<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, 1998

                                      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)
                                                     
  Registrant's telephone number, including area code         (781) 933-4772
                                                             --------------

         Securities registered pursuant to Section 12 (b) of the Act:
                    Common Stock, $.01 par value per share
                    --------------------------------------
                               (Title of Class)
       Securities registered pursuant to Section 12 (g) of the Act: None

     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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]

     As of June 25, 1998, 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  (without admitting that such person
whose shares are not included in such calculation is an affiliate) was
$8,131,112, based on the last sale price as reported on the American Stock
Exchange on such date.

                      DOCUMENTS INCORPORATED BY REFERENCE
The registrant hereby incorporates by reference into Part III of this report
portions of its proxy statement for the 1998 annual meeting of stockholders,
which will be filed within 120 days of the registrant's fiscal year ended  March
31, 1998.

                                       1
<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 natural arteries and are 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.

     CardioTech owns a number of patents relating to its vascular graft
manufacturing technology.  In addition, PolyMedica Corporation ("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 

                                       2
<PAGE>
 
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.

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 before
initiating dialysis in order to allow for tissue in-growth into the graft.

     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 dialized 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.

                                       3
<PAGE>
 
     The Company is currently conducting Phase I clinical trials of the
VascuLink Graft in Holland, France and Sweden 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, which began in November 1996, involves one site and
up to 20 patients. The clinical trial in France, which began in June 1997,
involves three sites and up to 40 patients. The clinical trial in Sweden, which
began in the last quarter of Fiscal 1998 involves two sites. There can be no
assurance that the Company's 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 approximately 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 has designed 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.

     On April 1, 1998, the Company, through its wholly owned subsidiary,
CardioTech International, Ltd. ("CTI Ltd."), entered into a two year research
collaboration with The Royal Free Hospital School of Medicine (University of
London) ("Royal"), which relates to the investigation and clinical trials of the
MyoLink graft and the clinical evaluation of endothelial cell-seeding of
peripheral vascular grafts. This research, if successfully commercialized may
result in the payment of royalties to the Royal Free Hospital. The research will
be funded by a loan of /(pounds)/252,942 ($414,765) (the "Loan") from Freemedic
PLC, a subsidiary of Royal (together with Royal, "Freemedic"), to CTI Ltd. The
Loan, plus accrued interest, is convertible under certain conditions, at either
the Company's or Fremedic's option, into Common Stock of the Company at a
conversion price of $3.70 per share. Freemedic may terminate the collaboration
at any time upon a material breach by the Company of any obligation under the
collaboration agreement or upon an event of default under the Loan agreement.

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.

     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.

                                       4
<PAGE>
 
     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.  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 Artery 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.

     CardioTech also 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, 1998, the Company was the recipient
of two Small Business Innovation Research grants awarded by National Institutes
of Health ("NIH") to support the Company's research and development programs.

                                       5
<PAGE>
 
     Research revenues related to biomaterials were approximately $872,521 and
$570,676 for the year ended March 31, 1998 and 1997, respectively.  For the year
ended March 31, 1998, 26% and 56% 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 Company's manufacturing operations in the United Kingdom currently hold
an ISO 9001 Certificate of Registration from National Quality Assurance, Ltd. 
This internationally recognized endorsement of ongoing quality management 
represents the highest level of certification available.


     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 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.

                                       6



<PAGE>
 
     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. Research and Development expenditures
for the years ended March 31, 1998, 1997 and 1996 were $1,638,381, $1,031,605 
and $910,676 respectively.

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.

                                       7
<PAGE>
 
     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 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.

                                       8
<PAGE>
 
     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.

EXCHANGE LISTING

     The Company's outstanding stock is currently listed on the American Stock
Exchange under the ticker symbol "CTE." CardioTech was granted listing approval
for 1,066,792 shares of its common stock for the 1998 calendar year. However,
there can be no assurance that these shares will not be de-listed during the
1998 calendar year. If the Company's shares were to be de-listed, it is likely
that CardioTech's fund raising ability would be adversely affected.

EMPLOYEES

     As of June 1998, the Company has 10 full-time employees. Of these full-time
employees, 4 are in research and development, 2 are in manufacturing and
production, and 4 are in management, administrative, or marketing 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.

YEAR 2000 ISSUES

     The Company uses computer software programs for its financial business
systems and administrative functions. The Company believes that its programs are
"Year 2000" compliant, and will be able to appropriately interpret the upcoming
calendar year "2000." However, there can be no assurance that potential "Year
2000" compliance failures will not have a material adverse affect on the
Company's business, results of operations or financial condition.

                                       9
<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 3 months, after
which the lease relating to these facilities will expire and CardioTech will
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.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is not a party to any legal proceedings.

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, 1998.

                                       10
<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 last two fiscal years,
as reported on the American Stock Exchange.

  Fiscal Year Ended March 31, 1997   High    Low
                                     ------  ---

June 30                              5-3/8   3-1/8
September 30                         3-3/8   1-1/2
December 31                         3-1/16  1-9/16
March 31                            2-9/16   1-3/4
 
Fiscal Year Ended March 31, 1998
 
June 30                             2-3/16   1-1/2
September 30                        4-9/16   1-1/2
December 31                         4-9/16   2-1/4
March 31                             2-3/4   1-1/2

     As of June 29, 1998, there were approximately 476 stockholders of record
and 2,970 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.

                                       11

<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, 1998, 1997, 1996, 1995, and
1994 and (ii) balance sheet data for the Company at March 31, 1998, 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.

<TABLE>
<CAPTION>
                                                                YEAR ENDED MARCH 31,
                                             1998          1997          1996         1995         1994
                                         -----------   -----------   -----------   ----------   ----------
<S>                                      <C>           <C>           <C>           <C>          <C>
STATEMENT OF OPERATIONS DATA
 
Research Revenues                        $   872,521   $   570,676   $   228,806   $  407,510   $  285,876
Operating Expenses:
   Research & Development                  1,638,381     1,031,605       910,676      708,723      699,919
   Selling, General, & Administrative      1,118,233       903,016       512,926      297,727      375,886
                                         -----------   -----------   -----------   ----------   ----------
 
Total Operating Expenses                   2,756,614     1,934,621     1,423,602    1,006,450    1,075,805
                                         -----------   -----------   -----------   ----------   ----------
 
Net Loss                                 $(1,808,955)  $(1,655,572)  $(2,188,030)  $ (598,940)  $ (789,929)
                                         ===========   ===========   ===========   ==========   ==========
Loss per Common Share                    
  Basic & Diluted                        $     (0.42)  $     (0.42)  $     (0.77)  $    (0.21)  $    (0.28)
                                         ===========   ===========   ===========   ==========   ========== 
</TABLE> 


<TABLE> 
<CAPTION> 
AT MARCH 31
                                             1998          1997          1996         1995         1994
                                         -----------   -----------   -----------   ----------   ----------
<S>                                      <C>           <C>           <C>           <C>          <C> 
Balance Sheet Data/(1)/
Total Current Assets                     $ 2,640,218   $ 2,535,285   $       504   $      504   $      504
Working Capital                            2,043,679     2,350,349           504          504          504
Total Assets                               3,039,638     2,782,787        35,694       44,150       52,222
Stockholders' Equity                         783,099     2,597,851        35,694       44,150       52,222
</TABLE> 

/(1)/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.

                                       12
<PAGE>
 
Item 7.  Management's Discussion and Analysis of Financial Condition 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 $301,845, or 53%, to $872,521 for the fiscal
year ended March 31, 1998. Research revenues for the fiscal year ended March 31,
1997 increased  $341,870, or 149%, to $570,676 from $228,806 for the 1996 fiscal
year. The increases in both periods were primarily due to an increase in revenue
derived from NIH grants, an increase in royalty revenues, and an increase in the
company's sale of medical grade polyurethanes.

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 $606,776,
or 59%, to $1,638,381 in the 1998 fiscal year and $120,929, or 13%, to
$1,031,605 in the 1997 fiscal year. The increases in both periods were primarily
the result of expenditures related to clinical trials of the VascuLink Vascular
Access Grafts in Europe and the NIH grants. Approximately 50% of the Company's
expenditures relating to these NIH grants are contracted to outside hospitals
and laboratories. The Company intends to increase its clinical trials sites for
the Vasculink Vascular Access graft as well as beginning clinical trials on
Myolink Peripheral Graft, and, therefore, anticipates that the cost of research
and development will continue to increases in the 1999 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 $215,217, or 24%, to $1,118,233 in the 1998 fiscal year and $390,090,
or 76%, to $903,016 in the 1997 fiscal year.  The increase in the selling,
general, and administrative expenses in the 1998 fiscal year was principally due
to increased costs as the Company continued to establish itself as a stand-alone
company and incurred costs related to professional, legal, and consulting fees,
as well as marketing and selling, investor relations and public reporting
expenses. The increase in selling, general and administrative expenses in the
1997 fiscal year was principally due to 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 1999 fiscal
year due to growth in management systems and marketing and selling efforts.

                                       13
<PAGE>
 
OTHER INCOME AND EXPENSES
     Other income and expenses is comprised of interest income related to the
Company's invested cash balances, offset by costs associated with the spin off.
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 expenses improved $366,765, to
income of $75,138 for the 1998 fiscal year. During the 1997 fiscal year, other
income and expenses decreased $701,607, or 71%, to an expense of $291,627. The
1997 expense balance included $393,879 in spin-off transaction costs offset by
interest income of $102,897. The decrease in interest income for the year ended
March 31, 1998 was primarily due to reduced money market balances due to
operational cash flow needs.

PROVISION FOR INCOME TAXES

     The Company had no provision for income taxes for the 1996, 1997, and 1998
fiscal years due to the fact that it incurred net operating losses for these
fiscal years.  The Company has an operating loss carried forward for the period
June 12, 1996 to March 31, 1998 of approximately $3,678,000.  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 revenues from the sale
of vascular grafts, although it has received research revenues relating to its
other biomaterial sales and from the NIH to support graft research. Since
inception, funding has come from PMI and 7% Senior convertible notes with a face
value of $1,660,000 issued on March 31, 1998. CardioTech expects to continue to
incur operating losses unless and until product sales and/or royalty generate
sufficient revenues 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
$2,226,691 in cash.  CardioTech estimates such amount will be sufficient to fund
its working capital and research and development activities through June 1999.
However, CardioTech's spending level may increase depending on the Company's
ability to raise additional capital.

                                       14
<PAGE>
 
     Past spending levels are not necessarily indicative of future spending
levels. From the inception of CardioTech's business through March 31, 1996, PMI
funded approximately $4.0 million in operating losses to support CardioTech's
research activities. Future expenditures for 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 management's 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.

Year 2000 Compliance

     The Year 2000 Issue refers to potential problems with computer systems or 
any equipment with computer chips or software that use dates where the date has 
been stored as just two digits (e.g., 97 for 1997). On January 1, 2000, any 
clock or date recording mechanism incorporating the date sensitive software 
which uses only two digits to represent the year may recognize a date using 00 
as the year 1900 rather than the year 2000. This could result in a system 
failure or miscalculations causing disruption of operations, including, among 
other things, a temporary inability to process transactions, send invoices, or 
engage in similar business activities.

     The Company has conducted a review of its internal information systems to 
determine the extent of any Year 2000 problem. Based on such review, the Company
does not currently believe that it has material exposure to the Year 2000 Issue 
with respect to its own information systems, since its core existing business 
information systems correctly define the year 2000.

     The Company is in the process of contacting its major customers in a effort
to determine the extent to which the Company may be vulnerable to those parties'
failure to timely correct their own Year 2000 problems. To date, the Company is 
unaware of any situations of noncompliance that would materially adversely 
affect its operations or financial condition. There can be no assurance, 
however, that instances of noncompliance which could have a material adverse 
effect on the Company's operations or financial condition will not be 
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the 
Company's information systems would not have a material adverse effect on the 
Company's operations or financial condition.
 
                                       15
<PAGE>
 
Item 8.

<TABLE>
<CAPTION>
INDEX OF FINANCIAL STATEMENTS                                              Page
<S>                                                                   <C>
Report of Independent Accountants                                          17
 
Consolidated Balance Sheets as of March 31, 1998 and 1997                  18
 
Consolidated Statements of Operations for each of the three years
in the period ended March 31, 1998.                                        19
 
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended March 31, 1998.                            20
 
Consolidated Statements of Cash Flows for each of the three years
in the period ended March 31, 1998.                                        21
 
Notes to Consolidated Financial Statements                            22 - 34
 
Exhibits                                                                   44
</TABLE>

                                       16
<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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended March 31, 1998.  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, 1998 and 1997, and results of its operations
and its cash flows for the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.

     From inception to June 12, 1996 the Company was a majority-owned subsidiary
of PolyMedica Corporation. As explained in Note B to the financial statements,
for the period 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 Corporation.  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 27, 1998

                                       17
<PAGE>
 
                        CARDIOTECH INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEET


<TABLE>
<CAPTION>
                                                                MARCH 31, 1998           MARCH 31, 1997
                                                                --------------           --------------   
<S>                                                             <C>                      <C> 
Assets
 
Current Assets:
          Cash & Equivalents                                    $     2,226,691          $     2,346,366
          Accounts Receivable - Trade                                    58,707                    8,292
          Accounts Receivable - Other                                   328,318                   93,218
          Prepaid Expenses                                               26,502                   87,409
                                                                ---------------          ---------------
 
      Total Current Assets                                            2,640,218                2,535,285
 
          Property and Equipment, Net                                   187,654                  231,619
          Other Non-Current Assets                                      211,766                   15,883
                                                                ---------------          ---------------   
 
      Total Assets                                                    3,039,638                2,782,787
                                                                ===============          ===============
      Liabilities and Stockholders' Equity
 
      Current Liabilities:
          Accounts Payable                                      $       161,243          $        50,860
          Accrued Expenses                                              435,296                  134,076
                                                                ---------------          ---------------
 
      Total Current Liabilities                                         596,539                  184,936
 
      Long Term Notes Payable                                         1,660,000                        -
 
      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, 4,272,916 issued and
           outstanding at March 31, 1998 and 1997                        42,729                   42,729
          Additional Paid in Capital                                  8,232,579                8,232,579
          Accumulated Deficit                                        (7,495,630)              (5,686,675)
          Cumulative Translation Adjustment                               3,421                    9,218
                                                                ---------------          ---------------
 
          Total Stockholders' Equity                                    783,099                2,597,851
                                                                ---------------          ---------------
 
          Total Liabilities and Stockholders' Equity            $     3,039,638          $     2,782,787
                                                                ===============          ===============
</TABLE> 


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


                                       18


<PAGE>
 
                        CARDIOTECH INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                            YEARS ENDED MARCH 31,
                                                            ---------------------
                                           1998                     1997                  1996
                                      -------------            -------------         ------------- 
<S>                                   <C>                      <C>                   <C> 
Research Revenue                      $    872,521             $    570,676          $    228,806

OPERATING EXPENSES
 Research and Development                1,638,381                1,031,605               910,676
 Selling, General and Admin.             1,118,233                  903,016               512,926
                                      ------------             ------------          ------------  

Total Operating Expenses                 2,756,614                1,934,621             1,423,602

OTHER INCOME AND EXPENSES
 Interest Income                            75,138                  102,270
 Spin Off Transaction Cost                                         (393,897)             (993,234)
                                      ------------             ------------          ------------ 

Net Loss                              $ (1,808,955)            $ (1,655,572)         $ (2,188,030)
                                      ============             ============          ============ 

Net Loss Per Common Share
Basic and Diluted                     $      (0.42)            $      (0.42)         $      (0.77)
                                      ============             ============          ============ 

Weighted Average Shares,
Basic and Diluted                        4,272,916                3,983,067             2,831,941 
 
</TABLE> 

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

                                       19
<PAGE>
 
                         CARDIOTECH INTERNATIONAL, INC.
                       STATEMENT OF STOCKHOLDERS' EQUITY
                   FOR YEARS ENDED MARCH 31, 1996, 1997, 1998

<TABLE>
<CAPTION>
                                    Common Stock                  
                                    ------------                   Additional    Total         Currency        Stock-  
                                  Number of             Due to     Paid in       Accumulated   Translation     holder
                                  Shares    Amount      Parent     Capital       Deficit       Adjustment      Equity
                                 -------------------------------------------------------------------------------------- 
<S>                              <C>        <C>      <C>           <C>           <C>           <C>          <C>
Balance at March 31, 1995        2,831,491  $ 2,831  $ 1,884,392                 $(1,843,073)               $    44,150
 
   Net Loss                                                                       (2,188,030)                (2,188,030)
   Advance from Parent                   -        -    2,179,574             -             -            -     2,179,574
                                 ---------  -------  -----------    ----------   -----------   ----------   -----------
Balance at March 31, 1996        2,831,491    2,831    4,063,966             -    (4,031,103)           -        35,694
 
   Issuance of Common
   Stock to Parent               1,412,625   39,610            -     3,960,375             -            -     3,999,985
 
   Payment of Shared Spin-off
   Costs to Former Parent                -        -            -      (373,631)            -            -      (373,631)
 
   Forgiveness of Advances
   from Parent and Adjustment
   of APIC                               -        -   (4,063,966)    4,559,123             -            -       495,157
 
   Issuance of Common Stock
   Warrants                              -        -            -        15,000             -            -        15,000
 
   Issuance of Common Stock
   for Services                     28,800      288            -        71,712             -            -        72,000
 
   Effect of Cumulative
   Translation Adjustment                -        -            -             -             -        9,218         9,218
 
Net Loss                                 -        -            -             -    (1,655,572)           -    (1,655,572)
                                 ---------  -------  -----------    ----------   -----------   ----------   -----------
Balance at March 31, 1997        4,272,916   42,729            -     8,232,579    (5,686,675)       9,218     2,597,851
 
   Effect of Cumulative
   Translation Adjustment                -        -            -             -             -       (5,797)       (5,797)
 
Net Loss                                 -        -            -             -    (1,808,955)           -    (1,808,955)
                                 ---------  -------  -----------    ----------   -----------   ----------   -----------
Balance at March 31, 1998        4,272,916   42,729            -    $8,232,579   $(7,495,630)       3,421       783,099
                                 =========  =======  ===========    ==========   ===========   ==========   ===========
</TABLE>

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

                                       20
<PAGE>
 
                         CARDIOTECH INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED MARCH 31,
                                                               1998                      1997                     1996
                                                          --------------            --------------           -------------- 
<S>                                                       <C>                       <C>                      <C> 
Cash flows from operating activities:              
  Net Loss                                                   $(1,808,955)              $(1,655,572)             $(2,188,030)
  Adjustments to reconcile net loss to             
   net cash flows from operating activities:       
   Depreciation and Amortization                                  71,776                    63,965                    9,238
   Loss (gain)on disposal of Property & Equipment                 (2,500)                                             2,082
   Non Cash Expenses                                                                        66,000
    Changes in assets and liabilities              
     Accounts Receivables                                       (285,515)                 (101,510)
     Prepaid Expenses                                             60,907                   (87,409)
     Accounts Payable                                            110,383                    50,860
     Accrued expenses                                            301,220                   134,076
     Increase in non-current assets                              (35,883)                  (15,883)
                                                          --------------            --------------           -------------- 
                                                   
      Net cash flows from operating activities                (1,588,567)               (1,545,473)              (2,176,710)
                                                            
                                                   
Cash Flows from Investing Activities:              
 Purchase of Property, and Equipment                             (28,936)                 (116,750)
 Proceeds from sale of Property and Equipment                      2,500
                                                          --------------            --------------           --------------
 Net Cash Flows from Investing Activities                        (26,436)                 (116,750)
                                                          ==============            ==============           ==============
                                                   
Cash Flows from Financing Activities:              
 Issuance of Convertible Notes Payable                         1,500,000
 Net proceeds from issuance of common stock                                              3,830,000
 Advance from parent                                                                       531,302                2,176,710
 Payment of spin-off costs                                                                (373,631)
                                                          --------------            --------------           --------------
                                                   
      Net cash flows from financing activities                 1,500,000                 3,987,671                2,176,710
                                                          ==============            ==============           ==============
                                                   
      Net increase in cash and cash equivalents                 (115,003)                2,325,448
                                                   
      Effect of exchange rate changes on cash                     (4,672)                   20,414
                                                   
      Cash and cash equivalents at beginning of    
       period                                                  2,346,366                       504                      504
                                                          --------------            --------------           --------------
                                                   
      Cash and cash equivalents at end of period             $ 2,226,691               $ 2,346,366             $        504
                                                          ==============            ==============           ==============
</TABLE> 
 
The accompanying notes are an integral part of the consolidated financial
statements.

                                       21
<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 Corporation. ("PMI").
CardioTech was incorporated in March 1993. The accompanying financial statements
for the year 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
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.

                                      22
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE 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.

USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the 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
additional capital to support research and development activities and to
commercialize its vascular graft technology. 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. 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 $2,226,691 in cash. CardioTech estimates such
amounts will be sufficient to fund its working capital and research and
development activities through June 1999.

                                      23
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)
                                        
     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 Institutes of Health Small
Business Innovative Research Grants, and Royalty Income Receivable.

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, 1998 and 1997, the Company was the
recipient of four 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.

                                      24 
<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 June, 1996 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.

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 depreciated thereon are removed from the
accounts and related gains and losses are included in operations.

BASIC AND DILUTED EARNINGS PER SHARE

     The Company computes basic and diluted earnings per share ("EPS") in
accordance with Statement of Financial Accountings Standards No. 128, "Earnings
Per Share", which the Company adopted on October 1, 1997. Basic earnings per
share is based upon the weighted average number of common shares outstanding
during the period. Diluted earnings per share is based upon the weighted average
number of common shares outstanding during the period plus additional weighted
average common equivalent shares outstanding during the period. Common
equivalent shares have been excluded from the computation of diluted loss per
share for all periods presented, as their effect would have been anti-dilutive.

                                      25
<PAGE>
 
Common equivalent shares result from the assumed exercise of outstanding stock
options and warrants, the proceeds of which are then assumed to have been used
to repurchase outstanding common stock using the treasury stock method.

     The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations shown on the Consolidated Statements
of Operations:

<TABLE>
<CAPTION>
                                           For the years ended March 31,
                                           -----------------------------
                                      In thousands, except for per share data

                                   1998                     1997             1996
                                   ----                     ----             ----
<S>                               <C>                   <C>               <C> 
BASIC AND DILUTED EPS
Numerator:
 Net income (loss)                $(1,809)               $(1,656)          $(2,188)
                                  -------                -------           -------
                                                                        
Denominator:                                                            
 Common shares outstanding          4,272                  3,983             2,832
                                  -------                -------           -------
                                                                        
Basic and Diluted EPS             $ (0.42)               $ (0.42)          $ (0.77)
                                  =======                =======           ======= 
                                                                        
</TABLE> 
 
     Options to purchase 945,022 and 902,022 shares of common stock outstanding
during the periods ended March 31, 1998 and 1997, respectively, were excluded
from the calculation of diluted earnings per share because the effect of their
inclusion would have been anti-dilutive.

                                      26
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

 
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 has no income tax provision for the years ended March 31, 1998
and 1997.

DEBT ISSUANCE COST

     The costs related to the issuance of debt are capitalized and amortized to
interest expense on a straight line basis over the life of the debt.

RECENT ACCOUNTING PRONOUNCEMENTS

     The Company will adopt Statement of Financial Accounting Standards No. 130 
"Reporting Comprehensive Income" in fiscal 1999. This Statement establishes 
standards for reporting and displaying comprehensive income and its components 
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. This statement requires the classification of items of 
comprehensive income by their nature in a financial statement and the 
accumulated balance of other comprehensive income separately from retained 
earnings and additional paid-in capital in the equity section of the balance 
sheet. The Company believes that adoption of this Statement will not have a 
material effect on its financial statements.

    The Company will also adopt Statement of Financial Accounting Standards No.
131 "Disclosures About Segments of an Enterprise and Related Information" fiscal
1999. This statement supersedes FASB Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise," but retains the requirement to report
information about major customers. This Statement establishes standards for
reporting information about operating segments in annual financial statements.
Operating segments are defined as components of an enterprise evaluated
regularly by the Company's senior management in deciding how to allocate
resources and in assessing performance. The Company believes that adoption of
this statement will not significantly change its segment reporting disclosures.

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, $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

                                      27
<PAGE>
 
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 and were incurred in the fiscal year 1997. There were no
remaining spin-off costs in Fiscal year 1998.

                                      28
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

LICENSE AGREEMENT

     PMI 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.

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, 1998   March 31, 1997
                                             --------------   -------------- 
<S>                                          <C>              <C>
Laboratory Equipment                            $ 333,057        $ 314,764   
Furniture, Fixtures, and Office Equipment          70,879           60,236   
Leasehold Improvements                             11,715           11,715   
                                                ---------        ---------   
                                                                             
Subtotal                                          415,651          386,715   
Less Accumulated Depreciation                    (227,997)        (155,096)  
                                                ---------        ---------   
                                                                             
                                                $ 187,654        $ 231,619   
</TABLE>

Depreciation expense for Property and equipment for the fiscal years ended March
31, 1998, 1997, and 1996 was approximately $71,776, $63,965, and $9,238,
respectively.

                                       29
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

E. ACCRUED EXPENSES:

Accrued Expenses consist of:

<TABLE>  
<CAPTION>                                             
                                            1998             1997
                                        -----------      -----------
<S>                                     <C>              <C> 
Legal and Professional Fee              $    92,454      $    52,746
Salaries and Benefits                       130,132           21,273
Research and Development                    202,956                0
Other                                         9,754           60,057
                                        -----------      -----------
                                                    
                                        $   435,296      $   134,076
                                        -----------      -----------
</TABLE> 
 
F. INCOME TAXES
 
Income (loss) before income taxes was generated as follows in the years ended
March 31:

<TABLE> 
<CAPTION> 
                                   1998          1997                     
                                -----------   -----------                 
          <S>                   <C>           <C>                         
          United States         $(1,111,596)  $(1,122,167)                
          Foreign                  (697,359)     (533,405)                
                                -----------   -----------                 

                                $(1,808,955)  $(1,655,572)   
                                -----------   -----------     
</TABLE> 

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

<TABLE> 
<CAPTION> 
                                               1998             1997
                                             --------         -------
<S>                                         <C>             <C> 
               Expected federal tax rate     (34.00%)         (34.00%)
               State income taxes, net      
               of federal tax benefit         (3.93)          ( 2.91)
               Change in                    
               Valuation Allowance            37.26            28.16 
               Meals & Entertainment                                 
               and Other Permanent                                   
               Items                           0.67             8.75 
                                              ------           ------
               Effective Tax Rate              0.00%            0.00%
                                              ------           ------

</TABLE> 
                                       30
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

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, 1998 and 1997:

<TABLE>
<CAPTION>
          Deferred tax asset:
                                                      1998         1997
          <S>                                       <C>         <C>
               Net Operating Loss                  $ 1,426,300   $ 755,600
               Tax Credits                                 400       2,800
                                                   -----------   ---------
                                                   $ 1,426,700   $ 758,400
                                                   -----------   ---------

          Deferred tax liabilities:
                                                       1998        1997

               Depreciation                        $    25,750   $  29,300
                                                   -----------   ---------
               Deferred Tax Liability                   25,750      29,300
                                                   -----------   ---------
               Valuation Allowance                 $(1,400,950)  $(729,100)
                                                   ------------  ---------
 
               Net Deferred Tax Assets             $     -0-     $      -0-
                                                   ------------  ---------
</TABLE>

     As of March 31, 1998, the Company had Federal net operating loss carry
forwards of approximately $2,594,000 available to offset future taxable income
which begin to expire in 2010. The Company has Foreign net operating loss carry
forwards of approximately $1,200,000.

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. The consolidated financial
statements have been restated to reflect these amendments.

                                       31
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE 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.

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 lessor 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. 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 CardioTech's research revenues are
shown as follows:

<TABLE>
<CAPTION>
                                 Year Ended March 31,                 
                                 --------------------
                                  1998   1997   1996              
                                  ----   ----   ----              
<S>                              <C>     <C>    <C>                
Customer A                         26%    18%    33%              
Customer B                         56%    73%    46%               
</TABLE>

K. COMMITMENTS AND LONG TERM OBLIGATIONS:

     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 1998 are as follows:

<TABLE> 
<CAPTION> 
     Fiscal Year(s):
     <S>                 <C> 
          1998              92,959
                         ---------
          Total          $  92,959
                         ---------
</TABLE> 

Rent expenses for operating leases was $193,757, $158,013 and $0 for the years 
ended March 31, 1998, 1997 and 1996, respectively.

                                       32
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


     On March 31, 1998, the Company issued $1,660,000, 7% Convertible Senior
Notes with a maturity date of March 20, 2003 to Dresdner, Kleinwort Benston
Private Partners LP ("DKB"). Interest will accrue annually and is payable
quarterly in cash and/or additional Notes at the option of DKB.

     At any time prior to maturity, DKB may convert the Notes, in whole or part,
plus accrued interest into Common Stock of the Company at a conversion price of
$1.995 which is subject to adjustment in certain events.

     Prior to maturity, the Notes are redeemable by the Company at a premium
which ranges from 105% to 100% of principal. Upon the occurrence of a change of
control, DKB may require the Company repurchase the Notes at a premium which
ranges from 105% to 100%. At maturity and under certain conditions, the Company
may repay the Notes, plus accrued interest, by converting them, in whole or in
part, into Common Stock of the Company at the conversion price.

     If the Company elects not to issue sufficient shares pursuant to the
conversion, redemption or repayment of the Notes, the balance of any amounts due
will be paid in cash, based upon the prevailing market price of the shares of
Common Stock not issued.

     CardioTech has the right to issue to DKB an additional $840,000 in 7% 
Convertible Senior Notes, provided certain milestones are attained prior to 
September 30, 1998.

     Certain financial and other covenants exist including, but not limited to 
maintenance of working capital and positive net worth, maintenance of share 
listing on the AMEX (or other acceptable national exchange) and receipt of an
unqualified audit opinion without a "going concern" paragraph. In the event of 
default the Notes may be accelerated.

L. STOCK OPTION DISCLOSURE:

     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. The options vest over 4 years. 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 

                                       33
<PAGE>
 
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 Plans for the year ended March 31, 1998 is as follows:

<TABLE> 
<CAPTION> 
                                                            WEIGHTED AVERAGE
                                        NUMBER OF SHARES     EXERCISE PRICE
                                        ----------------     -------------- 
<S>                                     <C>                 <C>  
Outstanding March 31, 1996                           -                -
Granted                                      1,768,230            $3.17
Canceled                                       866,208             $.41
Exercised                                            -                -
Outstanding March 31, 1997                     902,022            $1.98 
Granted                                         57,854            $2.01
Canceled                                       (14,854)           $1.94
Exercised                                            -                -
                                             ---------           ------
Outstanding March 31, 1998                     945,022            $1.98  
</TABLE> 
 
Summarized information about stock options outstanding at March 31, 1998
is as follows:

<TABLE> 
<CAPTION> 
                                                                ---- EXERCISABLE ----
                                       AVERAGE     WEIGHTED                 WEIGHTED 
                       NUMBER OF      REMAINING     AVERAGE                  AVERAGE
    RANGE OF           OPTIONS       CONTRACTUAL    EXERCISE    NUMBER OF    EXERCISE
 EXERCISE PRICES      OUTSTANDING        LIFE        PRICE       OPTIONS      PRICE
 <S>                  <C>            <C>          <C>           <C>       <C> 
    $1.75-2.56          930,022           8.6        $1.91       590,447      $1.94
      $4.55              15,000           3.6        $4.55        15,000      $4.55
</TABLE>

        Options exercisable at March 31, 1998 and March 31, 1997 were 605,447 
and 401,409 respectively.

                                       34
<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)

     The fair value of each option granted during the fiscal years 1998 and 
1997, is estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions:

<TABLE> 
<CAPTION> 
                                                           1998    1997  
                                                           ----    ---- 
<S>                                                        <C>     <C>  
Dividend yield............................................ none    none 
Expected volatility....................................... 78%     65%  
Risk-free interest rate................................... 6.2%    6.3% 
Expected life............................................. 4       4     

Weighted average fair value of options granted at fair value during:
1998...................................................... $1.67
1997...................................................... $1.48
</TABLE> 

Had compensation cost for the Company's 1998 and 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:
1998..................................... $(1,808,955)       $(0.42)
1997.....................................  (1,655,572)        (0.42)

Pro forma:
1998..................................... $(2,159,024)       $(0.51)
1997.....................................  (2,633,592)        (0.66)
</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. As a result of the
antidilutive provisions, CardioTech is required to issue additional warrants to
John Hancock when additional common shares or common share equivalents are
issued to third parties at a price lower than the exercise price. On March 31,
1998 the exercise price of the Warrants was adjusted to $3.41 per share and the
number of shares subject to the Warrants was adjusted to 276,656 shares.

                                       35



<PAGE>
 
                 CARDIOTECH INTERNATIONAL, INC. AND SUBSIDIARY
                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  (continued)


N. EARNINGS PER SHARE 

     The following table reconciles the numerator and denominator of the basic
and diluted earnings per share computations shown on the Consolidated Statements
of Operations:

O. SUBSEQUENT EVENTS

     On April 1, 1998 the Company's wholly owned subsidiary CardioTech
International, Ltd., signed a collaborative research and development agreement
with the Royal Free Hospital School of Medicine.  This research and development 
is funded by a loan of GBP 252,942 ($424,765) from Freemedic PLC, a subsidiary
of the Royal Free Hospital, to CardioTech International, Ltd. The loan has a
fixed rate of interest of 10% and both principal and interest are payable in
full before April 01, 2000.

     The loan is convertible, at Freemedic's option, into Common Stock of the
Company at $3.70 per share from April 1, 1998 until March 20, 2000. During this
period, the loan is also convertible at the Company's option into Common Stock
of the Company at $3.70 per share, provided that the market price for the
Company's Common Stock exceeds $3.70 from the day that the Company gives notice
of such conversion until seven business days thereafter. The loan is secured by
a pledge of all the assets of CardioTech International, Ltd. and is guaranteed
by the Company.

<TABLE>
<CAPTION>
                                            For the years ended March 31,
                                            -----------------------------
                                        In thousands, except for per share data

                                   1998                     1997             1996
                                   ----                     ----             ----
<S>                               <C>                   <C>               <C> 
BASIC AND DILUTED EPS
Numerator:
 Net income (loss)                $(1,809)               $(1,656)          $(2,188)
                                  -------                -------           -------
                                                                        
Denominator:                                                            
 Common shares outstanding          4,272                  3,983             2,832
                                  -------                -------           -------
                                                                        
Basic and Diluted EPS             $ (0.42)               $ (0.42)          $ (0.77)
                                  =======                =======           ======= 
                                                                        
</TABLE> 
 
     Options to purchase 945,022 and 902,022 shares of common stock outstanding
during the periods ended March 31, 1998 and 1997, respectively, were excluded
from the calculation of diluted earnings per share because the effect of their
inclusion would have been anti-dilutive.

                                       36
<PAGE>
 
Item 9.  Changes In and Disagreements with Accountants on a Accounting and
Financial Disclosure

     There have been no changes in accounts or disagreements with accountants on
accounting and financial disclosure matters.

                                       37
<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 "Section 16 (A) Beneficial Ownership Reporting
Compliance" in the Company's 1998 definitive proxy statement to be filed
pursuant to Regulation 14A not later than July 29, 1998, 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 1998 definitive proxy
statement to be filed pursuant to Regulation 14A not later than July 29, 1998,
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 1998 definitive proxy statement to
be filed pursuant to Regulation 14A not later than July 29, 1998, 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 1998
definitive proxy statement to be filed pursuant to Regulation 14A not later than
July 29, 1998, and is incorporated herein by reference.

                                       38
<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 16.
     (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

     Exhibit Number:
     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 Stock Option Plan,
          as amended.

     10.5 Employment Agreement of Michael Szycher, dated March 26, 1998.

     10.6 Employment Agreement of Alan Edwards, dated March 24, 1998.

     10.7 Service Agreement of Alan Edwards, dated March 24, 1998.

     10.8 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.

                                       39
<PAGE>
 
     10.9  Letter Agreement between CardioTech, PMI, and John Hancock Mutual
           Life Insurance Company was filed as Exhibit 10.9 and is incorporated
           herein by reference.

     10.10 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.

     10.11 Lease Agreement between CardioTech and Cummings Properties 
           Management, Inc., dated June 26, 1998.

     10.12 Loan and Option Agreement dated as of March 31, 1998 and among
           CardioTech, CardioTech International Ltd. ("CTI, Ltd."), the Royal
           Free Hospital School of Medicine ("Royal Free Hospital") and
           Freemedic PLC ("Freemedic").

     10.13 CTI, Ltd and Royal free Hospital Research Agreement in respect of the
           Development of Vascular Grafts, dated April 1, 1998.

     10.14 Freemedic and CTI, Ltd. License Agreement, dated as of April 1, 1998.

     10.15 Note Purchase Agreement dated as of March 31, 1998 between CardioTech
           and Dresdner Kleinwort Benson Private Equity Partners, LP ("Kleinwort
           Benson") was filed as Exhibit 99.1 to CardioTech's Form 8-K filed
           with the Securities and Exchange Commission (the "Commission") on
           April 15, 1998 and is incorporated herein by reference.

     10.16 7% Convertible Senior Note dated as of March 31, 1998 between
           CardioTech and Kleinwort Benson was filed as Exhibit 99.2 to
           CardioTech's Form 8-K filed with the Commission on April 15, 1998 and
           is incorporated herein by reference.

     21    Subsidiaries of CardioTech

     23    Consent of Coopers & Lybrand L.L.P.

     27    Financial Data Schedule

(b)  Reports on Form 8-K

     Form 8-K filed with the Commission on April 15, 1998 reporting the
     transactions with Kleinwort Benson and with Freemedic.
     
(c)  See (3) above.

(d)  See (2) above.

                                       40
<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 29, 1998     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 29, 1998     /s/ Michael Szycher
                         -------------------
                         Michael Szycher
                         Chairman, Chief Executive Officer
                         (Principal Executive Officer)

Dated: June 29, 1998     /s/ John E. Mattern
                         -------------------
                         John E. Mattern
                         Chief Financial Officer, Chief Operating
                         Officer (Principal Financial and
                         Accounting Officer)

Dated: June 29, 1998     /s/ Jonathan Walker
                         -------------------
                         Jonathan Walker
                         Director

Dated: June 29, 1998     /s/ Alan Edwards
                         ----------------
                         Alan Edwards
                         Director
 
Dated: June 29, 1998     /s/ Michael Barretti
                         --------------------
                         Michael Barretti
                         Director

                                       41
<PAGE>
 
                              INDEX FOR EXHIBITS
<TABLE> 
<CAPTION> 
EXHIBIT                                                               PAGE
<C>       <S>                                                         <C>
10.4      CardioTech 1996 Employee, Director
          and Consultant Stock Option Plan, as amended.

10.5      Employment Agreement of Michael Szycher, 
          dated March 26, 1998.

10.6      Employment Agreement of Alan Edwards,
          dated March 24, 1998.

10.7      Service Agreement of Alan Edwards, dated March 24, 1998.

10.11     Lease Agreement between CardioTech and Cummings
          Properties Management, Inc., dated June 26, 1998.

10.12     Loan and Option Agreement dated as of March 31, 1998
          by and among CardioTech, CardioTech International Ltd.
          ("CTI, Ltd."), the Royal Free Hospital School of
          Medicine ("Royal Free Hospital") and Freemedic PLC
          ("Freemedic").

10.13     CTI, Ltd. and Royal Free Hospital Research Agreement
          in respect of the Development of Vascular Grafts,
          dated as of April 1, 1998.

10.14     Freemedic and CTI, Ltd. License Agreement, 
          dated as of April 1, 1998.

21        Subsidiaries of CardioTech

23        Consent of Coopers & Lybrand L.L.P.

27        Financial Data Schedule


</TABLE>