<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)

  [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [Fee Required]

       For the fiscal year ended DECEMBER 31, 1997

       or

  [ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934 [No fee required]

       For the Transition period from ____________ to ___________

                         Commission File Number: 0-28424

                            CARDIOGENESIS CORPORATION
             (Exact name of registrant as specified in its charter)

                DELAWARE                                 77-0352469
    ---------------------------------               ---------------------
     (State or other jurisdiction of                  (I.R.S. employer
     incorporation or organization)                  identification No.)

                               540 OAKMEAD PARKWAY
                           SUNNYVALE, CALIFORNIA 94086
          (Address of principal executive offices, including zip code)

                                 (408) 328-8500
              (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:  NONE
Securities registered pursuant to Section 12(g) of the Act:

                    COMMON STOCK, $0.001 PAR VALUE PER SHARE
                                (Title of Class)

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

       The number of outstanding shares of Registrant's Common Stock on March
27, 1998 was 12,186,751 shares. The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based upon the closing price of such
voting stock on March 27, 1998, as reported by the Nasdaq national market, was
approximately $31,067,000. Shares of Common Stock held by each executive officer
and director and by each entity affiliated with such persons have been excluded
from such calculation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.

                       DOCUMENTS INCORPORATED BY REFERENCE

        Certain sections of the Registrant's definitive Proxy Statement for the
1998 Annual Stockholders Meeting to be held on June 2, 1998 are incorporated by
reference in Part III of this Form 10-K to the extent stated herein.



<PAGE>   2

                                    FORM 10-K



                                TABLE OF CONTENTS


<TABLE>
<S>         <C>                                                              <C>
PART I
ITEM 1.     Business.......................................................   2
ITEM 2.     Properties.....................................................  14
ITEM 3.     Legal Proceedings..............................................  14
ITEM 4.     Submission of Matters to a Vote of Security Holders............  15

PART II
ITEM 5.     Market for Registrant's Common Equity and Related
              Stockholder Matters..........................................  15
ITEM 6.     Selected Financial Data........................................  16
ITEM 7.     Management's Discussion and Analysis of Financial Condition
              and Results of Operations....................................  16
ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk.....  26
ITEM 8.     Financial Statements and Supplementary Data....................  27
ITEM 9.     Changes in and Disagreements With Accountants on Accounting
              and Financial Disclosure.....................................  46

PART III
ITEM 10.    Directors and Executives Officers of the Registrant............  46
ITEM 11.    Executive Compensation.........................................  46
ITEM 12.    Security Ownership of Certain Beneficial Owners and
              Management...................................................  46
ITEM 13.    Certain Relationships and Related Transactions.................  46

PART IV
ITEM 14.    Exhibits, Financial Statement Schedules and Reports on
              Form 8-K...................................................... 46
SIGNATURES.................................................................. 50
</TABLE>



                                     PART I

ITEM 1.  BUSINESS

        This Report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements involve a number of risks and uncertainties,
including the factors described throughout this Report, particularly the section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors." The actual results the Company achieves
may differ materially from any forward-looking statements due to such risks and
uncertainties. The Company has identified by an asterisk (*) various sentences
within this Report which contain such forward-looking statements, and words such
as "believes,""anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. The Company undertakes no obligation to revise
any forward-looking statements to reflect events or circumstances that may arise
after the date of this Report. Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report that attempt
to advise interested parties of the risks and factors that may affect the
Company's business.





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GENERAL

        CardioGenesis is developing proprietary probe and catheter systems to
perform both surgical and catheter-based percutaneous transmyocardial
revascularization ("TMR"). TMR is used to treat patients with severe coronary
artery disease ("CAD") who suffer from recurrent debilitating chest pain. Unlike
coronary artery bypass graft ("CABG") surgery and percutaneous transluminal
coronary angioplasty ("PTCA"), which are used to bypass, reopen or widen blocked
or narrowed arteries, TMR involves the use of laser energy, delivered through
probes and catheters, to create typically between 15 and 30 channels in the
ischemic oxygen-starved regions of the heart muscle. Clinical studies of TMR to
treat severe angina at some of the world's leading medical centers have
demonstrated improvements in clinical conditions and have reported reductions in
the frequency of repeated diagnostic procedures and hospitalizations. While the
mechanism of the potential clinical benefit of TMR is currently unproven, and
additional clinical and mechanism investigations are ongoing, the Company
believes the reported benefits of TMR are associated with angiogenesis, the
formation of new blood vessels.

        The Company is currently developing three types of TMR systems, based
upon its patented technology, for use by cardiothoracic surgeons and
interventional cardiologists to treat patients with severe CAD. The Company's
intraoperative TMR ("ITMR(TM)") System and thoracoscopic TMR ("TTMR(TM)") System
use an epicardial approach (i.e., creating channels from outside the heart into
the left ventricle) and its percutaneous myocardial revascularization system
("PMR(TM)") uses an endocardial approach (i.e., creating channels from inside
the left ventricle partially through the myocardium).

        The Company's objective is to establish TMR as a conventional therapy to
treat CAD and to become the worldwide market leader of TMR systems. *To
establish CardioGenesis as the leading provider of TMR systems, the Company
intends to continue to conduct clinical trials at, and focus its marketing
efforts on, high volume, prestigious cardiovascular centers. The Company's
clinical efforts have been focused on patients with severe angina for whom
existing therapies cannot be used (so-called "no-option" patients). *The Company
plans to conduct clinical trials to broaden the applications for its TMR systems
to cover multiple indications, including use as an adjunct to other
interventional therapies, such as CABG and PTCA. *The Company intends to build
upon its domestic and international intellectual property position, particularly
its issued percutaneous and intraoperative TMR method patents. *The Company
seeks to rapidly establish a large installed base of its TMR systems in key
international markets, emerging secondary markets, and, following U.S. Food and
Drug Administration ("FDA") approval, in the United States, thereby creating an
opportunity for a recurring revenue stream from the sale of its disposable
probes and catheters. To help achieve this goal, the Company has entered into an
exclusive international distribution agreement with Boston Scientific
Corporation ("BSC"), a worldwide leader in medical devices. *The Company
believes this agreement, which grants BSC exclusive rights and responsibilities
for sales and distribution of the full range of the Company's TMR products in
all international markets, is the approach needed to capitalize on the market
potential of TMR therapy and the Company's TMR probes and catheters.
*Additionally, the Company intends to invest significant resources to enhance
its understanding of the TMR mechanism to enable it to further develop its
products and to promote widespread adoption of TMR in the medical community.

CARDIOGENESIS TMR APPROACHES AND MARKETS

        The Company's proprietary TMR systems are designed to create channels
either (i) epicardially (i.e., from outside the heart into the left ventricle)
or (ii) endocardially (i.e., from inside the left ventricle partially through
the myocardium). The Company's ITMR System and TTMR System use an epicardial
approach and its PMR System uses an endocardial approach.

        ITMR. In an intraoperative TMR procedure, the heart is exposed by a
cardiothoracic surgeon through either a thoracotomy (an incision through the
chest wall) or a sternotomy (an incision through the sternum). The Company's
ITMR probe is then applied directly onto the myocardium delivering laser energy
to create channels into the left ventricle. The Company initiated Phase I
feasibility clinical trials with the ITMR System in "no-option" patients in
November 1995. In June 1996, the Company received approval from the FDA to
expand its multi-center ITMR clinical trial to a Phase II, prospective,
randomized clinical trial in "no-option" patients.

        Enrollment in the Phase II, randomized, no-option trial is now complete.
The Company has commenced submission of data and information to the FDA on the
ITMR System. The Company plans to continue submitting information and updates to
the FDA throughout the next six to nine months and to respond to periodic
inquiries from the FDA with respect to review of such data and information. This
proactive and collaborative approach to submissions provides the Company with a
means for frequent reviews by the FDA of information required for Pre-Market
Release Approval ("PMA") as well as discussions regarding the ITMR System. See
"--Clinical Trials."

        In August 1996, the Company received an Investigational Device Exemption
("IDE") from the FDA and has begun a clinical study of its ITMR system used as
an adjunctive therapy to CABG in patients with severe angina who are only
partially treatable by CABG. The adjunct to CABG clinical trial is on-going. See
"-- Clinical Trials."

        PMR. The Company's percutaneous PMR System is designed to be used by an
interventional cardiologist in a cardiac catheterization laboratory. In this
procedure, the cardiologist accesses the heart by inserting a fiber optic
equipped catheter system into the femoral





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artery at the groin and then advancing it through the aorta into the left
ventricle. Once in the ventricle, the fiber optic catheter is guided to the
ischemic areas of the endocardial wall surface to create channels partially
through the wall of the heart. *The Company believes that PMR, as a
catheter-based procedure, is less invasive, less traumatic, and more
cost-effective than other TMR approaches. In November 1996, the Company
initiated clinical testing in Europe of its PMR System in "no-option" patients.
In July 1997, the Company received an IDE from the FDA which allows a
multi-center clinical trial of its PMR system to treat angina in no-option
patients at up to twelve clinical sites. The PMR clinical trials are on-going.
See "-- Clinical Trials."

        TTMR. In a thoracoscopic TMR procedure, a TTMR probe is used by a
cardiothoracic surgeon in combination with endoscopic instruments to access and
visualize the heart. Through these endoscopic instruments, the TTMR probe is
maneuvered and placed on the beating heart delivering laser energy to create
channels into the left ventricle.

        *The Company believes the approaches discussed above may be used for a
number of CAD indications. However, none of the Company's TMR systems has
received FDA approval, and there can be no assurance any of these approaches
will receive FDA approval for any of the indications discussed below or will be
accepted by the medical community as viable methods for the treatment of CAD.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA."

POTENTIAL INDICATIONS

        *The Company believes the three approaches it is developing could be
used to address a range of indications for TMR and estimates each year there are
more than 500,000 patients in the United States and other key markets who could
potentially benefit from TMR therapy.

        "No-option." TMR is currently being studied as a treatment for patients
with severe CAD not treatable by PTCA, CABG or other interventional therapies.
These patients have severe diffuse multivessel CAD and may have undergone
multiple prior cardiac procedures. *The Company believes all of its TMR systems
could be used in the treatment of "no-option" patients.

        Adjunct to CABG. TMR is also currently being studied in combination with
CABG, in cases where the patient has one or more areas of the heart afflicted by
severe CAD that cannot be adequately bypassed. In these cases, the coronary
arteries that can be bypassed are grafted, while other areas that are ischemic
and not suitable for bypass are treated with TMR. *The Company believes its ITMR
and TTMR Systems could address this potential indication.

        Adjunct to PTCA. *The Company believes its proprietary PMR System may be
used in combination with a PTCA procedure, where there is evidence of severely
ischemic regions of the heart not amenable to treatment with PTCA alone. In this
situation, the Company's PMR System would be used to treat the regions of the
heart where PTCA is not effective.

        No Company has yet received approval from the FDA to market TMR systems
in the United States for any indication. None of the Company's TMR systems has
been proven to be safe or efficacious nor has the Company received regulatory
approval to market any of its TMR systems in the United States. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Early Stage of Clinical Trials; No Assurance of
Safety or Efficacy" and "-- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA."

PRODUCTS

        The Company's TMR systems include disposable fiber optic probes and
catheters for transmitting laser energy to the myocardium, a Holmium YAG
("Ho:YAG") laser unit, and an electrocardiogram ("ECG") monitor, which are
described below.

        Disposable Fiber Optic Probes and Catheters. The proprietary probes used
in the Company's ITMR and TTMR Systems and the proprietary catheters used in the
Company's PMR System are flexible, fiber-optic based devices for positioning and
transmitting laser energy to create channels through the wall of the heart. The
tip of the probe includes a proprietary lens apparatus that creates laser energy
distribution to allow for progressive, controlled penetration of the myocardium.
A highly flexible optical fiber, encased within a protective fiber jacket,
transmits energy to the lens from the laser. The probes and catheters are
designed as





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disposable single-use devices. The PMR aligning catheter, with its coaxial
design, can be directed anywhere into the left ventricle. The catheter system
permits steering within the ventricle to guide the optical system to the
appropriate areas of the heart wall. Once the catheter system is oriented toward
the target to be treated, the lens is independently advanced to the ventricular
wall assuring perpendicular contact on the myocardial wall.

        Ho:YAG Laser. The Company's TMR systems incorporate a proprietary Ho:YAG
laser specifically designed for TMR applications. The Company's current laser is
a portable unit, weighing approximately 140 pounds, which delivers laser energy.
*The Company believes the Ho:YAG laser is optimally suited for TMR procedures
because of (i) its tissue ablation characteristics; (ii) its ability to deliver
treatment energy through a fiber optic device, thereby allowing percutaneous
applications; (iii) its reliability when compared with other types of lasers;
and (iv) its ability to be manufactured cost-effectively.

        ECG Monitor. The Company's TMR systems include a commercially available,
microprocessor-controlled ECG monitor and a Company proprietary software
algorithm. This ECG monitor provides the means for timing the firing of the
Company's laser to the patient's cardiac electrical activity. *Based on early
research sponsored by the Company and conducted at a major academic institution,
the Company believes timing the laser to the patient's cardiac electrical
activity may be a significant factor in minimizing the occurrence of arrhythmias
(irregular heartbeats).

        The Company's TMR systems are designed to offer the following
advantages:

        Flexible System Design. The Company's TMR systems are designed to
deliver laser energy in a progressive, controlled manner through a fiber optic
probe or catheter, providing the Company with a technology adaptable for
multiple approaches and indications.

        Price/Performance. The Company has designed its TMR systems to be
cost-effective, enabling flexibility in the pricing of its laser systems and
disposable probes and catheters. *The Company believes that this flexibility
will enable it to offer superior price/performance to its customers.

        Size and Portability. The Company's current TMR systems weigh
approximately 140 pounds, are portable and do not occupy a significant amount of
space in an operating room or cardiac catheterization laboratory.

        Reliability. The Ho:YAG laser used in the Company's TMR systems is a
solid state laser designed for reliability, thereby minimizing maintenance
costs. The Company's TMR systems are also designed to meet and withstand the
rigors of shipment, installation, repeated use, and relocation within the
hospital environment.

        In July 1996, the Company received the Conformite Europeene (CE) Mark
approval to market its ITMR System in the European Community. The CE Mark is
granted to companies whose products meet the essential requirements of the
European Medical Device Directive ("MDD") and provides the regulatory approval
necessary for commercialization in the European Community. In October 1996, at
the European Association of Cardio-Thoracic Surgery's annual meeting in Prague,
Czech Republic, the Company commercially launched the ITMR System in Europe.

        In January 1998, the Company received the CE Mark approval for use of
its PMR system in the European Community. The Company is working closely with
BSC, as the Company's exclusive distributor in international markets to expand
the base of PMR sites and in preparing for the market launch of the System in
Europe and in other international markets.

        The Company is not currently developing any products outside the field
of TMR. Consequently, the Company is dependent on the successful development and
commercialization of the Company's TMR systems. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors --
Dependence on TMR Product Line; Rapid Technological Change."

MARKETING, SALES AND DISTRIBUTION

        The Company's marketing strategy is designed to generate broad market
acceptance of the TMR procedure based on demonstrated clinical efficacy and
cost-effectiveness. The Company's strategy includes developing and maintaining
close working relationships with key cardiothoracic surgeons and interventional
cardiologists who practice at major cardiac care centers. *The Company seeks to
rapidly establish a large installed base of its TMR systems in key international
markets and emerging secondary markets thereby creating an opportunity for a
recurring revenue stream from the sale of its disposable probes and catheters.

       *The Company expects that education and awareness of cardiothoracic
surgeons, interventional cardiologists and patients as to the benefits of the
Company's TMR systems will be a key component of its marketing and sales effort
for its TMR probe and catheter systems. *The Company currently supports and
intends to support rigorous clinical research designed to support the safety and
efficacy of its





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TMR systems. *In addition, to increase awareness of its TMR systems, the Company
has encouraged and intends to encourage the appropriate presentation of the
results of this research by the research investigators at major national and
international medical symposia and by the publication of clinical and scientific
reports of such results in major peer-reviewed publications.

        *In the United States, the Company intends to market its products, if
approved by the FDA, with a direct sales organization. The Company has deployed
a U.S. sales force. However, additional resources will be required to develop a
sales force capable of effectively commercializing the Company's TMR systems in
the United States. Failure to build an effective sales and marketing
organization could have a material adverse effect on the Company's business,
financial condition and results of operations.

        To effectively address the international markets, in 1996 the Company
entered into an exclusive international distribution agreement with BSC, a
worldwide leader in medical devices. *The Company believes this agreement, which
grants BSC exclusive rights and responsibilities for sales and distribution of
the full range of its TMR products in all international markets, is the approach
needed to capitalize on the market potential of TMR therapy and the Company's
TMR probes and catheters. *The Company believes this strategic relationship
should favorably position the Company in the increasingly competitive TMR
technology, sales and marketing  environment and should help the Company to
address new marketing challenges.

        Until such time, if ever, as the FDA approves the Company's TMR systems
for marketing in the United States, the Company anticipates it will continue to
derive its revenues primarily from BSC as the Company's exclusive international
distributor. The agreement with BSC does not allow the Company to control
international end-market prices and may not result in the same level of sales
and marketing efforts as would be the case using a direct sales force. BSC has
certain rights to terminate the agreement with the Company which, if exercised,
would require the Company to make alternative arrangements for the sale of its
products internationally, and which, if exercised, could have a material adverse
effect on the Company's business, financial condition and results of operations
for the foreseeable future. Even if FDA approval is obtained, the Company
expects international sales will continue to account for a significant portion
of the Company's total revenues. As a result, most of the Company's revenues
until such approval is obtained, and a significant portion of the Company's
revenues thereafter, will be subject to the risks associated with international
sales. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Risk Factors -- Reliance on a Third Party for All
International Sales" and "-- Need to Comply with International Government
Regulation."

CLINICAL TRIALS

        ITMR. Clinical data from the Company's prospective randomized ITMR trial
presented at recent medical symposia indicate that patients who received
treatment with the ITMR System achieved approximately a two class drop in angina
class as measured on the Canadian Cardiovascular Society Angina Scale and a 45
percent improvement in exercise tolerance, as opposed to no improvement in
angina class or exercise tolerance in study patients who did not receive the
ITMR therapy. There are no reported operative deaths in the Company's randomized
study and the mortality rate in the ITMR therapy group is less than six percent.

        Enrollment in the Phase II, randomized, no-option trial is now complete.
The Company has commenced submission of data and information to the FDA on its
ITMR System. The Company plans to continue submitting information and updates to
the FDA throughout the next six to nine months and to respond to periodic
inquiries from the FDA with respect to review of such data and information. This
proactive and collaborative approach to submissions provides the Company with a
means for frequent reviews by the FDA of information required for PMA as well as
discussions regarding the Company's ITMR System.

        Adjunct to CABG. In August 1996, the Company launched an additional
prospective, randomized, multi-center clinical study under an FDA authorized IDE
to evaluate the ITMR therapy as an adjunct to CABG surgery in up to 500 patients
at up to 25 clinical sites.

        PMR. Pilot clinical studies for the PMR System were first conducted in
Europe in November 1996 and the Company treated the first U.S. human patient in
July 1997. CardioGenesis was the first Company to initiate clinical studies of a
minimally invasive percutaneous approach to transmyocardial revascularization.
More than 100 patients have been treated with the PMR System at clinical
investigation centers in the U.S. and Europe. Clinical data presented at recent
medical symposia indicate patients treated with the PMR System are achieving
angina class reductions and exercise tolerance improvements comparable to those
achieved by patients treated with the ITMR System.





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        *Due to the severity of the underlying illnesses of the patients in this
population, the Company expects the use of its TMR systems to be accompanied by
a certain level of patient morbidity and mortality. There can be no assurance
any clinical investigations the Company conducts will be completed or, if
completed, will provide sufficient safety and effectiveness data and information
to support a PMA application and to obtain FDA marketing approval. See "--
Government Regulation."

MANUFACTURING

        General

        The Company's manufacturing activities conducted at its facility in
Sunnyvale, California consist of assembly and testing of the fiber optic probe
and catheter systems used for the TMR procedures. The Company has developed
various proprietary processes used to manufacture its probes and catheters.
Recently, the Company's manufacturing activities have increased to support the
demand from commercial sales in Europe and to continue to provide probes and
catheters for use in the Company's clinical trials and laboratory testing. The
Company uses third party suppliers to manufacture the Ho:YAG laser and ECG
monitor included in its TMR systems and for other services and operations
including sterilization of its products.

        The Company's facilities include a controlled environment room where
most assembly operations are performed. The Company has complied with various
international regulatory requirements including meeting ISO 9001/EN 46001 and
MDD requirements and has obtained a CE Mark approval to market both the ITMR
System and the PMR System in Europe. Before the FDA will approve a PMA
application, it will inspect the Company's manufacturing facilities and
processes for compliance with FDA regulations. The Company's manufacturing
facilities have not yet been inspected by the FDA. In the event additional
manufacturing sites are added or manufacturing processes are changed, such new
facilities and processes are also subject to regulatory inspection for
compliance with United States and international regulations. See "-- Government
Regulation."

        Suppliers

        A major component used in the Company's TMR systems, the ECG monitor, is
currently available from a sole source. In addition, several other components
used in the Company's TMR systems are purchased by the Company from a single
supplier. The Company periodically conducts assessments of alternative vendors
for various components used in its TMR systems. However, the qualification of
additional or replacement vendors for certain components is a lengthy process.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- Dependence on Sole Suppliers," and "-- No
Assurance of Obtaining Required Regulatory Approvals to Market Products in the
United States; Significant Time Before Submission of Any PMA."

        The Ho:YAG laser currently used in the Company's TMR systems is
manufactured by New Star Lasers ("New Star") pursuant to an OEM Supply
Agreement. Under the New Star OEM Agreement and related Research Development
Agreement, the Company has exclusive rights to sell or otherwise distribute the
laser on a worldwide basis either incorporated into the Company's products or on
a stand-alone basis. The New Star OEM Agreement prohibits the laser vendors from
selling or otherwise distributing the laser to any third party unless approved
in advance in writing by the Company. During the term of the New Star OEM
Agreement and for a period of one year thereafter, the laser vendors are
prohibited from making a laser, or any major subassembly of a laser, that is the
same as or functionally equivalent to the Company's laser for use competitive
with that of the Company. New Star has the exclusive right under the OEM
Agreement to manufacture and supply the laser to the Company, subject to the
right of the Company to obtain lasers from a second source under certain
circumstances.

        Commencing in the fourth quarter 1997, the Company began purchasing
lasers from Carl Baasel Lasertechnik GmbH pursuant to an OEM Product Development
and Supply Agreement (the "Baasel OEM Agreement"). Under the Baasel OEM
Agreement, the Company has exclusive rights to sell or otherwise distribute the
laser on a worldwide basis either incorporated into the Company's products or on
a stand-alone basis. The Baasel OEM agreement prohibits Baasel from selling or
otherwise distributing the laser in the configuration developed for and used by
the Company's TMR systems to any third party unless approved in advance in
writing by the Company's TMR systems to any third party unless approved in
advance in writing by the Company. During the term of the Baasel OEM Agreement
and for a period of one year thereafter, the laser vendors are prohibited from
making a laser, or any major subassembly of a laser, that is the same or as
functionally equivalent to the Company's laser for use competitive with that of
the Company.

PATENTS AND PROPRIETARY RIGHTS

        The Company relies on a combination of patent, trade secret, copyright
and trademark laws and contractual restrictions to establish and protect
proprietary rights in its TMR systems.

        The Company holds six patents in the United States. One of the Company's
United States patents is directed to methods of PMR, in which a catheter system
is inserted through a patient's vascular system into the heart, and energy is
applied to the inner wall of the heart creating revascularization in the
myocardium. Two of the Company's United States patents are directed to methods
of ITMR





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and TTMR, where a flexible probe is inserted into a patient's chest cavity and
energy is applied to the outer wall of the heart creating revascularization
through the heart muscle. These patents expire in the year 2012. The Company
also has two patents, which expire in the year 2009, one directed to a
specialized lens and means for securing the lens to an optical fiber to provide
a desirable energy emission pattern and one of which is related to a system for
detecting broken optical fibers. The Company also has a patent which expires in
the year 2013 relating to a reinforced optical fiber system. The Company has
twenty United States patent applications pending and intends to file additional
patent applications on various features of its TMR systems in the future. The
Company has sixteen international patent applications pending and intends to
file additional international patent applications corresponding to most of the
pending United States patent applications. Several of the pending patent
applications have received Notices of Allowance, and the Company expects one or
more U.S. patents to issue. However, there can be no assurance additional
patents will issue with respect to any currently pending or future patent
application.

        The medical device industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and some
companies in the medical device industry have employed intellectual property
litigation to attempt in whole or, in part, to gain a competitive advantage.
Certain of the Company's competitors and potential competitors have obtained
United States patents covering technology that could be used for certain TMR
procedures, and there can be no assurance such competitors, potential
competitors or others have not filed and do not hold international patents
covering other TMR technology. In February 1995, the Company received a letter
from PLC Medical Systems, Inc. ("PLC") advising the Company of the existence of
certain of PLC's patents, including one entitled Heart-Synchronized Pulsed Laser
System ("PLC Patent"). This letter requested an assessment by the Company of its
activities in this area. *The Company believes, based on its review of the PLC
Patent and opinions of counsel, that the Company's TMR systems do not infringe
such PLC Patent. In 1996, the Company initiated a suit against PLC seeking a
judgment that the PLC Patent is invalid and unenforceable. PLC has
counterclaimed against the Company for patent infringement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Risk of Infringement; Patents and Proprietary Technology."

RESEARCH AND DEVELOPMENT

        The Company's research and development efforts to date have been focused
on development of the Company's ITMR, PMR and TTMR Systems. The Company is
committed to enhancing the medical community's knowledge and acceptance of TMR
for the treatment of severe angina. *The Company intends to continue its basic
research of the TMR mechanism and to focus on the expansion of the indications
and approaches for using its TMR systems, in particular its PMR System. *In
addition, the Company will continue to address improvements in the devices that
are a part of the TMR systems, including improvements which may reduce the cost
of its TMR systems. *Based on its research, the Company believes the reported
reduction in chest pain, improvement in exercise tolerance, and perceived
long-term increase in myocardial blood flow may be associated with the formation
of new blood vessels (angiogenesis). Further product research and development by
the Company will require substantial expenditures and has inherent risks, and
there can be no assurance the Company will be successful in identifying products
for which demand exists or in developing products that have the characteristics
necessary to treat particular indications, or that any new products introduced
by the Company will receive regulatory approval or be commercially successful.
Total research and development expenses of the Company were approximately $14.2
million, $7.1 million, and $4.0 million for the years ended December 31, 1997,
1996 and 1995, respectively.

        Research and development work by the Company related to TMR is being
carried out at Columbia University ("Columbia") pursuant to an agreement that
has been extended into 1999. Under this agreement, the Company has a worldwide
exclusive license to any patents that issue in connection with the research
conducted. The license also includes a paid up, exclusive worldwide license to
use and disclose (subject to certain nondisclosure requirements) information,
data and know-how relating to the subject matter of the research and the
Company's products resulting from the research. The license may become
nonexclusive, at the election of Columbia, if the Company fails to use
reasonable efforts to develop and market the products resulting from the
research for commercial sale and distribution throughout the world. The license
also contains certain most-favored licensing provisions in the event that the
license becomes nonexclusive. The agreement provides for the payment of certain
royalties by the Company to Columbia based on its net revenues from products to
the extent such products include the patented technology developed by Columbia
under the agreement, including any sales made under an IDE. These royalties are
offset by funds advanced by the Company and prior sponsors to whom the Company
is a successor under the Columbia agreement to fund such research of Columbia.
The Company is not required to pay royalties to Columbia under the agreement
until certain conditions are met, and such conditions have not been met.

COMPETITION

        Competition in the market for the treatment of CAD, in the medical
device industry generally, and in the TMR market in particular, is intense and
is expected to increase. The Company competes primarily with other developers
and manufacturers of TMR systems, including





                                       8
<PAGE>   9

PLC, Eclipse Surgical Technologies, Inc. ("Eclipse"), and U.S. Surgical
Corporation ("U.S. Surgical"). Some of the Company's competitors and many of its
potential competitors have substantially greater name recognition and capital
resources than does the Company and also may have greater resources and
expertise in the areas of research and development, obtaining regulatory
approvals, manufacturing and marketing. The TMR market is characterized by rapid
technical innovation. There can be no assurance the Company's competitors will
not succeed in developing TMR products or procedures that are more effective or
more effectively marketed than products marketed by the Company or that render
the Company's technology obsolete. Additionally, even if the Company's products
provide performance comparable to competing products, there can be no assurance
the Company will be able to obtain necessary regulatory approvals to compete
against competitors in terms of manufacturing, marketing and sales. Certain
companies, including PLC and Eclipse, have completed enrollment in randomized
clinical trials of products and procedures involving TMR that compete with those
offered by the Company, and have received regulatory approvals in Europe to
begin commercially marketing their various TMR products. Earlier entrants in the
market in a therapeutic area often obtain and maintain greater market share than
later entrants.

        *The Company believes the primary competitive factors in the market for
TMR systems include clinical performance, product safety and reliability,
availability of third-party reimbursement, product design specifically for TMR
use, product quality, ease of use, price of systems and disposable components,
customer service, and company reputation. In addition, the length of time
required for products to be developed and receive regulatory approval and the
ability to obtain, use and successfully enforce and defend patents or other
proprietary rights to prevent sales by competitors are also important
competitive factors. *The Company believes it competes favorably with respect to
these factors, although certain competitors are at a more advanced stage in the
clinical trial and regulatory approval processes. There can be no assurance the
Company will be able to continue to compete successfully in the future with
respect to any or all of the factors that are or may be relevant to success in
its markets.

        Many of the medical indications that may be treatable with TMR are
currently being treated by drug therapies or surgery and other interventional
therapies, including CABG and PTCA. A number of these therapies are widely
accepted in the medical community, have a long history of use and continue to be
enhanced rapidly. There is no assurance that procedures using TMR will be able
to replace or augment such established treatments or that clinical research will
support the use of TMR. Additionally, new surgical procedures and new drug
therapies are being developed to treat CAD. These new procedures and drug
therapies could be more effective, safer or more cost-effective than TMR. The
inability of TMR to replace or augment existing therapies or to be more
effective, safer or more cost-effective than new therapies could have a material
adverse effect on the Company's business, financial condition and results of
operations.

GOVERNMENT REGULATION

        United States

        The Company's TMR systems and accessories are regulated in the United
States as medical devices. As such, the Company is subject to extensive
regulation by the FDA and state and local authorities including the California
Department of Health Services ("CDHS"). Pursuant to the Federal Food, Drug, and
Cosmetic Act ("FDC Act") and the regulations promulgated thereunder, the FDA
regulates the pre-clinical and clinical testing, manufacture, labeling,
distribution, sale, marketing, advertising and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, refusal of the government to grant PMA
approval under Section 515 of the FDC Act or premarket notification clearance
under Section 510(k) of the FDC Act ("510(k)"), withdrawal of marketing
clearances or approvals, a recommendation by the FDA that the Company not be
permitted to enter into government contracts and criminal prosecution. In
certain circumstances, the FDA also has the authority to order recall, repair,
replacement of or refund of the cost of, a device manufactured or distributed by
the Company. To date, none of the Company's products has been approved for sale
in the United States. FDA approval of a PMA for the relevant TMR system will be
required before such TMR system can be marketed in the United States.

        In the United States, medical devices are classified as Class I, II or
III on the basis of the controls deemed by the FDA to be necessary to reasonably
assure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling, premarket notification and adherence to FDA-mandated
current good manufacturing practice ("GMP") requirements), and Class II devices
are subject to general controls and special controls (e.g., performance
standards, postmarket surveillance, patient registries and FDA guidelines).
Generally, Class III devices are those that must receive premarket approval by
the FDA to assure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices). Class III
devices usually require clinical testing and FDA approval prior to marketing and
distribution. The Company's TMR systems are Class III devices.





                                       9
<PAGE>   10

        Before a new medical device can be introduced into the market, the
manufacturer generally must obtain FDA clearance of a 510(k) or approval of a
PMA under Section 515 of the FDC Act. A PMA application is required 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 must be supported by valid scientific evidence that typically
includes extensive data, including biocompability data, preclinical study data
(e.g., bench testing, laboratory and animal studies) and clinical study data, to
demonstrate the safety and efficacy of the device. If human clinical trials of a
device are required and the device presents, in the FDA's view, 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 by 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 sponsors and all reviewing IRBs conclude that the device presents a
"nonsignificant risk" to the patient, a sponsor may begin clinical trials after
obtaining approval for the study protocol by one or more of the appropriate
IRBs, without the need for FDA approval of the study protocol. Sponsors of
clinical trials are permitted under FDA regulations to sell devices distributed
in the course of the clinical 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 FDA
has the authority to re-evaluate, alter, suspend or terminate clinical testing
based on its assessment of data collected throughout the trials.

        The PMA must also contain 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, promotional labeling and materials concerning training
methods (if any). Upon submission of a PMA, the FDA makes a threshold
determination as to whether the application is sufficiently complete to permit
filing for 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 generally takes one
to three years from the date the PMA is accepted for filing, but may take
significantly longer if the FDA requests additional information and/or if any
major amendments to the PMA are filed. The review time is often significantly
extended by the FDA's requests 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 by
the FDA 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 and may also conduct a bioresearch monitoring inspection to ensure
the integrity and scientific validity of the clinical data.

        If the FDA's evaluations of both the PMA and the manufacturing
facilities are favorable, the FDA will issue either an approval letter or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of the PMA. When and if those conditions have been fulfilled
to the satisfaction of the FDA, the agency will issue an order approving the
PMA, authorizing commercial marketing of the device for certain indications. If
the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional pre-clinical or clinical trials are
necessary, in which case approval of the PMA could be delayed for up to several
years while additional pre-clinical or 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.

        Any products manufactured or distributed by the Company pursuant to the
IDE or subsequent FDA clearances or approvals are subject to pervasive and
continuing regulatory oversight by the FDA, 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. The FDC Act requires medical devices be manufactured in
accordance with the FDA's current GMP regulations. These regulations require,
among other things, the manufacturing process be regulated and controlled by the
use of written procedures and the ability to produce devices which meet the
manufacturer's specifications be validated by extensive and detailed testing of
every aspect of the process. They also require investigation of any deficiencies
in the manufacturing process or in the products produced and detailed record
keeping. Manufacturing facilities are subject to FDA and CDHS inspection on a
periodic basis to monitor compliance with GMP requirements. If violations of the





                                       10
<PAGE>   11

applicable regulations are noted during FDA and CDHS inspections of the
Company's, or its subcontractors' manufacturing facilities, the FDA and CDHS
can, among other things, prohibit further manufacturing, distribution and sale
of the Company's devices until the violations are cured. *The FDA has proposed
changes to the GMP regulations that will, among other things, require design
controls and maintenance of service records, which will likely increase the cost
of complying with GMP requirements. Other applicable requirements include the
FDA's medical device reporting regulation, which requires that the Company
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its marketed devices, as well as product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunction were to recur.

        Labeling, advertising and promotion activities for investigational and
marketed devices are subject to scrutiny by the FDA and, in certain instances,
by the Federal Trade Commission. The FDA enforces statutory prohibitions against
promoting and 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 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.
Compliance with such laws and regulations now or in the future could require
substantial expenditures by the Company.

        Changes in existing requirements or interpretations (on which
regulations heavily depend) or adoption of new requirements or policies could
adversely affect the ability of the Company to comply with regulatory
requirements. Compliance with such laws and regulations now or in the future
could require substantial expenditures by the Company. Failure to comply with
regulatory requirements, or an increase in the cost of compliance, could have a
material adverse effect on the Company's business, financial condition and
results of operations.

        In addition to the requirements for medical devices in general, the FDA
places additional regulations, in the form of performance standards, upon the
manufacture of medical laser products. The laser used in the Company's TMR
systems is self-certified by the manufacturer for conformity to these
performance standards. The Company is required to file with the FDA initial and
annual reports of production quantities with respect to its laser. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Risk Factors -- No Assurance of Obtaining Required Regulatory
Approvals to Market Products in the United States; Significant Time Before
Submission of Any PMA" and "-- Need to Comply with United States Manufacturing
Standards; Limited Manufacturing Experience."

        International

        For the Company to market its TMR systems in European and certain other
foreign countries, the Company must obtain certain regulatory approvals and
clearances and otherwise comply with extensive regulations regarding product
safety, manufacturing processes and quality. These regulations, including the
requirements for approvals or clearance to market and the time required for
regulatory review, vary from country to country. In July 1996, the Company
received CE Mark approval to market its ITMR System in the European Community.
The CE Mark is granted to companies whose products meet the essential
requirements of the European MDD and provides the regulatory approval necessary
for commercialization in Europe. In January 1998, the Company received the CE
Mark approval to market its PMR system in the European Community. *The Company
may rely in some circumstances on its exclusive international distributor, BSC,
for the receipt of premarket approvals and compliance with clinical trial
requirements in certain countries where the Company intends to market its TMR
products. Any enforcement action by regulatory authorities with respect to past
or future regulatory noncompliance could have a material adverse effect on the
Company's business, financial condition and results of operations.

        The time required to obtain approval for sale in foreign countries may
be longer or shorter than that required for FDA approval for U.S. sales, and the
requirements may differ. In addition, there may be foreign regulatory barriers
other than premarket approval. The FDA must approve exports of devices that
require a PMA but are not yet approved domestically, unless they are approved
for sale by any member country of the European Union and the other "listed"
countries, including Australia, Canada, Israel, Japan, New Zealand, Switzerland
and South Africa, in which case they can be exported for sale to any country
without prior FDA approval. In addition, an unapproved device may be exported
without prior FDA approval to the listed countries for investigational use in
accordance with the laws of those countries. To obtain FDA export approval when
required, the Company must provide the FDA with data and information to
demonstrate that the device: (1) is not contrary to public health and safety;
and (2) has the approval of the country to which it is intended for export. To
allow the FDA to determine that export of a device is not contrary to public
health and safety, the





                                       11
<PAGE>   12

Company is required to submit basic data regarding the safety of the device
unless the device is the subject of an FDA-approved IDE and it will be marketed
or used for clinical trials in the importing country for the same intended use,
or at least two IRBs in the United States have determined that the device is a
nonsignificant risk device and the device will be marketed or used for clinical
trials in the importing country for the same intended use. The Company also must
submit a letter to the FDA from the foreign country approving importation of the
device.

        To sell its products within the European Economic Area ("EEA"),
consisting of the countries of the European Union and Norway and Iceland, the
Company is required to meet the requirements of the MDD and to affix the CE mark
on its products to attest to such compliance. To comply, the Company's products
must meet the "essential requirements," as defined under the MDD, relating to
safety and performance and the Company must successfully undergo verification of
its regulatory compliance ("conformity assessment") by a "notified body"
selected by the Company. Under MDD, the Company's TMR systems are in Class III,
the highest risk class, and therefore are subject to the most rigorous controls.
In addition to having to comply with the requirements of any particular country,
the authorities have the right under the MDD to prohibit a particular
investigation and impose specific conditions.

        Since the Company obtained the CE Mark approval for its ITMR and PMR
systems, it is now subject to continued supervision by the notified body and
will be required to report any serious adverse incidents to the appropriate
authorities. The Company also will be required to comply with additional
national requirements that are outside the scope of the MDD. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Need to Comply with International Government Regulation."

THIRD-PARTY REIMBURSEMENT

        In the United States, hospitals, physicians and other health care
providers that purchase medical devices generally rely on third-party payors,
principally Medicare, Medicaid, private health insurance plans, health
maintenance organizations, and other sources of reimbursement for health care
costs ("Third-Party Payors"), to reimburse all or part of the cost of the
procedure in which the medical device is being used.

        Third-party reimbursement has generally been available in the United
States for cardiovascular surgery and interventional cardiology procedures using
devices that have received FDA approval for marketing. *Although the Company
does not anticipate receiving reimbursements for its TMR Systems from Medicare
during its clinical trials, the Company does intend to seek reimbursement from
other Third-Party Payors. There can be no assurance, however, that such
reimbursement will be available. A failure by physicians to receive what they
consider to be adequate reimbursement for the TMR procedures in which the
Company's products are used could have a material adverse effect on the
Company's business, financial condition and results of operations. In addition,
failure to receive international reimbursement approvals could limit market
acceptance of the Company's products in the international markets in which such
approvals are sought which could 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 -- Risk
Factors -- Uncertain Availability of Third-Party Reimbursement."

PRODUCT LIABILITY AND INSURANCE

        The Company's business exposes the Company to potential product
liability risks or product recalls inherent in the design, development,
manufacture and marketing of medical devices. The Company could be subject to
product liability claims in the event the use of the Company's TMR systems is
alleged to have caused adverse effects on a patient or such products are
believed to be defective. The Company's products are designed to be used in high
medical risk situations where there is a high risk of serious injury or death to
the patient. Such risks will continue to exist with respect to those products
that may in the future receive regulatory clearance for commercial sale. The
failure to comply with the FDA's GMP or other regulations could have a material
adverse effect on the ability of the Company to defend against product liability
lawsuits. Although the Company has not experienced any product liability claims
to date, any such claims could have a material adverse effect on the Company's
business, financial condition and results of operations. There can be no
assurance the Company's product liability insurance, with coverage limits of $5
million per occurrence and in the aggregate and additional coverage limits of
DM1 million (approximately $546,000) per person and DM50 million (approximately
$27,300,000) in the aggregate for the use of the Company's TMR systems in
Germany, will be adequate for any future product liability problems or that such
insurance coverage will continue to be available on commercially reasonable
terms or at all. Since TMR is not well understood and the lack of data regarding
the clinical safety and efficacy of the Company's TMR systems, there can be no
assurance such coverage limits would be adequate to protect the Company from
liabilities it might incur in connection with the development, manufacture and
sale of its products. In addition, the Company may require increased product
liability coverage if any products are commercialized. Product





                                       12
<PAGE>   13

liability insurance is expensive and in the future may not be available to the
Company on terms acceptable to the Company, if at all. A successful product
liability claim or series of claims brought against the Company in excess of its
insurance coverage could have a material and adverse effect on the Company's
business, financial condition and results of operations.

EMPLOYEES

        As of February 28, 1998, the Company had a total of 81 employees,
including 17 in research and development, 18 in operations, 14 in clinical and
regulatory affairs, 8 in quality assurance, 15 in sales and marketing and 9 in
finance and administration. In addition, the Company has consulting and other
contract arrangements. The Company believes the success of its business will
depend, in significant part, on its ability to attract and retain qualified
personnel. None of the Company's employees are represented by a collective
bargaining agreement and the Company has not experienced any work stoppage. The
Company considers its relations with its employees to be good. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Dependence on Management, Other Key Personnel and Scientific
Advisors."

SCIENTIFIC ADVISORY BOARD

        The Company has a Scientific Advisory Board consisting primarily of
leading physicians and scientists in the field of CAD. Scientific Advisory Board
members consult regularly 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 members of the Company's Scientific Advisory
Board 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
compensates certain members of its Scientific Advisory Board for participating
in meetings of the Board or for performing other services for the Company. The
Company's Scientific Advisory Board consists of:

<TABLE>
<CAPTION>

          NAME                                      OCCUPATION/TITLE
          ----                                      ----------------
<S>                                     <C>
Robert W. Anderson, M.D. .............  David C. Sabiston Professor and
                                        Chairman, Department of Surgery, Duke
                                        University Medical Center

Daniel Burkhoff, M.D., Ph.D. .........  Director of Cardiac Physiology
                                        Laboratory, Columbia Presbyterian
                                        Medical Center; Assistant Professor of
                                        Medicine, Columbia University

James L. Cox, M.D. ...................  Evarts A. Graham Professor of Surgery,
                                        Chief, Division of Cardiothoracic
                                        Surgery, Washington University School of
                                        Medicine

Pascal Goldschmidt, M.D., Ph.D. ......  Associate Professor of Medicine and Cell
                                        Biology and Anatomy; Co-Director,
                                        Ciccarone Center for the Prevention of
                                        Heart Disease; Co-Director, Thrombosis
                                        Center; Director, Bernard Vascular
                                        Biology Laboratory; Johns Hopkins
                                        University

Keith L. March, M.D., Ph.D. ..........  Associate Professor of Medicine,
                                        Krannert Institute of Cardiology,
                                        Indiana University Medical Center

Craig R. Smith, M.D. .................  Chief, Division of Cardiothoracic
                                        Surgery, Columbia Presbyterian Medical
                                        Center; Associate Professor of Surgery,
                                        Columbia University

Sharon Tomsen, M.D. ..................  Associate Professor, Surgical Oncology
                                        and Anatomic Pathology; Program
                                        Director, Laser Biology Research
                                        Program, University of Texas M.D.
                                        Anderson Cancer Center; Adjunct
                                        Associate Professor, Biomedical
                                        Engineering Program, University of
                                        Texas, Austin
</TABLE>





                                       13
<PAGE>   14

ITEM 2.  PROPERTIES

        The Company currently maintains its primary offices, research
laboratories and manufacturing and warehouse operations in a facility in
Sunnyvale, California having approximately 19,000 square feet of space. These
premises are leased pursuant to an agreement which expires in October 1999. *The
Company believes this facility will be adequate for its operations through at
least 1998, including anticipated manufacturing volume.

ITEM 3.  LEGAL PROCEEDINGS

        In September 1996, the Company filed an action for declaratory relief
against PLC Systems, Inc. of Canada and its wholly-owned U.S. subsidiary, PLC
Medical Systems, Inc., (collectively, "PLC"), seeking a judgment that PLC's
United States patent No. 5,125,926 (the "PLC Patent") to a certain
heart-synchronized pulsed laser system is not infringed, is invalid and
unenforceable. In the suit, filed in the United States District Court for the
Northern District of California, the Company also requested the Court to enter
judgment that the Company's Transmyocardial Revascularization (TMR) systems do
not infringe the PLC Patent. In October 1996, PLC responded to the complaint. In
its response, PLC took the position that the PLC Patent has been infringed by
the Company, but made no further claims. In September 1997, the Company filed an
amended complaint asking the Federal District Court to consider evidence of
inequitable conduct in the U.S. Patent Office while the PLC Patent was being
obtained by PLC. The amended complaint asserts that the PLC Patent is invalid
and unenforceable because material prior work of another party was withheld from
the Patent Office. Trial is set to begin January 11, 1999.

        On February 9, 198, PLC submitted the Rudko Patent to the U.S. Patent
Office seeking reissue on the basis that the Rudko Patent as granted is "wholly
or partly inoperative or invalid."

        In January 1997, the Company filed an Opposition to a European Patent
owned by PLC (the "European Patent") that is a counterpart to the PLC Patent.
The Opposition seeks to have the European Patent declared invalid. The Company
believes it has meritorious positions with respect to the invalidity of the
European Patent and intends to pursue the Opposition proceeding vigorously.

        In September 1997, the Company was served with a complaint filed by PLC
in Munich, Germany alleging that CardioGenesis and its former German sales agent
have infringed EP 0 553 576, a European counterpart of the PLC Patent.
CardioGenesis has referred the complaint to patent counsel and is proceeding in
its defense on the basis of non-infringement.

        The prosecution and defense of intellectual property suits and related
legal and administrative proceedings are costly and time consuming. The question
of patent infringement involves complex legal and factual issues and there can
be no assurance any conclusion reached by the Company regarding infringement
will be consistent with the resolution of any such issues by a court or
administrative body. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors -- Risk of Infringement;
Patents and Proprietary Technology."








                                       14
<PAGE>   15


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

         Not applicable.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock has been included for quotation on the Nasdaq
National Market under the symbol "CGCP" since the Company's initial public
offering on May 21, 1996. The following table sets forth, for the periods
indicated, the range of high and low bid information for the Company's Common
stock as reported by Nasdaq:

<TABLE>
<CAPTION>
                                              HIGH           LOW
                                             ------         ------
                 1996
                 <S>                         <C>            <C>
                 Second Quarter              $23.25         $12.75
                 Third Quarter               $15.00         $ 8.75
                 Fourth Quarter              $15.00         $10.5156

                 1997
                 First Quarter               $17.50         $11.25
                 Second Quarter              $13.25         $ 7.25
                 Third Quarter               $12.625        $ 9.625
                 Fourth Quarter              $12.625        $ 5.00
</TABLE>

        On March 27, 1998, there were approximately 88 holders of record of the
Company's Common Stock.

        The Company has never declared or paid any cash dividends on its Common
Stock, and does not anticipate paying any cash dividends in the foreseeable
future.




                                       15
<PAGE>   16

ITEM 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                  PERIOD FROM
                                                 SEPTEMBER 23,
                                                 1993 (DATE OF
                                                 INCEPTION) TO                     YEAR ENDED DECEMBER 31,
                                                  DECEMBER 31,     ------------------------------------------------------
                                                      1993           1994           1995           1996            1997
                                                 -------------     --------       --------       --------        --------
                                                           (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                 <C>            <C>            <C>               <C>           <C>
Statement of Operations Data:
Sales
 ..........................................                                                       $  3,959        $  7,559
Cost of sales ..................................                                                    2,866           4,991
                                                                                                 --------        --------
  Gross profit .................................                                                    1,093           2,568
                                                                                                 --------        --------
Operating expenses:
  Research and development .....................    $     85       $  1,423       $  3,967          7,140          14,210
  General and administrative ...................          21            559          1,178          2,622           3,722
  Sales and marketing ..........................          --             --            336          2,417           5,426
  Write-off of acquired in-process
    research and development ...................         750             --             --             --              --
                                                    --------       --------       --------       --------        --------
      Operating expenses .......................         856          1,982          5,481         12,179          23,358
                                                    --------       --------       --------       --------        --------
      Operating loss ...........................        (856)        (1,982)        (5,481)       (11,086)        (20,790)
Interest income, net............................           3            198            182          2,286           2,819
                                                    --------       --------       --------       --------        --------
      Net loss .................................    $   (853)      $ (1,784)      $ (5,299)      $ (8,800)       $(17,971)
                                                    ========       ========       ========       ========        ========

Net loss per common share and per
  common share -- assuming dilution(1)..........    $     --       $     --       $     --       $  (1.18)       $  (1.49)
                                                    ========       ========       ========       ========        ========
Shares used in computing net loss per
  common share and  per common share
  --  assuming dilution.............                      --             --             --          7,427          12,029
                                                    ========       ========       ========       ========        ========
</TABLE>

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                            --------------------------------------------------------------------
                                              1993           1994           1995           1996           1997
                                            --------       --------       --------       --------       --------
                                                                (IN THOUSANDS)
<S>                                         <C>            <C>            <C>            <C>             <C>
Balance Sheet Data:
Cash, cash equivalents and
  available-for-sale securities ..........  $  1,113       $  5,324       $ 14,036       $ 58,208       $ 40,535
Working capital ..........................     1,120          5,321         14,192         57,324         32,575
Total assets .............................     1,127          5,885         16,223         64,297         48,240
Redeemable convertible preferred stock....     1,979          8,457         22,390             --             --
Total stockholders' equity (deficit)......      (852)        (2,636)        (7,831)        61,395         44,146
</TABLE>

(1)  Per share data has been restated to reflect the Company's adoption of
     Statement of Financial Accounting Standards No. 128 "Earnings per Share"
     and the Securities and Exchange Commission Staff Accounting Bulletin No. 98
     effective December 31, 1997. For the years ended December 31, 1995 and 1994
     and for the period ended December 31, 1993, the Company had 246, 0, and 0
     shares of common stock outstanding. The Company does not believe the
     earnings per share data for these periods are meaningful. See Note 1 of
     Notes to Consolidated Financial Statements.

(2)  The Company has not declared any cash dividends on its common stock since
     its inception and does not anticipate paying cash dividends in the
     forecoming future.

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

OVERVIEW

        Since its inception, CardioGenesis has been primarily engaged in the
design, development, and marketing of its transmyocardial revascularization
(TMR) systems. The Company has only a limited operating history and has
experienced significant operating losses since its inception. The Company
incurred a net loss of $18 million in 1997. The development and potential
commercialization of the Company's products will continue to require significant
research and development, regulatory, sales and marketing, manufacturing and
other expenditures. *Operating losses are expected to continue at least through
1999 as the Company continues to perform research and development, to fund
clinical trials in support of regulatory and reimbursement approvals, and to
expand its marketing and sales activities in the U.S. and internationally by
supporting BSC, the exclusive distributor in international markets. *There can
be no assurance that the Company's TMR systems will ever generate significant
revenues or the Company will achieve or sustain profitability.

        The research, manufacture, sale and distribution of medical devices such
as the Company's TMR 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 of the Company's TMR
systems can be marketed in the United States. Securing FDA approvals and
clearances will


                                       16
<PAGE>   17

require submission to the FDA of extensive clinical data and technical
information. Also, many foreign governments and the European Union also have
review processes for medical devices. The Company has received CE Mark approval
to market its ITMR System and PMR System in the European Union. The CE Mark is
granted to companies whose products meet the essential requirements of the
European MDD and provides the regulatory approval necessary for
commercialization in Europe. The Company will be subject to continued
supervision by regulators and will be required to report any serious adverse
incidents to the appropriate authorities. The Company also will be required to
comply with additional national requirements that are outside the scope of the
MDD. *The Company plans to continue to seek regulatory approvals to allow for
marketing and distribution of its products in international markets.

        The Company commenced clinical trials of its ITMR System in October 1995
and began clinical trials of its PMR System in November 1996. Clinical trials of
the Company's TTMR System have not commenced.

        In July 1996, the Company began a Phase II clinical trial under an IDE
that allowed a prospective, randomized, multi-center clinical trial of its ITMR
System in "no-option" patients with severe CAD. Enrollment in the Phase II,
randomized, no-option trial is now complete. The Company has commenced
submission of data and information to the FDA on the Company's ITMR System. *The
Company plans to continue submitting information and updates to the FDA
throughout the next six to nine months and to respond to periodic inquiries from
the FDA with respect to review of such data and information. *This proactive and
collaborative approach to submissions provides the Company with a means for
frequent reviews by the FDA of information required for PMA as well as
discussions regarding the intraoperative ITMR System.

        In August 1996, the Company received an IDE from the FDA and has begun a
major clinical study of its intraoperative ITMR System used as an adjunctive
therapy to CABG surgery in patients with severe angina who are only partially
treatable by CABG. The adjunct to CABG clinical trials are ongoing.

        Clinical trials for the Company's PMR System commenced in Europe in
November 1996. In January 1998, the Company received the CE Mark approval for
use of its PMR System in the European community. In July 1997, the Company
received an IDE from the FDA which allows a multi-center clinical trial of the
PMR system to treat angina in no-option patients at up to twelve clinical sites
in the U.S. Enrollment for the U.S. clinical trial sites has begun and the
trials are ongoing. In addition to treating the first U.S. human patient on July
31, 1997, more than 100 human patients have been treated with the Company's PMR
system.

        The Company recorded sales of $7.6 million in 1997 from sales of its
ITMR Systems, PMR Systems and disposable probes and catheters to its
international distributor, BSC, and to clinical trial sites in the U.S. The
Company recognizes product revenues upon shipment of its products to customers
and fulfillment of acceptance terms, if any, and when no significant contractual
obligations remain outstanding. Deferred revenue consists of shipments that have
been made which are subject to limited rights of return or other contingencies.
*The Company anticipates its revenues from product sales over the next several
years will be primarily derived from international sales by BSC. *As a result,
the revenue levels of the Company are and will be dependent on the efforts of
BSC. *Any such international sales will be subject to a number of risks,
including foreign currency fluctuations, economic or political instability,
foreign tax laws, shipping delays, various tariffs and trade regulations and
restrictions and foreign medical regulations, any of which could have a
material adverse impact on the Company's revenues.

        * Results of the Company's operations have varied and are expected to
fluctuate significantly from quarter to quarter depending on numerous factors,
including: (i) reliance on BSC; (ii) demand for the Company's products, new
product introductions by the Company or its competitors or transitions to new
products; (iii) the timing of orders and shipments; (iv) the degree of
acceptance of TMR therapy by the medical community; (v) competition, including
pricing pressures; (vi) potential third-party patent infringement claims; (vii)
the timing of regulatory and third-party reimbursement approvals; (viii)
expansion of the Company's manufacturing capacity and the Company's ability to
manufacture its products efficiently; (ix) the timing of research and
development expenses, including clinical trial-related expenditures; and (x)
seasonal factors affecting the number of procedures performed. *Due to such
fluctuations in operating results, period-to-period comparisons of the Company's
operating results are not necessarily meaningful and should not be relied upon
as indicators of likely future performance.




                                       17
<PAGE>   18
RESULTS OF OPERATIONS

        Years Ended December 31, 1997, 1996, and 1995

        Sales. Sales were recognized for the first time in 1996. Sales of the
Company's TMR systems for commercial use in Europe and for use at clinical trial
sites in both the U.S. and Europe totaled approximately $7.6 million and $4.0
million for the year ended December 31, 1997 and 1996, respectively. The
increase in sales from 1996 to 1997 is primarily due to the exclusive
international distribution agreement with BSC.

        Cost of Sales. Cost of sales for the year ended December 31, 1997 was
approximately $5 million, or 66% of sales. Cost of sales for the year ended
December 31, 1996 was approximately $2.9 million, or 72% of sales. The decrease
in cost of sales as a percent of sales from 1996 to 1997 was primarily due to
the allocation of fixed overhead costs over more units. *However, no assurance
can be given that demand for the Company's products will grow sufficiently to
require increased levels of production.

        Research and Development Expenses. Research and development expenses
increased $7.1 million to $14.2 million for 1997 from $7.1 million for 1996 and
increased $3.1 million in 1996 from $4.0 million for 1995. The increase from
1996 to 1997 was primarily due to increased activity in the clinical trials and
continued investment in research in the field of TMR. The increase from 1995 to
1996 was primarily due to expenses related to the initiation of three additional
clinical trials, two with the Company's ITMR System and one with the PMR System.
Also, the Company increased its investment in mechanism research in the field of
TMR. *The Company expects research and development expenses to continue to
increase throughout 1998 as the Company continues to enroll patients in its
ongoing clinical trials, initiates additional clinical trials, and continues to
invest in TMR mechanism research.

        General and Administrative Expenses. General and administrative expenses
increased $1.1 million to $3.7 million for 1997 from $2.6 million for 1996 and
increased $1.4 million in 1996 from $1.2 million for 1995. The increase in 1997
was primarily due to increased finance and administration personnel costs to
support the Company's growth, increased legal fees associated with research and
development agreements and the exclusive international distribution agreement
with BSC, and legal fees related to the PLC litigation. The increase from 1995
to 1996 is primarily attributed to employee growth, legal fees relating to the
exclusive distribution agreement with BSC, legal fees associated with the
initiation of the suit by the Company against PLC, increased property, general
and product liability insurance costs, public and investor relations costs, and
the costs incurred to comply with the additional requirements associated with
being a public company. *The Company expects that its general and administrative
expenses will continue to increase in 1998.

        Sales and Marketing Expenses. Sales and marketing expenses increased $3
million to $5.4 million for 1997 from $2.4 million for 1996 and increased $2.1
million in 1996 from $336,000 in 1995. The increase in 1997 was primarily due to
the addition of sales and marketing personnel and the implementation of
marketing and training programs, transition costs related to the BSC
international sales agreement, and continued costs associated with the launch of
the Company's TMR system in Europe. The increase from 1995 to 1996 is primarily
attributed to preparing for and launching the ITMR system in Europe, employee
growth, and the implementation of outreach programs at the clinical sites. *The
Company expects that sales and marketing expenses will continue to increase in
1998 as the Company expands clinical studies, conducts physician training, and
supports the sales and marketing activities of BSC.

        Interest Income. Interest income increased $.5 million to $2.8 million
for 1997 from $2.3 million for 1996 and increased $2.1 million in 1996 from
$182,000 in 1995. The increase in interest income in 1997 was attributable
primarily to fluctuations in the Company's cash and cash equivalents and
short-term investments balances, coupled with interest fluctuations. The
increase in interest income in 1996 was due to the investment of the proceeds
from the Company's initial public offering of Common Stock in May 1996 of
approximately $54.5 million, net of issuance costs

        Deferred Compensation Expense. The Company recorded deferred
compensation expense of approximately $1.4 million and $874,000 with respect to
options to purchase Common Stock granted and Preferred Stock issued during 1996
and 1995, respectively. Deferred compensation expense is being amortized over
the vesting period of the options, which is generally four years. The Company
recognized compensation expense of $480,000, $849,000 and $104,000 for 1997,
1996 and 1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

        The Company has funded its operations since inception primarily through
the private sale of capital stock and interest income on proceeds from private
financings as well as proceeds and interest thereon from its initial public
offering in May 1996. Through December 31, 1997, the Company had raised
approximately $77.2 million from the sale of stock, net of issuance costs.

        Net cash used in the Company's operations was $17.4 million, $9.2
million, and $5.0 million for the years ended December 31, 1997, 1996, and 1995,
respectively. The increases in net cash used in the Company's operations were
primarily a result of higher research and development, general and
administrative, and sales and marketing activities. The Company's acquisition of
property and equipment was $360,000, $1.7 million, and $175,000 for the years
ended December 31, 1997, 1996, and 1995, respectively. The





                                       18
<PAGE>   19

increase in capital expenditures for 1996 was primarily due to relocating the
Company's facilities to Sunnyvale, California and to providing equipment for the
new employees hired during the year. *The Company expects a similar level of
capital expenditures in 1998.

        At December 31, 1997, the Company had cash, cash equivalents and
available-for-sale securities, totaling $40.5 million. *The Company plans to
finance its operations and capital needs principally from the cash, cash
equivalents and available-for-sale securities, and, to the extent available,
from bank and lease financing, and believes these sources of cash will be
sufficient to fund its operations through 1998. However, the Company's future
liquidity and capital requirements will depend upon numerous factors, including
the level of sales of the Company's products generated by BSC in major and
emerging international markets; market acceptance of, and demand for the
Company's products; the Company's clinical research and product development
programs; the receipt of, and the time required to obtain, regulatory clearances
and approvals; the resources the Company devotes to the development, manufacture
and marketing of its products; the resources required to hire and develop a
direct sales force in the United States, and to expand manufacturing capacity;
facilities requirements; and other factors. *Although the Company believes its
current levels of cash, cash equivalents, and available-for-sale securities,
together with cash generated from operations, will provide adequate funding for
its operations and capital requirements through 1998, the Company may be
required to raise additional funds through public or private debt or equity
financings, collaborative relationships, bank facilities or other arrangements.
*There can be no assurance the Company will not require additional funding
sooner or that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. *Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants.

        As of December 31, 1997, the Company had federal and California net
operating loss carryforwards of approximately $32.5 million and $10.0 million,
respectively. The federal and California net operating loss carryforwards will
expire by the years 2012 and 2002, respectively, if not utilized. Utilization of
net operating loss carryforwards is subject to certain limitations under the Tax
Reform Act of 1986, as amended, where certain changes occur in the stock
ownership of a company. *These annual limitations may result in expiration of
net operating loss carryforwards before they can be fully utilized.

IMPACT OF THE YEAR 2000 ON INFORMATION SYSTEMS

        The Company relies on computers and computer software to run its
business, as do its vendors, suppliers and customers. These computers and
computer software may not be able to properly recognize the dates commencing in
the Year 2000. The Company has not completed an assessment of the impact this
may have on its businesses and does not have a reasonable basis to conclude
whether the impact of the Year 2000 dates will or will not materially affect
future results. To date the Company has not found any material impact which may
result from failure of its computers and computer software or that of its
vendors, suppliers, and customers. However, the Company plans to make an
assessment of this during 1998, and, if appropriate, develop an action plan to
correct it.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. Comprehensive income is defined as the change in equity of
a business enterprise during a period, resulting from transactions and other
events and circumstances from nonowner sources. The impact of adopting SFAS No.
130, which is effective for the Company in 1998, has not been determined.

        In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information." SFAS No. 131 requires publicly-held companies to report financial
and other information about key revenue-producing segments of the entity for
which such information is available and is utilized by the chief operating
decision maker. Specific information to be reported for individual segments
includes profit or loss, certain revenue and expense items and total assets. A
reconciliation of segment financial information to amounts reported in the
financial statements would be provided. SFAS No. 131 is effective for the
Company in 1998. The Company operates in one business segment; namely, the
research, development, manufacture and sale of cardiovascular devices.

RISK FACTORS

        Reliance on a Third Party for All International Sales

        Until such time, if ever, as the FDA approves the Company's TMR systems
for marketing in the United States, the Company anticipates it will derive its
revenues primarily from BSC as the Company's exclusive international
distributor. The agreement with BSC will not allow the Company to control
international end-market prices and might not result in the same level of sales
and marketing efforts as would be the case if the Company used a direct sales
force. BSC has certain rights to terminate the agreement with the Company which,
if exercised, would require the Company to make alternative arrangements for the
sale of its products internationally, and could have a material adverse effect
on the Company's business, financial condition and results of operations. Even
if FDA approval is obtained, the Company expects international sales will
continue to account for a significant portion of the Company's total revenues.
As a result, most of the Company's revenues until such approval is obtained, and
a significant portion of the Company's revenues thereafter, will be subject to
the risks associated with international sales, including foreign currency
fluctuations, economic or political instability, foreign tax laws, shipping
delays, various tariffs and trade regulations and restrictions and foreign
medical regulations, any of which could have a significant impact on the
Company's revenues. Future imposition of, or significant increases in the level
of, customs duties, export quotas or other trade restrictions, could have a
material adverse effect on the Company's business, financial condition and
results of operations. The international nature of the Company's business also
subjects it and BSC to laws and regulations of the international jurisdictions
in which they operate or in which the Company's products may be sold. The
regulation of medical devices in a number of such jurisdictions, particularly in
the EEA, continues to develop and there can be no assurance new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. The Company has four pending international
patent applications and has been issued no international patents to date. While
the Company intends to file and prosecute existing and future patent
applications in various European countries, the laws of certain foreign
countries do not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.

        Uncertainty of Clinical Adoption of TMR; Need for Increased
Understanding of TMR Mechanism





                                       19
<PAGE>   20

        Although TMR therapy using lasers has been in development since the
1980s, TMR remains experimental and has not achieved broad clinical adoption.
The Company is unable to predict whether or at what rate and how broadly TMR
will be adopted by the medical community.

        Physician endorsements will be essential for clinical adoption of TMR.
Even if the clinical efficacy of TMR is established, physicians may elect not to
recommend TMR for any number of reasons. The reasons why TMR may effectively
treat CAD are not well understood. Although the Company intends to use research,
development and clinical efforts to enhance knowledge of the physiological
effects of TMR, there can be no assurance such understanding will be achieved on
a timely basis, or at all. Failure of the Company and its competitors to gain a
thorough understanding of the physiological effects of TMR, and to disseminate
such understanding within the medical community, could adversely effect the
clinical adoption of TMR.

        Clinical adoption of TMR will also depend upon the Company's ability to
facilitate training of cardiothoracic surgeons and interventional cardiologists
in TMR therapy, and the willingness of such physicians to adopt such procedures.
Patient acceptance of the procedure will depend in part upon physician
recommendations as well as other factors, including the degree of invasiveness,
the effectiveness of the procedure, and the rate and severity of complications
associated with the procedure as compared to other procedures. Even if TMR is
clinically adopted, physicians may elect not to recommend the procedure unless
acceptable reimbursement from health care payors is available. Failure of TMR,
for whatever reason, to achieve significant clinical adoption or failure of the
Company's TMR systems to achieve any significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations. See " -- Uncertain Availability of Third-Party
Reimbursement."

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

        The Company's ITMR and PMR Systems are at an early stage of clinical
testing, and there can be no assurance regarding the clinical safety or efficacy
of either of these systems. The Company has not begun clinical trials of its
TTMR Systems and there can be no assurance this system will be approved for
clinical trials. Clinical trials of the Company's TMR systems will require
dedication by the Company of substantial financial and management resources, and
completing such trials will take several years. There can be no assurance any of
the Company's TMR systems will prove to be safe or effective. If the Company's
TMR systems do not prove to be safe and effective in clinical trials or if the
Company is otherwise unable to commercialize its TMR systems successfully, the
Company's business, financial condition, and results of operations would be
materially and adversely affected and could result in the cessation of the
Company's business.

        Dependence on TMR Product Line; Rapid Technological Change

        The Company is not currently developing any products other than its TMR
systems. Consequently, the Company is dependent on the successful development
and commercialization of the Company's TMR systems. Unfavorable clinical trial
results, failure to obtain regulatory approvals in a timely manner, or at all,
or failure to gain widespread market acceptance for any of the Company's TMR
systems would have a material adverse effect on the Company's business,
financial condition and results of operations and cessation of the Company's
business could occur.

        The medical device industry is characterized by rapid and significant
technological change. Therefore, the Company's future success will depend in
large part on the Company's ability to continue to respond to such changes, as
well as to expand the indications and applications for which its products are
used, through the timely development and successful introduction of enhanced and
new versions of its TMR systems. Product research and development will require
substantial expenditures and will be subject to inherent risks, and there can be
no assurance the Company will be successful in identifying products for which
demand exists or in developing products that have the characteristics necessary
to treat particular indications, or that any new product introduced will receive
regulatory approval or will be commercially successful.

        No Assurance of Obtaining Required Regulatory Approvals to Market
        Products in the United States;
        Significant Time Before Submission of Any PMA

        To date, none of the Company's products has been approved for sale in
the United States. Prior to receiving regulatory approval for marketing in the
United States, medical devices such as the Company's products are subject to
rigorous preclinical and clinical testing mandated by the FDA and, to a lesser
extent, by state regulatory authorities, such as the CDHS. The process of
obtaining and maintaining requisite regulatory approvals is lengthy, expensive
and uncertain. The





                                       20
<PAGE>   21

IDE/PMA process generally takes several years or longer to complete and is
expensive. Moreover, regulatory approvals, if granted, may include significant
limitations on the indicated uses for which a product may be marketed. FDA
enforcement policy strictly prohibits the marketing of approved medical devices
for unapproved uses.

        The Company's TMR systems will require approval of a PMA by the FDA
before such products can be marketed in the United States. The Company has
received FDA approval of three IDEs for its ITMR System. All three clinical
trials - a feasibility study of ITMR; a Phase II prospective, randomized,
multi-center study of ITMR; and a study of ITMR therapy as an adjunct to CABG-
have begun. The Company has received FDA approval of one IDE for its Axcis PMR
System for a multi-center clinical trial of no-option patients at up to ten
clinical sites. The Company has not submitted an application to the FDA for an
IDE for its PMR System or TTMR System. FDA regulations subject sponsors of IDEs
to certain requirements, including proper monitoring of clinical investigations,
selection of qualified investigators, record keeping, reporting of unanticipated
adverse device events and submission of periodic progress reports. The FDA also
has the authority to inspect premises where devices are held and to inspect and
copy all records pertaining to an investigation. In addition, a sponsor is
prohibited from promoting or commercializing a device prior to receiving PMA
approval. There can be no assurance any feasibility study that the Company
proposes will be approved by the FDA, will be completed or, if completed, will
provide sufficient data and information to support additional clinical
investigations of the type necessary to obtain FDA marketing clearance or
approval. There can be no assurance any of the Company's products will ever be
approved for sale in the United States. Additionally, there can be no assurance
required United States regulatory filings will be made in a timely manner,
approvals to commence future clinical trials will be received, clinical trials
will commence or be concluded in the time frames anticipated by the Company, any
such clinical trials will be successful or the Company will be able to obtain
regulatory approvals on a timely basis, or at all, to market its products.
Delays in initiating or completing clinical trials or in the receipt of
regulatory approval of the Company's products, the failure to obtain regulatory
approvals for such products, significant limitations in the indicated uses for
which such products may be marketed or substantial costs incurred in obtaining
such approvals would have a material adverse effect on the Company's business,
financial condition and results of operations and cessation of the Company's
business could occur.

        In January 1996, the Company reported to the FDA the existence of an
error in the software incorporated into the Ho:YAG laser included in its TMR
systems. The Company's laser manufacturer New Star had determined that, under
certain circumstances, the laser could be fired even though its control panel
indicated it was in the "stand-by" mode. The Company initiated a voluntary field
correction of the lasers, categorized as a Class II recall by the FDA, and the
software error has been corrected. FDA defines a Class II recall as one in which
use of, or exposure to, the product may cause temporary or medically adverse
health consequences or where the probability of serious adverse health
consequences is remote. The FDA has acknowledged the correction of the software
error and the completion of the related field activities. However, there can be
no assurance the Company will not experience future product defects,
malfunctions, manufacturing difficulties or recalls related to the Ho:YAG laser
or any other component used in the Company's TMR systems. Any such occurrence
could cause delay in regulatory approvals or adversely affect acceptance of the
Company's products and could have a material adverse effect on the Company's
business, financial condition and results of operations.

        Need to Comply with International Government Regulation

        International sales of medical devices often are subject to regulatory
requirements in foreign countries. The regulatory review process varies from
country to country. The Company's products are subject to pre-market approval in
the European Union and subject to other regulatory requirements in those and
other countries. In addition, the regulation of medical devices continues to
change. Any enforcement action by regulatory authorities with respect to past or
future regulatory noncompliance could have a material adverse effect on the
Company's business, financial condition and results of operations.

        The time required to obtain approval for sale in foreign countries may
be longer or shorter than required for FDA approval, and the requirements may
differ. In addition, there may be foreign regulatory barriers other than
pre-market approval. The FDA must approve exports of devices that require a PMA
but are not yet approved domestically, unless they are approved for sale by any
member country of the European Union and the other "listed" countries, including
Australia, Canada, Israel, Japan, New Zealand, Switzerland and South Africa, in
which case they can be exported for sale to any country without prior FDA
approval. In addition, an unapproved device may be exported without prior FDA
approval to the listed countries for investigational use in accordance with the
laws of those countries.

        To sell its TMR Systems within the EEA, the Company has received
approval to affix CE markings on its products to attest the Company's compliance
with the





                                       21
<PAGE>   22

requirements of the MDD of the EEA (the "MDD"). The Company will be subject to
continued supervision and will be required to report any serious adverse
incidents to the appropriate authorities. The Company also will be required to
comply with additional national requirements that are outside the scope of the
MDD. In addition, the Company has received ISO 9001/EN 46001 certification,
which was required to meet the CE Mark certification prerequisites. The Company
has not received CE Mark certification for the sale of its other systems in the
EEA. There can be no assurance the Company will be able to achieve or maintain
the compliance required for CE marking on all or any of its products or it will
be able to produce its products profitably and in a timely manner while
complying with the requirements of the MDD and other regulatory requirements.

        Failure to comply with applicable regulatory requirements can result in
fines, injunctions, civil penalties, recalls or seizures of products, total or
partial suspensions of production, refusals by foreign governments to permit
product sales and criminal prosecution. Furthermore, 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. There can be no assurance the Company will be able to obtain
necessary regulatory clearances or approvals on a timely basis or at all or it
will not be required to incur significant costs in obtaining or maintaining such
foreign regulatory approvals. Delays in receipt of, or failure to receive, such
approvals or clearances, the loss of previously obtained approvals or clearances
or the 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.

        Risk of Infringement; Patents and Proprietary Technology

        The Company is dependent in large part on its ability to obtain patent
protection for its products and processes, to preserve its trade secrets and
proprietary technology, and to operate without infringing upon the patents or
proprietary rights of third parties. The medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights, and companies in the medical device industry have employed
intellectual property litigation to gain a competitive advantage. Certain of the
Company's competitors and potential competitors have obtained United States
patents covering technology that could be used for certain TMR procedures, and
there can be no assurance such competitors, potential competitors or others have
not filed and do not hold international patents covering other TMR technology.
No assurance can be given that any such international patents would be
interpreted the same as any counterpart United States patents.

        From time to time, the Company has been contacted by various third
parties requesting the Company review and consider the applicability of certain
patents to the Company's technology. In particular, in February 1995, the
Company received a letter from PLC advising the Company of the existence of
certain of PLC's patents, including the PLC Patent. This letter requested an
assessment by the Company of the Company's activities in this area. The Company
believes, based on its review of the PLC Patent and an opinion of the Company's
counsel, the Company's TMR systems do not infringe such PLC Patent. In 1996, the
Company initiated a suit against PLC seeking a judgment that the PLC Patent is
invalid and unenforceable. PLC has counterclaimed against the Company for patent
infringement.

        While the Company periodically reviews the scope of its patents and
other relevant patents of which it is aware, the question of patent infringement
involves complex legal and factual issues and there can be no assurance any
conclusion reached by the Company regarding infringement will be consistent with
the resolution of any such issues by a court. Further, there can be no assurance
the Company will not become subject to patent infringement claims or litigation
or interference proceedings declared by the U.S. Patent Office to determine the
priority of inventions.

        The defense and prosecution of intellectual property suits, U.S. Patent
office interference proceedings and related legal and administrative proceedings
are both costly and time-consuming. Further litigation may be necessary to
enforce patents issued to the Company, to protect trade secrets or know-how
owned by the Company or to determine the enforceability, scope and validity of
the proprietary rights of others. Any litigation or interference proceedings
will result in substantial expense to the Company and significant diversion of
effort by the Company's technical and management personnel. An adverse
determination in such litigation or interference proceedings could subject the
Company to significant liabilities to third parties, require the Company to seek
licenses from third parties, prevent the Company from selling its products in
certain markets or at all, or require the Company to modify its products.
Although patent and intellectual property disputes regarding medical devices are
often settled through licensing and similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance the necessary licenses would be available
to the Company on satisfactory terms, if at all. Adverse determinations in a
judicial or administrative proceeding or failure to obtain necessary licenses
could prevent the Company from manufacturing and





                                       22
<PAGE>   23

selling its products, which would have a material adverse effect on the
Company's business, financial condition and results of operations.

        The validity and breadth of claims in medical technology patents involve
complex legal and factual questions and, therefore, may be highly uncertain. No
assurance can be given that any issued patent or patents based on pending patent
applications or any future patent application will exclude competitors or
provide competitive advantages to the Company, that any of the Company's patents
in which it has licensed rights will be held valid if subsequently challenged or
that others will not claim rights in or ownership of the patents and other
proprietary rights held or licensed by the Company. Furthermore, there can be no
assurance others have not developed or will not develop similar products,
duplicate any of the Company's products or design around any patents issued to
or licensed by the Company or that may be issued in the future to the Company.
Since patent applications in the United States are maintained in secrecy until
patents issue, the Company also cannot be certain others did not first file
applications for inventions covered by the Company's pending patent
applications, nor can the Company be certain it will not infringe any patents
that may issue to others on such applications.

        The U.S. patent laws were recently amended to exempt physicians, other
health care professionals, and affiliated entities from infringement liability
for medical and surgical procedures performed on patients. The Company cannot
predict whether this amendment might have a material adverse effect on the
Company's ability to protect its proprietary methods and procedures.

        The Company typically requires its employees, consultants and advisors
to execute confidentiality and assignment of inventions agreements in connection
with their employment, consulting or advisory relations 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.

        Highly Competitive Markets; Risk of Alternative Therapies

        Competition in the market for the treatment of CAD, in the medical
device industry generally, and in the TMR market in particular, is intense and
is expected to increase. The Company competes primarily with other producers of
TMR systems, including PLC, Eclipse, and U.S. Surgical. Some of the Company's
competitors and many of its potential competitors have substantially greater
name recognition and capital resources than does the Company and also may have
greater resources and expertise in the areas of research and development,
obtaining regulatory approvals, manufacturing and marketing. The TMR market is
characterized by rapid technical innovation. There can be no assurance the
Company's competitors will not succeed in developing TMR products or procedures
that are more effective or more effectively marketed than products marketed by
the Company or that render the Company's technology obsolete. Additionally, even
if the Company's products provide performance comparable to competing products,
there can be no assurance the Company will be able to obtain necessary
regulatory approvals to compete against competitors in terms of manufacturing,
marketing and sales. Certain companies, including PLC and Eclipse have completed
enrollment in randomized clinical trials of products and procedures involving
TMR that compete with those offered by the Company, and received regulatory
approvals in Europe to begin commercially marketing their various TMR products.
Earlier entrants in the market in a therapeutic area often obtain and maintain
greater market share than later entrants.

        There can be no assurance that the Company will be able to continue to
compete successfully in the future. *The Company believes the primary
competitive factors in the market for TMR systems include clinical performance,
product safety and reliability, availability of third-party reimbursement,
product design specifically for TMR use, product quality, ease of use, price,
customer service and company reputation. In addition, the length of time
required for products to be developed and receive regulatory approval and the
ability to use patents or other proprietary rights to prevent sales by
competitors are also important competitive factors.

        Many of the medical indications that may be treatable with TMR are
currently being treated by drug therapies or surgery and other interventional
therapies, including CABG and PTCA. A number of these therapies are widely
accepted in the medical community, have a long history of use and continue to be
enhanced rapidly. There is no assurance that procedures using TMR will be able
to replace or augment such established treatments or that clinical research will
support the use of TMR. Additionally, new surgical procedures and new drug
therapies are being developed by other parties to treat CAD. These new
procedures and drug therapies could be more effective, safer or more





                                       23
<PAGE>   24

cost-effective than TMR. The inability of TMR to replace or augment existing
therapies or to be more effective, safer or more cost-effective than new
therapies could have a material adverse effect on the Company's business,
financial condition and results of operations.

        Uncertain Availability of Third-Party Reimbursement

        In the United States, hospitals, physicians and other health care
providers that purchase medical devices generally rely on third-party payors to
reimburse all or part of the cost of the procedure in which the medical device
is being used. Few individuals are able to pay directly for the costs associated
with the use of the Company's products. Certain Third-Party Payors such as
Medicare determine whether to provide coverage for a particular procedure and
then reimburse hospitals for inpatient medical services at a prospectively fixed
rate based on the diagnosis related group ("DRG") to which the case is assigned.
DRG assignment is based on the diagnosis of the patient and the procedures
performed. The fixed rate of reimbursement established by Medicare is
independent of the hospital's cost incurred for the specific case and the
specific devices used. Medicare and other Third-Party Payors are increasingly
scrutinizing whether to cover new products and the level of reimbursement for
covered products. The Company intends to work with government officials to
secure a DRG assignment for its TMR systems that would provide hospitals with
appropriate payment. A failure by the Company to secure approval of a DRG that
adequately reflects the costs associated with use of the Company's TMR system
could have a material adverse effect on its business, financial condition and
results of operations.

        *Although the Company does not anticipate receiving reimbursements for
its ITMR Systems from Medicare during its clinical trials, the Company does
intend to seek reimbursement from other Third-Party Payors. There can be no
assurance, however, that such reimbursement will be available.

        Third-Party Payors that do not use prospectively fixed payments
increasingly use other cost-containment processes that may pose administrative
hurdles to the use of the Company's products. In addition, Third-Party Payors
may deny reimbursement if they determine that the device used in a treatment is
unnecessary, inappropriate, experimental, used for a non-approved indication or
not cost-effective. Potential purchasers must determine the clinical benefits of
the Company's TMR systems justify the additional cost or the additional effort
required to obtain prior authorization or coverage and the uncertainty of
actually obtaining such authorization or coverage.

        Physician services are reimbursed by Medicare based on a physician fee
schedule as coded under the CPT-4 coding system. There is no assurance the codes
that will be used for submitting claims for TMR 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. A failure by physicians to receive
what they consider to be adequate reimbursement for the TMR procedures in which
the Company's products are used could have a material adverse effect on the
Company's business, financial condition, and results of operations.

        If the Company obtains the necessary foreign regulatory registrations or
approvals, market acceptance of the Company's products in international markets
would be dependent, in part, upon the availability of reimbursement within
prevailing health care payment systems. Reimbursement and health care payment
systems in international markets vary significantly by country, and include both
government sponsored health care and private insurance. Although the Company
intends to seek international reimbursement approvals, there can be no assurance
any such approvals will be obtained in a timely manner, if at all. Failure to
receive international reimbursement approvals could have a material adverse
effect on market acceptance of the Company's products in the international
markets in which such approvals are sought.

        *The Company believes the overall escalating cost of medical products
and services has led, and will continue to lead, to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance in either United States or international markets that third-party
reimbursement and coverage will be available or adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of Third-Party Payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis. The unavailability of Third-Party
Payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, fundamental reforms in the healthcare industry in the United States
and Europe continue to be considered, although the Company cannot predict
whether or when any healthcare reform proposals will be adopted and what impact
such proposals might have.





                                       24
<PAGE>   25

        Dependence on Sole Suppliers

        A major component used in the Company's TMR systems, the ECG monitor, is
currently available from a sole source. In addition, several other components
used in the Company's TMR systems are purchased by the Company from a single
supplier. The Company periodically conducts assessments of alternative vendors
for various components used in its TMR systems. However, the qualification of
additional or replacement vendors for certain components is a lengthy process.
In addition, if the Company were to retain different suppliers of the ECG
monitor, the Company would need to obtain approval from the FDA in an IDE or PMA
amendment (if the IDE or PMA were still under review) or an IDE or PMA
supplement (if the IDE or PMA were already approved). There can be no assurance
that such approval would be obtained on a timely basis, if at all. Although the
FDA is required by law to complete its review of a PMA or PMA supplement within
180 days, the FDA may take a significantly longer period of time to complete its
review. Any significant interruption in the supply of components used in the
Company's TMR systems 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.

        Certain of the Company's suppliers, including the manufacturers of its
laser, could have difficulty expanding their manufacturing capacity to meet the
Company's needs if demand for the Company's TMR systems were to increase rapidly
or significantly. In addition, any defect or malfunction in the laser or other
products provided by the Company's suppliers could cause delay in regulatory
approvals or adversely affect acceptance of the Company's products. There can be
no assurance materials obtained from outside suppliers will continue to be
available in adequate quantities or that the Company will be able to locate
alternative suppliers on a timely basis. The failure to obtain sufficient
quantities of lasers or component materials would have a material adverse effect
on the Company's business, financial condition and results of operations.

        The Company purchases lasers from its suppliers pursuant to OEM Supply
Agreements, however, the Company generally operates on a purchase order basis
with most of its suppliers, including the manufacturer of the ECG monitor used
in the Company's TMR systems. Vendors that supply products to the Company and
could at any time determine to cease the supply and production of such
components, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

        Dependence on Management, Other Key Personnel and Scientific Advisors

        The Company's ability to operate successfully depends in significant
part upon the continued service of certain key scientific, technical, managerial
and finance personnel and the Company's continuing ability to attract and retain
additional highly qualified personnel. *In order to support market development
and sales in the future and augment its long term competitive position, the
Company anticipates it will be required to make significant additions of
personnel in manufacturing, research and development and sales and marketing.
Competition for such personnel is intense, and there can be no assurance the
Company can attract or retain highly qualified scientific, technical,
manufacturing, sales and marketing and finance personnel in the future. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect upon the Company's business, financial condition
and results of operations. In addition, many employees of the Company, including
a number of its key scientific, technical and managerial personnel, are subject
to the terms of confidentiality agreements with respect to proprietary
information of their former employers. The failure of these employees to comply
with the terms of their agreements with, or other obligations to, such former
employers could result in assertion of claims against the Company and such
employees, which, if successful, could restrict the role of such employees with
the Company and have a material adverse effect on the Company's business,
financial condition and results of operations.

        The Company has established a Scientific Advisory Board including
experts in cardiac surgery, interventional cardiology, cardiology and basic
science. Members of the Scientific Advisory Board consult with the Company
regarding research and development efforts at the Company but are employed
elsewhere on a full-time basis. As a result, they can only spend a limited





                                       25
<PAGE>   26

amount of time on the Company's affairs and there can be no assurance the
members of the Company's Scientific Advisory Board will continue to serve in
such capacity.

        Need to Comply with United States Manufacturing Standards; Limited
        Manufacturing Experience

        The Company has limited experience in manufacturing its products.
Manufacturers often encounter difficulties in increasing production, including
problems involving production yields, adequate supplies of components, quality
control and assurance (including failure to comply with good manufacturing
practices ("GMP") regulations, international quality standards and other
regulatory requirements) and shortages of qualified personnel. Difficulties
experienced by the Company in manufacturing scale-up could have a material
adverse effect on its business, financial condition and results of operations.
There can be no assurance the Company will be successful in increasing
manufacturing capacity or it will not experience manufacturing difficulties or
product recalls in the future.

        Under current law, if the Company markets its devices or manufactures
finished devices in the United States, it will be required to demonstrate
compliance with the FDA's current GMP regulations. In addition, the FDA will
inspect the Company's manufacturing facilities on a regular basis to determine
such compliance. The FDA could determine the Company's export of components is
not in compliance with the FDC Act or the FDA's regulations or policies and
prohibit exports in the future. Failure to comply with applicable FDA or other
regulatory requirements can result in fines, injunctions, civil penalties,
recalls or seizures of products, total or partial suspensions of production and
criminal prosecutions. The FDA has recently promulgated new GMP regulations. To
date, the Company has no experience dealing with the new regulations.

        Product Liability Risk; Possible Insufficiency of Insurance

        The Company's business exposes the Company to potential product
liability risks or product recalls that are inherent in the design, development,
manufacture and marketing of medical devices. The Company could be subject to
product liability claims if the use of the Company's TMR systems is alleged to
have caused adverse effects on a patient or such products are believed to be
defective. The Company's products are designed to be used in life-threatening
situations where there is a high risk of serious injury or death. Such risks
will continue to exist with respect to those products that may in the future
receive regulatory clearance for commercial sale. The failure to comply with the
FDA's GMP or other regulations could have a material adverse effect on the
ability of the Company to defend against product liability lawsuits. Although
the Company has not experienced any product liability claims to date, any such
claims could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance the Company's
product liability insurance, with coverage limits of $5 million per occurrence
and in the aggregate and additional coverage limits of DM1 million
(approximately $546,000) per person and DM50 million (approximately $27,300,000)
in the aggregate for use of the Company's TMR systems in Germany, will be
adequate for any future product liability problems or that such insurance
coverage will continue to be available on commercially reasonable terms or at
all. Particularly given that TMR is not well understood and the lack of data
regarding the clinical safety and efficacy of the Company's TMR systems, there
can be no assurance such coverage limits would be adequate to protect the
Company from liabilities it might incur in connection with the development,
manufacture and sale of its products. In addition, the Company may require
increased product liability coverage if any products are commercialized. Product
liability insurance is expensive and in the future may not be available to the
Company on acceptable terms, if at all. If the Company was held liable for a
product liability claim or series of claims brought against the Company in
excess of its insurance coverage such liability could have a material and
adverse effect on the Company's business, financial condition and results of
operations.

Item 7A  Quantitative and Qualitative Disclosures about Market Risk

         Not Applicable.

                                       26
<PAGE>   27
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                      -----



                                                                    Page

Report of Coopers & Lybrand L.L.P., Independent Accountants...........28

Consolidated Balance Sheets...........................................29

Consolidated Statements of Operations.................................30

Consolidated Statement of Stockholders' Equity (Deficit)..............31

Consolidated Statements of Cash Flows.................................32

Notes to Consolidated Financial Statements............................34



Financial Statement Schedule

   The following financial statement schedule of the Company for the three
years ended December 31, 1997 is filed as part of this Form 10-K and should be
read in conjunction with the Consolidated Financial Statements, and related
notes thereto, of the Company.

Report of Independent Accountants on Financial Statement Schedule.....48

Schedule II - Valuation and Qualifying Accounts.......................49


   All other schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements or
notes thereto.






                                       27
<PAGE>   28



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of CardioGenesis Corporation:

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

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free 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 consolidated financial position of CardioGenesis
Corporation as of December 31, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.


                                                COOPERS & LYBRAND L.L.P.


San Jose, California
January 30, 1998



                                       28
<PAGE>   29



                            CARDIOGENESIS CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
                                     -------

<TABLE>
<CAPTION>
                                                                           December 31,
                                                                  ----------------------------
                           ASSETS                                     1997             1996
                                                                   -----------      -----------
<S>                                                                <C>              <C>
Current assets:
     Cash and cash equivalents                                     $    6,047        $    2,080
     Available-for-sale securities                                     24,469            53,626
     Accounts receivable, net of allowance for doubtful
       accounts of $50 in 1997 and $225 in 1996                         3,293             2,024
     Inventories                                                        1,109             1,108
     Interest receivable                                                  574               934
     Prepaids and other                                                 1,177               454
                                                                   ----------        ----------

                      Total current assets                             36,669            60,226

Property and equipment, net                                             1,529             1,546
Available-for-sale securities, noncurrent                              10,019             2,502
Other assets                                                               23                23
                                                                   ----------        ----------

                      Total assets                                 $   48,240        $   64,297
                                                                   ==========        ==========

                        LIABILITIES

Current liabilities:
     Accounts payable                                              $    1,450      $        237
     Short-term note payable                                               40               215
     Accrued expenses                                                   1,828             1,696
     Accrued compensation                                                 626               384
     Deferred revenue                                                     150               370
                                                                   ----------        ----------

               Total liabilities                                        4,094             2,902
                                                                   ----------        ----------

Commitments and contingencies (Note 6)

                    STOCKHOLDERS' EQUITY

Preferred stock, $0.001 par value:
     Authorized:  2,000 shares
     Issued and outstanding:  no shares in 1997 and
       1996
Common stock, $0.001 par value:
     Authorized:  40,000 shares
     Issued and outstanding:  12,067 shares in 1997 and
       11,967 shares in 1996                                               12                12
Additional paid in capital                                             79,680            79,450
Deferred compensation                                                    (848)           (1,328)
Unrealized gains on available-for-sale securities                          39
Cumulative foreign currency translation adjustments                        31                (4)
Accumulated deficit                                                   (34,706)          (16,735)
                                                                   ----------        ----------

               Total stockholders' equity                              44,146            61,395
                                                                   ----------        ----------

                      Total liabilities and stockholders'
equity                                                             $   48,240       $    64,297
                                                                   ==========       ===========
</TABLE>



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



                                       29
<PAGE>   30



                                    CARDIOGENESIS CORPORATION
                              CONSOLIDATED STATEMENTS OF OPERATIONS
                              (in thousands, except per share data)
                                             -------



<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                -----------------------------------------
                                                                   1997             1996           1995
                                                                ---------        --------       ---------
<S>                                                             <C>              <C>            <C>
Sales                                                           $    7,559       $    3,959
Cost of sales                                                        4,991            2,866
                                                                ----------       ----------
         Gross profit                                                2,568            1,093
                                                                ----------       ----------

Operating expenses:
     Research and development                                       14,210            7,140     $   3,967
     General and administrative                                      3,722            2,622         1,178
     Sales and marketing                                             5,426            2,417           336
                                                                ----------       ----------     ---------

         Total operating expenses                                   23,358           12,179         5,481
                                                                ----------       ----------     ---------

         Operating loss                                            (20,790)         (11,086)       (5,481)

Interest income                                                      2,855            2,319           182

Interest expense and other                                             (36)             (33)
                                                                ----------       ----------     ---------

         Net loss                                               $  (17,971)      $   (8,800)    $  (5,299)
                                                                ==========       ==========     =========

Net loss per common share and per common share - assuming
  dilution                                                      $    (1.49)      $    (1.18)    $      --
                                                                ==========       ==========     =========
Shares used in computing net loss per common share and
  per common share - assuming dilution                              12,029            7,427            --
                                                                ==========       ==========     =========
</TABLE>



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



                                       30
<PAGE>   31



                            CARDIOGENESIS CORPORATION
            CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)
                                     -------



<TABLE>
<CAPTION>

                                                                         Common Stock               Additional
                                                                   --------------------------        Paid-In        Deferred
                                                                     Shares          Amount          Capital      Compensation
                                                                   ----------      ----------      ----------      ----------
<S>                                                                     <C>        <C>                <C>          <C>
Balances, January 1, 1995
     Deferred compensation related to issuance of
     preferred stock and grants of stock options                                                   $      874      $     (874)
     Amortization of deferred compensation                                                                                104
     Net loss
                                                                                                   ----------      ----------

Balances, December 31, 1995                                                                               874            (770)
   Deferred compensation related to
       issuance of preferred stock and grants
       of stock options                                                                                 1,407          (1,407)
   Amortization of deferred compensation                                                                                  849
   Issuance of common stock upon
       exercise of stock options and stock grants                         409                              75
   Conversion of redeemable preferred stock to common
      stock in connection with Initial Public Offering in
      May 1996                                                          8,558      $        9          22,622
     Issuance of common stock in Initial Public Offering, net
      of issuance costs of $5,533                                       3,000               3          54,472
     Foreign currency translation adjustment
     Net loss
                                                                   ----------      ----------      ----------      ----------
Balances, December 31, 1996                                            11,967              12          79,450          (1,328)
     Amortization of deferred compensation                                                                                480
     Issuance of common stock upon
      exercise of stock options and stock grants                           83                              76
     Issuance of common stock under the Employee Stock
      Purchase Plan                                                        17                             154
     Change in unrealized gains on
      available for sale securities
     Foreign currency translation adjustment
     Net loss
                                                                   ----------      ----------      ----------      ----------
Balances, December 31, 1997                                            12,067      $       12        $ 79,680      $    (848)
                                                                   ==========      ==========      ==========      ==========

</TABLE>


<TABLE>
<CAPTION>
                                                                                   Unrealized      Cumulative
                                                                                    Gains on         Foreign           Total
                                                                                   Available-       Currency       Stockholders'
                                                                 Accumulated        For-Sale       Translation        Equity
                                                                   Deficit         Securities      Adjustments       (Deficit)
                                                                  ----------       ----------      ----------       ----------
<S>                                                                  <C>           <C>             <C>               <C>
Balances, January 1, 1995                                         $  (2,636)                                     $     (2,636)
     Deferred compensation related to issuance of
     preferred stock and grants of stock options                                                                           --
     Amortization of deferred compensation                                                                                104
     Net loss                                                        (5,299)                                           (5,299)
                                                                   ----------      ----------      ----------      ----------
Balances, December 31, 1995                                          (7,935)                                           (7,831)
   Deferred compensation related to
       issuance of preferred stock and grants
       of stock options                                                                                                    --
   Amortization of deferred compensation                                                                                  849
   Issuance of common stock upon
       exercise of stock options and stock grants                                                                          75
   Conversion of redeemable preferred stock to common
      stock in connection with Initial Public Offering in
      May 1996                                                                                                          22,631
     Issuance of common stock in Initial Public Offering, net
       of issuance costs of $5,533                                                                                      54,475
     Foreign currency translation adjustment                                                       $       (4)              (4)
     Net loss                                                          (8,800)                                          (8,800)
                                                                    ----------      ----------      ----------      ----------
Balances, December 31, 1996                                             16,735                             (4)          61,395
     Amortization of deferred compensation                                                                                 480
     Issuance of common stock upon
      exercise of stock options and stock grants                                                                            76
     Issuance of common stock under the Employee Stock
      Purchase Plan                                                                                                       154
     Change in unrealized gains on
      available for sale securities                                                $       39                              39
     Foreign currency translation adjustment                                                              (27)            (27)
     Net loss                                                         (17,971)                                        (17,971)
                                                                   ----------      ----------      ----------      ----------
Balances, December 31, 1997                                        $  (34,706)     $       39        $    (31)      $  44,146
                                                                   ==========      ==========      ==========      ==========
</TABLE>



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


                                       31
<PAGE>   32


                                   CARDIOGENESIS CORPORATION
                             CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         (in thousands)
                                            -------

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                            ----------------------------------------
                                                               1997           1996           1995
                                                            ----------     ----------     ----------
<S>                                                         <C>            <C>             <C>
Cash flows from operating activities:
     Net loss                                               $  (17,971)    $   (8,800)     $  (5,299)
     Adjustments to reconcile net loss to net cash used
     in operating activities:
     Depreciation and amortization                                 375            310            114
     Amortization of deferred compensation                         480            849            104
     Loss on disposal of property and equipment                      2            152            215
     Changes in assets and liabilities:
     Accounts receivable                                        (1,268)        (1,154)          (870)
     Inventories                                                    (1)          (483)          (625)
     Interest receivable                                           360           (832)          (102)
     Prepaids and other                                           (723)          (231)          (161)
     Accounts payable                                            1,213           (283)           475
     Accrued expenses                                              132          1,395            126
     Accrued compensation                                          242            411            129
     Deferred revenue                                             (220)          (500)           870
                                                            ----------     ----------     ----------

     Net cash used in operating activities                     (17,379)        (9,166)        (5,024)
                                                            ----------     ----------     ----------

Cash flows from investing activities:
     Purchase of available-for-sale securities                (129,897)      (200,922)       (30,235)
     Maturities of available-for-sale securities               151,575        154,681         23,869
     Acquisition of property and equipment                        (360)        (1,678)          (175)
     (Increase) decrease in other assets                                           13            (21)
                                                            ----------     ----------     ----------

     Net cash provided by (used in) investing activities        21,318        (47,906)        (6,562)
                                                            ----------     ----------     ----------

Cash flows from financing activities:
     Proceeds from note payable                                                   215
     Payments on note payable                                     (175)
     Proceeds from issuance of preferred stock, net of
       issuance costs                                                             241         13,934
     Proceeds from issuance of common stock, net of
       issuance costs                                              230         54,550
                                                            ----------     ----------     ----------

     Net cash provided by financing activities                      55         55,006         13,934
                                                            ----------     ----------     ----------

Net increase (decrease) in cash and cash equivalents             3,994         (2,066)         2,348

Effect of exchange rates on cash and cash equivalents              (27)            (4)

Cash and cash equivalents, beginning of year                     2,080          4,150          1,802
                                                            ----------     ----------     ----------

Cash and cash equivalents, end of year                      $    6,047     $    2,080     $    4,150
                                                            ==========     ==========     ==========

SUPPLEMENTAL CASH FLOW INFORMATION:

     Conversion of redeemable
       preferred stock to common stock in connection with the
       Company's Initial Public Offering                                   $   22,631
                                                                           ==========

     Unrealized gains on available-for-sale securities      $       39
                                                            ==========
</TABLE>


                                       32

<PAGE>   33



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



                                       33
<PAGE>   34



                            CARDIOGENESIS CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                     -------

  1. Summary of Significant Accounting Policies:

         BUSINESS:

         CardioGenesis Corporation, (the Company) was incorporated in September
         1993 to conduct research, develop and manufacture cardiovascular
         surgical devices, including disposable systems, to perform both
         surgical and catheter based percutaneous transmyocardial
         revascularization. Since its inception, the Company has devoted
         substantially all of its efforts to developing products and bringing
         them to market, raising capital and recruiting personnel. The Company's
         principal operations commenced during 1996 at which time it emerged
         from the development stage.

         In the course of its development activities, the Company has sustained
         operating losses and expects such losses to continue at least through
         1999. The Company will finance its operations primarily through its
         cash, cash equivalents and available-for-sale securities, together with
         existing credit facilities and future revenues. There can be no
         assurance that the Company will not require additional funding and
         should this prove necessary, the Company may sell additional shares of
         its common or preferred stock through private placement or further
         public offerings.

         In May 1996, the Company completed its Initial Public Offering (IPO)
         selling 3,000,000 shares of its common stock with net proceeds of $54.5
         million.

         BASIS OF CONSOLIDATION:

         The consolidated financial statements include the accounts of
         CardioGenesis Corporation and its wholly owned subsidiary after all
         intercompany balances and transactions have been eliminated.

         CASH AND CASH EQUIVALENTS:

         The Company considers all highly liquid investments purchased with an
         original maturity of three months or less from the date of purchase and
         money market funds to be cash equivalents.

         AVAILABLE-FOR-SALE SECURITIES:

         All investments are classified as available-for-sale and therefore are
         carried at fair market value. Unrealized gains and losses on such
         securities are reported as a separate component of stockholders'
         equity. Realized gains and losses on sales of all such securities are
         reported in earnings and computed using the specific identification
         cost method.

                                        7
                                    CONTINUED



                                       34
<PAGE>   35



                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------

  1. Summary of Significant Accounting Policies, continued:

         INVENTORIES:

         Inventories are stated at the lower of cost (determined on a first-in,
         first-out basis) or market.

         PROPERTY AND EQUIPMENT:

         Property and equipment are recorded at cost and depreciated using the
         straight-line method over the estimated useful lives of the respective
         assets, generally two to seven years. Amortization of leasehold
         improvements is provided on a straight-line basis over the estimated
         useful life of the related asset or the lease term, whichever is
         shorter. Maintenance and repairs are charged to operations as incurred.

         REVENUE RECOGNITION:

         The Company recognizes product sales upon shipment of product to the
         customer and fulfillment of acceptance terms, if any, and when no
         significant contractual obligations remain outstanding.

         RESEARCH AND DEVELOPMENT:

         Research and development costs are charged to operations as incurred.

         CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES:

         The majority of the Company's cash, cash equivalents and
         available-for-sale securities are invested in deposits with a major
         bank in the United States. Deposits in this bank may exceed the amount
         of insurance provided on such deposits.

         Sales to both international and domestic customers are generally made
         on open credit terms. Management performs ongoing credit evaluations of
         the Company's customers and maintains an allowance for potential credit
         losses when needed, but historically has not experienced any
         significant losses related to individual customers or groups of
         customers in any particular geographic area.

         The Company's products require approval of the Food and Drug
         Administration (FDA) or other international regulatory agencies prior
         to commercialized sales. The Company cannot be assured that its
         products will receive this regulatory approval. During 1996, the
         Company received approval to market its ITMR system in the European
         Community. If the Company was denied regulatory approval or approval
         was delayed, it would have a material adverse impact on the Company.



                                   CONTINUED


                                       35
<PAGE>   36


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  1. Summary of Significant Accounting Policies, continued:

         CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES,
         continued:

         The Company purchases all of its ECG monitors from one of two
         suppliers. Management believes that other producers could be found to
         supply ECG monitors to the Company's specifications with relatively
         consistent pricing. [Management believes that there would be minimal
         delay if the Company was required to change suppliers. If the Company
         experienced delays in locating a new supplier of ECG monitors, it would
         have a material adverse impact on the Company.]

         Export sales totaled approximately $4.5 million and $2.0 million for
         1997 and 1996, respectively.

         The Company operates in an industry which experiences rapid
         technological changes, which may render inventories maintained by the
         Company obsolete.

         INCOME TAXES:

         Income taxes are accounted for under the liability method. Deferred tax
         assets and liabilities are recognized for the future tax consequences
         attributable to differences between the financial statement carrying
         amounts of existing assets and liabilities and their respective tax
         basis. Deferred tax assets and liabilities are measured using enacted
         tax rates expected to apply to taxable income in the years in which
         those temporary differences are expected to be recovered or settled.
         Valuation allowances are established when necessary to reduce deferred
         tax assets to the amounts expected to be realized.



                                   CONTINUED


                                       36

<PAGE>   37

                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  1. Summary of Significant Accounting Policies, continued:

         USE OF ESTIMATES:

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenues
         and expenses during the reporting period. Actual results could differ
         from those estimates.


         FOREIGN CURRENCY TRANSLATION:

         The Company's international subsidiary uses its local currency as its
         functional currency. Assets and liabilities are translated at exchange
         rates in effect at the balance sheet date and income and expense
         accounts at average exchange rates during the year. Resulting
         translation adjustments are recorded directly to a separate component
         of stockholders' equity.

         COMPUTATION OF NET LOSS PER COMMON SHARE AND PER COMMON SHARE-ASSUMING
         DILUTION:

         The Company adopted Statement of Financial Accounting Standards (SFAS)
         No. 128 "Earnings Per Share" and the Securities and Exchange Commission
         Staff Accounting Bulletin No. 98 (SAB No. 98) effective December 31,
         1997; accordingly, all prior periods have been restated. Net loss per
         common share and per common share-assuming dilution are computed using
         the weighted average number of shares of common stock outstanding.
         Common equivalent shares from stock options and preferred stock are
         excluded from the computation of net loss per common share-assuming
         dilution as their effect is antidilutive. No additional shares are
         considered to be outstanding for either computation under the
         provisions of SAB No. 98. As of December 31, 1995 there were 246
         shares of common stock outstanding. The Company does not believe that
         earnings per share for periods prior to its Initial Public Offering
         are meaningful.

         RECLASSIFICATIONS:

         Certain amounts in the financial statements have been reclassified to
         conform with the current year's presentation. The reclassifications had
         no impact on previously reported net losses.



                                   CONTINUED

                                       37

<PAGE>   38

                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------



  1. Summary of Significant Accounting Policies, continued:

         RECENT ACCOUNTING PRONOUNCEMENTS:

         In June 1997, the Financial Accounting Standards Board (FASB) issued
         Statement of Financial Accounting Standards No. 130, "Reporting
         Comprehensive Income." SFAS No. 130 establishes standards for the
         reporting and display of comprehensive income and its components in a
         full set of general purpose financial statements. Comprehensive income
         is defined as the change in equity of a business enterprise during a
         period, resulting from transactions and other events and circumstances
         from nonowner sources. The impact of adopting SFAS No. 130, which is
         effective for the Company in 1998, has not been determined.

         In June 1997, the FASB issued Statement of Financial Accounting
         Standards No. 131, "Disclosure about Segments of an Enterprise and
         Related Information." SFAS No. 131 requires publicly-held companies to
         report financial and other information about key revenue-producing
         segments of the entity for which such information is available and is
         utilized by the chief operating decision maker. Specific information to
         be reported for individual segments includes profit or loss, certain
         revenue and expense items and total assets. A reconciliation of segment
         financial information to amounts reported in the financial statements
         would be provided. SFAS No. 131 is effective for the Company in 1998.
         The Company operates in one business segment; namely, the research,
         development, manufacture, and sale of cardiovascular surgical devices.


  2. Available-for-Sale Securities:

      At December 31, 1997, available-for-sale securities consisted of corporate
      obligations and obligations of federal government agencies, bearing
      interest at rates ranging from 5.51% to 8.45% per annum, and maturing from
      January 28, 1998, through October 10, 1999. The maturities of the
      available-for-sale securities do not exceed two years.



                                   CONTINUED


                                       38
<PAGE>   39


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  2.  Available-for-Sale Securities, continued:

      The amortized cost and fair value of available-for-sale securities at
      December 31, 1997 and 1996 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                            1997                                         1996
                                       ----------------------------------------------        ----------------------------
                                       Amortized          Unrealized          Fair           Amortized            Fair
                                          Cost              Gain              Value             Cost              Value
                                       ----------        ----------        ----------        ----------        ----------
<S>                                     <C>              <C>               <C>               <C>                <C>
     U.S. Government securities        $    8,491        $       19        $    8,510        $   26,446        $   26,446
     Corporate obligations                 25,958                20            25,978            29,682            29,682
                                       ----------        ----------        ----------        ----------        ----------
                                        $  34,449        $       39        $   34,488        $   56,128        $   56,128
                                       ==========        ==========        ==========        ==========        ==========
</TABLE>



   3. Inventories:

      Inventories consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,
                                                            ---------------------------
                                                               1997            1996
                                                            -----------     -----------
<S>                                                          <C>             <C>
             Raw materials                                   $      736     $        20
             Finished goods                                         373           1,088
                                                            -----------     -----------

                                                            $     1,109     $     1,108
                                                            ===========     ===========
</TABLE>



  4.  Property and Equipment:

      Property and equipment consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                ------------------------
                                                                   1997         1996
                                                                ----------   -----------

<S>                                                              <C>          <C>
           Computer equipment                                    $     520    $      403
           Laboratory equipment                                        514           430
           Furniture and equipment                                     698           447
           Leasehold improvements                                      540           731
                                                                ----------   -----------

                                                                     2,272         2,011
           Less accumulated depreciation and amortization              743           465
                                                                ----------   -----------

                                                                $    1,529    $    1,546
                                                                ==========   ===========
</TABLE>



                                   CONTINUED


                                       39
<PAGE>   40


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


   5. Accrued Expenses:

      Accrued expenses consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31,
                                                                ------------------------
                                                                   1997         1996
                                                                ----------   -----------
<S>                                                              <C>          <C>
           Clinical Patient Research                             $  1,074     $     333
           Contract Research                                          231           266
           Consulting                                                               275
           Distributors                                                             400
           Legal                                                      358           176
           Employee Stock Purchase Plan                                73            72
           Other                                                       92           174
                                                                ----------   -----------

                                                                 $  1,828     $   1,696
                                                                ==========   ===========
</TABLE>



  6.  Commitments and Contingencies:

         FACILITY LEASE:

         The Company leases its Sunnyvale, California facility under a
         noncancelable operating lease expiring in October 1999. In addition to
         monthly rent, the lease is subject to additional payments for utilities
         and other costs above the base amounts. The Company has the option to
         extend the term of this lease for an additional five years upon all of
         the same terms and conditions except base rent.

         Future minimum lease payments are as follows at December 31, 1997 (in
         thousands):

<TABLE>
<CAPTION>
<S>                                                       <C>
               1998                                       $   191
               1999                                           160
                                                         ---------
                                                          $   351
                                                         =========
</TABLE>



                                   CONTINUED


                                       40
<PAGE>   41

                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  6.  Commitments and Contingencies, continued:

         FACILITY LEASE, continued:

         Rent expense for the years ended December 31, 1997, 1996 and 1995 was
         $229,000, $229,000 and $65,000, respectively.

         RESEARCH AGREEMENT:

         The Company, in its acquisition of technology in 1993, assumed certain
         obligations under an ongoing research and development agreement with
         Columbia University (Columbia). The agreement provides for a license
         fee of $1.5 million to be paid to Columbia on the date the technology
         licensed under the agreement meets all the following conditions:
         marketing approval from the FDA; issuance of a United States patent for
         the product; and demonstration of the manufacturability of the product.
         The Company must pay a royalty to Columbia of 1.4% of all net revenues
         from sales of the products subject to the license beginning twelve
         months preceding the issuance of the first United States patent. A
         royalty of 50% is required for all sublicense revenue. The agreement
         allows for cumulative research payments under the agreement to be
         deducted from future royalty payments required. Previous payments under
         the agreement made by the Company and the assignor to Columbia which
         would reduce future royalties for product sales have been expensed, as
         incurred, as research and development expenses.

         The Company has agreements to pay consultants and institutions $655,000
         for various research and development efforts in 1998.

         LITIGATION:

         The Company is a party to various legal actions that have occurred in
         the normal course of business. In the opinion of management, the
         outcome of these actions will not have a material effect on the
         financial position, cash flows, or results of operations of the
         Company.


  7. Stockholders' Equity

         COMMON STOCK:

         At December 31, 1997, the Company had 40 million shares of common stock
         authorized. In April 1996, the Company reincorporated in the State of
         Delaware. The financial statements have been retroactively adjusted to
         reflect the reincorporation. In April 1996, the Company had a 4.1-for-5
         reverse stock split of the Company's common and preferred stock. The
         financial statements have been retroactively restated to give effect to
         the split.



                                   CONTINUED


                                       41
<PAGE>   42

                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------

  7. Stockholders' Equity, continued:


         EMPLOYEE STOCK PURCHASE PLAN:

         In April 1996, the Board of Directors adopted the 1996 Employee Stock
         Purchase Plan and reserved 123,000 shares of common stock for issuance
         under the Plan. The Plan provides for consecutive 24 month offering
         periods. Each offering period is comprised of four six month purchase
         periods. Shares are purchased through employees' payroll deductions at
         exercise prices equal to 85% of the lesser of the fair market value of
         the Company's common stock at either the first day of the applicable
         offering period or the last day of the respective purchase period.
         17,000 shares had been issued under this plan as of December 31, 1997.

         STOCK OPTION PLANS:

         In November 1993, the Company established the 1993 Equity Incentive
         Plan (the 1993 Plan) that, as amended in 1995, authorized the Board of
         Directors to grant 1,640,000 incentive and nonstatutory stock options
         to employees, officers, directors and consultants of the Company. The
         Plan expires in 2003.

         In April 1996, the Company adopted the 1996 Equity Incentive Plan (the
         1996 Plan). Pursuant to the provisions of this plan, the Board of
         Directors may grant incentive and nonstatutory stock options to
         employees, officers, directors and consultants of the Company. At
         December 31, 1997, there were 1,120,000 shares reserved for issuance
         under this plan. The Plan expires in 2006.

         Additionally in April 1996, the Company adopted the 1996 Directors
         Stock Option Plan. Only nonstatutory stock options may be granted under
         this plan, and only to non-employee directors of the company. At
         December 31, 1997, there were 98,000 shares reserved for issuance under
         this plan. The Plan expires in 2006.



                                   CONTINUED


                                       42
<PAGE>   43

                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  7. Stockholders' Equity, continued:

         STOCK OPTION PLANS, continued:

         Under the Plans, options must be granted at not less than the fair
         market value at the date of grant as determined by the Board of
         Directors, or committee thereof, except for options granted to a person
         owning greater than 10% of the total combined voting power of all
         classes of stock of the Company, for which the exercise price of the
         options must be not less than 110% of the fair market value at the time
         of grant as determined by the Board of Directors or committee thereof
         and nonstatutory stock options, for which the exercise price of the
         options must not be less than 85% of the fair market value at the time
         of grant as determined by the Board of Directors or committee thereof.
         The Board of Directors, or committee thereof, has the authority to set
         the term of the options (no longer than ten years from the date of
         grant, five years for greater than 10% owners of voting stock). Under
         the Plans, options generally vest at a rate of 25% annually after the
         vesting commencement date.

         Activity under the Plans is set forth below (in thousands, except per
         share data):

<TABLE>
<CAPTION>
                                                                          Options Outstanding
                                             Shares         ------------------------------------------------
                                            Available           Number
                                               for                of             Exercise         Aggregate
                                              Grant             Shares            Price             Price
                                           ------------      ------------       -----------      ------------
<S>                                                 <C>               <C>       <C>   <C>        <C>
          Balances, January 1, 1995                 740               531       $0.12-$0.24      $         82
               Additional shares
                 reserved by plan amendment         369
               Options granted                     (813)              813       $0.24-$0.61               233
               Options canceled                       8                (8)         $0.24                   (2)
                                           ------------      ------------                        ------------

          Balances, December 31, 1995               304             1,336       $0.12-$0.61               313
               Additional shares
                 reserved by plan amendment         918
               Options granted                     (646)              646      $0.61-$14.50             5,161
               Options canceled                      75               (75)     $0.12-$14.50              (648)
               Options exercised                                     (409)      $0.12-$1.83               (75)
                                           ------------      ------------                        ------------

          Balances, December 31, 1996               651             1,498      $0.12-$14.50             4,751
               Additional shares
                 reserved by plan amendment         300
               Options granted                   (1,318)            1,318      $6.50-$15.25            10,153
               Options canceled                     692              (692)     $0.12-$15.25            (7,032)
               Options exercised                                      (83)     $0.12-$10.75               (76)
                                           ------------      ------------                        ------------

          Balances, December 31, 1997               325             2,041      $0.12-$14.50         $   7,796
                                           ============      ============                        ============
</TABLE>



CONTINUED


                                       43
<PAGE>   44


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  7. Stockholders' Equity, continued:

         STOCK OPTION PLANS, continued:

         In December 1997, the Company offered employees the right to cancel
         certain outstanding stock options and receive new options with an
         exercise price of $6.50 per share, the closing price of the common
         stock on the date individual employees agreed to cancel their original
         outstanding stock options. Options to purchase a total of 502,000
         shares at original exercise prices ranging from $7.25 to $15.25 per
         share were canceled and new options were issued in December 1997. The
         option term and vesting under the new options are identical to the
         terms of the canceled options.

         The options outstanding and currently exercisable by exercise price at
         December 31, 1997 are as follows (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                   Options Currently
                              Options Outstanding                      Exercisable
             ------------------------------------------------    ---------------------
                                         Weighted
                                          Average    Weighted      Weighted Average
                                         Remaining   Average
              Exercise        Number    Contractual  Exercise      Number     Exercise
               Prices       Outstanding    Life       Price      Exercisable   Price
             -----------    ----------- -----------  --------    -----------  --------

<S>          <C>                   <C>     <C>         <C>            <C>     <C>
             $0.12-$0.24           751     7.13        $0.22          511     $0.21
             $0.61-$0.61           160     8.00        $0.61           73     $0.61
             $1.83-$1.83           149     8.17        $1.83           75     $1.83
            $6.50-$14.50           981     9.32        $7.25          196     $8.16
                                 -----                               ----
                                 2,041                                855
                                 =====                               ====
</TABLE>

         At December 31, 1997, options to purchase 855,000 shares were
         exercisable at an average exercise price of $2.21 per share and
         2,041,000 shares of common stock are reserved in the event of options
         exercised.

         Deferred compensation to be recognized as a result of stock options
         granted and preferred stock issued during 1996 and 1995 totaled $1.4
         million and $874,000 respectively. Amortization of deferred
         compensation is generally over a vesting period of four years, with
         compensation expense recognized in the period ended December 31, 1997,
         1996 and 1995 of $480,000, $849,000 and $104,000 respectively.



                                   CONTINUED


                                       44
<PAGE>   45


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  7. Stockholders' Equity, continued:

         STOCK-BASED COMPENSATION:

         The Company has adopted the disclosure-only provisions of Statement of
         Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
         Stock-Based Compensation." Accordingly, no compensation cost has been
         recognized for the Plans (including the Employee Stock Purchase Plan).
         Had compensation cost for the Plans been determined based on the fair
         value at the grant date for awards in 1997, 1996 and 1995 consistent
         with the provisions of SFAS No. 123, the Company's net loss and net
         loss per common share and per common share-assuming dilution for the
         years ended December 31, 1997, 1996 and 1995 would have been increased
         to the pro forma amounts indicated below (in thousands, except per
         share data):

<TABLE>
<CAPTION>
                                                                    Year Ended
                                                                    December 31,
                                                   ---------------------------------------------
                                                       1997             1996             1995
                                                   -----------       ----------       ----------

<S>                                                 <C>                <C>             <C>
          Net loss - as reported                   $   (17,971)       $  (8,800)      $   (5,299)
                                                   ===========       ==========       ==========
          Net loss - pro forma                     $   (19,800)       $  (9,258)      $   (5,318)
                                                   ===========       ==========       ==========
          Net loss per common share and per
          common share-assuming dilution - as
          reported
                                                   $     (1.49)      $    (1.18)      $       --
                                                   ===========       ==========       ==========

           Net loss per common share and per
           common share-assuming dilution -
           pro forma                               $     (1.65)      $    (1.25)      $       --
                                                   ===========       ==========       ==========
</TABLE>


         The above pro forma disclosures are not necessarily representative of
         the effects on reported net income or loss for future years.



                                   CONTINUED


                                       45
<PAGE>   46


                            CARDIOGENESIS CORPORATION
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
                                     -------


  7. Stockholders' Equity, continued:

         STOCK-BASED COMPENSATION, continued:

         The fair value of each option grant is estimated on the date of grant
         using the minimum value method (prior to the IPO) and the Black-Scholes
         method (subsequent to the IPO) with the following weighted average
         assumptions by subgroup:



<TABLE>
<CAPTION>
                                             Option Plans               Stock
                                       --------       --------        Purchase
                                       Group A        Group B           Plan
                                       --------       --------       --------

<S>                                        <C>            <C>            <C>
          Risk-free interest rate          6.48%          5.86%          5.32%
          Expected life                    4.23           4.54            0.5
          Expected dividends           $     --       $     --       $     --
          Expected volatility            0.7633         0.7633         0.7633

</TABLE>


         The weighted average expected life was calculated based on the vesting
         period and the exercise behavior of each subgroup. Group A represents
         higher paid employees, while Group B represents lower paid employees.
         The risk-free interest rate was calculated in accordance with the grant
         date and expected life calculated for each subgroup.


  8. Income Taxes:

          At December 31, 1997 and 1996, the components of deferred tax assets
     are as follows (in thousands):

<TABLE>
<CAPTION>
                                                        1997           1996
                                                      --------       --------
<S>                                                   <C>            <C>
Intangible assets                                     $    (4)       $    40
Depreciation                                               39              6
Tax credits                                               972            229
Accrued expenses and other                                471            219
Capitalized research and development                      676            628
Deferred revenue                                           --            111
Net operating loss carryforwards                       11,636          4,779
                                                       ------          -----
Net deferred tax assets                                13,790          6,012
Less valuation allowance                              (13,790)        (6,012)
                                                       ------         ------
                                                      $    --        $    --
                                                       ======         ======

</TABLE>

          The Company had federal and state net operating loss carryforwards of
     approximately $32.5 million and $10.0 million, respectively, at December
     31, 1997, available to offset future regular and alternative minimum
     taxable income. The Company's federal and state net operating loss
     carryforwards will expire by the years 2012 and 2002, respectively.

          The Tax Reform Act of 1986 substantially changed the rules relative to
     net operating loss carryforwards in the event of an "ownership change" of a
     corporation. Future changes in ownership may result in limitations on the
     annual utilization of net operating loss carryforwards.


  9. Related Party Transactions:

          The Company paid $113,000, $159,000, and $178,000 for consulting fees
     to certain stockholders during the years ended December 31, 1997, 1996 and
     1995, respectively.



                                   CONTINUED


                                       46
<PAGE>   47

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

        - none -


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT

        The information required by this item with respect to the directors of
the Company is incorporated by reference from the definitive proxy statement for
the Company's 1998 annual meeting of stockholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this report (the "Proxy Statement") under the caption
"Proposal No. 1-Election of Directors." The information relating to the
executive officers of the Company is incorporated by reference from the Proxy
Statement under the caption "Executive Officers."

        Information required by this item with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance."

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this item is incorporated by reference from
the Proxy Statement under the captions "Executive Compensation," "Proposal No.
1-Election of Directors-Director Compensation," and "Compensation Committee
Interlocks and Insider Participation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this item is incorporated by reference from
the Proxy Statement under the caption "Security Ownership of Certain Beneficial
Owners and Management."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this item is incorporated by reference from
the Proxy Statement under the caption "Certain Relationships and Related
Transactions."

                                    PART IV

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

        (a) The following documents are filed as part of this Form:

        1.  Index to Financial Statements
            -----------------------------

        The Consolidated Financial Statements, notes thereto, and Independent
        Accountant's Report thereon are included in Part II, Item 8 of this Form
        10-K.

        2.  Financial Statement Schedule

        The Financial Statement Schedule is included in Part II, Item 8 of this
        Form 10-K.

        3.  Exhibits

        The following exhibits are filed or incorporated by reference as part of
        this Form 10-K:

        EXHIBIT
        NUMBER                              EXHIBIT TITLE
        -------      -----------------------------------------------------------

          3.01       Restated Certificate of Incorporation.(4)

          3.02       Registrant's Bylaws.(1)

          4.01       Form of Specimen Certificate for Registrant's Common
                     Stock.(1)

          4.02       Registrant's Second Restated Investors' Rights Agreement,
                     dated as of December 5, 1995 as amended.(1)

         10.01       Registrant's 1993 Equity Incentive Plan and related
                     documents.(1)*

         10.02       Registrant's 1996 Equity Incentive Plan and related
                     documents.(1)(3)*

         10.03       Registrant's 1996 Directors Stock Option Plan and related
                     documents.(1)*

         10.04       Registrant's 1996 Employee Stock Purchase Plan and related
                     documents.(1)*

         10.05       Standard Industrial/Commercial Multi-Tenant Lease, dated
                     December 18, 1995, by and between Registrant and De La Cruz
                     Enterprises.(1)

         10.06       Koll Business Center Lease, dated July 13, 1994, by and
                     between Registrant and Fujita California Partners III.(1)

         10.07       Form of Indemnity Agreement.(1)*

         10.08       Agreement, dated August 1, 1991, by and among the Trustees
                     of Columbia University in the City of New York, Eli Lilly
                     and Company and Advanced Cardiovascular Systems, Inc. and
                     related documents.(1)(2)

         10.09       OEM Supply Agreement, dated May 31, 1995, by and between
                     Registrant and New Star Lasers as amended.(1)(2)

         10.10       Research and Development Agreement, dated June 1, 1995, by
                     and between Registrant and New Star Lasers.(1)(2)

         10.11       Product Documentation, Approval, Manufacturing and Supply
                     Agreement, dated January 2, 1996, by and between Registrant
                     and Indigo Medical GmbH.(1)(2)

         10.12       Consulting Agreement, dated March 1, 1996, by and between
                     Registrant and Michael Aita.(1)(2)*

         10.13       Employment Terms Letter, dated November 23, 1993, issued
                     by the Company to Michael Aita.(1)*

         10.14       Consulting Agreement, dated November 23, 1993, by and among
                     Registrant, Carl J. Simpson and Advanced Cardiovascular
                     systems, Inc. as amended.(1)*

         10.15       International Distribution Agreement, dated January 22,
                     1997, by and between Registrant and Boston Scientific
                     Corporation.**(2)(5)

         10.16       OEM Product Development and Supply Agreement, dated
                     March 10, 1997, between Registrant and Carl Baasel
                     Lasertechnik GmbH.**

         23.01       Consent of Coopers & Lybrand, L.L.P., independent
                     accountants.

         27.01       Financial Data Schedule.

         27.02       Restated Financial Data Schedule for Nine Months Ended
                     September 30, 1997.

         27.03       Restated Financial Data Schedule for Six Months Ended
                     June 30, 1997.

         27.04       Restated Financial Data Schedule for Three Months Ended
                     March 31, 1997.

         27.05       Restated Financial Data Schedule for Twelve Months Ended
                     December 31, 1996.

         27.06       Restated Financial Data Schedule for Nine Months Ended
                     September 30, 1996.

         27.07       Restated Financial Data Schedule for Six Months Ended
                     June 30, 1996.
-------------------
  * Management contract or compensatory arrangement.

 ** Confidential treatment has been requested with respect to certain portions
    of this exhibit. Confidential portions have been filed separately with the
    Securities and Exchange Commission.

(1) Incorporated by reference to the Exhibits to Registrant's Registration
    Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996
    (the "Form SB-2").

(2) Confidential treatment has been granted with respect to certain portions of
    this agreement. Such portions have been omitted from this filing and have
    been filed separately with the Securities and Exchange Commission.

(3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly
    report on Form 10-Q for the quarter ended September 30, 1997.

(4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report
    on Form 10-K for the fiscal year ended December 31, 1996.

(5) Incorporated by reference to the Exhibit 10.19 of Registrant's quarterly
    report on Form 10-Q for the quarter ended June 30, 1997.

         (b) Reports on Form 8-K
             -------------------

             None

         (c) Exhibits
             --------

             See Item 14(a) above.

         (d) Financial Statement Schedule
             ----------------------------

             See Item 14(a) above.



                                       47




<PAGE>   48
       REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE


        In connection with our audits of the consolidated financial statements
of CardioGenesis Corporation as of December 31, 1997 and 1996, and for each of
the three years in the period ended December 31, 1997, which financial
statements are included in this Annual Report on Form 10-K, we have also audited
the financial statement schedule listed in Item 8 herein.

        In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.


                                        COOPERS & LYBRAND L.L.P.


San Jose, California
January 30, 1998







                                       48
<PAGE>   49
                                                                   (Schedule II)

                           CARDIOGENESIS CORPORATION
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                    Balance at
                                                    Beginning        Charged to                          Balance at
                                                      of the          Costs and                          End of the
            Description                               Period          Expenses        Deductions           Period
--------------------------------------------        ----------       ----------       ----------         ---------
<S>                                                 <C>              <C>              <C>                <C>

Balance for the year ended December 31, 1995:
  Allowance for doubtful accounts receivable            $0                                                  $0

Balance for the year ended December 31, 1996:
  Allowance for doubtful accounts receivable            $0              $225               --               $225

Balance for the year ended December 31, 1997:
  Allowance for doubtful accounts receivable            $225            $207             $(382)             $ 50


</TABLE>







                                       49
<PAGE>   50


                                   SIGNATURES

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

                                      CARDIOGENESIS CORPORATION

                                      By: /s/ ALLEN W. HILL
                                          ----------------------------

                                      Allen W. Hill
                                      President and Chief Executive Officer

Date: March 31, 1998

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

<TABLE>
<CAPTION>
Signature                          Title                                  Date
----------------------------       ----------------------------           ---------------
<S>                                <C>                                    <C>
/s/ ALLEN W. HILL                  President, Chief Executive             March 31, 1998
-------------------------          Officer and a Director
    Allen W. Hill                  (Principal Executive Officer)


/s/ RICHARD P. POWERS              Chief Financial Officer,               March 31, 1998
-------------------------          Vice President of Finance
    Richard P. Powers              and Administration and Secretary
                                   (Principal Financial Officer and
                                   Principal Accounting Officer)


/s/ DAVID B. APFELBERG             Director                               March 31, 1998
-------------------------
    David B. Apfelberg


/s/ JACK M. GILL                   Director                               March 31, 1998
-------------------------
    Jack M. Gill


/s/ DAVID C. HULL, JR.             Director                               March 31, 1998
-------------------------
    David C. Hull, Jr.


/s/ THOMAS D. KILEY                Director                               March 31, 1998
-------------------------
    Thomas D. Kiley


/s/ E. WALTER LANGE                Director                               March 31, 1998
-------------------------
    E. Walter Lange


/s/ ROBERT C. STRAUSS              Director                               March 31, 1998
-------------------------
    Robert C. Strauss


</TABLE>




                                       50
<PAGE>   51
                                EXHIBIT INDEX


        EXHIBIT
        NUMBER                              EXHIBIT TITLE
        -------      -----------------------------------------------------------

          3.01       Restated Certificate of Incorporation.(4)

          3.02       Registrant's Bylaws.(1)

          4.01       Form of Specimen Certificate for Registrant's Common
                     Stock.(1)

          4.02       Registrant's Second Restated Investors' Rights Agreement,
                     dated as of December 5, 1995 as amended.(1)

         10.01       Registrant's 1993 Equity Incentive Plan and related
                     documents.(1)*

         10.02       Registrant's 1996 Equity Incentive Plan and related
                     documents.(1)(3)*

         10.03       Registrant's 1996 Directors Stock Option Plan and related
                     documents.(1)*

         10.04       Registrant's 1996 Employee Stock Purchase Plan and related
                     documents.(1)*

         10.05       Standard Industrial/Commercial Multi-Tenant Lease, dated
                     December 18, 1995, by and between Registrant and De La Cruz
                     Enterprises.(1)

         10.06       Koll Business Center Lease, dated July 13, 1994, by and
                     between Registrant and Fujita California Partners III.(1)

         10.07       Form of Indemnity Agreement.(1)*

         10.08       Agreement, dated August 1, 1991, by and among the Trustees
                     of Columbia University in the City of New York, Eli Lilly
                     and Company and Advanced Cardiovascular Systems, Inc. and
                     related documents.(1)(2)

         10.09       OEM Supply Agreement, dated May 31, 1995, by and between
                     Registrant and New Star Lasers as amended.(1)(2)

         10.10       Research and Development Agreement, dated June 1, 1995, by
                     and between Registrant and New Star Lasers.(1)(2)

         10.11       Product Documentation, Approval, Manufacturing and Supply
                     Agreement, dated January 2, 1996, by and between Registrant
                     and Indigo Medical GmbH.(1)(2)

         10.12       Consulting Agreement, dated March 1, 1996, by and between
                     Registrant and Michael Aita.(1)(2)*

         10.13       Employment Terms Letter, dated November 23, 1993, issued
                     by the Company to Michael Aita.(1)*

         10.14       Consulting Agreement, dated November 23, 1993, by and among
                     Registrant, Carl J. Simpson and Advanced Cardiovascular
                     systems, Inc. as amended.(1)*

         10.15       International Distribution Agreement, dated January 22,
                     1997, by and between Registrant and Boston Scientific
                     Corporation.**(2)(5)

         10.16       OEM Product Development and Supply Agreement, dated
                     March 10, 1997, between Registrant and Carl Baasel
                     Lasertechnik GmbH.**

         23.01       Consent of Coopers & Lybrand, L.L.P., independent
                     accountants.

         27.01       Financial Data Schedule.

         27.02       Restated Financial Data Schedule for Nine Months Ended
                     September 30, 1997.

         27.03       Restated Financial Data Schedule for Six Months Ended
                     June 30, 1997.

         27.04       Restated Financial Data Schedule for Three Months Ended
                     March 31, 1997.

         27.05       Restated Financial Data Schedule for Twelve Months Ended
                     December 31, 1996.

         27.06       Restated Financial Data Schedule for Nine Months Ended
                     September 30, 1996.

         27.07       Restated Financial Data Schedule for Six Months Ended
                     June 30, 1996.
-------------------
  * Management contract or compensatory arrangement.

 ** Confidential treatment has been requested with respect to certain portions
    of this exhibit. Confidential portions have been filed separately with the
    Securities and Exchange Commission.

(1) Incorporated by reference to the Exhibits to Registrant's Registration
    Statement on Form SB-2 (No. 333-3752-LA), declared effective on May 21, 1996
    (the "Form SB-2").

(2) Confidential treatment has been granted with respect to certain portions of
    this agreement. Such portions have been omitted from this filing and have
    been filed separately with the Securities and Exchange Commission.

(3) Incorporated by reference to the Exhibit 10.20 of Registrant's quarterly
    report on Form 10-Q for the quarter ended September 30, 1997.

(4) Incorporated by reference to the Exhibit 3.01 of Registrant's annual report
    on Form 10-K for the fiscal year ended December 31, 1996.

(5) Incorporated by reference to Exhibit 10.19 of Registrant's quarterly report
    on Form 10-Q for the quarter ended June 30, 1997.

                                       51