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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K


           X            Annual Report Pursuant to Section 13 or 15(d) 
      ------------      of the Securities Exchange Act of 1934 for the
                        fiscal year ended December 31, 1996

      ------------      Transition Report Pursuant to Section 13 or 15(d) of 
                        the Securities Exchange Act of 1934

    Commission File Number:  0-27540

                         ENDOVASCULAR TECHNOLOGIES, INC.
             (Exact Name of Registrant as Specified in its Charter)

                DELAWARE                                     94-3096794
     (State or Other Jurisdiction of                      (I.R.S. Employer
     Incorporation or Organization)                    Identification Number)

                               1360 O'BRIEN DRIVE
                          MENLO PARK, CALIFORNIA 94025
                                 (415) 325-1600
           (Address, including Zip Code, and Telephone Number, including 
            Area Code, of Registrant's Principal Executive Offices)


           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

                                                 Name of each exchange
       Title of each class                        on which registered
              None                                        None

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                         COMMON STOCK, $.00001 PAR VALUE
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                          Yes     X               No
                               -------                ------

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 or any amendment to this
Form 10-K. ( )

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of Common stock on March 25, 1997 as
reported on the Nasdaq National Market, was approximately $82,900,000. Shares of
Common Stock held by each officer and director and by certain persons who own 5%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

As of March 25, 1997, registrant had outstanding 8,481,868 shares of Common
Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Registrant's 1997 Annual Meeting of
Stockholders to be held July 17, 1997 are incorporated by reference in Part III
of this Form 10-K Report.

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                                     PART I

         This report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors."

ITEM 1.  BUSINESS

GENERAL

         EndoVascular Technologies, Inc. (the "Company") designs, develops and
manufactures minimally invasive endovascular systems to repair diseased or
damaged vascular structures. The Company's Endovascular Grafting System, or
EGS(R) system, provides catheter-based delivery and implantation of a
specialized sutureless prosthesis, or implant, to repair abdominal aortic
aneurysms ("AAAs"). The EGS system offers a minimally invasive alternative to
the open surgical procedure performed today. The EGS system is approved for
marketing in Australia and Italy, and clinical trials are ongoing in the United
States and throughout Europe. The Company believes that its endovascular
procedure for AAA repair offers significant advantages over conventional AAA
surgery.

         To the Company's knowledge, it was the first company to receive
Investigational Device Exemption ("IDE") approval from the United States Food
and Drug Administration ("FDA") to conduct human clinical trials in the United
States with an endovascular system to treat AAAs. The Company is currently
conducting Phase II clinical trials of its three products: the Tube EGS system;
the Bifurcated EGS system; and the Aortoiliac EGS system. Upon completing
clinical trials, the Company intends to seek marketing clearances through filing
of premarket approval applications ("PMAs") with the FDA. The Company has
received ISO 9001/EN 46001 certification and submitted required clinical and
technical data in an application for CE Mark approval to market its products
throughout the European Community. The application is currently under review by
a sanctioned notified agency.

         The Company's business entails a variety of risks. See "Risk Factors"
at page 17.

OVERVIEW

         An abdominal aortic aneurysm is a balloon-like enlargement of the
aorta, resulting from weakened arterial walls. Once AAAs develop, they continue
to enlarge and, if left untreated, become increasingly susceptible to rupture,
usually resulting in death. Even unruptured AAAs can cause serious clinical
problems, including blood clot formation that can lead to aortic occlusions or
embolism. Although AAA is one of the most serious cardiovascular diseases, most
AAAs are never detected. Approximately 70% to 80% of AAA patients are
asymptomatic at the time of initial diagnosis, and AAAs are generally discovered
during procedures to diagnose unrelated medical conditions.

         In the United States, an estimated 1.5 million people have AAAs,
including those not yet clinically diagnosed. The Company estimates that each
year approximately 190,000 AAAs are diagnosed and 45,000 patients undergo AAA
surgery. AAAs are generally more prevalent in people over 60 and are more common
in men than in women.

         The conventional treatment for AAA is a complicated open surgical
procedure requiring a significant incision of the patient's abdomen, withdrawal
of the patient's intestines to provide access to the aneurysm and cross-clamping
of the aorta to stop blood flow. The aneurysm is repaired by means of
implantation and suture attachment of a vascular graft into the aorta inside the
aneurysmal sac. This procedure typically lasts two to four hours and is
performed under general anesthesia.



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         As a result of its invasiveness, open surgical AAA repair has high
mortality and complication rates. The mortality rate for emergency surgery to
repair a ruptured AAA approaches 50%, while the mortality rate for elective
surgical AAA repair is estimated to range from 4% to 10%. Complication rates
vary significantly depending upon whether the surgery is to repair ruptured or
unruptured AAAs. Complication rates for elective AAA surgery vary depending upon
patient risk classification, ranging from 15% for low-risk patients to 40% for
high-risk patients. The most significant complications include myocardial
infarction, acute renal failure, pulmonary impairment, bowel ischemia,
paraplegia and impotence.

         Conventional open surgical AAA repair is expensive and requires an
extended recovery period. The average cost of AAA surgery is approximately
$28,000, excluding physicians' fees. The typical recovery period includes
approximately 10 to 15 days in the hospital and up to two months of home
convalescence.

         Many patients diagnosed with AAAs do not undergo elective AAA surgical
repair because they are high risk candidates for open surgery or because the
size of their aneurysm is below the threshold at which the risks associated with
open surgery outweigh the risk of aneurysm rupture. This non-surgery patient
group is generally monitored for aneurysm expansion.

         Because of the high mortality and complication rates associated with
open surgical repair and the high cost and extended recovery time for AAA
surgery, there is a significant need for an alternative to today's conventional
surgical treatment of AAAs.

THE EVT SOLUTION

         The Company has developed a minimally invasive procedure for the repair
of unruptured AAAs. The Company's EGS system provides catheter-based delivery
and implantation of the EndoGraft(R) endovascular prosthesis inside and through
the AAA. This specialized prosthesis is similar to the graft used in the open
surgical procedure except that it is implanted by means of a proprietary,
sutureless attachment system. The EGS system is designed to offer a less
expensive and less debilitating AAA repair compared to open surgery.

         The Company's procedure requires a small groin incision, called a
"cut-down," to access the femoral artery. The EndoGraft prosthesis is delivered
to the aneurysm site in a collapsed state by means of a catheter that is
introduced through the cut down and then navigated into the aorta using
fluoroscopic visualization. Once properly positioned through the AAA, the
EndoGraft prosthesis is released and implanted in the aorta by a balloon
inflation. The EndoGraft prosthesis is composed of a vascular graft with
proprietary attachment systems that consist of self expanding wire frames and a
number of anchoring hooks. The attachment systems are designed to create a
circumferential seal and anchor the prosthesis to the vessel wall by means of
the hooks, much like a line of sutures. The Company believes that the resulting
repair is quite similar to open AAA surgery.

         Based on the results of clinical trials to date, the Company believes
that its endovascular AAA repair procedure should provide the following
advantages over conventional AAA surgery:

         o Lower Mortality and Complication Rates. The Company's endovascular
approach should result in lower mortality and complication rates because it is
significantly less invasive.

         o Shorter Hospital Stay. The Company's endovascular approach should
significantly reduce hospital stays and the need for post-procedure recovery in
an intensive care unit. In a recent comparative clinical trial, hospital stays
averaged 2.4 days for patients undergoing the Company's procedure compared to
8.2 days for patients undergoing open surgical repair.



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         o Faster Recovery and Reduced Convalescence Time. The Company's
endovascular procedure should permit faster recovery and reduced convalescence
time because it involves significantly less tissue trauma and hemodynamic
stress.

         o Lower Cost. The Company's endovascular procedure should result in
significantly lower costs primarily as a result of shorter hospital stays.

As a result of these significant advantages, the Company believes that its
endovascular procedure will be considered for patients currently treated
surgically as well as some patients who elect not to undergo open surgery or who
are deemed not to be candidates for open surgery.

THE EVT STRATEGY

         The Company's objective is to become the premier supplier of
endovascular surgery products to repair diseased or damaged vascular structures
through less invasive endovascular techniques as an alternative to open surgery.
Important elements of the Company's strategy include:

         o Achieve First to Market Position. The Company's strategy is to be
first to market with endovascular systems to treat AAAs. To the Company's
knowledge, it was the first company to receive IDE approval from the FDA to
conduct human clinical trials in the United States with such systems. The
Company's three products are currently in Phase II clinical trials. Clinical
trials are also ongoing in Europe. The Company has received ISO 9001/EN 46001
certification and has submitted an application for a CE mark to allow marketing
of its products throughout the European Union. The Company's products are
approved for marketing in Australia and Italy.

         o Establish the Endovascular Grafting System as the Standard of Care
for AAA Repair. The Company's intent is to establish its products as the
standard of care for elective treatment of AAAs. The Company plans to coordinate
market rollout by selectively targeting top tier medical institutions and
conducting intensive physician training seminars. Through this effort, the
Company aims to train well-respected clinical supporters for its procedure and
leverage their reputation in the clinical community to generate wider demand.
The Company will promote its products at major medical conventions and through
advertising and educational support materials.

         o Expand Treatable AAA Patient Population. If it receives regulatory
approval of the EGS systems, the Company intends to promote its endovascular
procedure for those patients diagnosed but not currently treated for their AAAs.
In addition, the Company will endeavor to increase the rate of diagnosis of
asymptomatic AAAs by creating public awareness of AAA disease and by supporting
the merits of early detection and endovascular treatment.

         o Leverage Core Technology. The Company intends to leverage its core
endovascular technology to expand its product offerings for endovascular
interventions. The Company intends to focus on increasing the applicability of
products for the treatment of AAA and addressing other clinical needs in the
field of vascular surgery.

         o Protect and Enhance Proprietary Technology. The Company believes that
its patent portfolio may offer a significant competitive advantage. The Company
currently has 13 issued United States patents and nine issued foreign patents,
and has over 45 pending United States and foreign patent applications. The
Company intends to continue its aggressive patent filing strategy and to
vigorously defend its intellectual property rights against any infringement.



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THE ENDOVASCULAR GRAFTING SYSTEM

         The Endovascular Grafting System comprises the EndoGraft endovascular
prosthesis and its delivery catheter. In addition, the Company manufactures
certain peripheral devices used before and during the endovascular AAA repair
procedure, including the EVT Expandable Sheath and the AngioScale(TM)
angiography catheter.

         EndoGraft Endovascular Prosthesis

         The EndoGraft endovascular prosthesis is composed of a vascular graft,
similar to a surgical graft, with proprietary attachment systems that consist of
self-expanding wire frames and a number of anchoring hooks. The attachment
systems are designed to create a circumferential seal and anchor the prosthesis
to the vessel wall by means of the hooks, much like a line of sutures.
Radiological markers, sutured to the outside wall of the graft, facilitate
fluoroscopic visualization of the prosthesis during implantation and x-ray
evaluation of the prosthesis after implantation.

         The EndoGraft prosthesis is available in three designs and in a range
of sizes to conform to patient anatomy. The Tube EndoGraft prosthesis is
designed for the treatment of discrete AAAs with anatomy that allows for
attachment below the aneurysm and above the aortic bifurcation. The Bifurcated
EndoGraft prosthesis is designed to treat AAAs with insufficient vasculature
above the aortic bifurcation to permit attachment and seal of the Tube EndoGraft
prosthesis. This prosthesis divides into two limbs that are attached to the
iliac arteries below the aortic bifurcation. The Aortoiliac EndoGraft prosthesis
is designed to treat vascular anatomy in which one iliac artery is narrowed or
extremely tortuous, making it unsuitable for implantation of the limb of a
Bifurcated prosthesis. This implant has an aortic trunk and one iliac limb
instead of two limbs. Once implanted, blood flow is re-established to the other
leg by means of a minimally invasive surgical grafting procedure, which is
accomplished through two small groin incisions.

         Delivery Catheter

         The EndoGraft prosthesis is pre-loaded into a delivery catheter that is
designed to transport the prosthesis to the aorta and facilitate a controlled,
accurate implantation across the aneurysm. This over-the-wire delivery catheter
consists of capsules that contain the compressed EndoGraft prosthesis attachment
systems, a jacket covering the body of the implant, an implantation balloon that
is inflated to seat the attachment system hooks and handle assemblies with
controls for implant release and ports for guidewire insertion, contrast
injection, and balloon inflation. Given the difference in prosthesis design and
function, the Tube, Bifurcated and Aortoiliac delivery catheters differ slightly
in configuration and operation.

         A similar procedure is performed for the implantation of a Tube and
Aortoiliac EndoGraft prosthesis. Following a surgical incision to expose the
femoral artery, the delivery catheter is introduced and navigated over a
guidewire into the aorta while the EndoGraft prosthesis is maintained in a
collapsed state. Using fluoroscopic visualization, the EndoGraft prosthesis is
properly positioned relative to the AAA. The top attachment system is exposed
and the hooks are driven into the aortic wall by means of balloon inflations.
The bottom attachment system is then exposed and implanted in a similar manner.
The delivery catheter is removed from the patient leaving the EndoGraft
prosthesis in place. Implantation of a Bifurcated EndoGraft prosthesis involves
access through both femoral arteries in order to position the limbs of the
implant in the iliac arteries.

         Peripheral Devices

         The EVT Expandable Sheath is designed to facilitate catheter insertions
into the femoral artery and provide a conduit for passage of delivery catheters
through the peripheral vasculature and into the abdominal aorta. The
AngioScale(TM) angiography catheter is used to measure aneurysm anatomy for the
purpose of accurately sizing 



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the EndoGraft prosthesis. The Company also manufactures an iliac artery
occlusion implant and delivery catheter that is used in conjunction with the
Aortoiliac EGS system.

ATTACHMENT SYSTEM FRACTURES AND PRODUCT REDESIGN

         In January 1995, the Company discovered fractures in the attachment
system component of the Tube EndoGraft prosthesis during routine follow-up
tests. Based on this discovery, the Company suspended its clinical trials
worldwide. As of December 31, 1996, a total of 37 patients, representing
approximately 41% of 91 patients in whom the Tube EndoGraft prosthesis was
implanted prior to February 1995, have experienced attachment system fractures.
In eight patients with fractures, including seven patients who also had
Perigraft Flow, the Tube EndoGraft prosthesis was removed and the AAA was
treated by conversion to open surgical repair. See "Clinical Trials-Tube EGS
System." Three patients with fractures have died for reasons unrelated to the
attachment system fractures. The remaining patients are closely monitored for
fractures or the onset of adverse clinical consequences by their physicians and
the Company. Except for the seven patients converted to open surgery, no major
adverse clinical consequences have resulted from known fractures to date. There
can be no assurance, however, that adverse clinical consequences will not occur
in the future, the result of which could have a material adverse effect on the
Company's business, financial condition and results of operations.

         Following suspension of clinical trials in January 1995, the Company
determined that the fractures were caused by metal fatigue resulting from higher
than anticipated forces acting on the attachment systems. As a result, the
Company implemented a number of significant enhancements to the attachment
systems and subjected the redesigned attachment systems to accelerated fatigue
testing. There can be no assurance, however, that the accelerated fatigue
testing accurately simulates the actual forces present in the human body. The
Company is currently conducting Phase II clinical trials of its Tube,
Bifurcated, and Aortoiliac EGS systems. International clinical trials are also
ongoing. See "-Clinical Trials." Since re-initiating clinical trials,
approximately 300 implantation procedures have been performed worldwide with
longest patient follow-up now over 15 months.

         The Company expects additional fractures to occur in the non-modified
attachment systems. The Company believes, based on tests it has conducted and
clinical experience to date, that the redesigned attachment systems should
prevent fractures in future implants. However, there can be no assurance that
fractures will not occur in the redesigned attachment system, which may not be
apparent for a substantial time, or that the Company will not experience
additional problems with the redesigned attachment system. Any attachment system
fractures that might occur in the redesigned attachment system could result in
another suspension or termination of clinical trials which would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors - Attachment System Fractures; Suspension of
Clinical Trials."

CLINICAL TRIALS

         In the United States the Company is conducting Phase II clinical trials
of the Tube, Bifurcated, and Aortoiliac EGS systems. In addition, the Company is
conducting clinical trials of its EGS systems in the United Kingdom, Germany,
France, The Netherlands, and Sweden. The Company has received ISO 9001/EN 46001
certification and submitted required clinical and technical data in an
application for CE mark approval to market of its products throughout the
European Community. The application is currently under review by a sanctioned
Notified Body. The Company's products are approved for marketing in Australia
and Italy.

Tube EGS System

         The Company submitted an IDE to the FDA for the original Tube EGS
system in October 1991. The IDE was approved by the FDA in April 1992, and Phase
I clinical trials began in February 1993. A total of 17 human cases using the
original version of the Tube EGS system were performed.



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         Early experience with the Tube EGS system resulted in a decision by the
Company to develop a lower profile delivery catheter (i.e., a delivery catheter
with a smaller diameter) and a wider range of implant sizes before continuing
clinical trials. After making these revisions and receiving FDA clearance, the
Company continued human trials with this revised Tube EGS system in November
1993. The Company received FDA approval to initiate U.S. Phase II clinical
trials with this system in February 1994. This Phase II comparative trial was
partially completed before suspension in January 1995. A total of 19 patients
were treated with the Tube EGS system and 13 patients underwent open surgery in
the control group. The mean hospital stay for a patient treated with the Tube
EGS system was 3.0 days compared to 10.3 days for the patients treated in the
surgical control group.

         A total of 85 procedures were performed worldwide with the revised Tube
EGS system before suspension of clinical trials in January 1995, including the
19 procedures performed with the Tube EGS system in the U.S. Phase II clinical
trial. In 81, or 95% of these 85 procedures, the Tube EndoGraft prosthesis was
successfully delivered and implanted. In 35 of 81 successful Tube EndoGraft
prosthesis implantations using the revised Tube EGS system, blood flow outside
of the implant ("Perigraft Flow"), either from leakage around the attachment
site ("Leaks") or back-bleeding from branching arteries ("Branch Flow"), was
observed immediately following the procedure. Over time this Perigraft Flow
ceased in 17 of the patients, but in the remaining 18 patients, representing 22%
of the 81 patients, the Perigraft Flow did not spontaneously resolve. Nine of
these patients with persistent Perigraft Flow have been converted to open
surgical repair, including seven patients whose implants also had attachment
system fractures. Eight of the patients with continuing Perigraft Flow are being
monitored by their physicians and the Company for signs of aneurysm enlargement,
which would be a clear indication for conversion to standard surgery. One of the
patients with continuing Perigraft Flow had aneurysm enlargement and
subsequently died from AAA rupture after delays in scheduling conversion to
standard surgery because of other health problems.

         In January 1995, the Company voluntarily suspended clinical trials of
the Tube EGS system worldwide after discovering fractures in the attachment
system component of the Tube EndoGraft prosthesis. After obtaining FDA approval
of a redesigned attachment system in October 1995, the Company re-initiated U.S.
Phase II clinical trials of the Tube EGS system in November 1995. See
"-Attachment System Fractures and Product Redesign."

         In January 1997 the Company reported completion of patient enrollment
in the Phase II trial of the Tube EGS system. The trial is designed to directly
compare mortality, complications and length of hospital stay in a group of
patients treated with the Tube EGS(R) system to a group of control patients
undergoing standard AAA surgery. A total of 178 patients, 88 enrolled in the
Tube EGS group and 90 surgical control patients, were treated at twenty
participating investigative sites, including the University of California at Los
Angeles, Northwestern University, New York University, St. Thomas Hospital and
the Miami Vascular Institute. In the EGS patient group, the Tube EndoGraft(R)
prosthesis was successfully delivered and implanted in 83 or 94% of the 88
attempted procedures. There was no 30 day mortality in the EGS group, compared
to a 4.4% mortality rate in the surgical control group. There were no serious
complications, defined as the occurrence of myocardial infarction, stroke, renal
failure requiring dialysis, or bowel ischemia, reported in the EGS patient
group. Three surgical patients or 3.3% of the surgical control group experienced
myocardial infarction. There were no other serious complications reported in the
surgical control group. The mean hospital stay for patients in the EGS group was
2.4 days compared to 8.2 days for patients who underwent standard AAA surgery.

         Late complications and implant performance will be monitored during a
one year follow-up period. All radiological examinations, performed at discharge
and throughout the follow-up period, are independently evaluated by a core
laboratory at the Cleveland Clinic Foundation. As of December 31, 1996,
discharge evaluations had been completed by the core laboratory on 56, or 64% of
patients successfully treated in the EGS group. Leaks were noted in 13, or 23%
of these patients, and Branch Flow was present in 11, or 20% of patients at
discharge. Earlier studies indicate that in nearly 50% of patients, Leaks and
Branch Flow spontaneously close.

         The clinical significance of Leaks and Branch Flow is unknown. There
can be no assurance that Leaks and Branch Flow or other technical difficulties
will not occur in future procedures using the Company's EGS 



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systems or that their existence will not have a material adverse effect on the
safety and efficacy of the Tube EGS system, Bifurcated EGS system, Aortoiliac
EGS system or any follow-on devices and thereby prevent the Company from
obtaining PMA approval from the FDA. The longest follow-up for any Tube EGS
system patient is approaching four years.

         As of March 17, 1997, a total of 125 tube procedures have been
performed worldwide with the Company's redesigned attachment system.

Bifurcated EGS System

         Following FDA approval of the Company's IDE submission, the Company
began Phase I clinical trials of the Bifurcated EGS system in September 1994.
Although no fractures were evident in patients treated, worldwide clinical
trials of the Bifurcated EGS system were also suspended in January 1995. A total
of 12 cases were completed prior to suspension. Upon FDA approval to re-initiate
clinical trials using a modified Bifurcated EndoGraft prosthesis incorporating
attachment system enhancements similar to those made to the Tube EndoGraft
prosthesis, the Company re-started the Phase I clinical trial of the Bifurcated
EGS system in December 1995. In June 1995, the Company completed the Phase I
trial. A total of 24 patients were treated at five U.S. and two international
investigative sites. Six week follow-up data from each patient treated was
submitted to the FDA for review.

         Following FDA approval, the Company initiated Phase II clinical trials
of the Bifurcated EGS system in August 1996. This trial is similar in design to
the Phase II trial of the Company's Tube EGS system, and will utilize data from
the surgical control group enrolled in that trial for comparison purposes. As of
December 31, 1996, 38 patients had been enrolled in the Bifurcated EGS group.
The Company intends to release acute clinical results of the trial after the
enrollment phase is complete.

         As of March 17, 1997, a total of 154 bifurcated procedures have been
performed worldwide with the Company's redesigned attachment system. While
Perigraft Flow has been observed following bifurcated procedures in some
patients, preliminary results of the Bifurcated EGS system indicate a reduction
in instances of Perigraft Flow as compared to Perigraft Flow following
implantation of the Company's Tube EGS system. Although the longest follow-up of
patients treated with the Bifurcated EGS system is 30 months, human experience
with the Bifurcated EGS system is limited and clinical results are not yet
sufficient to assess efficacy.

Aortoiliac EGS System

         Following FDA approval of the Company's IDE submission, and an
allowance to bypass Phase I testing, the Company initiated Phase II clinical
trials of the Aortoiliac EGS system in November 1996. As of March 17, 1997, 16
Aortoiliac implantation procedures had been performed worldwide with the
redesigned attachment system. Human experience with the Aortoiliac EGS system is
limited and current clinical results are insufficient to access efficacy and
safety.

         The Company's EGS systems for treatment of AAAs are at an early stage
of clinical testing, and there can be no assurance as to their clinical safety
and efficacy. See "Risk Factors-Early Stage of Clinical Trials; No Assurance of
Safety and Efficacy."

RESEARCH AND DEVELOPMENT

         The Company has substantial expertise in the design and development of
endovascular grafting devices, including specialized endovascular implants,
graft attachment mechanisms, introducer and delivery catheters, vascular graft
design and testing, balloon development, metal working and welding, finite
element analysis and the modeling of in vivo corrosion/fatigue characteristics.



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         The Company is developing second generation EGS systems to enable
endovascular treatment of a larger percentage of the AAA patient population
including lower profile (i.e., delivery catheters with smaller diameters) Tube,
Bifurcated and Aortoiliac EGS systems. These systems should enhance the ability
to navigate peripheral vasculature and deliver endovascular grafts to the
abdominal aorta. The Company is developing a variety of devices to improve the
acute and long-term success of endovascular AAA procedures, including devices
designed to facilitate accurate EndoGraft prosthesis placement and to ensure a
complete seal between the implant and the underlying aortic or iliac vessel.

         The Company believes that its core technologies are applicable to a
wide variety of vascular diseases. For example, the Company has prototyped a
Thoracic EGS system to repair aneurysms in the thoracic aorta (the portion of
the aorta in the chest). The initial design of this device was developed by the
Company and physicians at Stanford University, whose early clinical results of
endovascular thoracic aneurysm repair have been published in the New England
Journal of Medicine. Development of second generation EGS systems, as well as
the Thoracic device, is at an early stage and the Company has not yet submitted
IDE's for any of these products. There can be no assurance that any of these
systems can be successfully developed, receive FDA clearance, be manufactured on
a cost-effective and timely basis, be successfully introduced or achieve market
acceptance. See "Risk Factors" for additional information regarding risks
generally applicable to the development of new products.

         The Company's research and development expenditures (which include
clinical trial, medical, regulatory and product development expenses) for the
years ended December 31, 1994, 1995 and 1996 were $7.4 million, $8.1 million,
and $12.1 million respectively.

PATENTS AND PROPRIETARY INFORMATION

         The Company's policy is to protect its proprietary position by, among
other methods, filing United States and foreign patent applications. The Company
holds 13 issued United States patents and nine issued foreign patents. In
addition, the Company has over 45 pending United States and foreign patent
applications. The Company believes that issued patents and pending patent
applications cover fundamental aspects of its EGS systems. However, no assurance
can be given that the patent applications owned by the Company will issue as
patents or that any issued patents owned by the Company will provide competitive
advantages for the Company's products or will not be successfully challenged or
circumvented by its competitors. In addition, there can be no assurance that
competitors, many of which have substantial resources and have made substantial
investments in competing technologies, will not seek to apply for and obtain
patents that will prevent, limit or interfere with the Company's ability to
make, use or sell its products either in the United States or in international
markets.

         The Company also relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute appropriate confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory relationships with
the Company. There can be no assurance, however, that these agreements will not
be breached or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its rights in unpatented proprietary
technology.

         Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are maintained
in secrecy for a period after filing. Publication of discoveries in the
scientific or patent literature tend to lag behind actual discoveries and
related patent applications, and the large number of patents and applications
and the fluid state of the Company's development activities make comprehensive
patent searches and analysis impractical or not cost-effective. Although the
Company has made patent and publication searches in the United States and in
foreign countries to determine whether materials, processes or designs used by
it or its potential products infringe or will infringe third-party patents, such
searches have not been comprehensive. Patents issued and patent applications
filed relating to medical devices are 



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voluminous and there can be no assurance that current and potential competitors
and other third parties have not filed or in the future will not file
applications for, or have not received or in the future will not receive,
patents and will not obtain additional proprietary rights relating to materials
or processes used or proposed to be used by the Company.

         The medical device industry in general, and the industry segment that
includes products for the treatment of cardiovascular disease, in particular,
have been characterized by substantial competition and litigation regarding
patent and other intellectual property rights. It is not uncommon for medical
device companies to receive letters from competitors or potential competitors
claiming or suggesting intellectual property infringement. The Company has
received letters from two medical device companies, Cook, Inc. ("Cook") and
InnerDyne Medical, Inc. ("InnerDyne"). The Cook letter, dated July 9, 1993,
suggested potential infringement of a Cook-owned patent by future commercial
sale of the Company's attachment system component of the EndoGraft prosthesis.
The Company has reviewed the Cook matter and the Company believes that no such
infringement exists. The InnerDyne letter, dated November 2, 1994, proposed that
the Company discuss licensing an InnerDyne-owned patent that InnerDyne believed
to be pertinent to the Company's EVT Expandable Sheath. The Company has reviewed
the InnerDyne matter and the Company believes that it is not necessary to enter
into a licensing arrangement with InnerDyne. There can be no assurance, however,
that the Company's products do not infringe upon the patent rights or other
intellectual property rights of Cook, InnerDyne or other companies, that the
Company will not be required to seek licenses from these or other companies or
that these or other companies will not bring claims of infringement against the
Company. Although patent and intellectual property disputes in the medical
device industry have sometimes been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. There can be no assurance that necessary
licenses would be available to the Company on satisfactory terms or at all.
Furthermore, any litigation or administrative proceeding could result in
substantial costs to the Company and distraction of the Company's management,
even if the Company ultimately prevails in such litigation. An adverse ruling in
any litigation or administrative proceeding could have a material adverse effect
on the Company's business, financial condition and results of operations.

         If any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses from the patent
owners of each of such patents or to redesign its products or processes to avoid
infringement. There can be no assurance that such licenses would be available at
all or available on terms acceptable to the Company or that the Company could
redesign its products or processes to avoid infringement. Litigation may be
necessary to defend against claims of infringement, to enforce patents issued to
the Company or to protect trade secrets and could result in substantial cost to,
and diversion of effort by, the Company.

MANUFACTURING

         The Company manufactures its products at its Menlo Park, California
facility. The Company believes that its facility has sufficient capacity to meet
the Company's anticipated manufacturing needs for the next 9 months. The Company
believes that, if marketing approvals of its EGS systems are obtained, it should
be able to manufacture commercial quantities of its products at a reasonable
cost. However, the manufacture of the Company's products is a complex and costly
operation involving a number of separate processes and components. Certain
manufacturing processes of the EGS systems are labor intensive and achieving
significant cost reductions will depend in part upon reducing the time required
to complete these processes. There can be no assurance that the Company will be
able to achieve anticipated cost reductions in the manufacture of its products.
To date, the Company's manufacturing activities have consisted primarily of
producing limited quantities of products for use in clinical trials and
controlled market release, and the Company does not have experience in
manufacturing its products in commercial quantities.

         The Company purchases certain components from various independent
suppliers that are either standard components or are built to the Company's
specifications. As a result of a concerted effort by the Company to 



                                       9
<PAGE>   11

develop multiple supplier contingency plans, most purchased components and
processes are available from more than one vendor. However, certain components
and processes are manufactured or provided by single source suppliers. The
Company utilizes raw materials manufactured by third parties, including Dow
Chemical and DuPont, in its products. In recent years, in the wake of litigation
surrounding silicone breast implants, both Dow Chemical and DuPont have ceased
supplying these materials for implantable medical devices. Although the Company
has a significant inventory of these materials, there can be no assurance that
use of these materials will not be restricted or that the Company will have
access to these raw materials in the future. The Company has and will continue
to consider, as appropriate, the internal manufacture of components and
processes currently provided by third parties, as well as the implementation of
new production processes. The Company's facility is subject to periodic
inspections by state and federal regulatory authorities. See "Risk
Factors-Dependence on Key Suppliers; Limited Manufacturing Experience" and
"-Government Regulation; Significant Time Before Submission of any PMA."

SALES AND MARKETING

         The Company believes that most endovascular AAA procedures in the
United States will be performed in a small percentage of all hospitals. If
marketing approval is obtained, the Company believes that it can market its
products to these hospitals with a moderately sized direct field organization.
The Company currently has three sales and marketing employees. Once established,
the domestic sales and marketing organization will focus on the leading
institutions where aneurysm surgery is frequently performed. If regulatory
approval is obtained, the Company intends to provide clinical education and
training programs to educate practitioners regarding the capabilities and uses
of the Company's products. In addition, the Company will continue to sponsor, at
leading medical institutions, clinical trials and research programs that support
clinical and technical development and regulatory approval of its products.

         Foreign markets are serviced currently by seven independent
distributors covering more than ten countries in Europe, Asia and Australia.
These independent distributors have the exclusive right to distribute the
Company's products within a defined territory. The Company's foreign
distributors generally purchase the Company's products during clinical trials at
an agreed upon contract price. If regulatory approval of the Company's products
is obtained, the Company's products will be purchased at a discount from list
price and resold to hospitals and clinics. Sales under the agreements are
denominated in U.S. dollars. Foreign sales are subject to certain risks,
including exchange rate fluctuations, international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies and
foreign medical regulations.

         If FDA approval to market the device is obtained, the Company plans to
coordinate market rollout by selectively targeting top tier institutions and
conducting intensive physician training seminars. Through this effort, the
Company hopes to train well-respected clinical supporters for this procedure and
leverage their reputation in the clinical community to generate wider demand. In
addition, the Company intends to promote its products at major medical
conventions and through advertising and educational product support materials.

         See "Risk Factors-Lack of Sales and Marketing Experience; Planned
Dependence on International Distributors."

COMPETITION

         The Company expects that significant competition in the endovascular
grafting market will develop. There are many large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than the Company, focusing on the development of
endovascular technology. Many of these companies have vascular stents, as well
as vascular graft and catheter technologies that may be applicable to
endovascular repair. The Company may compete against a number of these companies
including: Boston Scientific Corporation; Medtronic Corporation; Pfizer
Corporation; Johnson & Johnson; C.R. Bard, Inc.; and United States Surgical
Corporation. Several companies have designed and developed products that compete




                                       10
<PAGE>   12

directly with the Company's products. There can be no assurance that one or more
of these or other companies will not develop technologies that are more
effective or less costly than the Company's products, or that would otherwise
render the Company's products and technology non-competitive or obsolete. Such
competition could have a material, adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
products could be rendered obsolete as a result of future innovations in AAA
surgical techniques, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

         Any product developed by the Company that gains regulatory approval
will have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
endovascular grafting products are safety, long-term efficacy, ease of delivery,
reliability, innovation and price. The Company also believes that physician
relationships and customer support are important competitive factors. Although
the Company believes that it is the first to design, develop and initiate
clinical trials of endovascular graft products for the treatment of AAAs in the
United States, and, therefore, has a competitive advantage in the U.S. market,
there can be no assurance that this competitive position will be maintained or
that the Company will be first to market or ever market endovascular products
for the treatment of AAAs in the United States.

GOVERNMENT REGULATION

United States

         The Company's EGS systems are regulated in the United States as medical
devices. As such, the Company is subject to extensive regulation by the FDA.
Pursuant to the Federal Food, Drug, and Cosmetic Act of 1976, as amended, and
the regulations promulgated thereunder (the "Act"), the FDA regulates the
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, proceedings to detain products, fines, injunctions, civil and criminal
penalties against the Company, its officers and its employees, recall or seizure
of products, total or partial suspension of production, failure of the
government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing approvals and a recommendation by the FDA that the
Company not be permitted to enter into government contracts. The FDA also has
the authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.

         In the United States, medical devices are classified into one of three
classes (Class I, II or III), on the basis of the controls deemed necessary by
the FDA to reasonably assure their safety and efficacy. Under FDA regulations,
Class I devices are subject to general controls (for example, labeling,
premarket notification and adherence to GMPs) and Class II devices are subject
to general and special controls (for example, performance standards, postmarket
surveillance, patient registries, and FDA guidelines). Generally, Class III
devices are those that must receive premarket approval by the FDA to ensure
their safety and efficacy (for example, life-sustaining, life-supporting and
implantable devices, or new devices that have not been found substantially
equivalent to legally marketed devices).

         Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through either a 510(k) notification
or a premarket approval ("PMA") application. A 510(k) clearance will be granted
if the submitted information establishes that the proposed device is
"substantially equivalent" to a legally marketed Class I or II medical device,
or to a Class III medical device for which the FDA has not called for PMAs. A
510(k) notification must contain information to support a claim of substantial
equivalence which may include laboratory test results or the results of clinical
studies of the device in humans. Commercial distribution of a device for which a
510(k) notification is required can begin only after the FDA issues an order
finding the device 



                                       11
<PAGE>   13

to be "substantially equivalent" to a predicate device. The FDA has recently
been requiring a more rigorous demonstration of substantial equivalence than in
the past and is more likely to require the submission of human clinical study
data. It generally takes from four to twelve months from the date of submission
to obtain a 510(k) clearance, but it may take longer. The FDA may determine that
a proposed device is not substantially equivalent to a legally marketed device,
or that additional information is needed before a substantial equivalence
determination can be made. A "not substantially equivalent" determination, or a
request for additional information, could delay the market introduction of new
products that fall into this category.

         A PMA application must be filed if a proposed device is not
substantially equivalent to a legally marketed Class I or Class II device, or if
it is a Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive data, including preclinical and human clinical trial data to
demonstrate the safety and efficacy of the device. If human clinical trials of a
device are required and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) is
required to file an IDE application with the FDA prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs, but not the FDA. Sponsors of clinical trials are
permitted to sell those devices distributed in the course of the study provided
such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or an investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.

         The PMA application must also contain the results of all relevant bench
tests, laboratory and animal studies, a complete description of the device and
its components, and a detailed description of the methods, facilities and
controls used to manufacture the device. In addition, the submission must
include the proposed labeling, advertising literature and training methods (if
required). Upon receipt of a PMA application, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit a
substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing. Once the submission is accepted for filing, the FDA
begins an in-depth review of the PMA. An FDA review of a PMA application
generally takes one to two years from the date the PMA application is accepted
for filing, but may take significantly longer. The review time is often
significantly extended by the FDA asking for more information or clarification
of information already provided in the submission. During the review period, an
advisory committee, typically a panel of clinicians, will likely be convened to
review and evaluate the application and provide recommendations to the FDA as to
whether the device should be approved. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process,
the FDA generally will conduct an inspection of the manufacturer's facilities to
ensure that the facilities are in compliance with the applicable GMP
requirements.

         If the FDA's evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will either issue an approval
letter or an "approvable letter" containing a number of conditions which must be
met in order to secure final approval of the PMA. When and if those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval letter, authorizing commercial marketing of the device for certain
indications. If the FDA's evaluation of the PMA application or manufacturing
facilities is not favorable, the FDA will deny approval of the PMA application
or issue a "not approvable letter." The FDA may also determine that additional
clinical trials are necessary, in which case PMA approval could be delayed for
several years while additional clinical trials are conducted and submitted in an
amendment to the PMA. The PMA process can be expensive, uncertain and lengthy,
and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.



                                       12
<PAGE>   14

         Use of a medical device for applications not covered in a 510(k)
notification or a PMA, or modifications to a device that has been cleared to
market through a 510(k) notification or an approved PMA, its labeling, or its
manufacturing process, may require submission of a new 510(k) notification, a
new PMA or a PMA supplement. New 510(k) notifications, PMAs or PMA supplements
often require the submission of the same type of information required for the
original submission except that it is generally limited to that information
needed to support the proposed change from the product covered by the original
submission. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals, including approval of a PMA for any of its EGS
systems or any subsequent modifications to these systems, on a timely basis, or
at all. Regulatory approvals, if granted, may include significant limitations on
the intended uses for which the product may be marketed. Delays in receipt of or
failure to receive such approvals, the loss of previously received approvals, or
failure to comply with existing or future regulatory requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations and could result in cessation of the Company's business.

         The Company believes that FDA approval of a PMA application is required
before any EGS system can be marketed in the United States. In January 1995, the
Company voluntarily suspended clinical trials of the Tube and Bifurcated EGS
systems, pursuant to FDA-approved IDEs, after discovering attachment system
fractures in some of the Tube EndoGraft prostheses. The Company notified the FDA
of the voluntary suspension and began redesigning attachment systems to prevent
future fractures. The Company submitted numerous IDE supplements to the FDA
describing the Company's corrective actions and the modifications made to the
attachment systems. After obtaining FDA approvals to re-initiate clinical
trials, the Company resumed clinical trials of the Tube and Bifurcated EGS
systems in November and December 1995, respectively, and is currently conducting
such trials to collect data to support PMA applications. There can be no
assurance that similar design problems necessitating suspension of clinical
trials will not occur in the future. Any such problems, if they occur, will have
a material adverse effect on the Company's business, financial condition and
results of operations, and could result in cessation of the Company's business.
See "-Attachment System Fractures and Product Redesign."

         Results from clinical trials of the Company's Tube EGS system, revised
in November 1993, have indicated that blood flow outside the implant ("Perigraft
Flow") does not spontaneously resolve in 22% of patients in whom the Tube
EndoGraft prosthesis has been implanted. Perigraft Flow consists of both leakage
around the attachment site ("Leaks") and the back-bleeding from branching
arteries ("Branch Flow"). The clinical significance of Perigraft Flow is unknown
at this time. There can be no assurance that the existence of Perigraft Flow
will not have a material adverse effect on the Company's ability to demonstrate
the safety and efficacy of the Tube EGS or any follow-on devices and thereby
prevent the Company from obtaining approval of a PMA application. See
"Business-Clinical Trials." At the earliest, the Company anticipates filing PMAs
for the Tube, Bifurcated, and Aortoiliac EGS systems in 1998. There can be no
assurance as to when, or if, the Company will complete clinical trials of any of
its EGS systems or that data from such trials, if completed, will be adequate to
support approval of a PMA. Furthermore, there can be no assurance that the
Company will be able to obtain PMA approval on a timely basis, or at all, and
delays in the receipt of or failure to receive such approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations, and could result in cessation of the Company's business.

         Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies, including record keeping requirements and
reporting of adverse experiences with the use of the device. Device
manufacturers are required to register their establishments and list their
devices with the FDA and certain state agencies, and are subject to periodic
inspections by the FDA and certain state agencies. The Act requires devices to
be manufactured in accordance with Good Manufacturing Practices ("GMP")
regulations which impose certain procedural and documentation requirements upon
the Company with respect to manufacturing and quality assurance activities. The
FDA has proposed changes to the GMP regulations that would, among other things,
require design controls and maintenance of service records, which if finalized,
would likely increase the cost of complying with GMP requirements.



                                       13
<PAGE>   15

         Labeling and promotion activities are subject to scrutiny by the FDA
and in certain instances, by the Federal Trade Commission. The FDA actively
enforces regulations prohibiting marketing of products for unapproved uses. The
Company and its products are also subject to a variety of state laws and
regulations in those states or localities where its products are or will be
marketed. Any applicable state or local regulations may hinder the Company's
ability to market its products in those states or localities. The Company's
facilities have been inspected by State of California regulatory authorities
pursuant to granting a California Device Manufacturing License, but not, to
date, by the FDA. No assurance can be given that the Company's facilities will
be in compliance in all material respects with the applicable state or federal
requirements.

         The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations now or in the future or that such laws or regulations will not have
a material adverse effect upon the Company's ability to do business.

         Changes in existing requirements or adoption of new requirements or
policies could adversely affect the ability of the Company to comply with
regulatory requirements. Failure to comply with regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There can be no assurance that the Company will not
be required to incur significant costs to comply with laws and regulations in
the future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition, or results of operations.

International

         Sales of EGS systems outside of the United States are subject to
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA approval, and the requirements may differ. In
addition, there may be foreign regulatory barriers other than premarket
approval, and the FDA must approve exports of devices that require a PMA but are
not yet approved domestically. The current rules provide that, in order to
obtain FDA export approval, the Company must provide the FDA with documentation
from the medical device regulatory authority of the importing country stating
that the import of the device is not a violation of that country's medical
device laws. The Company has, where necessary, applied for and received such
permits for its EGS systems and is currently conducting clinical trials in the
United Kingdom, France, Germany, The Netherlands, and Sweden. The Company is in
the process of seeking approval to initiate clinical trials in Canada and Japan.
In Europe, the Company must obtain certifications necessary to enable the CE
mark to be affixed to the EGS systems, which, if obtained, would allow the
Company to market them throughout the European Union. The Company has submitted
an application for a CE Mark covering its EGS product family. Additionally, to
market products in Europe the Company is required to maintain ISO 9001/EN 46001
certification subject to periodic surveillance audits. The Company is ISO
9001/EN 4600 certified and has, to date, successfully passed three surveillance
audits.

         The Company, through its Japanese distributor, intends to conduct
clinical trials in Japan that will form the basis for an application for
approval to market the EGS systems in Japan. The distributor will be responsible
for management of clinical trials and obtaining regulatory approval, and such
approval will therefore be outside of the Company's control. Accordingly, there
can no assurance as to when or whether such approval will be received. Other
countries in which the Company intends to market EGS systems may adopt
regulations in the future that could prevent the Company from marketing its EGS
systems in those countries. In addition, the Company may be required to spend
significant amounts of capital in order to respond to requests for additional
information by the FDA or foreign regulatory bodies or may otherwise be required
to spend significant amounts of capital in order to obtain FDA and foreign
regulatory approvals. Any such events could substantially delay or preclude the
Company from marketing its EGS systems in the United States or foreign
countries.



                                       14
<PAGE>   16

         Foreign regulatory approvals, if granted, may include significant
limitations on the indicated uses for which the product may be marketed. In
addition, certain foreign regulatory authorities may impose numerous other
requirements, including manufacturing requirements, with which medical device
manufacturers must comply. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. Ongoing compliance with applicable regulatory
requirements is monitored by foreign regulatory bodies. Changes in existing
rules or adoption of new rules or policies could prevent the Company from
obtaining, or affect the timing of, foreign regulatory approvals or clearances.

THIRD-PARTY REIMBURSEMENT

         In the United States, the Company's products, if approved, will be
purchased primarily by medical institutions which then bill various third-party
payers such as Medicare, Medicaid and other government programs and private
insurance plans for the healthcare services provided to their patients. In
considering reimbursement for a new healthcare item or service, these payors
typically must decide whether to cover the item or service and how much to pay
if the item or service is covered.

Coverage

         In general, to be covered by Medicare, a health care item or service
must be "reasonable and necessary" for the diagnosis or treatment of an illness
or injury or to improve the functioning of a malformed body part. This has been
interpreted to mean that the item or service must be safe and effective, not
experimental or investigational (except under certain limited circumstances
involving devices furnished pursuant to an FDA-approved clinical trial), and
appropriate. Medicaid, Blue Cross and Blue Shield plans, commercial insurers,
and other third-party payors generally have limitations on coverage that are
similar to those of Medicare.

         Medicare traditionally has considered items or services involving
devices that have not been approved or cleared for marketing by the FDA to be
precluded from Medicare coverage. However, under a new policy effective November
1, 1995, Medicare coverage will not be precluded for items and related services
involving devices that have been classified by the FDA as
non-experimental/investigational ("Category B") devices and that are furnished
in accordance with FDA-approved protocols governing clinical trials. Even with
items or services involving Category B devices, however, Medicare coverage may
be denied if any other coverage requirements are not met, for example if the
treatment is not medically needed for the specific patient. On November 1, 1995,
the FDA indicated that it had assigned the IDE covering the current clinical
trials for the Tube EGS system and the IDE covering the current clinical trial
for the Bifurcated EGS system to Category B, and therefore Medicare
reimbursement is potentially available for these devices and related services.
The IDE covering the Company's Aortoiliac EGS system has been similarly assigned
to Category B. There can be no assurance, however, that these devices and
related services will be covered when they are used in clinical trials and, if
covered, whether the payment amounts for their use will be considered to be
adequate by hospitals and physicians. If the devices are not covered or the
payments are considered to be inadequate, the Company may need to bear
additional costs to sponsor such trials, and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Even if a device has received approval or clearance for marketing by
the FDA, there is no assurance that Medicare will cover the device and related
services, or Medicare may place certain restrictions on the circumstances in
which coverage will be available. In making such coverage determinations, the
Health Care Financing Administration ("HCFA"), which administers the Medicare
program, and HCFA's contractors, consider, among other things, peer-reviewed
articles concerning the safety and effectiveness of the device, the opinions of
medical specialty societies, and input from the FDA, the National Institutes of
Health, and other government agencies. There is no assurance that once the
Company's products are commercially available, they will be covered by Medicare
and other third-party payors. Limited coverage of the Company's products could
have a material adverse effect on the Company's business, financial condition
and results of operations.



                                       15
<PAGE>   17

Payment

         Acute care hospitals are now generally reimbursed by Medicare for
inpatient operating costs under a prospective payment system ("PPS"). Under PPS,
acute care hospitals receive a prospectively determined payment amount of the
operating costs associated with each covered inpatient stay of a Medicare
beneficiary; this amount is based upon the Diagnosis-Related Group ("DRG") to
which the patient is assigned based on such factors as the patient's primary
diagnosis and procedures performed, regardless of the actual cost of the
services provided. There are currently 495 DRGs, and the DRG classification
system is designed to include in each DRG cases that generally are relatively
homogeneous with respect to clinical characteristics and resource use. Since PPS
rates are predetermined, and generally paid irrespective of a hospital's acute
costs in furnishing care, acute care hospitals have incentives to lower their
inpatient costs by purchasing equipment and supplies that will reduce the length
of inpatient stays, decrease labor costs, or otherwise lower their costs
relative to the payment they will receive for the patient's DRG. HCFA has not
made any decision concerning which DRG will be generally assigned to patients
who undergo AAA diagnosis and endovascular repair procedures in which the
Company's products are used, and there can be no assurance that the DRG to which
such patients will be assigned will result in Medicare payment levels that are
considered by hospitals to be adequate. Because the DRG system is also used by
other government and private payors, HCFA's decision concerning the DRG
assignment for these patients also may affect the amount of payment made by
other payors.

         Physician services are reimbursed by Medicare based on a physician fee
schedule whereby payment is based on the number of "relative value units"
assigned to the service furnished by the physician as coded under the CPT-4
coding system. No decision has been made concerning whether existing CPT-4 codes
would be appropriate for use in coding AAA diagnosis and endovascular repair
procedures in which the Company's products are used or, if new codes are
required, how many relative units would be assigned to the new codes. There is
no assurance that the codes that will be used for submitting claims for
endovascular AAA procedures using the Company's products will result in Medicare
payment levels that physicians consider to be adequate. These codes and their
associated weights are used by many other third-party payors in addition to
Medicare.

         Failure by hospitals and physicians to receive what they consider to be
adequate reimbursement for AAA diagnosis and repair procedures in which the
Company's products are used would have a material adverse effect on the
Company's business, financial condition and results of operations.

         While the Company is pursuing CE mark approval to market its products
in the European Union and similar marketing approvals in non-European Union
countries such as Japan, marketing approval does not guarantee that hospitals
will be reimbursed for procedures involving the Company's products.
Reimbursement approval must be obtained from the government of each country in
which the Company's products are marketed. There can be no assurance that such
reimbursement approval will be received.

PRODUCT LIABILITY AND INSURANCE

         Medical device companies are subject to a risk of product liability and
other liability claims if the use of their products results in personal injury
claims. The Company's products are used in new procedures, often in situations
where there is a high degree of risk of serious injury or death. To date, the
Company has not experienced any product liability claims. However, there can be
no assurance that such a claim will not be brought against the Company either
for injuries occurring in the past or in the future, including but not limited
to injuries due to attachment system fractures in the Tube or Bifurcated EGS
systems. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company maintains
liability insurance with coverage of $1 million per occurrence and an annual
aggregate maximum of $4 million. There can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or that
such insurance will continue to be available on commercially acceptable terms,
or at all. See "Risk Factors-Product Liability and Availability of Insurance."



                                       16
<PAGE>   18

EMPLOYEES

         As of December 31, 1996, the Company had a total of 143 employees,
including 73 in manufacturing, 16 in quality and regulatory affairs, 34 in
research and development and clinical affairs, 5 in medical affairs, 12 in
administration and 3 in sales and marketing. The Company believes that its
future success will depend on its ability to attract and retain qualified
personnel. No Company employee is represented by a labor union, and the Company
has not experienced any work stoppages. The Company considers its employee
relations to be good.

SCIENTIFIC ADVISORY BOARD

         The Company has a Scientific Advisory Board consisting of leading
physicians in the field of vascular surgery. Scientific Advisory Board members
consult with the engineers, physicians, and scientists at the Company and advise
the Company on the specification and design of the Company's products and
clinical trials. The members of the Scientific Advisory Board are prominent
scholars in their field and, as a result, may serve as consultants to a variety
of companies. Because the scientific advisors may have consulting or advisory
positions with companies that may be competitors of the Company, each member of
the Scientific Advisory Board has entered into a confidentiality arrangement
with the Company. The Company's Scientific Advisory Board includes:

         Robert B. Rutherford, M.D., is a tenured Professor of Surgery and
Chairman Emeritus of the Section of Vascular Surgery at the University of
Colorado School of Medicine, and past President of the North American Chapter of
the International Society for Cardiovascular Surgery. Dr. Rutherford is the
Editor of Vascular Surgery, the leading textbook in the field now in its fourth
edition, and is the Senior Editor of the Journal of Vascular Surgery. He has an
international reputation as an authority in the treatment of abdominal aortic
aneurysms and arterial occlusive disease of the lower extremities.

         Jerry Goldstone, M.D., is a full Professor in the Section of Vascular
Surgery at the University of California, San Francisco. Dr. Goldstone was
previously the Chairman of the Section of Vascular Surgery at that institution
as well as the University of Arizona. Dr. Goldstone was the Secretary and is
currently the President of the North American Chapter of the International
Society for Cardiovascular Surgery. Dr. Goldstone is on the editorial boards of
the Journal of Vascular Surgery and the Journal of Endovascular Surgery, and is
the editor of Perspectives in Vascular Surgery.

         Richard Kempczinski, M.D., is a Professor of Surgery and past Chairman
of the Section of Vascular Surgery at the University of Cincinnati. Dr.
Kempczinski is on the editorial board of the Journal of Vascular Surgery and is
the past president of the Midwest Vascular Society. Dr. Kempczinski has
extensive background in research and prospective clinical trials and computer
applications in medicine.

         John Porter, M.D., is a Professor and Chairman of the Section of
Vascular Surgery at the University of Oregon. Dr. Porter is an Associate Editor
of Annals of Vascular Surgery and is the Recorder for the Society for Vascular
Surgery.

         The Scientific Advisory Board meets formally as a group on a periodic
basis. In addition, the Company meets informally with individual members on a
more frequent basis which varies from time to time depending on each member's
area of expertise and on the Company's ongoing research and development,
clinical and marketing programs. All member of the Scientific Advisory Board
receive compensation from the Company. No members of the Scientific Advisory
Board actively participates as a clinical investigator in any of the Company's
clinical trials.



                                       17
<PAGE>   19

RISK FACTORS

Early Stage of Clinical Trials; No Assurance of Safety and Efficacy

         The Company's EGS systems for endovascular abdominal aortic aneurysm
(AAA) repair are at an early stage of clinical testing. There can be no
assurance that the Company's products will prove to be safe and effective in
clinical trials or will ultimately be cleared for marketing by United States or
foreign regulatory authorities. The Company does not expect to submit a PMA for
any of its EGS systems until 1998, and there can be no assurance that the
Company will ever submit a PMA or that, if submitted, such PMA will be approved
by the FDA. If the Tube, Bifurcated or Aortoiliac EGS systems do not prove to be
safe and effective in clinical trials or if the Company is otherwise unable to
commercialize either system successfully, the Company's business, financial
condition and results of operations will be materially adversely effected and
cessation of the Company's business could occur.
See "Business - Clinical Trials."

         During the course of its clinical trials, the Company identifies
technical difficulties and areas of improvement for its products. The clinical
trials may identify significant technical or other obstacles to be overcome
prior to obtaining necessary regulatory or reimbursement approvals. For example,
the Company continues to observe blood flow outside the implant ("Perigraft
Flow") in patients treated with the Tube and Bifurcated EGS systems. See
"Business - Clinical Trials." The clinical significance of Perigraft Flow is
unknown. There can be no assurance that Perigraft Flow or other difficulties
will not have a material adverse effect on the safety and efficacy of the
Company's EGS systems or any follow-on devices and thereby prevent the Company
from obtaining PMA approval from the FDA.

Attachment System Fractures; Suspension of Clinical Trials in January 1995

         In January 1995, the Company discovered fractures in the attachment
system component of the Tube EndoGraft prosthesis during routine follow-up
tests. Based on this discovery, the Company suspended its clinical trials
worldwide. As of December 31, 1996, a total of 37 patients, representing
approximately 41% of 91 patients, implanted prior to February 1995, with the
Tube EndoGraft prosthesis in place for more than six weeks, have experienced
attachment system fractures. In eight patients with fractures, the Tube
EndoGraft prosthesis was removed and the AAA was treated by open surgery. Three
patients with fractures have died for reasons unrelated to the attachment system
fractures. The remaining patients are closely monitored by their physicians and
the Company for fractures or the onset of adverse clinical consequences. The
Company expects additional fractures to occur in these attachment systems. There
can be no assurance that additional adverse clinical consequences will not occur
in the future, which could result in the suspension of clinical trials or
otherwise have a material adverse effect on the Company's business, financial
condition and results of operations.

         Following suspension of clinical trials in January 1995, the Company
determined that the fractures were caused by metal fatigue resulting from higher
than anticipated forces acting on the attachment systems. As a result, the
Company implemented a number of significant modifications to the attachment
systems and subjected the redesigned attachment systems to accelerated fatigue
testing. There can be no assurance, however, that the accelerated fatigue
testing accurately simulates the actual forces present in the human body. In
addition, there can be no assurance that fractures will not occur in the
redesigned attachment systems, which may not be apparent for a substantial
period of time, or that the Company will not experience additional problems with
the redesigned attachment systems. Any future attachment system fractures that
might occur could result in another suspension or termination of clinical
trials, which would have a material adverse effect on the Company's business,
financial condition and results of operations.

Limited Operating History; History of Losses; Substantial Additional Losses;
Fluctuations in Operating Results

         The Company has a limited history of operations. Since its inception in
June 1989, the Company has been primarily engaged in research and development of
the EGS systems. The Company has experienced significant 



                                       18
<PAGE>   20

operating losses since inception, and as of December 31, 1996, the Company's
accumulated deficit was approximately $37.5 million. The Company will incur
substantial additional losses until it can achieve significant commercial sales
of its EGS systems which are dependent on a number of factors, including receipt
of marketing approval. There can be no assurance that any of the EGS systems or
any other products of the Company will be approved, can be successfully
commercialized or that the Company will achieve significant revenues from either
international or domestic sales of such products. In addition, there can be no
assurance that the Company will achieve or sustain profitability in the future.
Failure to achieve significant revenues or profitability would have a material
adverse effect on the Company's business, financial condition and results of
operations. Moreover, results of operations have varied and are expected to
fluctuate significantly from quarter to quarter depending upon numerous factors,
including the results of clinical trials, the introduction and market acceptance
of products by the Company or competitors, the results of regulatory and
reimbursement actions, the timing of orders by distributors, the expenditures
incurred in the research and development of new products, competitive pricing
and the expansion of manufacturing capacity. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

Government Regulation; Significant Time Before Submission of any PMA

         The Company's EGS systems are subject to extensive regulation by the
FDA and most foreign governments. The Company does not anticipate filing a PMA
for any of the EGS systems until 1998 and does not anticipate receiving approval
for at least one or two years after a PMA is accepted for filing, if at all.
There can be no assurance as to when, or if, the Company will complete clinical
trials of any of its EGS systems or that data from such trials, if completed,
will be adequate to support approval of a PMA. See "-Early Stage of Clinical
Trials; No Assurance of Safety and Efficacy" and "-Attachment System Fractures;
Suspension of Clinical Trials." Furthermore, there can be no assurance that the
Company will be able to obtain PMA approval on a timely basis, or at all, and
delays in the receipt of or failure to receive such approvals would have a
material adverse effect on the Company's business, financial condition and
results of operations and could result in cessation of the Company's business.

         Sales of EGS systems outside of the United States are subject to
regulatory requirements that vary widely from country to country. The time
required to obtain approval for sale in foreign countries may be longer or
shorter than that required for FDA approval, and the requirements may differ. In
addition, there may be foreign regulatory barriers other than premarket
approval, and the FDA must approve exports of devices that require a PMA but are
not yet approved domestically. Countries in which the Company intends to market
EGS systems may adopt regulations in the future that could prevent the Company
from marketing its EGS systems in those countries. In addition, the Company may
be required to spend significant amounts of capital in order to respond to
requests for additional information by the FDA or foreign regulatory bodies or
may otherwise be required to spend significant amounts of capital in order to
obtain FDA and foreign regulatory approvals. Any such events could substantially
delay or preclude the Company from marketing its EGS systems in the United
States or foreign countries.

         Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Foreign and domestic regulatory approvals,
if granted, may include significant limitations on the indicated uses for which
the product may be marketed. In addition, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical device
manufacturers must comply. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. The Company will also be required to adhere to
applicable FDA regulations setting forth current Good Manufacturing Practices
("GMP") requirements, which include testing, control and documentation
requirements. Ongoing compliance with GMP and other applicable regulatory
requirements are monitored through periodic inspections by state and federal
agencies, including the FDA, and by comparable agencies in other countries.
Changes in existing regulations or adoption of new regulations or policies could
prevent the Company from obtaining, or affect the timing of, future regulatory
approvals or clearances.



                                       19
<PAGE>   21

Substantial Dependence on Limited Product Line

         The Company anticipates that for the foreseeable future it will be
substantially dependent on the successful development and commercialization of
endovascular products for AAA repair. Failure of the Company to successfully
develop and commercialize these products would have a material adverse effect on
the Company's business, financial condition and results of operations.

No Assurance of Market Acceptance

         There can be no assurance that the Tube, Bifurcated or Aortoiliac EGS
systems will gain any significant degree of market acceptance among physicians,
patients or health care payors, even if necessary regulatory and reimbursement
approvals are obtained. The Company believes that recommendations by physicians
and health care payors will be essential for market acceptance of the EGS
systems, and there can be no assurance that any such recommendations will be
obtained. Physicians will not recommend the Tube, Bifurcated or Aortoiliac EGS
systems unless they conclude, based on clinical data and other factors, that the
EGS systems represent an acceptable alternative to open AAA surgical repair. In
particular, physicians may elect not to recommend the Tube, Bifurcated or
Aortoiliac EGS procedure until such time, if ever, as successful resolution of
the attachment fractures is established and the clinical significance of
unresolved Perigraft Flow is better understood. Widespread use of the Company's
EGS systems would require the training of numerous physicians, and the time
required to complete such training could result in a delay or dampening of
market acceptance. Even if the safety and efficacy of the Company's EGS systems
is established, physicians may elect not to use them for a number of reasons
including unfavorable reimbursement from health care payors. Failure of the
Company's products to achieve any significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.

Need for Substantial Additional Capital

         The Company's development efforts have consumed substantial capital to
date. The Company's future liquidity and capital requirements will depend upon
numerous factors, including: the progress of clinical trials; the timing and
costs of filing future IDEs, PMAs and PMA supplements; the timing and costs
required to receive both domestic and international governmental approvals; the
extent to which the Company's products gain market acceptance; the timing and
costs of product introductions; the extent of the Company's ongoing research and
development programs; and the costs of developing marketing and distribution
capabilities, if regulatory approvals are received. In February 1997, the
Company entered into a credit agreement pursuant to which the Company may borrow
up to $30,000,000 (the "Funds"), subject to the terms and conditions of the
credit agreement. The Company believes that the amount of Funds available
thereunder, together with existing cash, cash equivalents and short-term
investments will allow the Company to meet capital requirements for at least the
next 12 months. However, the credit agreement requires the Company to satisfy
certain conditions, the failure of which would prevent the Company from drawing
the Funds. Furthermore, any default by the Company under the credit agreement
would result in the acceleration of the Company's obligation to repay any drawn
Funds. In the event that the Company is unable to borrow Funds under the credit
agreement or repay Funds previously borrowed on an accelerated basis, the
Company's business, financial condition and results of operations could be
materially adversely affected. Furthermore, the Company may be required to seek
additional debt or equity financing. Issuance of additional equity securities
could result in substantial dilution to stockholders. There can be no assurance
that such financing will be available on terms acceptable to the Company, or at
all. The Company's inability to fund its capital requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."



                                       20
<PAGE>   22

Uncertainty Regarding Patents and Protection of Proprietary Technology

         The Company holds a number of issued United States and foreign patents
and has filed a number of United States and counterpart patent applications in
other countries. There can be no assurance that the Company's United States and
foreign issued patents or pending applications will offer any protection or that
they will not be challenged, invalidated or circumvented. In addition, there can
be no assurance that competitors will not obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.

         The Company typically enters into confidentiality and assignment
agreements in connection with employment, consulting or advisory relationships.
There can be no assurance, however, that these agreements will not be breached
or that the Company will have adequate remedies for any breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology, or that the Company can
meaningfully protect its rights in unpatented proprietary technology.

         Patent applications in the United States are maintained in secrecy
until patents issue, and patent applications in foreign countries are maintained
in secrecy for a period after filing. In addition, patents issued and patent
applications filed relating to medical devices are voluminous. Accordingly,
there can be no assurance that current and potential competitors or other third
parties have not or will not file applications for, or have not or will not
receive, patents and will not obtain additional proprietary rights relating to
materials or processes used or proposed to be used by the Company.

         The Company has received letters from two medical device companies,
Cook, Inc. ("Cook") and InnerDyne Medical, Inc. ("InnerDyne"). The Cook letter,
dated July 9, 1993, suggested potential infringement of a Cook-owned patent by
future commercial sale of the Company's attachment system component of the
EndoGraft prosthesis. The Company has reviewed the Cook matter and the Company
believes that no such infringement exists. The InnerDyne letter, dated November
2, 1994, proposed that the Company discuss licensing an InnerDyne-owned patent
that InnerDyne believed to be pertinent to the Company's EVT Expandable Sheath.
The Company has reviewed the InnerDyne matter and the Company believes that it
is not necessary to enter into a licensing arrangement with InnerDyne. There can
be no assurance, however, that the Company's products do not infringe upon the
patent rights or other intellectual property rights of Cook, InnerDyne or other
companies, that the Company will not be required to seek licenses from these or
other companies or that these or other companies will not bring claims of
infringement against the Company. Although patent and intellectual property
disputes in the medical device industry have sometimes been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. There can be no assurance
that necessary licenses would be available to the Company on satisfactory terms
or at all. Furthermore, any litigation or administrative proceeding could result
in substantial costs to the Company and distraction of the Company's management,
even if the Company ultimately prevails in such litigation. An adverse ruling in
any litigation or administrative proceeding could have a material adverse effect
on the Company's business, financial condition and results of operations.

         If any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses or to redesign
its products or processes to avoid infringement. There can be no assurance that
such licenses would be available at all or on terms acceptable to the Company or
that the Company could redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to the Company or to protect trade secrets and could result in
substantial cost to, and diversion of effort by, the Company.



                                       21
<PAGE>   23

Volatility of Stock Price

         The market price for the Company's Common Stock has been subject to
significant fluctuations and may be volatile in the future. The Company believes
that factors such as announcements of developments related to the Company's
business, announcements of clinical results, regulatory approvals, technological
innovations or new products or enhancements by the Company or its competitors,
developments in the Company's relationships with its customers, partners,
distributors, and suppliers, changes in analysts' estimates, regulatory
developments, political and economic instability, fluctuations in results of
operations and general conditions in the Company's market or the markets served
by the Company's customers or the economy could cause the price of the Company's
Common Stock to fluctuate, perhaps substantially. The Company may be
particularly vulnerable to fluctuations in the market price of its Common Stock
given the substantial amount of time before it may achieve significant revenues
from commercial sales of its products. In addition, in recent years the stock
market in general, and the market for shares of small capitalization health care
stocks in particular, have experienced extreme price fluctuations, which have
often been unrelated to the operating performance of affected companies. Such
fluctuations could adversely affect the market price of the Company's Common
Stock. There can be no assurance that the market price of the Company's Common
Stock will not continue to experience significant fluctuations in the future,
including fluctuations that are unrelated to the Company's performance.

Dependence on Key Suppliers; Limited Manufacturing Experience

         The Company uses or relies on sole source suppliers for certain
components and services used to manufacture its EGS systems. The Company
utilizes materials supplied by third parties, including raw material
manufactured by Dow Chemical Co. ("Dow Chemical") and DuPont, in its products.
In recent years, in the wake of litigation surrounding silicone breast implants,
both Dow Chemical and DuPont have ceased supplying chemical raw materials for
use in implantable medical devices, including DuPont raw material used to
produce the graft material utilized in the Company's EndoGraft prostheses. There
can be no assurance that use of such graft material by the Company will not be
restricted or that the Company will be able to obtain additional quantities of
such graft material in the future. Moreover, the continued use by the Company of
graft material based on chemical raw materials manufactured by third parties
could subject the Company to liability exposure. The Company believes that the
cessation of the supply of components and materials for implantable medical
devices may be addressed through legislative action. There can be no assurance
that such legislative action will occur on a timely basis, if at all. The
establishment of additional or replacement suppliers for certain of these
components of raw materials cannot be accomplished quickly, particularly because
of the time and effort required to obtain FDA approval to use materials from
alternative suppliers. Although the Company routinely attempts to identify
primary and alternative vendors, the qualification of additional or replacement
vendors for certain components or services is a lengthy process. Any significant
supply interruption would have a material adverse effect on the Company's
ability to manufacture its products and, therefore, a material adverse effect on
its business, financial condition and results of operations.

         The Company manufactures its products at its Menlo Park, California
facility. To date, the Company's manufacturing activities have consisted
primarily of producing limited quantities of products for use in clinical trials
and controlled market release. The manufacture of the Company's products is a
complex and costly operation involving a number of separate processes and
components. Certain manufacturing processes of the EGS systems are labor
intensive and achieving significant cost reductions will depend in part upon
reducing the time required to complete these processes. There can be no
assurance that the Company will be able to achieve cost reductions in the
manufacture of its products. The Company does not have experience in
manufacturing its products in the commercial quantities that might be required
if the Company receives PMA approval. Manufacturers often encounter difficulties
in scaling up manufacturing of new products, including problems involving
product yields, quality control and assurance, component and service
availability, adequacy of control policies and procedures and lack of qualified
personnel. The Company has and will continue to consider as appropriate the
internal manufacture of components currently provided by third parties, as well
as the implementation of new production processes. There can be no assurance
that manufacturing yields or costs will not be adversely affected by the



                                       22
<PAGE>   24

transition to in-house production or to new production processes when and if
such efforts are undertaken, and thereby materially and adversely affect the
Company's business, financial condition and results of operations.

Limitations on Third-Party Reimbursement

         In the United States, the Company's products will be purchased
primarily by medical institutions which then bill various third-party payors,
such as Medicare, Medicaid and other government programs and private insurance
plans, for the health care services provided to their patients. Medicare
traditionally has considered items or services involving devices that have not
been approved or cleared for marketing by the FDA to be precluded from Medicare
coverage. There can be no assurance, however, that any of the EGS systems and
related services will be covered when they are used in clinical trials and, if
covered, whether the payment amounts for their use will be considered to be
adequate by hospitals and physicians. If the devices are not covered or the
payments are considered to be inadequate, the Company may need to bear
additional costs to sponsor such trials, and such costs could have a material
adverse effect on the Company's business, financial condition and results of
operations. Even if a device has received approval or clearance for marketing by
the FDA, there can be no assurance that Medicare will cover the device and
related services. Furthermore, Medicare may place certain restrictions on the
circumstances in which coverage will be available. Limited or no coverage of the
Company's products would have a material adverse effect on the Company's
business, financial condition and results of operations.

         Acute care hospitals are now generally reimbursed by Medicare for
inpatient operating costs under a prospective payment system ("PPS"). Under PPS,
acute care hospitals receive a prospectively determined payment amount for each
covered inpatient based upon the Diagnosis-Related Group ("DRG") to which the
patient is assigned, regardless of the actual cost of the services provided. The
Health Care Financing Administration ("HCFA") has not made any decision
concerning which DRG will be generally assigned to patients who undergo AAA
diagnosis and endovascular repair procedures in which the Company's products are
used, and there can be no assurance that the DRG to which such patients will be
assigned will result in Medicare payment levels that are considered by hospitals
to be adequate. Because the DRG system is also used by other government and
private payors, HCFA's decision concerning the DRG assignment for these patients
also may affect the amount of payment made by other payors.

         Physician services are reimbursed by Medicare based on a physician fee
schedule which has not been determined for AAA diagnosis and endovascular repair
procedures in which the Company's products are used. There can be no assurance
that the physicians fee schedule for endovascular AAA procedures using the
Company's products will result in Medicare payment levels that physicians
consider to be adequate. In addition, Medicare payment levels are used by many
other third-party payors in addition to Medicare. Failure by hospitals and
physicians to receive what they consider to be adequate reimbursement for AAA
diagnosis and repair procedures in which the Company's products are used would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business-Government Regulation."

Competition

         The Company expects that significant competition in the endovascular
grafting market will develop. There are many large companies, with significantly
greater financial, manufacturing, marketing, distribution and technical
resources and experience than the Company, focusing on the development of
endovascular technology. Many of these companies have vascular stents, as well
as vascular graft and catheter technologies that may be applicable to
endovascular repair. The Company may compete against a number of these companies
including: Boston Scientific Corporation; Medtronic Corporation; Pfizer
Corporation; Johnson & Johnson; C.R. Bard, Inc.; and United States Surgical
Corporation. Several companies have designed and developed products that compete
directly with the Company's products. There can be no assurance that one or more
of these or other companies will not develop technologies that are more
effective or less costly than the Company's products, or that would otherwise
render the Company's products and technology non-competitive or obsolete. Such
competition could have a material, adverse effect on the Company's business,
financial condition and results of operations. In 



                                       23
<PAGE>   25

addition, the Company's products could be rendered obsolete as a result of
future innovations in AAA surgical techniques, which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

         Any product developed by the Company that gains regulatory approval
will have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Accordingly, the relative speeds with which the Company can develop
products, complete clinical testing and regulatory approval processes, gain
reimbursement acceptance and supply commercial quantities of the product to the
market are expected to be important competitive factors. In addition, the
Company believes that the primary competitive factors in the market for
endovascular grafting products are safety, long-term efficacy, ease of delivery,
reliability, innovation and price. The Company also believes that physician
relationships and customer support are important competitive factors. There can
be no assurance that the Company's competitive position will be maintained or
that the Company will be first to market endovascular products for the treatment
of AAA's in the United States.

Risk of Technological Obsolescence

         The medical device industry is characterized by rapid and significant
technological change. There can be no assurance that third parties will not
succeed in developing or marketing technologies and products that are more
effective than those developed or marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
new less invasive surgical procedures and medications could be developed that
replace or reduce the importance of current procedures that use the Company's
products. Accordingly, the Company's success will depend in part on its ability
to respond quickly to medical and technological changes through the development
and introduction of new products. Product development involves a high degree of
risk and there can be no assurance that the Company's new product development
efforts will result in any commercially successful products.

Risk of Federal Reform of Health Care

         There are widespread efforts to control health care costs in the United
States on the federal, state and local levels. For example, the U.S. Congress is
currently considering various legislative proposals to reform the Medicare and
Medicaid programs. Current proposals call for reductions in the annual updates
for hospital PPS rates and physician reimbursement rates, reductions in the
amount of added payments made to teaching hospitals and hospitals that serve a
disproportionate share of low-income persons, increased incentives and
opportunities for Medicare beneficiaries to obtain their benefits through
managed care plans, and the establishment of a "block grant" program that would
give states greater discretion in designing and administering state Medicaid
programs. If enacted into law, any of these proposals could affect the amount of
Medicare and Medicaid payment that is made to hospitals and physicians and, in
turn, demand for the Company's products. Lower demand for the Company's products
resulting from federal healthcare reform could have a material adverse effect on
the Company's business, financial condition and results of operations.

Lack of Sales and Marketing Experience; Planned Dependence on International
Distributors

         The Company currently has a small sales and marketing function and has
no experience in marketing and selling its EGS systems. There can be no
assurance that the Company will be able to recruit and train adequate sales and
marketing personnel. The Company plans to rely on distributors for substantially
all of its international sales. Any foreign sales by the Company may be subject
to certain risks, including exchange rate fluctuations, international monetary
conditions, tariffs, import licenses, trade policies, domestic and foreign tax
policies and foreign medical regulations. The loss of major international
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations.



                                       24
<PAGE>   26

Product Liability and Availability of Insurance

         The clinical use and sale of the Company's products involve significant
risk of product liability claims. There can be no assurance that the coverage
limits of the Company's insurance policies will be adequate. Product liability
insurance is expensive and in the future may not be available to the Company on
acceptable terms or at all. While there have been no product liability claims to
date, there can be no assurance that a product liability claim will not be
brought against the Company either for injuries occurring in the past or in the
future, including, but not limited to, injuries due to fractures in the
attachment system of the Tube EndoGraft prosthesis. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-Attachment System Fractures."

Dependence on Key Personnel

         The Company's future business and operating results depend in
significant part upon the continued contributions of its key technical personnel
and senior management, many of whom would be difficult to replace. None of such
persons is subject to a noncompetition agreement. The Company's business and
future operating results also depend in significant part upon its ability to
attract and retain qualified management, manufacturing, technical, marketing and
sales and support personnel for its operations. Competition for such personnel
is intense, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The loss of key employees, the failure
of any key employee to perform or the Company's inability to attract and retain
skilled employees, as needed, could materially adversely affect the Company's
business, financial condition and results of operations.

Control by Officers, Directors and Principal Stockholders

         The Company's officers, directors and principal stockholders
beneficially own a significant portion of the Company's Common Stock (assuming
exercise of immediately exercisable options held by such directors and
officers). As a result, such persons may have the ability effectively to control
the Company and direct its affairs and business. Such concentration of ownership
may also have the effect of delaying, deferring or preventing a change in
control of the Company.

Anti-takeover Effects of Certain Charter Provisions, Delaware Law and Rights
Plan

         Under the Company's Certificate of Incorporation, the Board of
Directors has the power to authorize the issuance of up to 5,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of and the voting or other rights of the
holders of the Common Stock. The Company has no present plans to issue shares of
Preferred Stock. In addition, the Company's Certificate of Incorporation
provides for a classified Board of Directors such that approximately only
one-third of the members of the Board are elected at each annual meeting of
stockholders. Classified Boards may have the effect of delaying, deferring or
discouraging changes in control of the Company. Further, certain provisions of
the Company's Bylaws and of Delaware law could discourage, delay or prevent a
merger, tender offer or proxy contest involving the Company. Furthermore, the
Company has adopted a stockholder rights plan that, in conjunction with certain
provisions of the Company's charter documents and Delaware law, could delay or
make more difficult a merger, tender offer, or proxy contest involving the
Company.



                                       25

<PAGE>   27

Absence of Dividends

         The Company has never paid cash dividends and does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. In
addition, the Company entered into a credit agreement in February, 1997,
pursuant to which the Company the Company has agreed not to make or declare any
dividends on the Common Stock for so long as it is indebted under such credit
agreement. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources."

ITEM 2.  PROPERTIES

         The Company leases approximately 40,000 square feet in Menlo Park,
California. This facility contains approximately 10,000 square feet of
manufacturing space, 27,000 square feet used for research and development and
3,000 square feet devoted to administrative offices. This facility is leased
through May 1999. The Company believes that this facility is adequate to meet
its current and anticipated requirements for the next 9 months. The Company
intends to lease additional space when it becomes necessary to expand its
facilities.

ITEM 3.  LEGAL PROCEEDINGS

         The Company is not a party to any material legal proceedings.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


         There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.


ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

         The executive officers and key employees of the Company are:

<TABLE>
<CAPTION>
NAME                                       AGE                       POSITION
----                                       ---                       --------
<S>                                         <C>     <C>
W. James Fitzsimmons...........             40      President and Chief Executive Officer
G. Bradley Cole................             41      Vice President, Finance and Chief Financial Officer
Elizabeth A. McDermott.........             38      Vice President, Research and Development
Jeffrey W. Jarvela.............             39      Vice President, Manufacturing
Lori E. Adels, Ph.D............             38      Vice President, Regulatory  Affairs and Quality
                                                    Assurance
Victor M. Bernhard, M.D........             69      Vice President, Medical Affairs
Ronald R. Giannotti............             36      Vice President, Sales and Marketing
</TABLE>

-------------------------

         Mr. Fitzsimmons has served as President, Chief Executive Officer and a
member of the Board of Directors since October 1991. From December 1989 to
September 1991, Mr. Fitzsimmons was Director of the Electro-cardiography
division of Physio-Control Corporation, then a wholly owned subsidiary of Eli
Lilly and Company ("Eli Lilly"). From December 1987 to November 1989, Mr.
Fitzsimmons was engaged in merger and acquisition activities for the Medical
Device and Diagnostics division of Eli Lilly, where he initiated the acquisition
of Devices for Vascular Intervention. Mr. Fitzsimmons is a director of VNUS
Medical Technologies, Inc., a privately held medical device company. Mr.
Fitzsimmons holds a B.S. in Biology-Premedical and an M.B.A. from Seattle
University.

         Mr. Cole joined the Company in July 1994 as Vice President, Finance and
Chief Financial Officer. From December 1988 to February 1994, Mr. Cole served as
Vice President and Chief Financial Officer of Applied 



                                       26
<PAGE>   28

Biosystems Incorporated, a publicly traded life science systems company acquired
by Perkin-Elmer Corporation in February 1993. Mr. Cole holds a B.S. in Business
Administration from Biola University and an M.B.A. from San Jose State
University.

         Ms. McDermott joined the Company in October 1996 as Vice President,
Research and Development. From February 1994 to September 1996, Ms. McDermott
served as Vice President, Research and Development of Pilkington Barnes Hind.
From January 1984 to February 1994, Ms. McDermott was employed by Advanced
Cardiovascular Systems, Inc., then a wholly owned subsidiary of Eli Lilly, where
she held various positions including Director of Research and Development and
Director of Regulatory and Clinical Affairs. Ms. McDermott holds a B.S. and an
M.S. in Biomedical Engineering from Case Western Reserve University.

         Mr. Jarvela joined the Company in April 1992 as Vice President,
Manufacturing. From January 1986 to March 1992, Mr. Jarvela was an employee at
Advanced Cardiovascular Systems, Inc., then a wholly owned subsidiary of Eli
Lilly, where he held various positions in industrial engineering, facilities,
research and development and manufacturing, including Director of Pilot
Operations, where he managed clinical product manufacturing. Mr. Jarvela holds a
B.S. in Industrial Engineering from the General Motors Institute.

         Dr. Adels has served as Vice President, Regulatory Affairs and Quality
Assurance since March 1995. From July 1992 to March 1995, Dr. Adels served as
Director of Regulatory Affairs and Quality Assurance. From November 1989 to July
1992, Dr. Adels was Manager of Clinical and Regulatory Affairs for
Pfizer/Shiley. Dr. Adels holds a Ph.D. in Psychobiology from the University of
California at Irvine and a B.A. in the Biological Basis of Behavior from the
University of Pennsylvania.

         Dr. Bernhard joined the Company in August 1994 as Vice President,
Medical Affairs. From July 1984 to July 1994, Dr. Bernhard was Professor of
Surgery and Chairman of the Vascular Surgery Section at the University of
Arizona College of Medicine. Dr. Bernhard is a member of the Society for
Vascular Surgery and past president of the Western Vascular Society. Dr.
Bernhard was on the Editorial Board of the Journal of Vascular Surgery and has
authored one textbook, 42 chapters in textbooks and scholarly books, and over
140 scientific publications in the field of vascular surgery. Dr. Bernhard holds
a B.S. in Science from Northwestern University and an M.D. from the Northwestern
University School of Medicine.

         Mr. Giannotti joined the Company in March 1996 as Vice President, Sales
and Marketing. From September 1991 to September 1995, Mr. Giannotti was Vice
President of Sales and Marketing for the Edwards Critical Care Division of
Baxter Healthcare Corporation. Prior to September 1991, Mr. Giannotti was
Director of Sales and Product Manager for Applied Medical Resources, Inc. Mr.
Giannotti holds a B.A. in Finance from the University of Southern California.

                                    PART II

ITEM 5.        MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED 
               STOCKHOLDER MATTERS

         The Company's common stock trades on the Nasdaq Stock Market under the
symbol "EVTI." The high and low closing prices of the Company's common stock
since the initial public offering on February 6, 1996 for the period ending
December 31, 1996 are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996                       HIGH              LOW
----------------------------                       ----              ---
<S>                                               <C>                 <C>  
First Quarter                                     $11.75              $9.50
Second Quarter                                     15.25               9.50
Third Quarter                                      12.88               9.25
Fourth Quarter                                     12.75               8.50
</TABLE>



                                       27
<PAGE>   29

         At December 31, 1996, there were 128 stockholders of record, excluding
the number of beneficial owners whose shares were held in street name.

         To date, the Company has not paid any cash dividends on shares of its
capital stock. The Company does not anticipate paying any cash dividends in the
foreseeable future. In addition, the Company entered into a credit agreement in
February 1997, pursuant to which the Company has agreed not to make or declare
any dividends on the Common Stock for so long as it is indebted under such
credit agreement. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."



                                       28
<PAGE>   30

ITEM 6.  SELECTED FINANCIAL DATA

                         SELECTED FINANCIAL INFORMATION

         The selected financial information set forth below should be read in
conjunction with the Company's Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Report. The selected financial data
presented below have been derived from the Company's financial statements that
have been audited by Arthur Andersen LLP independent public accountants, as
indicated in their report included elsewhere herein.

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                   -----------------------------------------------------------------------
                                                       1992           1993           1994           1995           1996
                                                   -----------    -----------    -----------    -----------    -----------
                                                                  (dollars in thousands, except per share data)
<S>                                                <C>            <C>            <C>            <C>            <C>        
Statement of Operations Data
Net product sales ..............................   $        --    $        --    $        --    $        --    $     1,159
Cost of goods sold .............................            --             --             --             --         (1,345)
                                                   -----------    -----------    -----------    -----------    -----------
     Gross margin (deficit) ....................   $        --    $        --    $        --    $        --           (186)

Operating costs and expenses:
              Research and development .........   $     1,557    $     3,517    $     7,379    $     8,094         12,084
              General and administrative .......           516            724            961          1,004          2,427
                                                   -----------    -----------    -----------    -----------    -----------
Total operating costs and expenses .............         2,073          4,241          8,340          9,098         14,511
                                                   -----------    -----------    -----------    -----------    -----------
Loss from operations ...........................        (2,073)        (4,241)        (8,340)        (9,098)       (14,697)
              Interest income (expense) ........           139            185            460            836          1,160
                                                   -----------    -----------    -----------    -----------    -----------
Net loss .......................................   $    (1,934)   $    (4,056)   $    (7,880)   $    (8,262)   $   (13,537)
                                                   -----------    -----------    -----------    -----------    -----------
Pro forma net loss per share(1) ................   $     (0.51)   $     (0.90)   $     (1.40)   $     (1.31)   $     (1.66)
Shares used in computing pro forma
              net loss per share (1) ...........     3,831,000      4,504,000      5,633,000      6,323,000      8,179,000
</TABLE>

<TABLE>
<CAPTION>
                                                                                 DECEMBER 31,
                                                   -----------------------------------------------------------------------
                                                       1992           1993           1994           1995           1996
                                                   -----------    -----------    -----------    -----------    -----------
<S>                                                <C>            <C>            <C>            <C>            <C>        
Balance Sheet Data:
Cash, cash equivalents and securities
      available-for-sale........................   $     2,589    $    10,685    $    17,493    $    10,149    $    17,859
Working capital ................................         2,547         10,570         17,328          9,384         16,695
Total assets ...................................         3,273         11,777         18,932         11,727         20,952
Total liabilities ..............................           100            484            731          1,466          2,278
Accumulated deficit ............................        (3,807)        (7,863)       (15,743)       (24,005)       (37,542)
Total stockholders' equity .....................         3,173         11,293         18,201         10,261         18,675
</TABLE>

-----------------
(1)  See Note 2 of Notes to Financial Statements.



                                       29
<PAGE>   31

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 
             RESULTS OF OPERATIONS

         This report on Form 10-K contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in "Risk Factors."

         OVERVIEW

         Since its inception in June 1989, the Company has been engaged in the
research and development of its EGS systems and related technology for the
endovascular repair of abdominal aortic aneurysms. To date, the Company has
generated limited revenues and has been unprofitable since inception. For the
period from incorporation to December 31, 1996, the Company has an accumulated
deficit of approximately $37.5 million. The Company does not expect to begin
generating significant revenues from sales of its products and will continue to
incur substantial losses for the next several years. Furthermore, the Company
expects its expenses in all categories to increase as its clinical trials and
other business activities expand.

         The research, manufacture, sale and distribution of medical devices
such as the Company's EGS systems are subject to numerous regulations imposed by
governmental authorities, principally the FDA and corresponding state and
foreign agencies. The regulatory process is lengthy, expensive and uncertain.
FDA approval of a PMA application is required before any EGS system can be
marketed in the United States. Securing FDA approvals and clearances will
require submission to the FDA of extensive clinical data and technical
information. Many foreign governments and the European Union also have a review
process for medical devices.

         The Company commenced clinical trials of its original Tube EGS system
in February 1993 and its Bifurcated EGS system in September 1994. Following
suspension of all clinical trials in January 1995 due to attachment system
fractures, and after receiving FDA clearance to reinitiate clinical trials, the
Company re-initiated Phase II clinical trials of the Tube EGS system in November
1995 and re-initiated Phase I clinical trials of the Bifurcated EGS system in
December 1995. In July, 1996, the Phase I clinical trial of the Bifurcated EGS
system was completed, and the Phase II clinical trial of that device was
approved and initiated in August. Substantial additional clinical testing of the
Tube and Bifurcated EGS systems is required and the Company does not believe it
will be able to complete clinical trials of, obtain regulatory approval for, and
begin commercial sales of its EGS systems in the United States before mid-1999,
if ever.

         In October 1996, the Company received approval from the FDA to begin
Phase II clinical trials of the Aortoiliac EGS system, bypassing the Phase I
trial. The Aortoiliac EGS system utilizes an endovascular prosthesis that is a
hybrid between the Company's Tube EndoGraft and Bifurcated EndoGraft. The device
is designed to address aneurysms in which one iliac artery is unsuitable for
endovascular attachment of an implant.

         In June 1995, the Company became ISO 9001/EN 46001 certified and has
submitted required clinical and technical data in an application for CE Mark
approval to market its products throughout the European Community. The
application is currently under review by a sanctioned Notified Body. The Company
anticipates that substantially all of its revenues from product sales over the
next several years will be derived from international sales through its
distributor network. Any such international sales will be subject to a number of
risks, including exchange rate fluctuations, international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies and
foreign medical regulations.

         There can be no assurance that the Company's research and development
efforts will be successfully completed. Given that clinical testing is at an
early stage, there can be no assurance that the Company's EGS systems will be
shown to be safe and effective. Accordingly, the Company is unable to predict
the likelihood that its products will be approved for marketing by the FDA or
any foreign government agency, and there can be no 



                                       30
<PAGE>   32

assurance that the Company will ever achieve either significant revenues from
sales of its EGS systems or profitable operations.

         Results of operations will fluctuate significantly from quarter to
quarter and will depend upon, among other factors: actions relating to foreign
and domestic regulatory and reimbursement matters; the extent to which the
Company's products gain market acceptance; the rate at which the Company
establishes its international distributor network; the progress of clinical
trials; and introduction of competing products or alternative treatments for
AAA. See "Risk Factors - Limited Operating History; History of Losses;
Substantial Additional Losses; Fluctuations in Operating Results."

RESULTS OF OPERATIONS

Years ended December 31, 1996 and 1995

         In 1996, the Company began recognizing revenue on sales of EGS systems
used in clinical trials. During the year, the Company recognized approximately
$1,159,000 in sales, 30% of which were international sales. The international
sales price to its European distributors may increase if marketing approval is
achieved in Europe through the approval of a CE Mark, but currently ranges from
approximately 55% to 60% of the U.S. price. During the year, sales of the Tube
EGS system accounted for approximately 50% of total sales and sales of the
Bifurcated EGS system accounted for approximately 49% of total sales. The
Aortoiliac EGS system, which began sales in October, 1996, accounted for 1% of
total sales for the year. Revenue is recognized only upon successful
implantation of an EndoGraft prosthesis.

         Negative gross margin for the year was approximately $186,000, or 16%
of product sales. Cost of goods sold exceeds product sales primarily due to the
Company's early stage of manufacturing and due to prices charged by the Company
during its pre-marketing stage. The Company expects the negative gross margin to
continue unless the Company is able to significantly increase its product sales
volume.

         Research and development expenses include research, development,
clinical and regulatory expenses and certain manufacturing expenses. Research
and development in 1996 increased to $12.1 million from $8.1 million in 1995.
The increase in spending was due primarily to an increase in personnel, with the
balance due to increases in materials and clinical costs related to expanded
clinical trials and increased costs related to a recent facility expansion.
Increases in clinical costs were primarily due to a greater number of patients
being entered into the U.S. clinical trials and monitored under standard
follow-up protocol in 1996 as compared to 1995. Costs resulting from the
suspension of clinical trials in January 1995 are included in research and
development. These include costs incurred to redesign the attachment system of
the Tube and Bifurcated EGS systems and increased costs of monitoring patients
implanted with the Tube EndoGraft prosthesis before the suspension of clinical
trials as a result of more frequent follow-up examinations of those patients.

         Sales, general and administrative expenses increased in 1996 to $2.4
million as compared to $1.0 million in 1995. This increase was due to an
increase in personnel and the creation of a sales and marketing organization
during the second quarter of 1996, as well as from increased expenses related to
being a publicly held company.

         Interest income in 1996 increased to approximately $1,160,000 from
approximately $836,000 in 1995 as a result of the Company's increased average
cash balance in 1996, following the Company initial public offering in February
1996.

         Net loss for 1996 increased to approximately $13.5 million from $8.3
million in 1995.



                                       31
<PAGE>   33

Years ended December 31, 1995 and 1994

         Research and development expenses increased to $8.1 million in 1995
from $7.4 million in 1994. The increase in spending was due to an increase in
personnel and clinical costs offset by lower manufacturing material costs due to
the suspension of clinical trials in January 1995. Increases in clinical costs
were primarily due to a greater number of patients being monitored under
standard follow-up protocol in 1995, as compared to 1994.

         General and administrative expenses increased in 1995 to approximately
$1,004,000 as compared to approximately $961,000 for 1994. This increase was
primarily due to additions to management of the Company.

Income Taxes

         The Company accounts for income taxes using the liability method. The
Company has incurred losses since inception. As of December 31, 1996, the
Company had net operating loss carryforwards of approximately $33.7 million and
$5.7 million for federal and state income tax purposes, respectively. The
Federal carryforwards expire in 2005 through 2011, and the state carryforwards
expire in 1997 through 2001. The principal differences between financial
reporting losses and losses for tax purposes are the result of capitalizing
research and development expenses and start-up costs for tax purposes. The
Company also has research and development credits available to reduce future
Federal and state income taxes, if any, of approximately $1.3 million and
$682,000, respectively.

         The Company believes that, based on a number of factors, there is
sufficient uncertainty regarding the realizability of carryforwards and credits
that a full valuation allowance has been recorded against the deferred tax
asset.

LIQUIDITY AND CAPITAL RESOURCES

         In February 1996, the Company completed an initial public offering of
two million shares of Common Stock with net proceeds to the Company of
approximately $21.6 million after deducting the underwriters discount,
commissions and offering expenses. Through December 31, 1995, the Company had
raised net proceeds of $33.7 million from the sale of Preferred Stock including
$14.7 million in 1994. Cash, cash equivalents and available for sale securities
were approximately $17.9 million at December 31, 1996.

         Cash used to fund operating activities has increased to $12.7 million
in 1996 from $7.4 million in 1995 and from $7.3 million in 1994, reflecting an
increase in activity principally related to increased research and development
and sales and marketing expenditures. The Company expects that substantial
additional cash will be used to fund operating activities until it achieves
significant commercial sales of its EGS systems which is dependent on a number
of factors including significant regulatory requirements as well as market
acceptance of the product.

         Cash used for purchases of property and equipment was approximately
$1,493,000 in 1996, $231,000 in 1995 and $662,000 in 1994. The significant
increase in 1996 was due to the facilities expansion related to research and
development and manufacturing. The Company anticipates that capital expenditures
will significantly increase in the future.

         The Company expects to continue to incur substantial expense in support
of additional research and development activities, including costs of clinical
studies, manufacturing costs, the continued development of a sales and marketing
organization and ongoing administrative activities. The Company anticipates that
existing cash, cash equivalents and short-term investments, will be sufficient
to fund its operations and planned new product development, including increased
working capital expenditures, through the next 9 months.



                                       32
<PAGE>   34

         In February 1997, the Company secured a credit facility of $30 million
which, together with the existing cash, cash equivalents, and short-term
investments, the Company believes will allow it to meet its capital requirements
for at least the next 12 months. However, the credit agreement requires the
Company to satisfy certain conditions, the failure of which would prevent the
Company from drawing the Funds. Furthermore, any default by the Company under
the credit agreement would result in the acceleration of the Company's
obligation to repay any drawn Funds. In the event that the Company is unable to
borrow Funds or repay Funds previously borrowed on an accelerated basis, the
Company's business, financial condition and results of operations could be
materially adversely affected. Furthermore, the Company may be required to seek
additional debt or equity financing. Issuance of additional equity securities
could result in substantial dilution to stockholders. There can be no assurance
that such financing will be available on terms acceptable to the Company, or at
all. Pursuant to the credit agreement the Company has agreed not to make or
declare any dividends on the Common Stock for so long as it is indebted under
such agreement.

         The Company's cash requirements may vary materially from those now
planned because of results of research, development, and clinical testing, the
development of regulatory submissions and the FDA regulatory process, the
development of commercial-scale manufacturing capability, the development of
sales, distribution and marketing capabilities, and other factors. The Company
may be required to seek additional funds through debt or equity financing.
Issuance of additional equity securities could result in substantial dilution to
stockholders. There can be no assurance that such financing will be available on
terms acceptable to the Company, or at all. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company may also
enter into collaborative arrangements with corporate partners that could provide
the Company with additional funding.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See Item 14(a) for an index to the financial statements and
supplementary financial information which are attached hereto.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None.

                                    PART III

         Certain information required by Part III is omitted from this Report
because the Registrant plans to file a definitive Proxy statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included therein
is incorporated herein by reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information concerning the Company's executive officers required by
this Item is incorporated by reference from the section in Part 4a hereof
entitled "Executive Officers of the Registrant." The information concerning the
Company's directors required by this Item is incorporated by reference from the
Proxy Statement under the heading "Election of Directors." The information
concerning compliance with Section 16(a) of the Securities Exchange Act of 1934,
as amended, required by this Item is incorporated by reference from the Proxy
Statement under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934."



                                       33
<PAGE>   35

ITEM 11. EXECUTIVE COMPENSATION

         The information required by this item is incorporated by reference from
the Proxy Statement under the heading "Executive Compensation and Related
Information."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information regarding security ownership of certain beneficial owners
and management will be set forth under the captions "Information Concerning
Voting and Proxy solicitation - Record Date and Stock Ownership" in the Proxy
Statement and is incorporated herein by reference.

ITEM 13. CERTAIN TRANSACTIONS

         The information required by this item is incorporated by reference from
the Proxy Statement under the heading "Certain Transactions".

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

                  The following documents are filed as part of this Report:

                           1.       Financial Statements. The following
                                    financial statements of the Company are
                                    filed as part of this report:

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                          <C>
Report of Independent Public Accountants.......................              37
Balance Sheets.................................................              38
Statements of Operations.......................................              39
Statements of Changes in Stockholders' Equity..................              40
Statements of Cash Flows.......................................              41
Notes to Financial Statements..................................              42
</TABLE>

                           2.       Financial Statement Schedules.  None

                           3.       Exhibits.

<TABLE>
<CAPTION>
  EXHIBIT
    NO.                             DESCRIPTION
    ---                             -----------
        <S>     <C>
        *3.1 -  Restated Certificate of Incorporation of the Company.
         3.2 -  Bylaws of the Company.
         4.1 -  Reference is made to Exhibits 3.1  and 3.2.
        *4.2 -  Specimen Common Stock certificate.
        *4.3 -  Fourth Amended and Restated Investor Rights Agreement, dated
                August 15, 1994, among the Company and the investors and the
                founders named therein.
         4.4 -  Credit Agreement between the Company and Guidant Corporation, 
                dated February 28, 1997.
       *10.1 -  Form of Indemnification Agreement.
       *10.2 -  1989 Stock Option Plan.
       *10.3 -  1995 Stock Option Plan.
       *10.4 -  Employee Stock Purchase Plan.
       *10.5 -  1996 Incentive Compensation Plan.
       *10.6 -  Employment agreement between the Company and W. James Fitzsimmons.
       *10.7 -  Employment agreement between the Company and Victor M. Bernhard.
</TABLE>


                                       34
<PAGE>   36

<TABLE>
    <S>         <C>                                                                      
      **10.8 -  Employment agreement between the Company and Ronald R. Giannotti.
     ***10.9 -  Employment agreement between the Company and Elizabeth A. McDermott.
     **10.10 -  Lease by and between Menlo  Business Park and Patrician 
                Associates, Inc. and the Company, as amended by First
                Amendment to Lease Agreement, dated February 26, 1996.
       10.11 -  Rights Agreement between the Company and ChaseMellon Shareholder 
                Services dated February 5, 1997.
       10.12 -  Promissory Note Secured by Second Deed of Trust between the 
                Company and Ronald R. Giannotti dated February 9, 1997.
       10.13 -  Officer Severance Plan and Summary Plan Description effective 
                September 24, 1996.
       10.14 -  Multimedia Development Agreement between the Company and 
                Engineering Animation, Inc. dated  March 19, 1997.
        11.1 -  Computation of Net Loss Per Share.
        27.1 -  Financial Data Schedule.
</TABLE>

-----------
*        Incorporated by reference from an exhibit to the Company's Registration
         Statement on Form S-1, as amended, (File No. 33-80557) declared
         effective by the Commission on February 6, 1996.

**       Incorporated by reference from an exhibit to the Company Annual Report
         on Form 10-K filed with the Commission on March 29, 1996.

***      Incorporated by reference from an exhibit to the Company Report on Form
         10-Q filed with the Commission on November 12, 1996.



                                       35
<PAGE>   37

                                   SIGNATURES

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



                                 ENDOVASCULAR TECHNOLOGIES, INC.



                         By:      /s/ W. James Fitzsimmons
                                  ---------------------------------------------
                                  W. James Fitzsimmons
                                  President and Chief Executive Officer




Dated:  March 22, 1997


                                POWER OF ATTORNEY

         KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints W. James Fitzsimmons and G.
Bradley Cole, and each of them acting individually, as his true and lawful
attorney-in-fact, each with full power of substitution and resubstitution, for
him in any and all capacities, to sign any and all amendments to this Report on
Form 10-K, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.



<TABLE>
<CAPTION>
          SIGNATURE                                            TITLE                                    DATE
          ---------                                            -----                                    ----
<S>                                    <C>                                                         <C> 
/s/ W. James Fitzsimmons               President, Chief Executive Officer (Principal               March 22, 1997
------------------------------------   Executive Officer) and Director
W. James Fitzsimmons                   


/s/ G. Bradley Cole                    Vice President, Finance and Chief Financial Officer         March 22, 1997
-------------------------------------- (Principal Financial and Accounting Officer)
G. Bradley Cole


/s/ H. DuBose Montgomery               Chairman of the Board of Directors                          March 22, 1997
-----------------------------------
H. DuBose Montgomery


/s/ Vaughn D. Bryson                   Director                                                    March 22, 1997
-----------------------------------
Vaughn D. Bryson


/s/ Tony R. Brown                      Director                                                    March 22, 1997
-------------------------------------
Tony R. Brown
</TABLE>



                                       36
<PAGE>   38

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of EndoVascular Technologies, Inc.:

         We have audited the accompanying balance sheets of EndoVascular
Technologies, Inc. as of December 31, 1996 and 1995, and the related statements
of operations, changes in stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. 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 of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of EndoVascular
Technologies, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.



                                    ARTHUR ANDERSEN LLP

San Jose, California
March 27, 1997




                                       37
<PAGE>   39

                         ENDOVASCULAR TECHNOLOGIES, INC.

                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                DECEMBER 31,
                                                                                      --------------------------------
                                                                                           1996             1995
                                                                                      --------------    --------------
<S>                                                                                   <C>               <C>           
CURRENT ASSETS:
   Cash and cash equivalents                                                          $    2,530,792    $    2,203,937
   Securities available-for-sale                                                          15,328,545         7,944,782
   Accounts receivable, net of allowance for doubtful accounts of $50,500                    505,440                --
   Interest receivable                                                                       269,329           154,768
   Prepaids and other                                                                        306,837           434,082
   Notes receivable from employees                                                            31,501           112,750
                                                                                      --------------    --------------
         Total current assets                                                             18,972,444        10,850,319

PROPERTY AND EQUIPMENT, net of accumulated depreciation of $931,067 and
   $523,820, respectively                                                                  1,905,579           819,921

OTHER ASSETS                                                                                  74,361            57,156
                                                                                      ==============    ==============
         Total assets                                                                 $   20,952,384    $   11,727,396
                                                                                      ==============    ==============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Current portion of obligations under capital lease                                 $           --    $       15,131
   Accounts payable                                                                          714,323           146,388
   Accrued and other liabilities                                                           1,563,384         1,304,383
                                                                                      --------------    --------------
         Total current liabilities                                                         2,277,707         1,465,902
                                                                                      --------------    --------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
   Convertible preferred stock, $.00001 par value:
     Authorized--5,000,000 shares and 40,000,000 shares at
       December 31, 1996 and 1995, respectively;
     Issued and outstanding--5,118,264 shares at December 31, 1995                                --                51
   Common stock, $0.00001 par value:
     Authorized--30,000,000 shares and 35,000,000 shares at December 31, 1996
       and 1995, respectively;
     Issued and outstanding--8,402,371 shares and 1,160,869 shares at
       December 31, 1996 and 1995, respectively                                                   84                12
   Additional paid-in capital                                                             56,298,754        34,375,515
   Deferred compensation                                                                     (81,934)         (109,242)
   Accumulated deficit                                                                   (37,542,227)      (24,004,842)
                                                                                      --------------    --------------
         Total stockholders' equity                                                       18,674,677        10,261,494
                                                                                      ==============    ==============
         Total liabilities and stockholders' equity                                   $   20,952,384    $  $11,727,396
                                                                                      ==============    ==============
</TABLE>


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


                                       38
<PAGE>   40

                         ENDOVASCULAR TECHNOLOGIES, INC.

                            STATEMENTS OF OPERATIONS



<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                               --------------------------------------------------
                                                                    1996             1995                1994
                                                               --------------    --------------    --------------
<S>                                                            <C>               <C>               <C>
NET PRODUCT SALES                                              $    1,159,250    $           --    $           --
COST OF GOODS SOLD                                                 (1,345,133)               --                --
                                                               --------------    --------------    --------------
     Gross margin (deficit)                                          (185,883)               --                --
OPERATING COSTS AND EXPENSES:
     Research and development                                      12,083,732         8,093,698         7,378,981
     Selling, general and administrative                            2,427,375         1,004,250           960,917
     Total operating costs and expenses                            14,511,107         9,097,948         8,339,898
                                                               --------------    --------------    --------------
     Loss from operations                                         (14,696,990)       (9,097,948)       (8,339,898)
INTEREST INCOME                                                     1,159,605           835,788           460,447
NET LOSS                                                       $  (13,537,385)   $   (8,262,160)   $   (7,879,451)
                                                               ==============    ==============    ==============
NET LOSS PER SHARE                                             $        (1.66)               --                --
                                                               ==============    ==============    ==============
SHARES USED IN COMPUTING NET LOSS PER SHARE                         8,179,293                --                --
                                                               ==============    ==============    ==============
PRO FORMA NET LOSS PER SHARE                                               --    $        (1.31)   $        (1.40)
                                                               ==============    ==============    ==============
SHARES USED IN COMPUTING PRO FORMA NET LOSS PER SHARE
                                                                           --         6,322,998         5,632,933
                                                               ==============    ==============    ==============
</TABLE>

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



                                       39

<PAGE>   41

                         ENDOVASCULAR TECHNOLOGIES, INC.

                  STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

           FOR THE PERIOD FROM DECEMBER 31, 1993 TO DECEMBER 31, 1996


<TABLE>
<CAPTION>
                                                 Preferred Stock                Common Stock
                                          ---------------------------   ---------------------------
                                              Shares        Amount         Shares          Amount
                                          ------------   ------------   ------------   ------------
<S>                                       <C>            <C>             <C>           <C>
BALANCE, December 31, 1993                   4,239,757   $         42        812,773   $          8

   Issuance of common stock under
     stock option plan                              --             --        161,803              2
   Repurchase of common stock on
     June 30, 1994 for $1.01 per
     share                                          --             --         (4,197)            -- 
   Issuance of preferred stock in
     August 1994 for cash for 
     $16.80 per share, net of
     issuance costs of $40,862                 878,507              9             --             -- 
   Net loss                                         --             --             --             -- 
                                          ------------   ------------   ------------   ------------
BALANCE, December 31, 1994                   5,118,264             51        970,379             10

   Issuance of common stock under
     stock option plan                              --             --        193,197              2
   Repurchase of common stock for
     $0.04 to $1.01 per share                       --             --         (2,707)            -- 
   Deferred compensation                            --             --             --             -- 
   Net loss                                         --             --             --             -- 
                                          ------------   ------------   ------------   ------------
BALANCE, December 31, 1995                   5,118,264             51      1,160,869             12

   Conversion of preferred stock to
     common stock                           (5,118,264)           (51)     5,118,264             51
   Issuance of common stock on
     February 12, 1996 for cash, 
     $12.00 per share, net of
     offering costs of $2,405,314                   --             --      2,000,000             20
   Issuance of common stock under
     stock option plan                              --             --        107,990              1
   Issuance of common stock under
     employee stock purchase plan                   --             --         15,248             -- 
   Amortization of deferred
     compensation                                   --             --             --             -- 
   Net loss                                         --             --             --             -- 
                                          ============   ============   ============   ============
BALANCE, December 31, 1996                          --          $  --   $  8,402,371   $         84
                                          ============   ============   ============   ============
</TABLE>



<TABLE>
<CAPTION>
                                            Additional                                    Total
                                             Paid-in       Deferred     Accumulated    Stockholders'
                                             Capital     Compensation     Deficit         Equity
                                          ------------   ------------   ------------   ------------
<S>                                       <C>            <C>             <C>           <C>
BALANCE, December 31, 1993                $ 19,155,820            $--   $ (7,863,231)  $ 11,292,639
                                          ------------   ------------   ------------   ------------
   Issuance of common stock under
     stock option plan                          72,867             --             --         72,869
   Repurchase of common stock on
     June 30, 1994 for $1.01 per
     share                                      (4,231)            --             --         (4,231)
   Issuance of preferred stock in
     August 1994 for cash for 
     $16.80 per share, net of
     issuance costs of $40,862              14,718,929             --             --     14,718,938
   Net loss                                         --             --     (7,879,451)    (7,879,451)
                                          ------------   ------------   ------------   ------------
BALANCE, December 31, 1994                  33,943,385             --    (15,742,682)    18,200,764

   Issuance of common stock under
     stock option plan                         325,522             --             --        325,524
   Repurchase of common stock for
     $0.04 to $1.01 per share                   (2,634)            --             --         (2,634)
   Deferred compensation                       109,242       (109,242)            --             --
   Net loss                                         --             --     (8,262,160)    (8,262,160)
                                          ------------   ------------   ------------   ------------
BALANCE, December 31, 1995                  34,375,515       (109,242)   (24,004,842)    10,261,494

   Conversion of preferred stock to
     common stock                                   --             --             --             --
   Issuance of common stock on
     February 12, 1996 for cash, 
     $12.00 per share, net of
     offering costs of $2,405,314           21,594,666             --             --     21,594,686
   Issuance of common stock under
     stock option plan                         173,043             --             --        173,044
   Issuance of common stock under
     employee stock purchase plan              155,530             --             --        155,530
   Amortization of deferred
     compensation                                   --         27,308             --         27,308
   Net loss                                         --             --    (13,537,385)   (13,537,385)
                                          ============   ============   ============   ============
BALANCE, December 31, 1996                $ 56,298,754   $    (81,934)  $(37,542,227)  $ 18,674,677
                                          ============   ============   ============   ============
</TABLE>


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



                                       40

<PAGE>   42

                         ENDOVASCULAR TECHNOLOGIES, INC.
                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                            YEARS ENDED DECEMBER 31,
                                                              ------------------------------------------------
                                                                   1996             1995             1994
                                                              --------------   --------------   --------------
<S>                                                           <C>              <C>              <C>            
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                   $  (13,537,385)  $   (8,262,160)  $   (7,879,451)
                                                              --------------   --------------   --------------
   Adjustments to reconcile net loss to net cash
     used in operating activities:
       Depreciation and amortization                                 410,247          239,314          184,398
       Amortization of deferred compensation                          27,308               --               --
       Write-off of other assets                                          --               --          358,110
       Changes in current assets and liabilities:
         Accounts receivable                                        (505,440)              --               --
         Interest receivable                                        (114,561)          14,160          (25,993)
         Prepaid expenses and other                                  127,245         (281,030)         (67,226)
         Note receivable from employees                               81,249          116,250         (108,750)
         Deposits and other assets                                   (20,205)           3,000               --
         Accounts payable                                            567,935           53,722         (141,158)
         Accrued and other liabilities                               259,001          705,703          377,370
                                                              --------------   --------------   --------------
           Total adjustments                                         832,779          851,119          576,751
                                                              --------------   --------------   --------------
           Net cash used in operating activities                 (12,704,606)      (7,411,041)      (7,302,700)
                                                              --------------   --------------   --------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of securities available for sale                     (32,042,727)     (25,366,859)     (27,918,983)
   Sale/maturity of securities available for sale                 24,658,964       32,760,370       18,657,729
   Purchases of property and equipment                            (1,492,905)        (231,288)        (662,049)
                                                              --------------   --------------   --------------
           Net cash provided by (used in)
             investing activities                                 (8,876,668)       7,162,223       (9,923,303)
                                                              --------------   --------------   --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayment of capital lease obligations                            (15,131)         (24,952)         (14,652)
   Proceeds from exercise of stock options                           173,044          325,524           72,869
   Proceeds from employee stock purchase plan                        155,530               --               --
   Repurchase of common stock options                                     --           (2,634)          (4,231)
   Proceeds from sale of preferred stock                                  --               --       14,759,800
   Proceeds from sale of common stock                             24,000,000               --               --
   Stock issuance costs                                           (2,405,314)              --          (40,862)
                                                              --------------   --------------   --------------
           Net cash provided by financing activities              21,908,129          297,938       14,772,924
                                                              --------------   --------------   --------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                 326,855           49,120       (2,453,079)

CASH AND CASH EQUIVALENTS, beginning of year                       2,203,937        2,154,817        4,607,896
                                                              --------------   --------------   --------------
CASH AND CASH EQUIVALENTS, end of year                        $    2,530,792   $    2,203,937   $    2,154,817
                                                              ==============   ==============   ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
   AND FINANCING TRANSACTIONS:
     Purchase of equipment under capital
        lease obligations                                     $           --   $           --   $       25,075
                                                              ==============   ==============   ==============
</TABLE>

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


                                       41
<PAGE>   43

                         ENDOVASCULAR TECHNOLOGIES, INC.

                          NOTES TO FINANCIAL STATEMENTS

                           DECEMBER 31, 1996 AND 1995


1.       OPERATIONS:

         EndoVascular Technologies, Inc. (the "Company") was incorporated in the
state of Delaware on June 30, 1989 and commenced operations on July 1, 1989 to
develop the Endovascular Grafting System, or "EGS(R) system," for repair of
abdominal aortic aneurysms. Since inception, the Company has devoted
substantially all of its efforts to product research and development.

         The Company's products are in early stage clinical trials. There can be
no assurance that the Company's research and development efforts will be
successfully completed. Given that clinical testing is at an early stage, there
can be no assurance that the EGS systems will be shown to be safe and effective.
There can be no assurance that its products will be approved for marketing by
the FDA or any foreign government agency or that the EGS systems or any other
products will be approved for marketing by the FDA or any foreign government
agency or that the EGS systems or any other product developed by the Company
will be successfully introduced or achieve any significant degree of market
acceptance. There can be no assurance that the Company will achieve significant
revenues from sales of its EGS systems, or achieve profitable operations.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BASIS OF PRESENTATION

         The preparation of financial statements in conformity with generally
accepted accounting principles requires certain estimates be made by management.
Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK

         Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of cash investments and
short-term investments. The Company has investment policies that limit such
investments to short-term, low risk investments.

CASH AND CASH EQUIVALENTS

         For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with an original maturity of three months or less
to be cash equivalents. Cash and cash equivalents are stated at cost, which
approximates market, and consist of short-term, highly liquid investments with
original maturities of less than 90 days.

PROPERTY AND EQUIPMENT

         Property and equipment consists of laboratory, production and office
equipment; leasehold improvements and software. Equipment and software are
recorded at cost and are depreciated using the straight-line method based upon
the estimated useful lives of three to five years. Leasehold improvements are
recorded at cost and are amortized over the estimated lives of the improvements
or the term of the lease, whichever is shorter. The cost of assets retired or
otherwise disposed of and the related accumulated depreciation are removed from
the accounts, and any gain or loss is included in the results of operations.
Maintenance and repairs that do not improve or extend the life of the related
asset are expensed as incurred.



                                       42
<PAGE>   44

         In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." This pronouncement requires that long-lived assets and certain identifiable
intangible assets be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted SFAS No. 121 effective January 1, 1996; such
adoption had no impact on the Company's results of operations or financial
condition.

REVENUE RECOGNITION

         Revenue from product sales is related to the sale of the Company's EGS
systems consisting of an endovascular prosthesis and delivery catheter. As the
Company's products are in clinical trials, the Company recognizes revenue once
the EGS system has been used in a surgical procedure. Costs of goods sold
include costs attributable to the manufacture of the products.

RESEARCH AND DEVELOPMENT

         Research and development costs include product development, clinical,
medical, quality and regulatory costs and are expensed as incurred.

NET LOSS PER SHARE

         Net loss per share and pro forma net loss per share are computed using
the weighted average number of common shares outstanding. Common equivalent
shares from stock options are excluded from the computation as their effect is
anti-dilutive, except that, pursuant to the Securities and Exchange Commission's
(the "Commission") Staff Accounting Bulletins, common and common equivalents
(stock options and preferred stock) issued during the 12-month period prior to
the initial public offering of the Company's common stock at prices below the
initial public offering price have been included in the net loss per share
calculation as if they were outstanding for all periods prior to and including
the quarter in which the Company's initial public offering was completed (using
the treasury stock method for stock options).

         Net loss per share and pro forma net loss per share have been computed
as described above and also include, pursuant to Commission staff policy, common
equivalent shares from convertible preferred shares issued more than 12 months
from the initial public offering of the Company's common stock that
automatically converted upon completion of the Company's initial public offering
(using the if-converted method) from the original date of issuance.

3.       SECURITIES AVAILABLE-FOR-SALE:

         The Company classifies its short-term investment securities as
available-for-sale. Such investments mature within one year and are carried at
amortized cost which approximates market. Available-for-sale securities at
December 31, 1996 and 1995 are presented below:

<TABLE>
<CAPTION>
                                                       1996            1995
                                                  --------------  --------------
<S>                                               <C>             <C>           
U.S. government securities                        $    3,208,457  $    3,580,900
Corporate debt securities and other                   12,120,088       4,363,882
                                                  ==============  ==============
         Total                                    $   15,328,545  $    7,944,782
                                                  ==============  ==============
</TABLE>



                                       43
<PAGE>   45

4.       PROPERTY AND EQUIPMENT:

         Property and equipment consists of the following at December 31, 1996
and 1995:

<TABLE>
<CAPTION>
                                                      1996            1995
                                                 --------------  --------------
<S>                                              <C>             <C>           
Machinery and equipment                          $      854,329  $      474,341
Computers and software                                  746,016         433,616
Furniture and fixtures                                  347,306         119,088
Leasehold improvements                                  888,995         316,696
                                                 --------------  --------------
                                                      2,836,646       1,343,741
Accumulated depreciation and amortization              (931,067)       (523,820)
                                                 ==============  ==============
                                                 $    1,905,579  $      819,921
                                                 ==============  ==============
</TABLE>


5.       NOTES RECEIVABLE:

         At December 31, 1996 and 1995, the Company had employee notes
receivable balances of $31,501 and $112,750, respectively. These non-interest
bearing notes are secured by employee stock options and real estate and are due
on demand.

6.       ACCRUED AND OTHER LIABILITIES:

         Accrued and other liabilities consist of the following at December 31,
1996 and 1995:

<TABLE>
<CAPTION>
                                                         1996           1995
                                                     ------------   ------------
<S>                                                  <C>            <C>         
Clinical trial services                              $    667,020   $    548,323
Accrued payroll and related expenses                      644,584        215,599
Legal, accounting and other                               251,780        540,461
                                                     ============   ============
                                                     $  1,563,384   $  1,304,383
                                                     ============   ============
</TABLE>

7.       INCOME TAXES:

         The significant components of net deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                     1996              1995
                                                 ------------      ------------
<S>                                              <C>               <C>         
Capitalized R&D expenses                         $  1,476,000      $    994,000
Net operating loss carryforwards                   11,816,000         6,662,000
R&D and other credit carryforwards                  1,944,000         1,379,000
Other                                               1,278,000         1,631,000
Valuation allowance                               (16,514,000)      (10,666,000)
                                                 ------------      ------------
          Total deferred tax asset               $         --      $         --
                                                 ============      ============
</TABLE>




                                       44
<PAGE>   46

         As of December 31, 1996, the Company had net operating loss
carryforwards of approximately $33,717,000 and $5,728,000 for federal and state
income tax purposes, respectively. The Federal carryforwards expire in 2005
through 2011, and the state carryforwards expire in 1997 through 2001. The
principal differences between financial reporting losses and losses for tax
purposes are the result of capitalizing research and development expenses and
start-up costs for tax purposes. The Company also has research and development
credits available to reduce future Federal and state income taxes, if any, of
approximately $1,262,000 and $682,000, respectively.

         The Company believes that, based on a number of factors, there is
sufficient uncertainty regarding the realizability of carryforwards and credits
that a full valuation allowance has been recorded against the deferred tax
asset.

8.       STOCKHOLDERS' EQUITY:

         On December 22, 1995, the Company effected a 1-for 4.2 reverse common
and preferred stock split. All stock data in the accompanying financial
statements has been retroactively adjusted to reflect the reverse stock split.

CONVERTIBLE PREFERRED STOCK

         Prior to the Company's initial public offering of common stock in
February 1996, the Company had authorized 40,000,000 shares of convertible
preferred stock. In connection with the initial public offering, all outstanding
preferred stock was converted to common stock. In addition, the Company amended
its certificate of incorporation and authorized 5,000,000 shares of undesignated
preferred stock.

COMMON STOCK

         On February 12, 1996, the Company completed an initial public offering
of two million shares of its common stock at $12.00 per share. Net proceeds to
the Company, after deducting underwriting discounts and commissions and expenses
were $21,594,686. In connection with the offering, all of the Company's
outstanding preferred stock was converted to an equivalent number of shares of
common stock. At December 31, 1996, 30,000,000 shares of common stock were
authorized of which 8,402,371 shares were outstanding.

STOCK OPTION PLANS

         The Company has two stock option plans: the 1989 Stock Option Plan (the
"1989 Plan") and the 1995 Stock Option Plan (the "1995 Plan") (collectively, the
"Plans"). The stock options granted under the Plans may be either incentive
stock options ("ISO's") or nonstatutory stock options. The Board of Directors
may set the rate at which the options become exercisable and determine when the
options expire, subject to the following limitations: no options shall be
exercisable after the tenth anniversary of the date of grant; an individual
option will become exercisable in the event the Company is sold or has other
significant changes in its ownership and the employee's job is eliminated within
12 months following a change in ownership.

         ISO's may not be granted at an exercise price of less than the fair
market value of the common stock at the date of grant and the exercise price of
a nonstatutory option cannot be less than eighty-five percent (85%) of the fair
market value of the common stock on the grant date.



                                       45
<PAGE>   47

         Activity under the Plans is as follows:


<TABLE>
<CAPTION>
                                                                            EXERCISE              WEIGHTED
                                                       OPTIONS               PRICE                AVERAGE
                                                     OUTSTANDING           PER SHARE           EXERCISE PRICE
                                                   ----------------    -------------------    -----------------
<S>                                                 <C>                 <C>                    <C>  
Outstanding at December 31, 1993                         547,321        $ .04  -  $1.47             $1.17

    Granted                                              452,214         1.47  -   6.30              2.72
    Exercised                                           (161,809)         .04  -   1.47               .45
    Canceled                                             (13,283)        1.01  -   4.20              1.51
                                                   ----------------    -------------------    -----------------

Outstanding at December 31, 1994                         824,443          .04  -   6.30              1.97

    Granted                                              358,284         4.20  -   7.35              5.17
    Exercised                                           (193,197)        1.01  -   4.20              1.68
    Canceled                                            (130,040)         .04  -   7.35              4.97
                                                   ----------------    -------------------    -----------------

Outstanding at December 31, 1995                         859,490          .04  -   7.35              2.86

    Granted                                              551,410         9.13  -  14.13              9.63
    Exercised                                           (107,990)         .08  -   7.35              1.60
    Canceled                                             (81,453)        1.01  -  10.38              3.26
                                                   ----------------    -------------------    -----------------

Outstanding at December 31, 1996                       1,221,457        $1.01  - $14.13             $6.00
                                                   ================    ===================    =================
</TABLE>

         There are 469,843 and 176,900 options available for grant at December
31, 1996 and 1995, respectively.

         The Company accounts for the Plans under APB Opinion No. 25, under
which compensation cost has only been recognized to the extent required under
the Commission's Staff Accounting Bulletins. Had compensation cost for these
plans been determined based on the fair value at the date of grant consistent
with SFAS No. 123 "Accounting for Stock Based Compensation", the Company's net
loss and net loss per share would have been increased to the following pro forma
amounts:

<TABLE>
<CAPTION>
                                                    1996              1995
                                               --------------    --------------
<S>                                            <C>               <C>            
Net loss        As reported                    $  (13,537,385)   $   (8,262,160)
                                               ==============    ==============
                Pro forma                      $  (13,942,337)   $   (8,280,788)
                                               ==============    ==============
Loss per share  As Reported                    $        (1.66)   $        (1.31)
                                               ==============    ==============
                Pro forma                      $        (1.70)   $        (1.31)
                                               ==============    ==============
</TABLE>



                                       46

<PAGE>   48

         Because the Statement 123 method of accounting is not required to be
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years. The following table summarizes information about stock options
outstanding at December 31, 1996:


<TABLE>
<CAPTION>
                                      OPTIONS OUTSTANDING                                       OPTIONS EXERCISABLE
                  -------------------------------------------------------------     ----------------------------------------
                       NUMBER               WEIGHTED-                                     NUMBER 
  RANGE OF         OUTSTANDING AT            AVERAGE               WEIGHTED-           EXERCISABLE 
  EXERCISE          DECEMBER 31,            REMAINING               AVERAGE            DECEMBER 31,         WEIGHTED-AVERAGE
   PRICES               1996             CONTRACTUAL LIFE       EXERCISE PRICE             1996              EXERCISE PRICE
--------------    ----------------      ------------------   ------------------     -------------------    -----------------
<C>               <C>                   <C>                   <C>                   <C>                    <C>          
$1.01 - $1.47         375,654                   7              $     1.23                248,240           $        1.14
$4.20 - $7.35         294,393                   9              $     5.30                 83,125           $        5.17
$9.00 - $14.13        551,410                  10              $     9.65                 13,705           $       11.26
                  ----------------                                                   -----------------
                    1,221,457                                                            345,070
                  ================                                                   =================
</TABLE>

         The weighted average fair value of options granted was $5.60 in 1996
and $3.29 in 1995. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates ranging from 3.4 percent to 7.55 percent; expected
dividend yields of zero percent; expected lives of 5 years; and expected
volatility of 65 percent.

EMPLOYEE STOCK PURCHASE PLAN

         The Company has authorized 125,000 shares of common stock for issuance
under the 1996 Employee Stock Purchase Plan. Employees may elect to withhold up
to 15% of their compensation for the purchase of the Company's common stock. The
amounts withheld are used to purchase the Company's common stock at a price
equal to 85% of the fair market value of the stock on the first or last day of a
six-month offering period, whichever is lower. The Company issued 15,248 shares
pursuant to this plan at an average price of $10.20 per share in 1996.

9.       COMMITMENTS AND CONTINGENCIES:

LEASE COMMITMENTS

         The Company leases its facilities under noncancelable operating lease
agreements. As of December 31, 1996, the minimum future lease payments under
these leases are as follows:

<TABLE>
<CAPTION>
                  YEAR ENDING
                  DECEMBER 31,                      AMOUNT
                -----------------              -----------------
                       <S>                         <C>       
                       1997                        $  488,632
                       1998                           513,070
                       1999                           215,490
</TABLE>

Total rent expense was approximately $451,000 for 1996, $241,000 for 1995 and
$220,000 for 1994.



                                       47
<PAGE>   49

PURCHASE COMMITMENT

         In January 1997, the Company entered into an agreement to acquire
certain imaging software from a third party. The Company expects to pay the
following minimum amounts related to the purchase agreement as follows:

<TABLE>
<CAPTION>
                    YEAR ENDING
                     DECEMBER 31,                AMOUNT
                  -------------------        --------------
                         <S>                     <C>    
                         1997                    850,000
                         1998                    450,000
                         1999                    200,000
</TABLE>

CONTINGENCIES

         In January 1995, the Company discovered breaks in the attachment system
component of its Tube Endograft prosthesis. Based on the discovery, the Company
voluntarily decided to suspend clinical trials worldwide. To date, 37 patients
have experienced attachment system fractures, of which 8 patients have had open
surgery to remove the implant. As a result of the breakages, the Company made
significant enhancements to attachment systems and obtained FDA approval to
reinitiate clinical trials in late 1995. The Company has recorded a reserve
(included in accrued liabilities) amounting to $145,000 and $350,000 at December
31, 1996 and 1995, respectively, to monitor such patients from the original
trials. After considering this reserve, the Company believes the ultimate
outcome of this matter will not have a material impact on the financial
statements taken as a whole.

10.      CREDIT AGREEMENT:

         In February 1997, the Company entered into a $30 million credit
agreement. Borrowings under the agreement bear interest at 16.5% to 19%.
Interest accruing during the first thirty months in which loans are outstanding
is payable in full thirty months after the date the first loan is made. Interest
accruing thereafter is due quarterly. Principal payments are due in full on
March 31, 2002. Balances owed under the agreement may be prepaid subject to a
prepayment fee, which is initially set at 5% of the prepayment amount and is
reduced on each anniversary date of the agreement by 1%. Further, all principal
outstanding will be due upon the occurrence of certain asset sales and issuances
of equity securities, and will be due at the lender's discretion upon a change
in control of the Company. Among other requirements, the agreement prohibits the
Company from paying dividends and incurring additional indebtedness.




                                       48
<PAGE>   50
                                 EXHIBIT INDEX

  <TABLE>
 <CAPTION>
  EXHIBIT
    NO.                           DESCRIPTION
    ---                           -----------
    <S>     <C>
    *3.1 -  Restated Certificate of Incorporation of the Company.
     3.2 -  Bylaws of the Company.
     4.1 -  Reference is made to Exhibits 3.1  and 3.2.
    *4.2 -  Specimen Common Stock certificate.
    *4.3 -  Fourth Amended and Restated Investor Rights Agreement, dated
            August 15, 1994, among the Company and the investors and the
            founders named therein.
     4.4 -  Credit Agreement between the Company and Guidant Corporation, 
            dated February 28, 1997.
   *10.1 -  Form of Indemnification Agreement.
   *10.2 -  1989 Stock Option Plan.
   *10.3 -  1995 Stock Option Plan.
   *10.4 -  Employee Stock Purchase Plan.
   *10.5 -  1996 Incentive Compensation Plan.
   *10.6 -  Employment agreement between the Company and W. James Fitzsimmons.
   *10.7 -  Employment agreement between the Company and Victor M. Bernhard.
  **10.8 -  Employment agreement between the Company and Ronald R. Giannotti.
 ***10.9 -  Employment agreement between the Company and Elizabeth A. McDermott.
 **10.10 -  Lease by and between Menlo  Business Park and Patrician 
            Associates, Inc. and the Company, as amended by First
            Amendment to Lease Agreement, dated February 26, 1996.
   10.11 -  Rights Agreement between the Company and ChaseMellon Shareholder 
            Services dated February 5, 1997.
   10.12 -  Promissory Note Secured by Second Deed of Trust between the 
            Company and Ronald R. Giannotti dated February 9, 1997.
   10.13 -  Officer Severance Plan and Summary Plan Description effective 
            September 24, 1996.
   10.14 -  Multimedia Development Agreement between the Company and 
            Engineering Animation, Inc. dated  March 19, 1997.
    11.1 -  Computation of Net Loss Per Share.
    27.1 -  Financial Data Schedule.
</TABLE>

-----------
*    Incorporated by reference from an exhibit to the Company's Registration
     Statement on Form S-1, as amended, (File No. 33-80557) declared
     effective by the Commission on February 6, 1996.

**   Incorporated by reference from an exhibit to the Company Annual Report
     on Form 10-K filed with the Commission on March 29, 1996.

***  Incorporated by reference from an exhibit to the Company Report on Form
     10-Q filed with the Commission on November 12, 1996.