1996 fiscal year. The increase in the selling, general and
administrative expenses in the 1997 fiscal year was principally due to the
additional costs incurred by the Company subsequent to the Spin Off, including
expenses related to the establishment of a separate finance and accounting
group, investor relations and public reporting fees, rent, insurance and legal
representation. The Company anticipates that selling, general and administrative
expenses will increase in the 1998 fiscal year due to growth in management
systems, as well as costs associated with being a publicly traded company.

                                       15
<PAGE>
 
Other Income and (Expense)

     Other income and (expense) is comprised of interest income related to the
Company's invested cash balances. The Company generally invests its cash in
money market accounts. The amount of interest income fluctuates based on the
amount of funds available and the prevailing interest rates. Other income and
(expense) decreased $701,607, or 71%, to an expense of $291,627 for the 1997
fiscal year from an expense of $993,254 for the 1996 fiscal year. During the
fiscal year ended March 31, 1997, the Company incurred $393,879 in Spin Off
transaction costs, offset by interest income of $102,897. All of the expenses in
the 1996 fiscal year were attributed to the Spin Off. There was no other
income and (expense) in the 1995 fiscal year.

Provision for Income Taxes

     The Company had no provision for income taxes for the 1995, 1996 and 1997
fiscal years due to the fact that it incurred net operating losses for these
fiscal years. The Company has a net operating loss carried forward for the
period June 12, 1996 to March 31, 1997 of approximately $1,870,000. Losses for
the periods prior to June 12, 1996 were consolidated with the results of PMI
and, accordingly, CardioTech will not receive any benefit from net operating
losses prior to June 12, 1996.

Liquidity and Capital Resources

     CardioTech's future growth will depend on its ability to raise capital to
support research and development activities and to commercialize its vascular
graft technology. To date, CardioTech has not generated any revenues from the
sale of vascular grafts, although it has received a minor amount of research
revenues relating to its other biomaterials applications and from the NIH to
support graft research. Since inception, funding from PMI has been used to
finance the development of CardioTech's technologies. CardioTech expects to
continue to incur operating losses unless and until product sales and/or royalty
payments generate sufficient revenue to fund its continuing operations.

     CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTech's capital requirements depend on numerous factors,
including but not limited to, the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.

     CardioTech is currently conducting its operations with approximately
$2,346,000 in cash contributed by PMI in connection with the Spin Off.
CardioTech estimates such amount will be sufficient to fund its working
capital and research and development activities through June 1998.

     Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTechs business through March 31, 1996, PMI
has funded approximately $4.0 million in operating losses to support
CardioTech's research activities. Future expenditures for

                                       16
<PAGE>
 
product development, especially related to outside testing and clinical trials,
are discretionary and, accordingly, can be adjusted as required depending on
the amount of available cash.

     CardioTech will seek to obtain additional funds through public or private
equity or debt financing, collaborative arrangements, or from other sources.
There can be no assurance that additional financing will be available at all or
on acceptable terms to permit successful commercialization of CardioTech's
technology and products. If adequate funds are not available, CardioTech may be
required to curtail significantly one or more if its research and development
programs, or obtain funds through arrangements with collaborative partners or
others that may require CardioTech to relinquish rights to certain of its
technologies, product candidates or products.

     The Company believes that this Form 10-K contains forward-looking
statements that are subject to certain risks and uncertainties. These forward-
looking statements include statements regarding the sufficiency of the Company's
liquidity and capital. Such statements are based on managements current
expectations and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
The Company cautions investors that there can be no assurance that actual
results or business conditions will not differ materially from those projected
or suggested in such forward-looking statements as a result of various factors,
including but not limited to the following: the Company's ability to
successfully complete clinical trials in a timely manner, the Company's ability
to obtain financing to support its working capital needs, the timely development
of products by the Company, intense competition related to the development of
synthetic grafts and difficulties inherent in developing synthetic grafts. As a
result, the Company's further development involves an high degree of risks. For
further information, refer to the more specific risks and uncertainties
discussed throughout this report.

                                       17
<PAGE>
 
Item 8.                                                              

<TABLE>
<CAPTION>
INDEX OF FINANCIAL STATEMENTS                                          Page

<S>                                                                  <C>
Report of Independent Accountants                                         19

 
Consolidated Balance Sheets as of March 31, 1997 and 1996                 20
 
Consolidated Statements of Operations for each of the three years
in the period ended March 31, 1997.                                       21
 
Consolidated Statements of Stockholders Equity for each of the
three years in the period ended March 31, 1997.                           22
 
Consolidated Statements of Cash Flows for each of the three years
in the period ended March 31, 1997.                                       23
 
Notes to Consolidated Financial Statements                           24 - 34
</TABLE>

                                       18
<PAGE>
 
                       Report of Independent Accountants


     To the Board of Directors and Stockholders of CardioTech International,
Inc.:

     We have audited the accompanying consolidated balance sheets of CardioTech
International, Inc. as of March 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders equity, and cash flows for each of the
three years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

     We conducted our audits in accordance with 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 from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of CardioTech
International, Inc. as of March 31, 1997 and 1996, and results of its operations
and its cash flows and for the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.

     From inception to June 12, 1996 the Company was a majority-owned subsidiary
of PolyMedica Industries, Inc. As explained in Note B to the financial
statements, for the periods prior to June 12, 1996, certain of the costs and
expenses in the financial statements represent inter-company allocations and
management estimates of the costs of services provided by PolyMedica Industries,
Inc. As a result, the financial statements presented may not be indicative of
the financial position or results of operations that would have been achieved
had the Company operated as a non-affiliated entity.



                                                        Coopers & Lybrand L.L.P.





Boston, Massachusetts
May 13, 1997

                                       19
<PAGE>
 
                         CardioTech International, Inc.
                          Consolidated Balance Sheets
<TABLE>
<CAPTION>
 
ASSETS                                    March 31, 1996   March 31, 1997
                                          --------------   --------------
<S>                                       <C>              <C>
Current Assets:
  Cash and Cash Equivalents                  $       504      $ 2,346,366
  Accounts Receivable - Trade                          -            8,292
  Accounts Receivable - Other                          -           93,218
  Prepaid Expenses                                     -           87,409
                                          --------------   -------------- 
 
Total Current Assets                                 504        2,535,285
 
Property and Equipment, Net                       35,190          231,619
Other Non-Current Assets                               -           15,883
                                          --------------   -------------- 
Total Assets                                 $    35,694      $ 2,782,787
                                          ==============   ==============
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current Liabilities:
  Accounts Payable                                     -           50,860
  Accrued Expenses                                     -          134,076
                                          --------------   -------------- 
Total Current Liabilities                              -          184,936
Stockholders' Equity:
  Preferred stock, $.01 par value,
  5,000,000 shares authorized,
  none issued or outstanding
  Common stock, $.01 par value,
  20,000,000 shares authorized,
  2,831,491 and 4,272,916 issued
  and outstanding at March 31, 1996
  and March 31, 1997,
  respectively                                     2,831           42,729
  Due to Parent                                4,063,966                -
  Additional Paid in Capital                           -        8,232,579
  Accumulated Deficit                        (4,031,103)      (5,686,675)
  Cumulative Translation Adjustment                    -            9,218
                                          --------------   -------------- 
 
Total Stockholders' Equity                        35,694        2,597,851
                                          --------------   -------------- 
 
Total Liabilities and Stockholders'          $    35,694      $ 2,782,787
Equity
                                          ==============   ============== 
 
</TABLE>

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

                                       20
<PAGE>
 
                        CardioTech International, Inc.
                     Consolidated Statements of Operations
 
<TABLE> 
<CAPTION>  
                                                               Years Ended
                                                                March 31,
                                                1995              1996            1997
                                           -----------------------------------------------
 
<S>                                        <C>             <C>               <C>    
Research Revenues                          $   407,510     $     228,806     $     570,676
                                                                             
Operating Expenses:                                                          
  Research and Development                     708,723           910,676         1,031,605
  Selling, General and                                                       
  Administrative                               297,727           512,926           903,016
                                          ------------    --------------    -------------- 

  Total Operating Expenses                   1,006,450         1,423,602         1,934,621
                                          ------------    --------------    -------------- 

Other Income and Expense                                                     
  Interest Income                                    -                 -           102,270
  Spin-off Transaction 
  costs                                              -          (993,234)         (393,897)
                                          ------------    --------------    -------------- 

Net Loss                                   $  (598,940)    $  (2,188,030)    $  (1,655,572)
                                          ============    ==============    ==============

Loss Per Common                                  (0.21)            (0.77)            (0.42)
Share                                                                        
                                          ============    ==============    ==============

Weighted Average Number                                                      
of Common Shares Outstanding                 2,831,941         2,831,941         3,983,067

</TABLE> 
                                     
 
 
  The accompanying notes are an integral part of the consolidated financial 
                                  statements
 

                                       21
<PAGE>
 
                        CardioTech International, Inc.
                    Consolidated Statement of Stockholders'
                                    Equity
                        For the Years Ended March 31, 
                               1995, 1996, 1997
 
<TABLE> 
<CAPTION>  
                                         Common Stock                                               
                                 -------------------------------                              Additional                  
                                      Number of                               Due to            Paid In     
                                       Shares          Amount                 Parent            Capital     
                                 ----------------  -------------------------------------------------------
<S>                              <C>               <C>               <C>                  <C>              
Balance at March 31, 1994               2,831,491      $   2,831         $   1,293,524        $         -
Net Loss                                                                                                     
Advance from Parent                                                            590,868                    
                                 ----------------  -------------   ------------------    --------------- 
Balance at March 31, 1995               2,831,491          2,831             1,884,392                  -
Net Loss                                                                                                     
Advance from Parent                                                          2,179,574                    
                                 ----------------  -------------    ------------------    --------------- 
Balance at March 31, 1996               2,831,491          2,831             4,063,966                  -
Issuance of Common                                                                                           
   Stock to Parent                      1,412,625         39,610                                3,960,375
Payment of shared spin off                                                                                   
   costs to former parent                                                                        (373,631)
Conversion of advances from 
   Parent to Equity                                                         (4,063,966)         4,559,123
Issuance of Common Stock                                                                                     
   Warrants for Services                                                                           15,000
Issuance of Common Stock                                                                                     
   for Services                            28,800            288                                   71,712
Effect of Cumulative                                                                                         
   Translation Adjustment                                                                                    
Net Loss                                                                                                     
                                 ----------------  -------------    ------------------    --------------- 

Balance at March 31, 1997            $  4,272,916      $  42,729         $           -       $  8,232,579
                                 ================  =============    ==================    =============== 
</TABLE> 
<TABLE> 
<CAPTION>  
                                             Total             Currency       
                                           Accumulated        Translation         Stockholders'
                                             Deficit          Adjustment             Equity     
                                     ----------------------------------------------------------
<S>                                  <C>                  <C>                <C>                                  
Balance at March 31, 1994            $    (1,244,133)         $        -           $     52,222                   
Net Loss                                    (598,940)                                  (598,940)                  
Advance from Parent                                                                     590,868                   
                                     ----------------     --------------     ------------------
Balance at March 31, 1995                 (1,843,073)                  -                 44,150                   
Net Loss                                  (2,188,030)                                (2,188,030)                    
Advance from Parent                                                                   2,179,574                    
                                     ----------------     --------------     ------------------
Balance at March 31, 1996                 (4,031,103)                  -                 35,694 
Issuance of Common                                                                     
   Stock to Parent                                                                    3,999,985            
Payment of shared spin off                                                              
   costs to former parent                                                              (373,631)            
Conversion of advances from 
   Parent to Equity                                                                     495,157 
Issuance of Common Stock                                                 
   Warrants for Services                                                                 15,000   
Issuance of Common Stock                                                                      
   for Services                                                                          72,000             
Effect of Cumulative                                                                      
   Translation Adjustment                                          9,218                  9,218                          
Net Loss                                  (1,655,572)                                (1,655,572)
                                     ----------------     --------------     ------------------

Balance at March 31, 1997            $    (5,686,675)         $    9,218           $  2,597,851 
                                     ================     ==============     ==================
</TABLE> 


   The accompanying notes are an integral part of the consolidated financial
                                  statements

                                       22
<PAGE>

                         CardioTech International Inc.
                     Consolidated Statements of Cash Flows
                         
<TABLE>  
<CAPTION>
                                                                               For the Year Ended March 31,  
                                                                       1995                1996                1997
                                                                  --------------     -----------------    --------------
<S>                                                              <C>                <C>                  <C> 
Cash flows from operating activities                              
 Net loss                                                         $     (598,940)    $      (2,188,030)   $   (1,655,572)
 Adjustments to reconcile net loss
  to net cash flows from operating activities
   Depreciation and Amortization                                           8,912                 9,238            63,965
   Loss on disposal of fixed assets                                        3,434                 2,082               -
   Stock compensation programs                                               -                     -              66,000
   Changes in operating assets and liabilities:
     Accounts Receivable                                                     -                     -            (101,510)
     Prepaid Expenses                                                        -                     -             (87,409)
     Accounts Payable                                                        -                     -              50,860
     Accrued Expenses                                                        -                     -             134,076
     Increase in Non-Current Assets                                          -                     -             (15,883)
                                                                  --------------     -----------------    --------------
Net cash flows from operating activities                                (586,594)           (2,176,710)       (1,545,473)

Cash Flows from Investing Activities
 Purchase of property, plant and equipment                                   -                     -            (116,750)
                                                                  --------------     -----------------    --------------
 Net Cash flows from Investing Activities                                    -                     -            (116,750)
                                                                  ==============     =================    ==============

Cash Flows from financing activities
 Net proceeds from Issuance of stock                                         -                     -           3,830,000   
 Advance from Parent                                                     586,594             2,176,710           531,302 
 Payment of spin-off costs                                                   -                     -            (373,631) 
                                                                  --------------     -----------------    --------------
 Net cash flows from financing activites                                 586,594             2,176,710         3,987,671
                                                                  ==============     =================    ==============

Net increase in cash and cash equivalents                                    -                     -           2,325,448

Effect of exchange rate changes on cash                                      -                     -              20,414 

Cash and equivalents at beginning of period                                  504                   504               504
                                                                  --------------     -----------------    --------------

Cash and equivalents at end of period                             $          504     $             504    $    2,346,366 
                                                                  ==============     =================    ==============
Supplemental disclosure of cash flow information:
 Cash paid during the period for Interest                                    -                     -                 -
 Income taxes paid                                                           -                     -                 -
</TABLE> 

  The accompanying notes are an integral part of the consolidated financial 
                                  statements


                                      23
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
                Notes to the Consolidated Financial Statements


A.  Nature of Business:

          CardioTech International, Inc. (including its subsidiary, collectively
"CardioTech" or the "Company") is using its proprietary technology to develop
and manufacture small bore vascular grafts, or synthetic blood vessels, made of
ChronoFlex, a family of polyurethanes that have been demonstrated to be
biocompatible and non-toxic. The Company is headquartered in Massachusetts and
operates from manufacturing and laboratory facilities located in Massachusetts
and the United Kingdom.

B.  Summary of Significant Accounting Policies:

Basis of Presentation

          CardioTech's business, which is the basis for these financial
statements, was a spin-off  of a portion of the business of PolyMedica
Industries, Inc. ("PMI"). CardioTech was incorporated in March 1993. The
accompanying financial statements for the years 1995 and 1996 and the period
April 1, 1996 through June 11, 1996 were derived from the historical books and
records of PMI and include the assets, liabilities, revenues and expenses of
CardioTech at historical cost.

          CardioTech's spun-off business operated as a division of PMI starting
in 1990. In September 1993, PMI purchased certain assets of Newtec Vascular
Products Limited ("Newtec"), a company that had conducted development work on
small bore vascular grafts. Newtec operated as a division of PMI until June
1995, when it was incorporated as a wholly-owned subsidiary of CardioTech.

          The financial statements for the periods prior to June 12, 1996 are
intended to present management's estimates of the results of consolidated
operations and financial condition of CardioTech as if it had operated as a
stand-alone company since inception. Certain of the costs and expenses for the
for the periods prior to June 12, 1996 presented in these consolidated financial
statements represent inter-company allocations and management estimates of the
cost of services provided by PMI and its subsidiaries.

          In June 1996, the Company issued 1,412,625 shares of Common Stock, par
value of $.01 per share (the "Common Stock"), to PMI for $3.8 million in cash,
equipment having an estimated market value of $147,000, the transfer of certain
vascular graft manufacturing patents, and the forgiveness of certain amounts due
to PMI. After it acquired these shares, PMI owned 3,929,493 shares, or 92.6%, of
the Common Stock. On June 12, 1996 and June 19, 1996, PMI distributed (the "Spin
Off") all of the shares of Common Stock that it owned to its stockholders of
record as of June 3, 1996. On June 11, 1996, all advances from PMI to CardioTech
were converted to equity and are now classified by the Company as additional
paid in capital.

                                       24
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

Basis of Consolidation

          The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary. All significant inter-company balances
and transactions have been eliminated.

Uses of Estimates

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates and such
differences may be material to the financial statements.

Future Operations

          CardioTech's future growth will largely depend on its ability to raise
capital to support research and development activities and to commercialize its
vascular graft technology. To date, CardioTech has not generated any significant
revenue from the sale of vascular grafts, although it has received a minor
amount of research revenue related to its other biomaterials applications. Since
inception, funding from PMI has been used to finance the development of
CardioTech's technologies. CardioTech expects to continue to incur operating
losses until vascular graft product sales and/or royalty payments generate
sufficient revenue to fund its continuing operations.

          CardioTech will require substantial funds for further research and
development, future pre-clinical and clinical trials, regulatory approvals,
establishment of commercial-scale manufacturing capabilities, and the marketing
of its products. CardioTechs capital requirements depend on numerous factors,
including but not limited to the progress of its research and development
programs, the progress of pre-clinical and clinical testing, the time and costs
involved in obtaining regulatory approvals, the cost of filing, prosecuting,
defending and enforcing any intellectual property rights, competing
technological and market developments, changes in CardioTech's development of
commercialization activities and arrangements, and the purchase of additional
facilities and capital equipment.

                                       25
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

          CardioTech is currently conducting its operations with approximately
$2,346,000 in cash contributed by PMI in connection with the Spin Off.
CardioTech estimates such amount will be sufficient to fund its working
capital and research and development activities through June 1998.

          CardioTech will seek to obtain additional funds through public or
private equity or debt financings, collaborative arrangements, or from other
sources. There can be no assurance that additional financing will be available
at all or on acceptable terms to permit successful commercialization of
CardioTech's technology and products in development. If adequate funds are not
available, CardioTech may be required to curtail significantly one or more of
its research and development programs, or obtain funds through arrangements with
collaborative partners or others that may require CardioTech to relinquish
rights to certain of its technologies, product candidates, or products.

Uncertainties

          The Company is subject to risks common to companies in the medical
device industry, including, but not limited to, development of new technology
innovations by competitors of the Company, dependence on key personnel,
protection of proprietary technology, and compliance with FDA government
regulations.

Cash and Cash Equivalents

          Cash and Cash Equivalents include cash on hand, demand deposits and
short term investments with original maturities of three months or less.

Accounts Receivable - Other

          Accounts Receivable - Other principally consist of revenue receivable
from research and development work completed on National Institute of Health
Small Business Innovative Research Grants.

Research Revenues

          Research Revenues are generated in connection with the development and
sale of ChronoFlex and other proprietary biomaterials for use in medical
devices. The Company has also received royalty fees from Bard Access Systems.
CardioTech recognizes these fees as revenue in accordance with the terms of the
contracts. Contracted development fees from corporate partners are recognized
upon completion of service or the attainment of technical benchmarks, as
appropriate.

          During the year ended March 31, 1997, the Company was the recipient of
the two Small Business Innovation Research (SBIR) grants, awarded by the
National Institute of Health to support the Company's research and development
programs. Revenue from these grants is recognized ratably over one year which 
properly matches costs with related revenues.

                                       26
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

Research and Development Expenses

          Research and development expenses are charged to expense as incurred.

Due to Parent, Advance from Parent

          Prior to the Spin-Off, all inter-company charges related to
CardioTech's operations and all amounts receivable to and payable by CardioTech
were processed by PMI, and the net amount was recorded as Advance from Parent in
Stockholders Equity. Amounts due to parent were permanently invested by PMI in
connection with the Common Stock Subscription Agreement discussed in Note C
below.

Foreign Currency Translation

          In accordance with Statement of Financial Accounting Standard No. 52,
"Foreign Currency Translation," assets and liabilities of the Company's foreign
subsidiary are translated into US dollars using current exchange rates at the
balance sheet date and revenues and expenses are translated at average exchange
rates prevailing during the period. The resulting translation adjustments are
recorded in a separate component of Stockholders' Equity. Transaction gains and 
losses are recorded in the Consolidated Statements of Operations.

                                       27
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)


Equipment and Leasehold Improvements

          Equipment and Leasehold improvements are stated at cost. Equipment is
depreciated using the straight-line method over the estimated useful lives of
the assets, ranging from five to seven years, and leasehold improvements are
amortized using the straight-line method over the shorter of the estimated life
of the asset or the remaining term of the lease. Expenditures for repairs and
maintenance are charged to expense as incurred. When assets are retired or 
disposed of, the cost and accumulated depreciation thereon are removed from the 
accounts and related gains and losses are included in operations.

Net Loss per Common Share

          Loss per common and common equivalent share are computed by dividing
net loss by the weighted average number of common and common equivalent shares
outstanding during the year. Both primary and fully diluted loss per common
share for 1995, 1996 and 1997 assume common equivalent shares would be
antidilutive. Common equivalent shares are calculated using the treasury stock
method.

Income Taxes

          Deferred tax assets and liabilities are recognized based on temporary
differences between the financial statements and tax basis of assets and
liabilities using enacted tax rates expected to be in effect when they are
realized. A valuation reserve against the net deferred assets is recorded, if,
based upon weighed available evidence, it is more likely than not that some or
all of the deferred tax assets will not be realized.

The Company had no income tax provision for the years ended March 31, 1997 and
1996.

                                       28
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

C.  Arrangements with PMI and Subsidiaries:

          From CardioTech's inception until June 11, 1996, all facilities and
support services, including research and administrative support, were provided
by PMI. For these services, CardioTech was charged $1,792,500 and $591,000 and
$169,354 for the years ended March 31, 1996, 1995 and for the period April 1,
1996 to June 11, 1996, respectively. These charges represent an allocation of
CardioTech's proportionate share of PMI's overhead costs by PMI using formulas
which management believed were reasonable based upon CardioTech's use of
facilities and services.

          In connection with the Spin Off, CardioTech entered into the following
agreements with PMI.

Distribution Agreement

          This agreement provided for the principal corporate transactions
required to effect the Spin Off, including, among other things, the preparation
of a registration statement registering the Common Stock under the Securities
Exchange Act of 1934, as amended, and an undertaking by CardioTech to prepare a
registration statement registering, under the Securities Act of 1933, as
amended, the shares of Common Stock to be issued upon the exercise of the
Warrants described in Note M.

          This agreement also allocated the costs related to the implementation
of the Spin Off between PMI and CardioTech and provided that each company would
share equally any liabilities under the federal and any state securities laws
incurred as a result of the distribution of the information statement relating
to the Spin Off.

          CardioTech agreed to reimburse PMI 50% of certain expenses incurred in
connection with the Distribution. CardioTech's portion of these expenses was 
approximately $374,000 in the fiscal year 1997.

License Agreement

          PMI has granted to CardioTech an exclusive, perpetual, world-wide,
royalty-free license for CardioTech to use all of the necessary patent and other
intellectual property owned by PMI in the implantable devices and materials
field (collectively, "PMI Licensed Technology"). PMI, at its own expense, will
file patent or other applications for the protection of all new inventions
formulated, made or conceived by PMI during the term of the license that related
to PMI Licensed Technology and all such inventions will be part of the
technology licensed to CardioTech. CardioTech, at its own expense, will file
patent or other applications for the protection of all new inventions
formulated, made, or conceived by CardioTech during the term of the license that
related to PMI Licensed Technology and all such inventions shall be exclusively
licensed to PMI for use by PMI in fields other than the implantable devices and
materials field.

                                       29
<PAGE>

                 CardioTech International, Inc. and Subsidiary
            Notes to Consolidated Financial Statements (continued)

Tax Matters Agreement

     The Tax Matters Agreement provides, among other things, that PMI will
be responsible for all federal, state, local and foreign tax liabilities of
CardioTech for periods ending on or prior to June 11, 1996 and CardioTech will
be responsible for all tax liabilities of CardioTech subsequent to that time.
The Tax Matters Agreement further provides that for the tax year of PMI that
includes June 11, 1996 and the tax year of CardioTech that commences immediately
following June 11, 1996, PMI will claim on its federal income tax returns
certain specified tax benefits and CardioTech will not claim any of such tax
benefits through June 11, 1996.

 
D.    Property and Equipment:

Property and equipment consist of the following:

<TABLE>
<CAPTION>
                                       March 31, 1996         March 31, 1997
 
<S>                                   <C>                    <C>
Laboratory equipment                    $      44,796           $    314,764
 
Furniture, fixtures and office
equipment                                      10,712                 60,236
 
Leasehold Improvements                              -                 11,715
                                      ---------------        --------------- 
                                               55,508                386,715
 
Less accumulated                              (20,318)              (155,096)
depreciation
                                      ---------------        --------------- 
 
TOTAL                                   $      35,190           $    231,619
                                      ===============        =============== 
</TABLE> 

Depreciation expense for property and equipment for the fiscal years ended
March 31, 1997, 1996, and 1995 was approximately $63,965, $9,238 and $8,912
respectively.

E.  Accrued Expenses:
 
Accrued Expenses consist of:

<TABLE> 
<CAPTION> 
                                1996    1997
<S>                             <C>     <C>  
Legal and Professional Fee      - 0 -   $52,746
Salaries and Benefits           - 0 -    21,273
Other                           - 0 -    60,057   
                                -----  --------  
                                 $0    $134,076
                                -----  --------
</TABLE>

                                       30
<PAGE>

F.  Income Taxes

Income (loss) before income taxes was generated as follows in the years ended
March 31:

<TABLE>
<CAPTION>
                                      1996              1997     
                                      ----              ----     
                  <S>              <C>              <C>          
                  United States     $(1,452,806)     $(1,122,167)
                  Foreign              (735,224)        (533,407)
                                    ------------     ------------
                                    $(2,188,030)     $(1,655,574)
                                    ============     ============
</TABLE>

A reconciliation between the Company's effective tax rate for continuing
operations and the United States statutory rate is as follows:

<TABLE> 
              <S>                                     <C>   
              Expected federal tax rate                (34.00%)
              State income taxes, net
              of federal tax benefit                    (2.91)
              Change in
              Valuation Allowance                       28.16
              Meals & Entertainment
              and Other Permanent
              Items                                      8.43
              Rate Differential                          0.32
                                                         -----
              Effective Tax Rate                         0.00%
                                                         -----
</TABLE> 

          A valuation allowance has been recorded to offset the related deferred
tax assets due to uncertainty or realizing the benefit of these assets. The
following is a summary of the significant components of the Company's deferred
tax assets and liabilities as of March 31, 1996 and 1997:

<TABLE>
<CAPTION>
        Deferred tax asset:
                                          1996             1997    
<S>                                    <C>               <C>       
              Net Operating Loss         $ 297,400       $ 755,600 
              Tax Credits                                    2,800 
                                         ---------       ---------     
                                         $ 297,400       $ 758,400      
                                         ---------       ---------      
                                                                        
        Deferred tax liabilities:                                       
                                          1996             1997         
                                                                        
              Depreciation               $  26,500       $  29,300      
              Deferred Tax                                              
              Liability                     26,500          29,300      
                                         ---------       ---------      
              Valuation Allowance        $(270,900)      $(729,100)     
                                         ---------       ---------      
                                                                        
              Net Deferred Tax Assets    $  -0-          $  -0-        
                                         ---------       ---------      
</TABLE>                                                               

          As of March 31, 1997, the Company had Federal net operating loss carry
forwards of approximately $1,370,000 available to offset future taxable income
which begin to expire in 2010. The Company has Foreign net operating loss carry
forwards of approximately $500,000.

          Prior to the Spin Off, CardioTech's results were consolidated with the
results of PMI. Accordingly CardioTech will not receive any benefit from net
operating losses incurred through the date of the Spin Off.

G. Stockholders' Equity:

     CardioTech was incorporated in March 1993 and issued 67,500 shares of
Common Stock. Of the 67,500 shares, 60,000 shares were issued to PMI and 7,500
shares were issued to certain founders of CardioTech. There were 100,000 shares
of Common Stock authorized for issuance.

     On March 19 and May 9, 1996, CardioTech amended its Article of Organization
to: (i) effect a net 41.95 for one stock split of the Common Stock (reflecting a
54.7328 for one stock split effected on March 19, 1996 and a 0.76645 for one
reverse stock split effected on May 9, 1996), (ii) increase the number of
authorized shares of Common Stock to 20,000,000 shares and (iii) authorize a
class of 5,000,000 shares of Preferred Stock. These consolidated financial
statements have been restated to reflect these amendments.

                                      31


<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

H. Related Party Transactions:

     As of March 31, 1996, the following executive officers and directors of PMI
owned a total of 314,623 shares (effected for stock split) of CardioTech:
Michael Szycher, Ph.D., Steven J. Lee, Arthur A. Siciliano, Ph.D., Andrew M.
Reed, Ph.D., Eric G. Walters and Robert J. Zappa. See Note G.

     One officer of PMI currently serves on CardioTech's Board of Directors.

I. Lease Agreement:

     On October 1, 1996, the Company signed a two (2) year lease agreement with
PolyMedica Pharmaceuticals, (U.S.A.) Inc., the owner or lessee of the office,
manufacturing and research facilities currently occupied by the Company in
Woburn, Massachusetts and Tarvin, Cheshire, UK. The lease agreement replaces in
its entirety the service agreement between PMI and the Company, signed in June
1996. The lease agreement expires on September 30, 1998. Thereafter, the Company
has the right to terminate the lease upon ninety (90) days written notice to the
landlord. The base rent in the first year is approximately $200,000 (including
payment for utilities) and in the second year is approximately $186,000. The
lease agreement also provides for a two (2) year payback of approximately
$20,000 in build out costs incurred by the landlord on behalf of the Company.

J. Major Customers:

     Customers comprising more than 10% of CardioTechs research revenues are
shown as follows:

<TABLE>
<CAPTION>
 
                               Year Ended March 31,
                               --------------------
 
                              1995     1996     1997  
                              ----     ----     ----  
<S>                           <C>      <C>      <C>   
                                                      
Customer A                    49%      33%      18%   
Customer B                    19%       -        -    
Customer C                    18%      46%      73%   
                                                            
</TABLE>
K.  Lease Commitments:

     The Company lease offices, laboratory and manufacturing space under a non-
cancelable operating lease with PMI. Future minimum lease payments as of the end
of fiscal 1997 are as follows:
<TABLE>
<CAPTION>
 
          Fiscal Year(s)
          <S>                 <C>

                  1997        $192,753
                  1998          92,959
                              --------
 
                  Total       $285,712
                              --------
 </TABLE>

                                       32
<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

L.  Supplemental Disclosures for Stock-Based Compensation:

     CardioTech's 1996 Employee, Director and Consultants Stock Option Plan (the
"Plan") was approved by CardioTech's Board of Directors and Stockholders in
March 1996. A total of approximately 1,167,000 shares have been reserved for
issuance under the Plan. Under the terms of the Plan the exercise price of
Incentive Stock Options issued under the Plan must be equal to the fair market
value of the Common Stock at date of grant. In the event that Non Qualified
Options are granted under the Plan, the exercise price may be less than the fair
market value of the Common Stock at time of grant (but not less than par value).
On October 1, 1996, the Compensation Committee of the Board of Directors of the
Company, which administers the Plan, repriced stock options to purchase 866,208
shares of Common Stock, at the fair market value on the date of repricing.

     As permitted by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation", ("SFAS 123"), the Company applies APB
Opinion No. 25 and related Interpretations in accounting for the Plan. SFAS 123
issued in 1995, defined a fair value method of accounting for stock options and
other equity instruments. Under the fair value method, compensation cost is
measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period. The
Company elected to continue to apply the accounting provisions of APB Opinion
No. 25 for stock options. The required disclosures under SFAS 123 as if the
Company had applied the new method of accounting are made below.

Activity under the Plan for the year ended March 31, 1997 is as follows:

<TABLE> 
<CAPTION> 
                                                                   Wtd. Avg.    
                                                       Number of   Exercise     
                                                        Shares      Price       
                                                      ----------- ----------    
<S>                                                   <C>         <C>           
                                                                                
Outstanding March 31, 1996                                      -         -
Granted                                                 1,768,230     $3.17
Canceled                                                  866,208     $4.41
Exercised                                                       -         -
Outstanding March 31, 1997                                902,022     $1.98
</TABLE> 

Summarized information about stock options outstanding at March 31, 1997 is as 
follows:

<TABLE> 
<CAPTION> 
                                                                         Exercisable
                                       Weighted                          -----------
                                        Average         Weighted                   Weighted
                     Number of         Remaining        Average                    Average
   Range of           Options         Contractural      Exercise     Number of     Exercise 
Exercise Prices     Outstanding           Life           Price        Options       Price
---------------     -----------           ----           -----        -------       -----
<S>                 <C>               <C>               <C>          <C>           <C> 
  $1.74 - $1.94        887,022             9.5            $1.94         386,409       $1.93
--------------------------------------------------------------------------------------------

     $4.55              15,000             3.6            $4.55          15,000       $4.55
--------------------------------------------------------------------------------------------
</TABLE> 

Options exercisable at March 31, 1996 and March 31, 1995 were 0.

                                       33

<PAGE>
 
                 CardioTech International, Inc. and Subsidiary
             Notes to Consolidated Financial Statements (continued)

     The fair value of each option granted during the fiscal year 1997 is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions:
<TABLE> 
<CAPTION> 
                                        1997
                                        ----
<S>                                     <C>  
Dividend yield . . . . . . . . . . . .  none
Expected volatility  . . . . . . . . .   65%
Risk-free interest rate  . . . . . . .   6.3%
Expected life. . . . . . . . . . . . .   4

Weighted average fair value of options 
granted at fair value during: 1997 . .  $1.48
</TABLE> 

Had compensation cost for the Company's 1997 stock option grants been
determined consistent with SFAS 123, the Company's net loss and net loss per
share would approximate the pro forma amounts below:
<TABLE> 
<CAPTION> 
                                        Net Income per
                         Net Income     fully diluted share
                         ----------     -------------------
<S>                      <C>            <C>
As reported:
1997 . . . . . . . . . . $(1,655,572)        $(.42)

Pro forma:
1997 . . . . . . . . . . $(2,633,592)        $(.66)
</TABLE> 

     The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards made prior to
1995. Additional awards in future years are anticipated.

M.  Warrants:

     In connection with the Spin Off, the Company issued warrants (the
"Warrants)" to John Hancock Mutual Life Insurance Company to purchase up to
255,100 shares of Common Stock at $3.70 per share. The Warrants are exercisable
beginning on June 19, 1996 and expire on January 31, 2000. In July 1996, the
Company issued shares of Common Stock to a third party for services to the
Company. As a result of the antidilutive provisions, the exercise price of the 
Warrants was adjusted to $3.69 per share and the number of shares subject to the
Warrants was adjusted to 255,660 shares.

                                       34
<PAGE>
 
Item 9.  Changes In and Disagreements with Accountants on a Accounting and
         Financial Disclosure

         There have been no disagreements on accounting and financial disclosure
matters.

                                       35
<PAGE>
 
                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

     The information required by this item will be set forth under the section
entitled "Management" and "Compliance with Section 16 (a) of the Securities
Exchange Act of 1934" in the Company's 1997 definitive proxy statement to be
filed pursuant to Regulation 14A not later than July 29, 1997, and is
incorporated herein by reference.

Item 11.  Executive Compensation

     The information required by this item will be set forth under the section
entitled "Executive Compensation" in the Company's 1997 definitive proxy
statement to be filed pursuant to Regulation 14A not later than July 29, 1997,
and is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information required by this item will be set forth under the section
entitled "Share Ownership" in the Company's 1997 definitive proxy statement to
be filed pursuant to Regulation 14A not later than July 29, 1997, and is
incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions

     The information required by this item will be set forth under the section
entitled "Certain Relationships and Related Transactions" in the Company's 1997
definitive proxy statement to be filed pursuant to Regulation 14A not later than
July 29, 1997, and is incorporated herein by reference.

                                       36
<PAGE>
 
                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  The following are filed as part of this Form 10-K:

     (1)  Financial Statements:
             For a list of financial statements which are filed as part of this
             Form 10-K, See Page F-1
     (2)  Financial Statement Schedules:
             All schedules are omitted because they are not applicable, or not
             required, or because the required information is included in the
             Financial Statements as notes thereto.

     (3)  Exhibits
<TABLE>
<CAPTION>

         Exhibit Number:
         <S>  <C> 

         2    Plan and Agreement of Distribution between PMI and CardioTech,
              dated May 13, 1996 was filed as Exhibit 2 to CardioTech's Form 10
              filed on March 20, 1996, as amended (the "Form 10"), and is
              incorporated herein by reference.

        3.1   Articles of Incorporation were filed as Exhibit 3.1 of the Form 10
              and are incorporated herein by reference.

        3.2   Bylaws were filed as Exhibit 3.2 of the Form 10 and are
              incorporated herein by reference.
              
       10.1   Amended and Restated Common Stock Subscription Agreement between 
              PMI and CardioTech, dated May 9, 1996, was filed as Exhibit 10.1
              of the Form 10 and is incorporated herein by reference. 
              
       10.2   Tax Matters Agreement between PMI and CardioTech, dated May 13,
              1996, was filed as Exhibit 10.2 of the Form 10 and is incorporated
              herein by reference.
              
       10.3   Amended and Restated License Agreement between PMI and CardioTech,
              dated May 13, 1996, was filed as Exhibit 10.4 of the Form 10 and
              is incorporated herein by reference.
                            
       10.4   CardioTech 1996 Employee, Director and Consultant Option Plan was
              filed as Exhibit 10.6 of the Form 10 and is incorporated herein by
              reference.
              
       10.5   Employment Agreement of Michael Szycher was filed as Exhibit 10.7
              of the Form 10 and is incorporated herein by reference.
</TABLE> 
              
                                       37
<PAGE>
 
       10.6   Warrant issued by CardioTech to John Hancock Mutual Life Insurance
              Company was filed as Exhibit 10.8 of the Form 10 and is
              incorporated herein by reference.

       10.7   Letter Agreement between CardioTech, PMI and John Hancock Mutual
              Life Insurance Company was filed as Exhibit 10.9 of the Form 10
              and is incorporated herein by reference.

       10.8   Development, Supply, and License Agreement between PMI and Bard
              Access Systems, dated November 11, 1992, was filed as Exhibit
              10.10 of the Form 10 and is incorporated herein by reference.
                                                                          
       10.9   Lease Agreement between PMI and CardioTech, dated October 1, 1996,
              was filed in Exhibit 10.1 to CardioTechs Form 10-Q filed on
              February 14, 1997 and is incorporated herein by reference.

         11   Statement Regarding Computation of Loss Per Common Share
 
         21   Subsidiaries of CardioTech
 
         23   Consent of Coopers & Lybrand L.L.P. to the incorporation of their
              reports included in this Form 10-K into CardioTech's previously
              filed Registration Statement on Form S-8.

         27   Financial Data Schedule

(b)  Reports on Form 8-K
              Form 8-K filed with the Commission on February 5, 1997 reporting
               the appointment of the registrants national sales representative.

(c)  See (3) above.

(d)  See (2) above.

                                       38
<PAGE>
 
                                   SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.

Dated:  June 30, 1997        CardioTech International, Inc.

                             By: /s/ Michael Szycher
                             -----------------------
                             Michael Szycher
                             Chairman and Chief Executive Officer

    Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Dated:  June 30, 1997        /s/ Michael Szycher
                             -------------------
                             Michael Szycher
                             Chairman, Chief Executive Officer
                             (Principal Executive Officer)

Dated:  June 30, 1997        /s/ John E. Mattern
                             -------------------
                             John E. Mattern
                             Chief Financial Officer, Chief Operating
                             Officer (Principal Financial and
                             Accounting Officer)

Dated:  June 30, 1997        /s/ Gene T. Gargiulo
                             --------------------
                             Gene T. Gargiulo
                             Director

Dated:  June 30, 1997        /s/ Arthur A. Siciliano
                             -----------------------
                             Arthur A. Siciliano
                             Director

Dated:  June 30, 1997        /s/ Alan Edwards
                             ----------------
                             Alan Edwards
                             Director

                                       39