SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                    FORM 10-Q

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934.

For the Quarter Ended September 30, 1996

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
    Act of 1934.

For the transition period from ___________ to ____________

                         Commission file number 0-19880

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


          Delaware                                           68-0028500
(State or other jurisdiction of                             (IRS Employer
incorporated or organization)                              Identification No.)

               2870 Kilgore Road, Rancho Cordova, California 95670
                    (Address of principal executive offices)

        Registrant's telephone number, including area code (916)638-8008

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
                                      ---    ---

On September 30, 1996,  the  registrant  had  outstanding  13,484,905  shares of
Common Stock of $.001 par value,  which is the registrant's only class of Common
Stock.

This report on Form 10-Q including all exhibits, contains 17 pages.


                                       1

<PAGE>

                             ENDOSONICS CORPORATION

                                    Form 10-Q

                                  Third Quarter

                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----
Part I.  Financial Information

Item 1.  Consolidated Financial Statements

         Consolidated balance sheets at September 30, 1996 and
             December 31, 1995............................................   3

         Consolidated statements of operations for the three months and
             nine months ended September 30, 1996 and 1995................   4

         Condensed consolidated statements of cash flows for the
             nine months ended September 30, 1996 and 1995.................  5

         Notes to condensed consolidated financial statements..............  6

Item 2.  Management's discussion and analysis of financial
    condition and results of operation .................................... 10

Part II.  Other Information

Item 1 through 5   Not Applicable

Item 6

     (a)  Exhibits:
          Exhibit 27 -- Financial Data Schedule

     (b)  No reports on Form 8-K were filed during the quarter

Signatures................................................................. 16

                                       2
<PAGE>
<TABLE>

                                                     ENDOSONICS CORPORATION
                                                  CONSOLIDATED BALANCE SHEETS
                                                          (Unaudited)
                                       (In thousands, except share and per share amounts)
<CAPTION>
                                                                                    September 30,             December 31,
                                                                                        1996                      1995
                                                                                  ------------------       -------------------
<S>                                                                                     <C>                      <C>
ASSETS
Current assets:
  Cash and cash equivalents                                                              $  35,333               $  36,757
  Short-term investments                                                                     4,054                   7,638
  Trade accounts receivable, net                                                             6,684                   5,852
  Inventories                                                                                3,976                   4,046
  Accrued interest receivable and other current assets                                         632                     973
                                                                                         ---------               ---------
        Total current assets                                                                50,679                  55,266
Property and equipment, net                                                                  1,743                   1,687
Investment in Cardiovascular Dynamics, Inc.                                                 20,795                    --
                                                                                         ---------               ---------
                                                                                         $  73,217               $  56,953
                                                                                         =========               =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses                                                  $   6,227               $   5,394
Deferred distributorship fee revenue                                                             9                     154
Convertible obligation                                                                        --                       750
Minority interest                                                                             --                     2,500

STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value
     5,000,000 shares authorized, no shares issued and outstanding                            --                      --
Common stock, $.001 par value; 25,000,000 shares
     authorized as of September 30, 1996 and December 31, 1995;
     and  13,484,905 and 12,831,512  shares issued and
     outstanding as of September 30, 1996 and December 31, 1995,
     respectively                                                                               14                      13
Additional paid-in capital                                                                 123,875                  98,989
Accumulated deficit                                                                        (56,836)                (50,837)
Unrealized loss on available-for-sale securities                                               (33)                     (7)
Foreign currency translation                                                                   (38)                     (3)
                                                                                         ---------               ---------
       Total stockholders' equity                                                           66,982                  48,155
                                                                                         $  73,217               $  56,953
                                                                                         =========               =========
<FN>

                             See accompanying notes
</FN>
</TABLE>

                                        3
<PAGE>
<TABLE>

                                                       ENDOSONICS CORPORATION
                                           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (Unaudited)
                                         (In thousands, except share and per share amounts)

<CAPTION>

                                                                Three Months Ended September 30,     Nine Months Ended September 30,
                                                                     1996            1995                1996            1995
                                                                -------------    ------------        ------------   -------------
<S>                                                              <C>             <C>                 <C>             <C>         
Total revenue                                                    $      5,493    $      4,661        $     18,266    $     11,431
Cost of sales                                                           3,270           2,417              12,072           7,114
                                                                 ------------    ------------        ------------    ------------
Gross profit                                                            2,223           2,244               6,194           4,317
                                                                                                    
                                                                                                    
                                                                                                    
Operating expenses:                                                                                 
  Acquired in-process research, development and clinical                 --              --                  --               488
  Other  research, development and clinical                             1,052           1,966               4,897           6,002
  Marketing and sales                                                     803           1,579               4,497           4,094
  General and administrative                                              905           1,128               3,567           3,051
  Restructuring                                                          --              --                   518            --
                                                                 ------------    ------------        ------------    ------------
         Total operating expenses                                       2,760           4,673              13,479          13,635
                                                                 ------------    ------------        ------------    ------------
Loss from operations                                                     (537)         (2,429)             (7,285)         (9,318)
                                                                                                    
Equity in Net Loss of CVD                                                (321)           --                  (370)           --
                                                                                                    
Other income:                                                                                       
  Interest income                                                         454             116               1,640             450
  Distributorship fees and other                                           32              24                  16              64
                                                                 ------------    ------------        ------------    ------------
         Total other income                                               486             140               1,656             514
                                                                 ------------    ------------        ------------    ------------
Net loss                                                                ($372)        ($2,289)            ($5,999)        ($8,804)
                                                                 ============    ============        ============    ============
Net loss per share                                                      ($.03)          ($.23)              ($.45)          ($.88)
Shares used in the calculation of                                                                   
     net loss per share                                            13,455,841      10,120,043          13,340,895      10,045,350
                                                                 ============    ============        ============    ============
<FN>                                                                                                
                                                                                                
                                            See accompanying notes
</FN>
</TABLE>

                                        4
<PAGE>
<TABLE>

                             ENDOSONICS CORPORATION
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                   (Unaudited)
               (In thousands, except share and per share amounts)
<CAPTION>

                                                                            Nine months ended
                                                                              September 30
                                                                            1996       1995
                                                                          --------    --------
<S>                                                                       <C>         <C>
Cash flows from operating activities
     Net loss                                                             ($ 5,999)   ($ 8,804)
     Adjustments to reconcile net loss to net
     cash used in operating activities:
          Non-cash in-process R & D                                           --           488
          Depreciation and amortization                                        471         572
          Amortization of deferred compensation                                 57        --
          Net changes in:
               Operating assets                                                421      (1,940)
               Operating liabilities and deferred revenue                      687        (916)
                                                                          --------    --------
                    Net cash used in operating activities                   (4,363)     (8,768)


Cash flows from investing activities:
     Purchase of short-term investments                                    (11,859)
     Sales of short-term investments                                           158       4,897
     Maturities of short-term investments                                   15,311       1,342
     Impact of CVD IPO                                                      (6,569)       --
     Capital expenditures for property and equipment                        (1,104)       (630)
                                                                          --------    --------
                    Net cash provided by (used in) investing activities     (4,063)      5,609


Cash flows from financing activities:
     Proceeds from common stock issuance to Cordis Corp.                     5,000        --
     Proceeds from convertible obligation                                     --           750
     Proceeds from issuance of stock                                         2,152         441
     Deferred Compensation                                                    (150)       --
                                                                          --------    --------
                    Net cash provided by financing activities                7,002       1,191
                                                                          --------    --------


Net (decrease) in cash and equivalents                                      (1,424)     (1,968)
Cash and equivalents, beginning of period                                   36,757       4,862
                                                                          ========    ========
Cash and equivalents, end of period                                       $ 35,333    $  2,894
                                                                          ========    ========


Non-cash financing and investing activities:
      Common stock issued in business acquisition                             --      $  2,660
                                                                          ========    ========
<FN>

                             See accompanying notes.
</FN>
</TABLE>
                                       5
<PAGE>

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                               SEPTEMBER 30, 1996

1.  Summary of Significant Accounting Policies

The interim financial information is unaudited.  In the opinion of management of
EndoSonics   Corporation   ("EndoSonics"   or  the  "Company"),   the  condensed
consolidated   financial   statements   included  in  this  report  reflect  all
adjustments  necessary,  consisting  only of normal  recurring  adjustments,  to
present fairly the Company's  consolidated  financial  position at September 30,
1996 and the  consolidated  results  of its  operations  and cash  flows for the
three- and nine-month periods ended September 30, 1996 and 1995. Results for the
interim are not necessarily  indicative of  consolidated  results to be expected
for the  entire  fiscal  year.  These  financial  statements  should  be read in
conjunction with the Company's audited  financial  statements for the year ended
December 31, 1995, contained in the Company's Annual Report on Form 10-K.

Principles of Consolidation

The  consolidated  financial  statements  include  the  accounts  of  EndoSonics
Corporation (the "Company"),  a Delaware  Corporation,  and its wholly-owned and
majority-owned   subsidiaries.   All  significant   intercompany   accounts  and
transactions have been eliminated.  Investments in unconsolidated  subsidiaries,
and  other  investments  in  which  the  Company  has a 20% to 50%  interest  or
otherwise has the ability to exercise significant  influence,  are accounted for
under the equity method (see Note 4).

Investments

In accordance  with SFAS 115, the Company has divided its  investment  portfolio
into held-to-maturity and  available-for-sale  categories.  Unrealized losses on
available-for-sale   securities   are  recorded  as  a  separate   component  of
shareholders' equity.

2.  Inventories

Inventories  are  stated at the lower of cost,  determined  on an  average  cost
basis, or market value. Inventories consist of the following:

                               September 30, 1996   December 31, 1995
                               ------------------   -----------------

         Raw materials              $1,308              $1,225
         Work-in-process             1,261               1,575
         Finished goods              1,407               1,246
                                    -------             -------
                                                       
         Total                      $3,976              $4,046
                                    =======             =======
                                              

                                       6

<PAGE>


3.  Computation of net loss per share

Net loss per share is computed  using the weighted  average  number of shares of
common  stock  outstanding.  Common  equivalent  shares  from stock  options are
excluded from the computation because their effect is antidilutive.

4.  Change in ownership percentage of Cardiovascular Dynamics, Inc.

On June 19, 1996,  EndoSonics' 84% owned  subsidiary,  Cardiovascular  Dynamics,
Inc. (CVD), successfully completed an Initial Public Offering (IPO) of 3,400,000
shares of common stock at $12.00 per share,  followed by an  additional  510,000
shares   issued  in  July  1996   (over-allotment   option   granted   to  CVD's
underwriters). As of September 30, 1996, EndoSonics owned 46% of the outstanding
shares of CVD. As a result of this transaction, CVD's results of operations have
been consolidated  through June 19, 1996, and accounted for on the equity method
thereafter. In June 1996, the Company recorded an increase to additional paid-in
capital of approximately  $21 million  representing the Company's  proportionate
share of CVD's net assets  following the IPO. In the quarter ended September 30,
1996, the Company recorded  ($321,000)  representing its proportionate  share of
CVD's net losses for the period. Financial information for CVD is shown below:

BALANCE SHEET INFORMATION   --  CVD

(Unaudited)                                                 September 30,
(In thousands)                                                  1996
                                                            -------------

         Current assets                                        $51,997  
         Property and equipment, net                               823
         Other assets                                              172
                                                               -------
                  Total assets                                 $52,992   
                                                               =======
         
         Current liabilities                                   $ 4,217
         Deferred distributorship fee revenue                      786
         Stockholders' equity                                   47,989
                                                               -------
                  Total liabilities and stockholders' equity   $52,992
                                                               =======
         
         EndoSonics' share of CVD's net assets                 $20,795
                                                               =======
         
                                       7
<PAGE>

<TABLE>

STATEMENT OF OPERATIONS -- CVD

<CAPTION>

(Unaudited)
(In thousands)                                       Three Months Ended              Nine Months Ended
                                                     September 30, 1996             September 30, 1996
                                                     ------------------             -------------------

         <S>                                              <C>                             <C>   
         Total revenue                                    $2,352                          $6,186
         Cost of sales                                     1,273                           3,136
                                                          -------                         -------
         Gross profit                                      1,079                           3,050
         Total operating expenses                          2,407                           5,626
                                                          -------                         -------

         Loss from operations                             (1,328)                         (2,576)
                                                          -------                         -------
         Other income (expense)                              630                             731
                                                          -------                         -------
         Net Loss                                          ($698)                        ($1,845)
                                                          =======                         =======
         EndoSonics' share of net losses of CVD            ($321)                          ($370)
                                                          =======                         =======
</TABLE>

Cardiovascular  Dynamics,  Inc., stock is quoted on The Nasdaq Stock Market. The
closing  price of CVD's stock at  September  30, 1996 was $10.25 per share.  The
Company held 4,040,000 shares of CVD's common stock at September 30, 1996.

5.  Components of the  Consolidated  Statement of Operations as of September 30,
    1996

(Unaudited)
(In Thousands)                         Nine months ended September 30, 1996
                                        IVUS          CVD      Consolidated
                                       -------------------------------------
Total revenue                          $14,432      $3,834        $18,266
Cost of sales                           10,209       1,863         12,072
                                       -------------------------------------
Gross profit                             4,223       1,971          6,194
                                                  
Operating expenses:                               
  Other research, development                     
         and clinical                    3,468       1,429          4,897
  Marketing and sales                    3,210       1,287          4,497
  General and administrative             3,064         503          3,567
  Restructuring                            518          --            518
                                       -------------------------------------
     Total operating expenses           10,260       3,219         13,479
                                       -------------------------------------
                                                  
Loss from operations                    (6,037)     (1,248)        (7,285)
                                                  
Other income (expense):                           
  Interest income                        1,567          73          1,640
  Other income (expense)                   (12)         28             16
                                       --------------------------------------
     Total other income                  1,555         101          1,656
                                       --------------------------------------
                                                  
Net Loss                               ($4,852)    ($1,147)       ($5,999)
                                       ======================================

                                       8
<PAGE>


Through June 19, 1996, the  Statements of Operations of EndoSonics  included the
results of operations of CVD. As of June 20, 1996, the Company began  accounting
for CVD under the equity method of accounting. (See Note 4.)

The  results  of  operations  for  IVUS   (intravascular   ultrasound)   include
restructuring  and other  charges made in the quarter  ended June 30,  1996,  of
approximately $3.1 million in connection with the consolidation of the Company's
IVUS  manufacturing  operations  and with  the  start-up  production  of the new
Five/64 imaging devices. (See Note 6.)

6.  Restructuring and Other Charges

In  June  1996,  the  Company  recorded   restructuring  and  other  charges  of
approximately $3.1 million in connection with the consolidation of the Company's
IVUS  manufacturing  operations  and with  the  start-up  production  of the new
Five/64 imaging  devices.  The elements of the total charges as of September 30,
1996 are as follows:

                                                (In Thousands)  
                                                 Representing
                                                   Asset              Future
                                  Provision       Write-Downs      Cash Outlays
                                  ----------------------------------------------
Consolidation of facilities        $   994                          $   867
Conversion to new technology         1,849           $808               815
Corporate reorganization               223                               93
                                   -------           ----           -------
                                   $ 3,066           $808           $ 1,775
                                   =======           ====           =======

The  charges  are  included  in  the  accompanying  Consolidated  Statements  of
Operations for the nine month period ended September 30, 1996 are as follows:

                                                          (In Thousands)
                                                               1996
                                                          --------------

Cost of sales                                               $   794
Other research, development and clinical                        475
Marketing and sales                                             480
General and administrative                                      799
Restructuring                                                   518
                                                            -------
         Total charges                                      $ 3,066
                                                            =======

                                       9


<PAGE>

Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL           
CONDITION AND RESULTS OF OPERATIONS

This Form 10-Q  contains  forward-looking  statements  which  involve  risks and
uncertainties.  The Company's actual results may differ  significantly  from the
results discussed in the forward-looking statements.  Factors that might cause a
difference include, but are not limited to, those discussed elsewhere herein and
in the Company's Annual Report on Form 10-K.

Overview

Since  inception in 1984,  EndoSonics has engaged  primarily in the research and
development, manufacture and sale of products for the diagnosis and treatment of
cardiovascular  disease. The Company's financial results will be affected in the
future by several  factors,  including  the timing of any FDA approval to market
the  Company's  products,  FDA  approval of IDE sites and the number of patients
permitted  to  be  treated,   future  changes  in  government   regulations  and
third-party  reimbursement  policies applicable to the Company's  products,  the
revenue mix of Oracle imaging  systems and catheters,  the progress of competing
technologies,  and the ability of the Company to develop the  manufacturing  and
marketing  capabilities  necessary to support  commercial  sales. As a result of
these factors, revenue levels, gross margins and operating results may fluctuate
from quarter to quarter.

Results of Operations

Third quarter of 1996 compared to the same period in 1995

Total Revenue.  Revenue (all IVUS) for the third quarter of 1996 advanced 18% to
$5.5  million  compared  to $4.7  million for the third  quarter of 1995,  which
included $1.6 million of CVD revenue.  Revenues for the IVUS business  increased
79% from $3.1 million in the third quarter of 1995.  The  principal  reasons for
this increase are continued  growth in demand for IVUS products both in the U.S.
and overseas markets,  and increased sales through the Company's  agreement with
Cordis Corporation (a Johnson & Johnson Company). Further growth is dependent on
the ability of the Company to increase  production  to levels of its new Five/64
catheters to levels  sufficient  to meet demand for the product in both the U.S.
and overseas markets.

                                       10
<PAGE>

Cost of Sales.  Cost of sales as a percentage of product sales  decreased to 60%
(all IVUS) for the three months ended  September 30, 1996 from 63% for the third
quarter  of 1995,  which  included  CVD.  For the IVUS  business,  cost of sales
increased from 57% in the third quarter of 1995. Gross profit margins  increased
to 40% (all IVUS) for the three months ended  September  30, 1996 as compared to
37% for the third quarter of 1995 which  included CVD.  Gross profit margins for
the IVUS business were 43% for third quarter of 1995.  The decrease in the third
quarter of 1996 was due primarily to the production  inefficiencies  incurred in
manufacturing  new catheter  products.  Due to the  uncertainty  associated with
continued improvements in the efficiency of the Company's  manufacturing process
and the impact of increasingly  competitive  pricing,  there can be no assurance
that the  Company's  gross profit margin will be maintained or improve in future
periods.

Other  Research,  Development  and Clinical.  Other  research,  development  and
clinical  decreased  to $1.1  million  (all  IVUS)  for the three  months  ended
September  30, 1996 as compared  to $2.0  million for the third  quarter of 1995
(which included CVD),  $1.5 million for the IVUS business.  This decrease of 27%
for  IVUS  is due to a  reduction  in  expenses  associated  with  the  Pinnacle
Development Project.

Marketing and Sales. Marketing and sales expenses decreased to $0.8 million (all
IVUS) for the three  months ended  September  30, 1996 from $1.6 million for the
third quarter of 1995 (which  included CVD), $1.1 million for the IVUS business.
This  decrease  of 27% for the  IVUS  business  is  primarily  the  result  of a
levelling off of costs associated with increased staffing and marketing programs
in  Europe  and the  United  States in  support  of higher  sales  levels.  As a
percentage of total revenue,  marketing and sales expenses for IVUS decreased to
15% for the three months ended  September 30, 1996 compared to 36% for the three
months ended September 30, 1995, due primarily to increased revenues.

General and  Administrative.  General and  administrative  expenses decreased to
$0.9 million (all IVUS) for the three months ended  September 30, 1996 from $1.1
million  (including  CVD) for the three months ended September 30, 1995. For the
IVUS  business,  general and  administrative  expenses  increased  29% from $0.7
million in the third  quarter of 1995 due to an overall  increase the  Company's
level  of  operations.   As  a  percentage  of  total   revenues,   general  and
administrative  expenses  decreased to 17% for the three months ended  September
30, 1996 compared with 22% of total revenue for the three months ended September
30, 1995 due to increased revenue.

Other Income Net.  Other  income  increased to $0.5 million for the three months
ended  September 30, 1996 from $0.1 million for the three months ended September
30, 1995, due to a higher level of interest  income earned on the proceeds of an
equity offering completed in the fourth quarter of 1995.

Net Loss. Net loss decreased to $0.4 million,  or $0.03 per share, for the three
months ended  September 30, 1996 as compared to a net loss of $2.3  million,  or
$0.23 per share,  for the three months ended  September 30, 1995.  Third quarter
1996 included $0.3 million equity in the net loss of CVD. On a comparable basis,
the IVUS business approached  break-even ($51,000 loss) for the third quarter of
1996  versus a loss of $2.0  million  for the third  quarter  of 1995.  Weighted
average  shares  outstanding  increased  by  approximately  3.4  million  shares
primarily as a result of the Company's  equity offering in the fourth quarter of
1995.

                                       11
<PAGE>

First Nine Months of 1996 compared to the same period of 1995

CVD's results of operations were  consolidated in the Company's  results through
June 19, 1996, and accounted for on the equity method thereafter. (See Note 4 to
Consolidated Financial Statements.)

Total Revenue.  Total revenue increased 60% to $18.3 million for the nine months
ended  September 30, 1996 from $11.4 million for the nine months ended September
30, 1995. Period to period comparison of IVUS revenues  reflected a 67% increase
from  $8.6  million  in 1995 to $14.4  million  in 1996.  The  increase  in IVUS
revenues  is due both to the  growth  of the  overall  market  for IVUS  imaging
products and increased  sales under the Company's  distribution  agreements with
Cordis and, to a lesser extent, with Fukuda.

Currently,  a majority of the Company's sales of IVUS products consists of sales
of the Company's IVUS imaging systems.  The Company  currently  anticipates that
sales of IVUS imaging  catheters will increase as a percentage of total sales of
IVUS products in future periods as the Company's  installed base grows.  For the
nine months ended  September 30, 1996 and September 30, 1995,  export sales as a
percentage of total revenue remained at 54%. The Company  currently  anticipates
that export  sales will  continue  to  represent  a  substantial  portion of the
Company's total revenue in future periods.

Cost of Sales.  Cost of sales as a percentage of product sales  decreased to 67%
for the nine months ended  September 30, 1996 from 68% for the nine months ended
September 30, 1995.  Period to period comparison of IVUS cost of sales reflected
an increase from 70% in 1995 to 73% in 1996. After adjusting for $0.8 million in
non-recurring  charges  in the IVUS  business  in 1996 (see Note 6 to  Condensed
Consolidated  Financial  Statements)  these  expenses  decreased to 67% of total
revenue.  Cost of sales in the first nine  months of 1995 were  affected by $0.7
million related to the voluntary recall of its Visions IVUS imaging catheters in
the first  quarter of 1995 due to  manufacturing  defects.  After  adjusting for
these recall  related  expenses,  cost of sales as a percentage of product sales
were 62% in the first nine months of 1995.

Gross  margins on product in the IVUS business for the first nine months of 1996
were  27%  compared  with  30%  for the  same  period  in  1995,  33%  and  38%,
respectively, after both of the above adjustments. The decrease in gross margins
are the result of  improvements in the Company's  manufacturing  processes which
were more than offset by higher costs associated with initial  production of new
catheter  products.  Due to the  possible  impact  of  increasingly  competitive
pricing there can be no assurance that the Company's gross profit margin will be
maintained  or  improve in future  periods.  The  Company  is in the  process of
establishing a new manufacturing process for its FIVE/64 catheter line in Rancho
Cordova,  California. Its gross margins will be affected during the remainder of
1996 and 1997 by the rate of  adoption  of  FIVE/64  catheter  products  and the
efficiency with which the Company is able to establish such process and facility
and achieve production volumes.

Acquired  In-process,   Research,   Development  and  Clinical.  In  June  1995,
EndoSonics  recorded  a non-cash  charge of $0.5  million  reflecting  the final
payment in connection with the 1993 acquisition of CVD.

                                       12
<PAGE>

Other  Research,  Development  and Clinical.  Other  research,  development  and
clinical  expenses  decreased  by 18% to $4.9  million for the nine months ended
September  30, 1996 from $6.0  million for the nine months ended  September  30,
1995. Period to period comparison of IVUS expenses reflected a 24% decrease from
$4.6  million in 1995 to $3.5  million  in 1995.  After  adjusting  for the $0.5
million in non-recurring  charges in 1996 (see Note 6 to Condensed  Consolidated
Financial  Statements),  these expenses for the IVUS business decreased 35%, due
to a decrease in expenses related to the Pinnacle Development Project.

Marketing and Sales.  Marketing and sales expenses increased 10% to $4.5 million
for the nine months ended  September  30, 1996  compared to $4.1 million for the
nine months  ended  September  30,  1995.  Period to period  comparison  of IVUS
marketing and sales expenses  reflected an 8% increase from $3.0 million in 1995
to $3.2  million in 1996.  After  adjusting  for $0.5  million in  non-recurring
charges in 1996 (see Note 6 to  Condensed  Consolidated  Financial  Statements),
these  expenses for the IVUS  business  decreased  10%. As a percentage of total
revenue,  marketing and sales expenses  decreased to 22%, 19% after  adjustments
for non-recurring charges, for the nine months ended September 30, 1996 from 34%
of total  revenue for the nine months ended  September 30, 1995 due primarily to
increased revenue.

General and Administrative. General and administrative expenses increased 17% to
$3.6 million for the nine months ended  September 30, 1996 from $3.1 million for
the nine months ended September 30, 1995.  Period to period  comparisons of IVUS
general and administrative expenses indicate a 48% increase from $2.1 million in
1995 to $3.1 million in 1996.  After adjusting for $0.8 million in non-recurring
charges in 1996 (see Note 6 to  Condensed  Consolidated  Financial  Statements),
these expenses for the IVUS business  decreased 9%.  General and  administrative
expenses  decreased  to  21%  of  total  revenue,   16%  after  adjustments  for
non-recurring  charges, for the nine months ended September 30, 1996 from 24% of
total  revenue for the nine months  ended  September  30, 1995 due  primarily to
increased revenue.

Restructuring  Charges.  In the second quarter of 1996 the Company recorded $0.5
million in  restructuring  charges in connection with the  consolidation  of its
administrative and manufacturing operations at a new facility in Rancho Cordova,
California. These charges related primarily to lease commitments associated with
the Pleasanton facility.

Other Income,  Net.  Other income  increased to $1.7 million for the nine months
ended  September 30, 1996 from $0.5 million for the nine months ended  September
30,  1995,  primarily  due to a higher  level of interest  income  earned on the
proceeds of an equity offering completed in the fourth quarter of 1995.

Net Loss. Net loss decreased to $6.0 million,  or $0.45 per share,  for the nine
months ended  September 30, 1996 as compared to a net loss of $8.8  million,  or
$0.88 per share,  for the nine months ended  September 30, 1995.  The second and
third  quarters  of 1996  include  $0.4  million  equity in the net loss of CVD.
Period to period  comparisons of the results of operations for the IVUS business
indicates a 31%  decrease in net loss from $6.5  million in 1995 to $4.5 million
(without CVD's losses) in 1996.  After adjusting for  non-recurring  expenses of
$3.1  million in the  second  quarter of 1996 and CVD's net losses in the second
and third  quarters,  net loss for the IVUS  business  decreased to $1.4 million
($0.11  per  share).   Weighted   average   shares   outstanding   increased  by
approximately  3.3  million,  primarily  as a  result  of the  Company's  equity
offering in the fourth quarter of 1995.

                                       13
<PAGE>

Liquidity and Capital Resources

On September 30, 1996, the Company had cash and  equivalents of $35,333,000  and
short-term investments of $4,054,000. As reflected in the condensed consolidated
statements  of cash  flows,  the  Company's  operations  continue  to  result in
negative cash flows.  Net cash used in operations  was  $4,363,000  for the nine
months ended September 30, 1996, as compared to $8,768,000 in the  corresponding
period in the previous year. The improvement is due in part to a lower net loss,
the  affiliate  loan payoff from CVD and increases in current  liabilities.  The
Company expects to incur  substantial  additional costs,  primarily  relating to
ongoing research and development,  clinical  programs,  and increased  marketing
efforts,  prior to  achieving  positive  cash flow from  operations.  EndoSonics
anticipates using cash resources  generated from product sales and existing cash
balances to fund operations in 1996.

The Company believes its available cash and equivalents,  short-term  investment
and working  capital  positions as of September 30, 1996,  will be sufficient to
meet the Company's operating expenses and capital requirements through 1997.

Cash Payment for Distribution Rights

On July 28,  1995,  CVD  received a cash  payment of $750,000  from its Japanese
distributor,  Fukuda Denshi Co.,  Ltd. In return for this cash payment,  CVD has
awarded  Japanese  distribution  rights to Fukuda  for  CVD's new  products  for
peripheral vascular, neurovascular and non-vascular clinical applications.


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<PAGE>


                                   SIGNATURES

Pursuant  to the  requirements  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.



                                                          ENDOSONICS CORPORATION






                                                       -------------------------
                                                               Reinhard Warnking
                                                             President and Chief
                                                               Executive Officer

                                                        Date:  November 14, 1996




                                                      --------------------------
                                                               Donald D. Huffman
                                                      Vice President-Finance and
                                                    Chief Financial Officer, and
                                                    Principal Accounting Officer

                                                        Date:  November 14, 1996




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