<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549


                                    FORM 10-Q


 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
--- ACT OF 1934

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

                                       OR

--- 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 0-27540


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


              DELAWARE                                   94-3096794
     (State of Incorporation)               (I.R.S. Employer Identification No.)

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



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
                                    ---     ---

The number of shares outstanding of the issuer's common stock as of November 3,
1997 was 8,550,262.


       This document contains 21 pages and the Exhibit Index is on Page 20






                                  Page 1 of 21
<PAGE>   2



                         ENDOVASCULAR TECHNOLOGIES, INC.


                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
PART I.          FINANCIAL INFORMATION                                                        PAGE

<S>              <C>                                                                          <C>
  Item 1.        Financial Statements

                 Condensed Balance Sheets as of September 30, 1997 and
                 December 31, 1996                                                              3

                 Condensed Statements of Operations for the Three and Nine Month
                 Periods Ended September 30, 1997 and September 30, 1996                        4

                 Condensed Statements of Cash Flows for the Nine Month Periods Ended
                 September 30, 1997 and September 30, 1996                                      5

                 Notes to Condensed Financial Statements                                        6

                 Risk Factors                                                                   7


  Item 2.        Management's Discussion and Analysis of Financial
                 Condition and Results of Operations                                           15



PART II.         OTHER INFORMATION

  Item 5.        Other Information                                                             18

  Item 6.        Exhibits and Reports on Form 8-K                                              18

  Signatures                                                                                   19

  Exhibit Index                                                                                20

  Exhibits                                                                                     21
</TABLE>




                                  Page 2 of 21
<PAGE>   3



                         ENDOVASCULAR TECHNOLOGIES, INC.



                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                September 30,   December 31,
                                                                    1997           1996
                                                                -------------   ------------
<S>                                                             <C>             <C>
ASSETS
Current Assets
  Cash and cash equivalents                                     $ 4,536,962     $ 2,530,792
  Securities available-for-sale                                   5,136,010      15,328,545
  Accounts receivable                                             1,169,700         505,440
  Interest receivable                                               153,210         269,329
  Inventory                                                         340,807               -
  Prepaids and other                                                475,424         306,837
  Notes receivable from employees                                   386,501          31,501
                                                                -----------     ----------- 
        Total current assets                                     12,198,614      18,972,444

Property and equipment, net                                       2,805,140       1,905,579
Other assets                                                         72,111          74,361
                                                                -----------     ----------- 
        Total assets                                            $15,075,865     $20,952,384
                                                                ===========     ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable                                                  927,711         714,323
  Accrued and other liabilities                                   2,795,224       1,563,384
                                                                -----------     ----------- 
        Total current liabilities                                 3,722,935       2,277,707
                                                                -----------     ----------- 
Line of credit, plus accrued interest                             7,044,301               -
                                                                -----------     ----------- 
Stockholders' Equity
  Common stock, $0.00001 par value:
        Authorized: 30,000,000 shares at September 30, 1997
        and December 31, 1996, respectively; issued and
        outstanding: 8,543,356 and 8,402,371 shares at
        September 30, 1997 and December 31, 1996,
        respectively                                                     86              84
  Additional paid-in capital                                     57,291,818      56,298,754
  Deferred compensation                                             (61,453)        (81,934)
  Accumulated deficit                                           (52,921,822)    (37,542,227)
                                                                -----------     ----------- 
        Total stockholders' equity                                4,308,629      18,674,677
                                                                -----------     ----------- 
        Total liabilities and stockholders' equity              $15,075,865     $20,952,384
                                                                ===========     ===========
</TABLE>






            See accompanying notes to condensed financial statements



                                  Page 3 of 21
<PAGE>   4

                         ENDOVASCULAR TECHNOLOGIES, INC.

                       CONDENSED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                  Three Months Ended September 30,     Nine Months Ended September 30,
                                  --------------------------------     -------------------------------
                                      1997               1996              1997             1996
                                  -----------        -----------       ------------      -----------    
<S>                               <C>                <C>               <C>               <C>
Net product sales                 $   939,840        $   303,500       $  2,627,145      $   659,000
Cost of goods sold                    833,171            369,336          2,391,454          801,423
                                  -----------        -----------       ------------      -----------    
      Gross margin                    106,669            (65,836)           235,691         (142,423)

Operating costs and expenses
  Research and development          5,031,460          3,178,248         12,354,994        8,465,551
  Selling, general and 
    administrative                  1,237,862            552,072          3,669,723        1,680,465
                                  -----------        -----------       ------------      -----------    
      Total operating costs
        and expenses                6,269,322          3,730,320         16,024,717       10,146,016

Loss from operations               (6,162,653)        (3,796,156)       (15,789,026)     (10,288,439)

Interest income (net)                  49,822            289,123            409,431          889,525
                                  -----------        -----------       ------------      -----------    
Net loss                          $(6,112,831)       $(3,507,033)      $(15,379,595)     $(9,398,914)
                                  ===========        ===========       ============      ===========
Net loss per share                $     (0.72)       $     (0.42)      $      (1.81)     $     (1.16)
                                  ===========        ===========       ============      ===========
Shares used in computing
  net loss per share                8,532,942          8,354,857          8,488,966        8,104,817
                                  ===========        ===========       ============      ===========
</TABLE>



            See accompanying notes to condensed financial statements




                                  Page 4 of 21




















            See accompanying notes to condensed financial statements




                                  Page 4 of 21
<PAGE>   5
                         ENDOVASCULAR TECHNOLOGIES, INC.



                       CONDENSED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                 NINE MONTHS ENDED SEPTEMBER 30,
                                                                 -------------------------------
                                                                      1997             1996
                                                                 -------------    --------------
<S>                                                              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         $(15,379,595)    $  (9,398,914)
Adjustments to reconcile net loss to net cash used
  in operating activities:
     Depreciation and amortization                                    427,202           264,955
     Amortization of deferred compensation                             20,481            20,481
     Changes in current assets and liabilities:
        Accounts receivable                                          (664,260)         (309,856)
        Interest receivable                                           116,119           (57,005)
        Inventory                                                    (340,807)               --
        Prepaids and other                                           (168,587)           22,102
        Note receivable from employees                               (355,000)               --
        Other assets                                                       --           (20,205)
        Accounts payable                                              213,388           (36,149)
        Accrued and other liabilities                               1,231,840           748,721
        Accrued interest payable                                       44,301                --
                                                                 -------------    --------------
          Net cash used in operating activities                   (14,854,918)       (8,765,870)

CASH FLOWS FROM INVESTING ACTIVITIES:
       Purchase of securities available-for-sale                   (7,608,924)      (31,531,776)
       Sale/maturity of securities available-for-sale              17,801,459        20,725,964
       Purchases of property and equipment                         (1,324,513)       (1,279,978)
                                                                 -------------    --------------
       Net cash provided by (used in) investing activities          8,868,022       (12,085,790)

CASH FLOWS FROM FINANCING ACTIVITIES:
       Drawdown on line of credit                                   7,000,000                --
       Repayment of capital lease obligations                              --           (15,131)
       Proceeds from exercise of stock options                        207,937           153,184
       Proceeds from employee stock purchase plan                     474,064           155,530
       Stock option vesting acceleration                              311,065                --
       Proceeds from sale of common stock                                  --        21,594,688
                                                                 -------------    --------------
       Net cash provided by financing activities                    7,993,066        21,888,271
                                                                 -------------    --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                           2,006,170         1,036,611

CASH AND CASH EQUIVALENTS, beginning of period                      2,530,792         2,203,937
                                                                 -------------    --------------
CASH AND CASH EQUIVALENTS, end of period                         $  4,536,962     $   3,240,548
                                                                 =============    ==============
</TABLE>



            See accompanying notes to condensed financial statements




                                  Page 5 of 21
<PAGE>   6

                         ENDOVASCULAR TECHNOLOGIES, INC.

                     NOTES TO CONDENSED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Interim Unaudited Financial Information

    The accompanying unaudited condensed financial statements have been prepared
    in accordance with the rules and regulations of the Securities and Exchange
    Commission ("Commission"). They do not include all of the information and
    footnotes required by generally accepted accounting principles for complete
    financial statements. In the opinion of management, all adjustments
    (consisting of normal recurring accruals) considered necessary for a fair
    presentation have been included. Operating results for the three and nine
    month periods ended September 30, 1997 are not necessarily indicative of the
    results that may be expected for the year ended December 31, 1997. The
    condensed financial statements should be read in conjunction with the
    Company's annual audited financial statements included in the Company's Form
    10K for the year ended December 31, 1996.


    Revenue Recognition

    Revenue from product sales is related to the sale of the Company's Ancure
    systems consisting of an endovascular prosthesis and delivery catheter and
    other ancillary items. The Company recognizes revenue once the Ancure system
    has been used in a surgical procedure. Costs of goods sold include costs
    attributable to the manufacture of the products.


    Net Loss Per Share

    Net loss per share is computed using the weighted average number of common
    shares outstanding. Common equivalent shares from stock options are excluded
    from the computation as their effect is anti-dilutive, except that, pursuant
    to the Commission's Staff Accounting Bulletins, common and common
    equivalents (stock options and preferred stock) issued during the 12-month
    period prior to the initial public offering of the Company's common stock at
    prices below the initial public offering price of $12.00 per share have been
    included in the calculation as if they were outstanding for all periods
    prior to the initial public offering (using the treasury stock method).

    In February 1997, the Financial Accounting Standards Board (FASB) issued
    Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per
    Share, which simplifies the standards for computing earnings per share
    previously found in Accounting Principles Board Opinion ("APBO") No. 15.
    SFAS No. 128 replaces the presentation of primary earnings per share with a
    presentation of basic earnings per share, which excludes dilution. SFAS No.
    128 also requires dual presentation of basic and diluted earnings per share
    on the face of the income statement for all entities with complex capital
    structures and requires a reconciliation. Diluted earnings per share is
    computed similarly to fully diluted earnings per share pursuant to APBO No.
    15. SFAS No. 128 must be adopted for financial statements issued for periods
    ending after December 15, 1997, including interim periods; earlier
    application is not permitted. SFAS No. 128 requires restatement of all
    prior-period earnings per share data presented. For the three and nine
    months ended September 30, 1997, basic and diluted loss per share would be
    equivalent to the loss per share presented in the accompanying condensed
    statement of operations.

2.  CREDIT AGREEMENT

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



                                  Page 6 of 21
<PAGE>   7

    At September 30, 1997, there was a principal balance of $7,000,000 owing
    under this agreement, with approximately $44,000 of accrued interest.


3.  SUBSEQUENT EVENT

    On October 5, 1997 a definitive merger agreement was signed for Guidant
    Corporation ("Guidant") to acquire the Company. The transaction will be a
    tax-free, stock-for-stock exchange, and will be accounted for as a pooling
    of interests transaction. As a result of the Merger, Company stockholders
    will have the right to receive, in exchange for each share of Company Common
    Stock they own, the number of shares of Guidant Common Stock determined by
    dividing $20.00 by the average price of a share of Guidant Common Stock
    during a specified period. However, if the average price of a share of
    Guidant Common Stock during a specified period is greater than or equal to
    $46.63 but less than or equal to $51.75, then Company stockholders will have
    the right to receive, in exchange for each share of Company Common Stock
    they own, 0.3865 of a share of Guidant Common Stock, and if the average
    price of a share of Guidant Common Stock during a specified period is less
    than $46.63, then Company stockholders will have the right to receive, in
    exchange for each share of Company common Stock they own, the number of
    share of Guidant Common Stock determined by dividing $18.00 by the average
    price of a share of Guidant Common Stock during a specified period. The
    merger is subject to certain closing conditions, including approval by
    Company stockholders and Hart-Scott-Rodino anti-trust clearance. The
    transaction is expected to be consummated in the first quarter of 1998.

    RISK FACTORS

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

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

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


    Attachment System Fractures; Suspension of Clinical Trials January 1995

    In January 1995, the Company discovered fractures in the attachment system
    component of the Tube EndoGraft prosthesis during routine follow-up tests.
    Based on this discovery, the Company suspended its clinical trials
    worldwide. As of November 3, 1997 a total of 46 patients, representing
    approximately 51% of 91 patients, implanted prior to February 1995, with the
    Tube EndoGraft prosthesis in place for more than six weeks, have experienced
    attachment system fractures. In 13 patients with fractures, the Tube
    EndoGraft prosthesis was removed and the AAA was treated by open surgery.
    Three patients with fractures have died for reasons unrelated to the
    attachment system fractures. The remaining patients are closely monitored by
    their physicians and the Company for fractures or the onset of adverse
    clinical consequences. The Company expects additional fractures to occur in
    these attachment systems. There can be no assurance that additional adverse
    clinical consequences will not occur in the future, which could result in
    the suspension of clinical trials or otherwise have a material adverse
    effect on the Company's business, financial condition and results of
    operations.

    Following suspension of clinical trials in January 1995, the Company
    determined that the fractures were caused by metal fatigue resulting from
    higher than anticipated forces acting on the attachment systems. As a
    result, the 



                                  Page 7 of 21
<PAGE>   8

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


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

    The Company has a limited history of operations. Since its inception in June
    1989, the Company has been primarily engaged in research and development of
    the Ancure systems. The Company has experienced significant operating losses
    since inception, and as of September 30, 1997, the Company's accumulated
    deficit was approximately $52.9 million. The Company will incur substantial
    additional losses until it can achieve significant commercial sales of its
    Ancure systems which are dependent on a number of factors, including receipt
    of U.S. marketing approval. There can be no assurance that the Ancure
    systems or any other products of the Company will be approved, can be
    successfully commercialized or that the Company will achieve significant
    revenues from either international or domestic sales of such products. In
    addition, there can be no assurance that the Company will achieve or sustain
    profitability in the future. Failure to achieve significant revenues or
    profitability would have a material adverse effect on the Company's
    business, financial condition and results of operations. Moreover, results
    of operations have varied and are expected to fluctuate significantly from
    quarter to quarter depending upon numerous factors, including the results of
    clinical trials, the introduction and market acceptance of products by the
    Company or competitors, international sales, the results of regulatory and
    reimbursement actions, the timing of orders by distributors, the
    expenditures incurred in the research and development of new products,
    competitive pricing and the expansion of manufacturing capacity. See
    "Management's Discussion and Analysis of Financial Condition and Results of
    Operations."


    Government Regulation; Significant Time Before Submission of any PMA

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

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

    Any devices manufactured or distributed by the Company pursuant to FDA
    clearances or approvals are subject to pervasive and continuing regulation
    by the FDA and certain state agencies. Foreign and domestic regulatory
    approvals, if granted, may include significant limitations on the indicated
    uses for which the product may be marketed. In addition, the FDA and certain
    foreign regulatory authorities impose numerous other requirements with which
    medical device manufacturers must comply. Product approvals could be
    withdrawn for failure to comply with regulatory standards or the occurrence
    of unforeseen problems following initial marketing. The Company is also be
    required to adhere to applicable FDA regulations setting forth current
    Quality Systems Regulations ("QSR") 



                                  Page 8 of 21
<PAGE>   9

    requirements, which include testing, control and documentation requirements.
    Ongoing compliance with QSR and other applicable regulatory requirements are
    monitored through periodic inspections by state and federal agencies,
    including the FDA, and by comparable agencies in other countries. Changes in
    existing regulations or adoption of new regulations or policies could
    prevent the Company from obtaining, or affect the timing of, future
    regulatory approvals or clearances.


    Substantial Dependence on Limited Product Line

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


    No Assurance of Market Acceptance

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


    Risk of Need for Substantial Additional Capital

    The Company's development efforts have consumed substantial capital to date.
    The Company's future liquidity and capital requirements will depend upon
    numerous factors, including: the progress of clinical trials; the timing and
    costs of filing future IDEs, PMAs and PMA supplements; the timing and costs
    required to receive both domestic and international governmental approvals;
    the extent to which the Company's products gain market acceptance; the
    timing and costs of product introductions; the extent of the Company's
    ongoing research and development programs; and the costs of developing
    marketing and distribution capabilities, if regulatory approvals are
    received. In February 1997, the Company entered into a credit agreement
    pursuant to which the Company may borrow up to $30,000,000 (the "Funds"),
    subject to the terms and conditions of the credit agreement. On September
    16, 1997, the Company borrowed $7 million under the credit agreement. The
    Company believes that the amount of Funds available thereunder, together
    with existing cash, cash equivalents and short-term investments will allow
    the Company to meet capital its requirements for at least the next 12
    months. However, the credit agreement requires the Company to satisfy
    certain conditions, the failure of which would prevent the Company from
    drawing the Funds. Furthermore, any default by the Company under the credit
    agreement would result in the acceleration of the Company's obligation to
    repay any drawn Funds. In the event that the Company is unable to borrow
    additional Funds under the credit agreement or repay Funds previously
    borrowed on an accelerated basis, the Company's business, financial
    condition and results of operations could be materially adversely affected.
    Furthermore, the Company may be required to seek additional debt or equity
    financing. Issuance of additional equity securities could result in
    substantial dilution to stockholders. There can be no assurance that such
    financing will be available on terms acceptable to the Company, or at all.
    The Company's inability to fund its capital requirements would have a
    material adverse effect on the Company's business, financial condition and
    results of operations. See "Management's Discussion and Analysis of
    Financial Condition and Results of Operations."


    Uncertainty Regarding Patents and Protection of Proprietary Technology

    The Company holds a number of issued United States and foreign patents and
    has filed a number of United States and counterpart patent applications in
    other countries. There can be no assurance that the Company's United States




                                  Page 9 of 21
<PAGE>   10

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

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

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

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

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


    Volatility of Stock Price

    The market price for the Company's Common Stock has been subject to
    significant fluctuations and may be volatile in the future. The Company
    believes that factors such as announcements of developments related to the
    Company's business, announcements of clinical results, regulatory approvals,
    technological innovations or new products or enhancements by the Company or
    its competitors, developments in the Company's relationships with its
    customers, partners, distributors, and suppliers, changes in analysts'
    estimates, regulatory developments, political and economic instability,
    fluctuations in results of operations and general conditions in the
    Company's market or the markets served by the Company's customers or the
    economy could cause the price of the Company's Common Stock to fluctuate,
    perhaps substantially. The Company may be particularly vulnerable to
    fluctuations in the market price of its Common Stock given the substantial
    amount of time before it may achieve significant revenues from commercial
    sales of its products. In addition, in recent years the stock market in
    general, and the market for shares of small capitalization health care
    stocks in particular, have experienced extreme price fluctuations, which
    have often been unrelated to the operating performance of affected
    companies. Such fluctuations could adversely affect the market 



                                 Page 10 of 21
<PAGE>   11

    price of the Company's Common Stock. There can be no assurance that the
    market price of the Company's Common Stock will not continue to experience
    significant fluctuations in the future, including fluctuations that are
    unrelated to the Company's performance. Further, it is likely that in some
    future quarter the Company's net sales or operating results will be below
    the expectations of public market analysts and investors. In such event, the
    price of the Company's Common Stock would likely be materially adversely
    affected.


    Risks Associated with International Sales

    International sales are expected to account for a substantial portion of the
    Company's revenues in the foreseeable future. A number of risks are inherent
    in international transactions. International sales may be limited or
    disrupted by the imposition of government controls, export license
    requirements, economic or political instability, trade restrictions, changes
    in tariffs or difficulties in staffing and management. Additionally,
    although the Company's sales are denominated in U.S. dollars, the Company's
    business, financial condition and results of operations may be adversely
    affected by fluctuations in currency exchange rates as well as increases in
    duty rates and difficulties in obtaining export licenses. The financial
    condition, expertise and performance of the Company's international
    distributors and any future international distributors could affect sales of
    the Company's products internationally and could have a material adverse
    effect on the Company's business, financial condition and results of
    operations.


    Dependence on Key Suppliers; Limited Manufacturing Experience

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

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


    Limitations on Third-Party Reimbursement

    In the United States, the Company's products will be purchased primarily by
    medical institutions which then bill various third-party payors, such as
    Medicare, Medicaid and other government programs and private insurance
    plans, for the health care services provided to their patients. Medicare
    traditionally has considered items or services 



                                 Page 11 of 21
<PAGE>   12

    involving devices that have not been approved or cleared for marketing by
    the FDA to be precluded from Medicare coverage. There can be no assurance,
    however, that any of the Ancure systems and related services will be covered
    when they are used in clinical trials and, if covered, whether the payment
    amounts for their use will be considered to be adequate by hospitals and
    physicians. If the devices are not covered or the payments are considered to
    be inadequate, the Company may need to bear additional costs to sponsor such
    trials, and such costs could have a material adverse effect on the Company's
    business, financial condition and results of operations. Even if a device
    has received approval or clearance for marketing by the FDA, there can be no
    assurance that Medicare will cover the device and related services.
    Furthermore, Medicare may place certain restrictions on the circumstances in
    which coverage will be available. Limited or no coverage of the Company's
    products would have a material adverse effect on the Company's business,
    financial condition and results of operations.

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

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


    Competition

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

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


    Risk of Technological Obsolescence



                                 Page 12 of 21
<PAGE>   13

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


    Risk of Federal Reform of Health Care

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


    Limited Sales and Marketing Experience; Dependence on International
    Distributors

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


    Product Liability and Availability of Insurance

    The clinical use and sale of the Company's products involve significant risk
    of product liability claims. There can be no assurance that the coverage
    limits of the Company's insurance policies will be adequate. Product
    liability insurance is expensive and in the future may not be available to
    the Company on acceptable terms or at all. While there have been no product
    liability claims to date, there can be no assurance that a product liability
    claim will not be brought against the Company either for injuries occurring
    in the past or in the future, including, but not limited to, injuries due to
    fractures in the attachment system of the Tube EndoGraft prosthesis. A
    successful claim brought against the Company in excess of its insurance
    coverage could have a material adverse effect on the Company's business,
    financial condition and results of operations. See "-Attachment System
    Fractures:
    Suspension of Clinical Trials in 1995."


    Dependence on Key Personnel

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


    Influence  by Officers, Directors and Principal Stockholders



                                 Page 13 of 21
<PAGE>   14

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


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

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


    Absence of Dividends

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





                                 Page 14 of 21
<PAGE>   15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

OVERVIEW

Since its inception in June 1989, the Company has been engaged in the research
and development of its Ancure systems and related technology for the
endovascular repair of abdominal aortic aneurysms. To date, the Company has
generated limited revenues and has been unprofitable since inception. The
Company does not expect to begin generating significant revenues from sales of
its products until it receives U.S. marketing approval and market launch, and
will continue to incur substantial losses for the next several years.
Furthermore, the Company expects its expenses in all categories to increase as
its clinical trials and other business activities expand.

The research, manufacture, sale and distribution of medical devices such as the
Company's Ancure systems are subject to numerous regulations imposed by
governmental authorities, principally 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 Ancure system can be
marketed in the United States. Securing FDA approvals and clearances will
require submission to the FDA of extensive clinical data and technical
information. Many foreign governments and the European Union also have a review
process for medical devices.

The Company commenced U.S. clinical trials of its original Tube Ancure system in
February 1993 and its Bifurcated Ancure system in September 1994. Following
suspension of all clinical trials in January 1995 due to attachment system
fractures, and after receiving FDA clearance to re-initiate clinical trials, the
Company re-initiated Phase II clinical trials of the Tube Ancure system in
November 1995 and reached its Phase II target enrollment in January 1997. The
Company re-initiated Phase I clinical trials of the Bifurcated Ancure system in
December 1995. In June 1996, the Phase I clinical trial of the Bifurcated Ancure
system was completed, and the Phase II clinical trial of that device was
initiated in August 1996 and reached its Phase II target enrollment in April
1997. Patient enrollment in each of these Phase II trials is continuing.
Additional clinical testing of the Tube and Bifurcated Ancure systems is
required and the Company does not believe it will be able to complete clinical
trials of, obtain regulatory approval for, and begin commercial sales of its
Ancure systems in the United States before mid-1999, if ever.

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

In June 1995, the Company became ISO 9001/EN 46001 certified and in May 1997
received CE Mark approval from an independent Dutch Notified Body for Medical
Devices to market its products throughout the European Community. The Company
anticipates that a substantial portion of its revenues from product sales over
the next year will be derived from international sales through a distributor
network. Any such international sales will be subject to a number of risks,
including exchange rate fluctuations, international monetary conditions,
tariffs, import licenses, trade policies, domestic and foreign tax policies and
foreign medical regulations. 

There can be no assurance that the Company's research and development efforts
will be successfully completed. Given that the Company is in clinical testing,
there can be no assurance that the Company's Ancure systems will be shown to be
safe and effective. Accordingly, the Company is unable to predict the likelihood
that its products will be approved for marketing by FDA, and there can be no
assurance that the Company will ever achieve either significant revenues from
sales of its Ancure systems or profitable operations. 

On October 5, 1997 a definitive merger agreement was signed for Guidant
Corporation ("Guidant") to acquire the Company. The transaction will be a
tax-free, stock-for-stock exchange, and will be accounted for as a pooling of
interests transaction. As a result of the Merger, Company stockholders will have
the right to receive, in exchange for each share of Company Common Stock they
own, the number of shares of Guidant Common Stock determined by dividing $20.00
by the average price of a share of Guidant Common Stock during a specified
period. However, if the average price of a share of Guidant Common Stock during
a specified period is greater than or equal to $46.63 but less than or equal to
$51.75, then Company stockholders will have the right to receive, in exchange
for each share of Company Common Stock they own, 0.3865 of a share of Guidant
Common Stock, and if the average price of a share of Guidant Common Stock during
a specified period is less than $46.63, then Company stockholders will have the
right to receive, in exchange for each share of Company common 


                                 Page 15 of 21
<PAGE>   16
Stock they own, the number of share of Guidant Common Stock determined by
dividing $18.00 by the average price of a share of Guidant Common Stock during a
specified period. The merger is subject to certain closing conditions, including
stockholder approval.

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




RESULTS OF OPERATIONS


Three and Nine Month Periods Ended September 30, 1997 and September 30, 1996

In 1996, the Company began recognizing revenue on sales of its products used in
clinical trials. During the three month period ended September 30, 1997, the
Company recognized approximately $940,000 in sales, 34% of which were
international sales. For the same period in 1996, the Company recognized
$303,500 in sales, 29% of which were international sales.

During the nine month period ended September 30, 1997, the Company recognized
approximately $2,627,000 in sales, 36% of which were international sales. For
the same period in 1996, the Company recognized $659,000 in sales, 27% of which
were international sales. The international sales price to European distributors
ranges from approximately 50% to 60% of the U.S. price. Revenue, in U.S.
clinical trials, is recognized only upon successful implantation of an EndoGraft
prosthesis.

Gross margin for the three month period ended September 30, 1997 was
approximately $107,000, or 11% of product sales. Negative gross margin for the
three month period ended September 30, 1996 was approximately $66,000, or 22% of
product sales. Gross margin for the nine month period ended September 30, 1997
was approximately $236,000, or 9% of product sales. Negative gross margin for
the nine month period ended September 30, 1996 was approximately $142,000, or
22% of product sales. A positive gross margin was reported for the first nine
months of 1997 due to higher sales volume. Higher volume allows fixed costs to
be spread over a greater number of units, thereby decreasing the cost per unit.
The negative gross margin reported in 1996 reflected the Company's early stage
of manufacturing.

Research and development expenses include research, development, clinical and
regulatory expenses and certain manufacturing and quality expenses. Research and
development for the three month period ended September 30, 1997 increased to
approximately $5,031,000 from approximately $3,178,000 for the comparable three
month period in 1996. The increase in spending was due primarily to expedited
PMA preparation activities as well as higher clinical trial costs, which is
directly related to the increased sales volume in the U.S. The balance of the
increased spending is due primarily to personnel costs associated with headcount
increases. These same factors primarily account for the increase in the nine
month period ended September 30, 1997 to approximately $12,355,000 from
approximately $8,466,000 in the comparable nine month period in 1996. The
Company believes that research and development expenses will continue to
increase in the future due to clinical trial expenses and continuing research
spending and regulatory requirements.

Selling, general and administrative expenses increased to approximately
$1,238,000 during the three month period ended September 30, 1997 from
approximately $552,000 for the comparable three month period in 1996. The 1997
period includes the costs associated with the Company's European operations.
Increases in personnel account for the balance of the increased spending. For
the nine month period ended September 30, 1997, selling, general and
administrative expenses increased to approximately $3,670,000 from approximately
$1,680,000 for the same period in 1996. The increase in spending was due
primarily to increased sales and marketing expenses and includes the costs
associated with the Company's European operations. Increases in personnel
account for the balance of the increased spending. The Company anticipates
continued increases in administrative expenses due to the increased level of
business activities.

The net loss of approximately $6,113,000 for the three months ended September
30, 1997 was greater than the net loss of approximately $3,507,000 for the
comparable period in 1996 due primarily to the increase in research and
development spending, principally related to clinical trial costs and expedited
PMA preparation activities, as well as the establishment of a marketing
organization in Europe. Similarly, for the nine months ended September 30, 1997,
the net loss of approximately $15,380,000 has increased from approximately
$9,399,000 reported for the nine month period ended September 30, 1996,
primarily due to the same factors mentioned above for the three month period
ending on the same date.

The Company has not incurred any income tax expense since inception due to its
history of operating losses.




                                 Page 16 of 21
<PAGE>   17

LIQUIDITY AND CAPITAL RESOURCES

In February 1996, the Company completed an initial public offering of two
million shares of Common Stock with net proceeds to the Company of approximately
$21.6 million after deducting the underwriters discount, commissions and
offering expenses. Cash, cash equivalents and available-for-sale securities were
approximately $9.7 million at September 30, 1997.

Cash used in operating activities for the nine months ended September 30, 1997
increased to approximately $14,855,000 from approximately $8,766,000 for the
comparable period in 1996, related to increased spending for research and
development expenditures, primarily clinical trials costs, expedited PMA
preparation activities, and personnel related costs, and the establishment of a
marketing organization in Europe.

Cash used for purchases of property and equipment in the nine month period ended
September 30, 1997 was approximately $1,325,000, as compared to approximately
$1,280,000 for the same period in 1996. The 1996 period includes costs
associated with a facilities expansion and the 1997 period includes development
payments on a software diagnostic project that is targeted to provide 3-D
modeling of patient anatomy to assist in selection, delivery and implantation of
the Company's products.

In February 1997, the Company secured a credit facility of $30 million (the
"Funds"). The credit agreement requires the Company to satisfy certain
conditions, the failure of which would prevent the Company from drawing the
Funds. Furthermore, any default by the Company under the credit agreement would
result in the acceleration of the Company's obligation to repay any drawn Funds.
During the three month period ended September 30, 1997, the Company drew down $7
million on this credit facility. In the event that the Company is unable to
borrow additional Funds or repay Funds previously borrowed on an accelerated
basis, the Company's business, financial condition and results of operations
could be materially adversely affected. Pursuant to the credit agreement the
Company has agreed not to make or declare any dividends on the Common Stock for
so long as it is indebted under such agreement.

The Company expects to continue to incur substantial expenses in support of
additional research and development activities, including costs of clinical
studies, manufacturing, the establishment of a sales and marketing organization
and ongoing administrative activities. The Company anticipates that pre-existing
cash and cash equivalents and available-for-sale securities and capital
available under its credit facility will be sufficient to fund its operations
and planned new product development, including increased working capital
expenditures, through the next 12 months.

The Company's cash requirements may vary materially from those now planned
because of results of research, development, and clinical testing, the
development of regulatory submissions and the FDA regulatory process, the
development of commercial-scale manufacturing capability, the development of
sales, distribution and marketing capabilities, and other factors. The Company
may be required to seek additional funds through debt or equity financing.
Issuance of additional equity securities could result in substantial dilution to
stockholders. There can be no assurance that such financing will be available on
terms acceptable to the Company, or at all. In the event that the merger
agreement with Guidant (see Note 3 to Financial Statements) is completed in a
timely manner, no additional funds will be required either through debt or
equity financing. The Company's inability to fund its capital requirements would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company may also enter into collaborative
arrangements with corporate partners that could provide the Company with
additional funding.






                                 Page 17 of 21
<PAGE>   18



PART II  OTHER INFORMATION

  ITEM 5.  OTHER INFORMATION

        See Note 3 of Notes to Financial Statements

  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    a)   Exhibits
         See Exhibit Index on Page 20

    b)   Reports on form 8-K
         There were no reports filed of Form 8-K during the quarterly period 
         ended September 30, 1997.

























                                 Page 18 of 21
<PAGE>   19



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.




                         ENDOVASCULAR TECHNOLOGIES, INC.
                         -------------------------------
                                  (Registrant)





Date:  November 10, 1997                   /s/ W. James Fitzsimmons
     --------------------          --------------------------------------------
                                             W. James Fitzsimmons
                                                President and
                                           Chief Executive Officer
                                        (Principal Executive Officer)




Date:  November 10, 1997                     /s/ G. Bradley Cole
     --------------------           -------------------------------------------
                                                G. Bradley Cole
                                     Senior Vice President of Operations and
                                            Chief Financial Officer
                                    (Principal Financial and Accounting Officer)





                                 Page 19 of 21
<PAGE>   20



                         ENDOVASCULAR TECHNOLOGIES, INC.
                          (A DEVELOPMENT STAGE COMPANY)

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO.                  DESCRIPTION                                                         PAGE NO.
-----------                  -----------                                                         --------
<S>                        <C>                                                                    <C>
            2.1     Agreement and Plan of Merger by and amoung Guidant
                    Corporation, Ski Acquisition Corp., and the Company dated
                    October 5, 1997.
           *3.1     Restated Certificate of Incorporation of the Company.
        ****3.2     Bylaws of the Company.
        ****4.1     Reference is made to Exhibits 3.1  and 3.2.
           *4.2     Specimen Common Stock certificate.
           *4.3     Fourth Amended and Restated Investor Rights Agreement, dated
                    August 15, 1994, among the Company and the investors and the
                    founders named therein.
        ****4.4     Credit Agreement between the Company and Guidant Corporation,
                    dated February 28, 1997.
          *10.1     Form of Indemnification Agreement.
          *10.2     1989 Stock Option Plan.
          *10.3     1995 Stock Option Plan.
          *10.4     Employee Stock Purchase Plan.
          *10.5     1996 Incentive Compensation Plan.
          *10.6     Employment agreement between the Company and W. James Fitzsimmons.
          *10.7     Employment agreement between the Company and Victor M. Bernhard.
         **10.8     Employment agreement between the Company and Ronald R. Giannotti.
        ***10.9     Employment agreement between the Company and Elizabeth A. McDermott.
         **10.10    Lease by and between Menlo  Business Park and Patrician
                    Associates, Inc. and the Company, as amended by First
                    Amendment to Lease Agreement, dated February 26, 1996.
       ****10.11    Rights Agreement between the Company and ChaseMellon
                    Shareholder Services dated February 5, 1997.
       ****10.12    Promissory Note Secured by Second Deed of Trust between the
                    Company and Ronald R. Giannotti dated February 9, 1997.
       ****10.13    Officer Severance Plan and Summary Plan Description effective
                    September 24, 1996.
       ****10.14    Multimedia Development Agreement between the Company and
                    Engineering Animation, Inc. dated  March 19, 1997.
      *****10.15    Promissory Note Secured by Second Deed of Trust between the
                    Company and Lori E. Adels dated April 11, 1997.
           10.16    Amendment to Rights Agreement between the Company and
                    ChaseMellon Shareholder Services, dated October 5, 1997.
           11.1     Computation of Net Loss Per Share.                                            21
           27.1     Financial Data Schedule.
</TABLE>

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

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

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

****   Incorporated by reference from an exhibit to the Company Annual Report on
       Form 10-K filed with the Commission on March 28, 1997.

*****  Incorporated by reference from an exhibit to the Company Form 10-Q filed
       with the Commission on May 15, 1997.



                                 Page 20 of 21