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


                                    FORM 10-Q


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

                  For the quarterly period ended March 31, 1998

                         Commission file number 0-27802

                       ARTERIAL VASCULAR ENGINEERING, INC.
             (Exact name of registrant as specified in its charter)


       Delaware                                          94-3144218
(State of incorporation)                    (I.R.S. Employer Identification No.)

3576 Unocal Place, Santa Rosa, California                  95403
 (Address of principal executive offices)                (Zip code)

                                 (707) 525-0111
              (Registrant's telephone number, including area code)

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

Yes  X    No
   ----     ----

         Indicate  the  number of  shares  outstanding  of each of the  issuer's
classes of common stock, as of the latest practicable date.

Class                                            Outstanding
Common Stock, $0.001 par value                   63,842,280 as of April 20, 1998


<PAGE>


                               INDEX TO FORM 10-Q


                                                                            Page
                                                                            ----

PART I  FINANCIAL INFORMATION

        Item 1. Financial Statements

                Condensed Consolidated Balance Sheets as of March 31,
                      1998 and June 30, 1997                                 3

                Condensed Consolidated Statements  of Operations for
                      the three and nine months ended March 31, 1998
                      and 1997                                               4

                Condensed Consolidated Statements of Cash Flows for
                      the nine months ended March 31, 1998 and 1997          5

                Notes to Condensed Consolidated Financial Statements         6

        Item 2. Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                    8


PART II OTHER INFORMATION

        Item 1. Legal Proceedings                                           16

        Item 2. Change in Securities and Use of Proceeds                    17

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


SIGNATURES                                                                  19

                                       2

<PAGE>


PART I FINANCIAL INFORMATION

         Item 1. Financial Statements

<TABLE>
                                        ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
                                                CONDENSED CONSOLIDATED BALANCE SHEETS
                                                             (Unaudited)
                                                           (In thousands)

<CAPTION>
                                                                                                 March 31,                June 30,
                                                                                                   1998                     1997
                                                                                                 ---------                ---------
<S>                                                                                              <C>                      <C>      
                                                               ASSETS
Current assets:
     Cash and cash equivalents                                                                   $  49,653                $  25,036
     Short-term investments                                                                         80,399                   62,192
     Accounts receivable, net                                                                       83,358                   22,850
     Inventories                                                                                     9,736                    7,302
     Deferred income tax                                                                             2,413                    2,413
     Prepaid expenses and other current assets                                                       6,472                    4,472
                                                                                                 ---------                ---------
        Total current assets                                                                       232,031                  124,265
Deferred income tax                                                                                  1,598                    1,598
Property, plant and equipment, net                                                                  52,465                   21,759
Purchased technology, net                                                                              260                      357
                                                                                                 ---------                ---------
        Total assets                                                                             $ 286,354                $ 147,979
                                                                                                 =========                =========


                                                             LIABILITIES
Current liabilities:
     Short-term borrowings                                                                       $  17,471                $    --
     Accounts payable                                                                                8,799                    4,035
     Accrued employee bonus                                                                         15,783                      387
     Accrued expenses                                                                               17,656                    5,357
     Income taxes payable                                                                           10,628                     --
                                                                                                 ---------                ---------
        Total current liabilities                                                                   70,337                    9,779
                                                                                                 ---------                ---------

                                                        STOCKHOLDERS' EQUITY
Common stock                                                                                            64                       62
Additional paid-in capital                                                                         115,743                   92,990
Treasury stock                                                                                        (390)                    (390)
Cumulative translation adjustment                                                                   (2,007)                  (1,364)
Retained earnings                                                                                  102,607                   46,902
                                                                                                 ---------                ---------
        Total stockholders' equity                                                                 216,017                  138,200
                                                                                                 ---------                ---------
        Total liabilities and stockholders' equity                                               $ 286,354                $ 147,979
                                                                                                 =========                =========

<FN>
                                                       See accompanying notes
</FN>
</TABLE>

                                                                 3

<PAGE>


<TABLE>
                                        ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
                                           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (Unaudited)
                                                (In thousands, except per share data)

<CAPTION>
                                                                        Three Months Ended                    Nine Months Ended
                                                                             March 31,                            March 31,
                                                                   ---------------------------           ---------------------------
                                                                     1998              1997                1998               1997
                                                                   --------           --------           --------           --------
<S>                                                                <C>                <C>                <C>                <C>     
Net sales                                                          $141,203           $ 20,402           $205,768           $ 57,197
Cost of sales                                                        27,546              4,596             40,691             11,240
                                                                   --------           --------           --------           --------
Gross profit                                                        113,657             15,806            165,077             45,957
                                                                   --------           --------           --------           --------

Operating expenses:
     Research and development                                        11,212              3,186             24,611              7,300
     Selling, general and administrative                             35,656              6,363             55,070             15,698
                                                                   --------           --------           --------           --------
        Total operating expenses                                     46,868              9,549             79,681             22,998
                                                                   --------           --------           --------           --------

Operating income                                                     66,789              6,257             85,396             22,959
Interest and other income                                             1,343                871              3,449              3,200
                                                                   --------           --------           --------           --------
Income before provision for income taxes                             68,132              7,128             88,845             26,159
Provision for income taxes                                           25,890              2,495             33,140              9,155
                                                                   --------           --------           --------           --------
Net income                                                         $ 42,242           $  4,633           $ 55,705           $ 17,004
                                                                   ========           ========           ========           ========

Net income per share - basic                                       $   0.67           $   0.07           $   0.89           $   0.27

Net income per share - diluted                                     $   0.64           $   0.07           $   0.86           $   0.27

Shares used to calculate net income per share:
        Basic                                                        63,383             61,948             62,647             61,863
        Diluted                                                      65,684             63,176             65,055             63,207

<FN>
                                                       See accompanying notes
</FN>
</TABLE>

                                                                 4

<PAGE>


<TABLE>
                                        ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
                                           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                             (Unaudited)
                                                           (In thousands)

<CAPTION>
                                                                                                          Nine Months Ended
                                                                                                               March 31,
                                                                                                    -------------------------------
                                                                                                      1998                   1997
                                                                                                    --------               --------
<S>                                                                                                 <C>                    <C>     
Cash flows from operating activities:
     Net income                                                                                     $ 55,705               $ 17,004
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities:
            Depreciation and amortization                                                              2,492                  1,149
            Provision for doubtful accounts                                                            5,929                    427
            Provision for obsolete inventory                                                             407                    (75)
            Amortization of deferred compensation                                                       --                       40
            Income tax reduction relating to stock plans                                              18,327                    823
            Changes in assets and liabilities:
                Short-term investments                                                               (18,207)               (29,335)
                Accounts receivable                                                                  (66,964)                (9,979)
                Inventories                                                                           (3,020)                (3,047)
                Prepaid expenses and other current assets                                             (2,352)                (2,226)
                Accounts payable                                                                       4,716                  1,659
                Accrued employee bonus                                                                15,396                   (171)
                Other accrued expenses                                                                12,392                  3,084
                Income taxes payable                                                                  10,927                 (5,630)
                                                                                                    --------               --------
                   Net cash provided by (used in) operating activities                                35,748                (26,277)
                                                                                                    --------               --------

Cash flows from investing activities:
     Acquisition of property, plant and equipment                                                    (33,126)               (10,700)
                                                                                                    --------               --------
                   Net cash used in investing activities                                             (33,126)               (10,700)
                                                                                                    --------               --------

Cash flows from financing activities:
     Increase in short-term borrowings                                                                17,471                   --
     Proceeds from issuance of common stock                                                            4,428                     51
     Acquisition of treasury stock                                                                      --                     (390)
                                                                                                    --------               --------
                   Net cash provided by (used in) financing activities                                21,899                   (339)
                                                                                                    --------               --------

Effect of exchange rate changes on cash and cash equivalents                                              96                   (298)

Net increase (decrease) in cash and cash equivalents                                                  24,617                (37,614)
Cash and cash equivalents, at beginning of period                                                     25,036                 59,238
                                                                                                    ========               ========
Cash and cash equivalents, at end of period                                                         $ 49,653               $ 21,624
                                                                                                    ========               ========

<FN>
                                                       See accompanying notes
</FN>
</TABLE>

                                                                 5

<PAGE>


              ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.         Basis of Presentation

                    The condensed  consolidated  financial  statements  included
           herein  have  been  prepared  by  the  Company,   without  audit,  in
           accordance with generally accepted accounting  principles for interim
           financial  information  and pursuant to the rules and  regulations of
           the Securities and Exchange Commission. In the opinion of management,
           all  adjustments  (consisting of only normal  recurring  adjustments)
           considered  necessary  to  present  fairly  the  financial  position,
           results  of  operations  and cash  flows  have been  included.  These
           consolidated  financial statements should be read in conjunction with
           the  audited  consolidated  financial  statements  contained  in  the
           Company's Form 10-K for the fiscal year ended June 30, 1997.

                    Certain  information  and  footnote   disclosures   normally
           included  in  financial   statements   prepared  in  accordance  with
           generally  accepted  accounting  principles  have been  condensed  or
           omitted.  The  year-end  balance  sheet data was derived from audited
           financial  statements,  but does not include disclosures  required by
           generally accepted accounting principles.

                    Operating  results  for the  three- and  nine-month  periods
           ended March 31, 1998 are not necessarily indicative of the results to
           be expected for any other interim period or for the full fiscal year.

2. Inventories (in thousands):

                                        March 31,      June 30,
                                          1998           1997
                                         ------         ------

                 Raw materials           $2,681         $  925
                 Work in process          2,555          3,044
                 Finished goods           4,500          3,333
                                         ------         ------
                                         $9,736         $7,302
                                         ======         ======


3.         Computation of Net Income Per Share

                    In 1997,  the Financial  Accounting  Standards  Board issued
           Statement of Financial  Accounting  Standards  No. 128,  Earnings per
           Share.  Statement 128 replaced the  previously  reported  primary and
           fully diluted  earnings per share with basic and diluted earnings per
           share.  Unlike primary  earnings per share,  basic earnings per share
           excludes any dilutive  effects of options,  warrants and  convertible
           securities.  Diluted  earnings  per  share  is  very  similar  to the
           previously  reported fully diluted  earnings per share.  All earnings
           per share  amounts for all  periods  have been  presented,  and where
           necessary, restated to conform to the Statement 128 requirements.

                                       6

<PAGE>


              ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                                   (Unaudited)

4.         Stock Split

                  On February 4, 1998, the Company's Board of Directors declared
           a two-for-one  stock split to be effected in the form of a 100% stock
           dividend  payable to  stockholders of record at the close of business
           February 17, 1998.  Distribution of the additional  shares  resulting
           from the stock  split  occurred  on March 2,  1998.  The stock  split
           resulted  in the  issuance  of  approximately  32 million  additional
           shares.  All references in the  accompanying  consolidated  financial
           statements to common shares and per-share amounts for the current and
           prior periods have been restated to reflect the stock split.

5.         Contingencies

                  Legal  proceedings  to  which  the  Company  is  a  party  are
           discussed  in Part I,  Item 3  ("Legal  Proceedings")  in the  Annual
           Report on Form 10-K and in the  Company's  quarterly  reports on Form
           10-Q for the periods ending September 30, 1997 and December 31, 1997.
           Material  developments  in  such  matters  and  certain  other  legal
           proceedings are discussed in Part II of this filing.

                                       7

<PAGE>



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

           Overview

                  The  statements  contained  in this  Form  10-Q  that  are not
           historical  are  forward-looking  statements  within  the  meaning of
           Section  27A of the  Securities  Act of 1933 and  Section  21E of the
           Securities Exchange Act of 1934,  including  statements regarding the
           Company's expectations,  beliefs,  intentions or strategies regarding
           the future.  Forward-looking  statements made herein include, without
           limitation,   statements  regarding   manufacturing   scale-up,   the
           intellectual  property  positions  of  competitors,  the  anticipated
           outcome  of  litigation,   the  extent  and  timing  of  new  product
           introductions, future revenues, customer demand, competition, pricing
           pressure, barriers to market entry, expansion of operations, risks of
           business combinations,  regulatory approvals, expenditures and margin
           levels,  and the  establishment  of direct  sales  forces in targeted
           countries. All forward-looking  statements in this document are based
           on  information  available to the Company as of the date hereof,  and
           the Company assumes no obligation to update any such  forward-looking
           statement.  It is important to note that the Company's actual results
           could   differ   materially   from  those  in  such   forward-looking
           statements.  Additional  risk factors  include those discussed in the
           reports  filed by the Company  from time to time on Forms 10-K,  10-Q
           and 8-K.

                  The   Company   is  engaged   in  the   design,   development,
           manufacturing   and  marketing  of  stent  systems  and  percutaneous
           transluminal  coronary  angioplasty ("PTCA") catheters designed to be
           utilized in connection with less invasive treatment of cardiovascular
           disease. The Company believes that it is currently one of the leading
           providers of coronary  stent  systems.  The Company began  commercial
           sales of its PTCA  catheters  in October  1993,  its  coronary  stent
           systems in October 1994, and its peripheral stent systems in December
           1996.  In June 1997,  the  Company's  Japanese  distributor  received
           regulatory  approval for the sale in Japan of the Company's  coronary
           stent systems,  and in January 1998 the Company  received the related
           reimbursement  approval.  In December  1997,  the Company  received a
           pre-market  approval  ("PMA")  from the United  States  Food and Drug
           Administration  (the "FDA") in connection  with its  commencement  of
           commercial  sales of its coronary stent systems in the United States.
           Prior to that time,  international  sales accounted for substantially
           all of the Company's revenues.

                  The increase in the Company's sales to date has primarily been
           due to greater demand for the Company's  coronary  stent systems.  In
           order to  support  increased  levels  of sales in the  future  and to
           augment its long term competitive  position,  the Company anticipates
           that it will be required to make  continuing  significant  additional
           expenditures in  manufacturing,  research and development  (including
           clinical  study  and  regulatory  costs),  sales and  marketing,  and
           administration,  both in absolute  dollars and as a percentage of net
           sales. The Company also expects to incur  significant  legal expenses
           relating to ongoing litigation, including patent litigation.

                  Generally,  the Company manufactures and ships product shortly
           after the receipt of orders,  and  anticipates  that it will do so in
           the  future.  From  time  to  time,  however,  the  Company  develops
           short-term  backlogs in connection with the scale-up of manufacturing
           of its stent  products.  There can be no  assurance  that the Company
           will

                                       8

<PAGE>


           be successful in scaling up production of new or modified products or
           that it will not  experience  manufacturing  difficulties  or develop
           backlogs in the future,  particularly with respect to the significant
           demands of the U.S. market. The Company is completing construction of
           a 130,000 square foot building at its corporate  headquarters  campus
           in  Santa  Rosa,  California,   which  will  be  largely  devoted  to
           manufacturing  activities.  However,  there can be no assurance  that
           such new  manufacturing  facility  will be  sufficient  to allow  the
           Company  to  adequately  supply the  significant  demands of the U.S.
           market on a long-term basis.

                  Since the  commencement of sales of its coronary stent systems
           in the United States, several of the Company's competitors have filed
           claims against the Company  alleging,  among other things,  that such
           stent  systems  infringe  on  certain  patents  of such  competitors.
           Although the Company  continually  reviews the scope of relevant U.S.
           and  foreign  patents  and  related   litigation,   the  question  of
           infringement  involves complex legal and factual issues and is highly
           uncertain.  There can be no assurance that any conclusion  reached by
           the  Company  regarding  infringement  will be  consistent  with  the
           resolution of such issue by a court.  If the  Company's  products are
           determined to infringe such patents and it cannot obtain a license on
           commercially  reasonable  terms or modify its current  technology  or
           develop new  products  to avoid  infringement,  the Company  would be
           required  to cease its sales of the  affected  products in the United
           States,  which could have a material  adverse affect on the Company's
           business, financial condition and results of operations. See Part II,
           Item 1.

                  The increasing  number of devices in the  international  stent
           market  and the  desire  of  companies  to  obtain  market  share has
           resulted in increased price  competition,  particularly in the second
           and third quarters of fiscal 1997. Such competition has, in the past,
           caused the Company to reduce prices on its stent systems. The Company
           expects that, as the stent industry develops, competition and pricing
           pressures  will increase.  In  particular,  it is likely that the FDA
           will begin to use a streamlined PMA process once a sufficient  number
           of similar  coronary  stent products have been cleared for commercial
           sale  in  the  United   States,   and  will  permit   coronary  stent
           manufacturers  to utilize a simplified  clinical  trial  structure in
           obtaining  marketing  approval here as sufficient  stent  performance
           data enters the public domain. Thus, the regulatory barriers to entry
           in the United States  coronary stent market that currently exist may,
           in the  future,  be lowered  significantly  with  respect to both new
           market  entrants  and  new  products   introduced  by  existing  U.S.
           competitors.  If the  Company  is  forced  to  effect  further  price
           reductions  in  connection  with  such  increased  competition,  such
           reductions  would reduce net sales in future periods if not offset by
           increased unit sales or other factors.

                  The Company  intends to expand its operations by promoting new
           or  complementary  products and by expanding the breadth and depth of
           its product offerings.  Expansion of the Company's operations in this
           manner  would  require  significant  additional  expense  as  well as
           substantial   managerial,   financial  and   operational   resources.
           Furthermore,  gross margins attributable to new business areas may be
           lower than those  associated  with the  Company's  existing  business
           activities.  There can be no assurance  that the Company will be able
           to expand  its  operations  in a  cost-effective  or  timely  manner.
           Furthermore, any new product or business launched by the Company that
           is not  favorably  received  by  customers  may damage the  Company's
           reputation  or the AVE brand.  The lack of market  acceptance of such
           efforts

                                       9

<PAGE>


           or the  Company's  inability to generate  satisfactory  revenues from
           such  expanded  product  offerings  to offset its costs  could have a
           material  adverse  effect  on  the  Company's   business,   financial
           condition and results of operations.

                  The  Company  may  choose to expand its  operations  or market
           presence  by  entering  into  business  combinations,   acquisitions,
           investments,  joint ventures or other strategic  alliances with third
           parties.  Any such  transaction  would be  accompanied  by the  risks
           commonly associated with such transactions, such as the difficulty of
           assimilating the operations, technology and personnel of the combined
           companies,   the  potential   disruption  of  the  Company's  ongoing
           business,  the  inability  to retain  key  technical  and  managerial
           personnel,  the inability of management to maximize the financial and
           strategic position of the Company through the successful  integration
           of  acquired   businesses,   additional   expenses   associated  with
           amortization  of  acquired  intangible  assets,  the  maintenance  of
           uniform  standards,  controls  and  policies  and the  impairment  of
           relationships with existing employees and customers.  There can be no
           assurance  that the Company would be  successful in overcoming  these
           risks or any other potential problems  encountered in connection with
           such business combinations, acquisitions, investments, joint ventures
           or other strategic  alliances,  or that such  transactions  would not
           have a material adverse effect on the Company's  business,  financial
           condition and results of operations.

                  Until April 1996,  substantially  all of the  Company's  sales
           were to international distributors who resell products to health care
           providers.  Since then,  however,  the Company has established direct
           sales forces in Canada,  France,  Germany, the Netherlands (servicing
           the Benelux countries),  Singapore,  Switzerland,  the United Kingdom
           and the United States (with respect to its coronary  stent  systems).
           The Company continually reviews its existing distributor arrangements
           and expects  from time to time to  establish  direct  sales forces in
           other  countries.  The Company  believes that the  establishment  and
           maintenance  of direct sales forces has required and will continue to
           require  significant ongoing  expenditures and additional  management
           resources and has resulted, and may continue to result, in additional
           costs to  eliminate  existing  distributor  relationships  (including
           costs relating to litigation with former distributors).

                  The Company  believes  that its computer  programs will not be
           adversely affected by the "Year 2000" problem, but it has not made an
           assessment  of whether  any of its  customers,  suppliers  or service
           providers will be so affected.  Failure of the Company's  software or
           that of its customers,  suppliers or service  providers  could have a
           material  adverse  effect  on  the  Company's   business,   financial
           condition and results of operations.

                  The Company  anticipates  that its results of  operations  may
           fluctuate  for  the  foreseeable   future  due  to  several  factors,
           including variations in operating expenses, the costs and the outcome
           of  litigation,  the Company's  ability to  manufacture  its products
           efficiently, competition (including pricing pressures), the timing of
           new product  introductions or transitions to new products,  the costs
           of establishing  direct sales operations,  the timing of research and
           development expenses (including clinical trial related expenditures),
           timing of regulatory  and third party  reimbursement  approvals,  the
           level of third-party reimbursement, sales by distributors, the mix of
           sales among  distributors  and the Company's  direct sales force, the
           fluctuations in international  currency  exchange rates, and seasonal
           factors impacting the number of elective

                                       10

<PAGE>


           angioplasty or stent procedures.  In addition,  the Company's results
           of  operations  could be  affected  by the timing of orders  from its
           distributors, changes in the Company's distributor network (including
           expenses in connection with termination of former distributors),  the
           ability  of  the  Company's   direct  sales  force  and   independent
           distributors  to effectively  promote the Company's  products and the
           ability of the Company to quickly and  cost-effectively  establish an
           effective  direct sales force in targeted  countries.  The  Company's
           limited  operating  history  makes  accurate   prediction  of  future
           operating results  difficult or impossible.  Although the Company has
           experienced growth in recent years and substantial growth in the most
           recent quarter,  there can be no assurance  that, in the future,  the
           Company  will  sustain  revenue  growth  or  remain  profitable  on a
           quarterly or annual basis or that its growth will be consistent  with
           predictions made by securities analysts. The Company has experienced,
           and may experience in one or more future quarters,  operating results
           that are  below  the  expectations  of  public  market  analysts  and
           investors. In such event, the price of the Company's common stock has
           been, and would likely be, materially and adversely affected.

           Recent Developments

                  On April 10,  1998,  the Company  entered into an agreement to
           acquire  the  shares of  outstanding  common  stock of World  Medical
           Manufacturing  Corporation,  a Florida Corporation ("World Medical").
           Under the terms of the agreement,  World Medical's  outstanding stock
           will be exchanged for, and its  outstanding  stock options  converted
           into,  stock and stock options of the Company valued at approximately
           $62 million. The exchange ratio will be determined in accordance with
           a formula based on the average price of Company common stock during a
           period  prior to the closing of the  acquisition,  subject to certain
           adjustments.  The  Company  expects to incur a  significant  one-time
           charge  related to the  acquisition,  largely in connection  with the
           write-off of in-process research and development.  The acquisition is
           expected to be  completed by July 1998 and is subject to the approval
           of shareholders of World Medical and certain other conditions.

                  For the  three  months  ended  March  31,  1998,  the  Company
           incurred  an expense of $17.0  million in  connection  with a special
           general employee bonus. This special bonus was awarded because of the
           achievement of overall growth and  performance  goals by the Company,
           including  the receipt in late December 1997 of a PMA from the FDA in
           connection with commercial sales by the Company of its coronary stent
           systems in the United States as well as the  successful  commencement
           of such domestic commercial sales. Of the total $17.0 million amount,
           $5.8 million was paid to employees in April,  1998, and the remainder
           is expected to be paid out in the near  future.  Although the Company
           may elect  from  time to time to pay  additional  quarterly  employee
           bonuses in the future,  the $17.0 million  special  general  employee
           bonus is a non-recurring expense.

           Results of  Operations  - Three and Nine Months  Ended March 31, 1998
           and 1997

                  Net sales.  For the three  months  ended March 31,  1998,  net
           sales were $141.2 million,  an increase of 592% from $20.4 million in
           the comparable period in fiscal 1997. For the nine months ended March
           31,  1998,  net sales were $205.8  million,

                                       11

<PAGE>


           an increase of 260% from $57.2  million in the  comparable  period in
           fiscal 1997.  The increase in net sales for the three- and nine-month
           periods was  primarily due to  significant  increases in net sales of
           the  Company's  Micro Stent II coronary  stent  systems in the United
           States and of GFX coronary stent systems in Japan.  The Company first
           began sales of its  coronary  stent  systems in the United  States in
           late December  1997 and in Japan in June 1997.  Outside of the United
           States,  the GFX(TM) family of coronary stent systems was responsible
           for a substantial  majority of the  Company's net sales.  The GFX(TM)
           was released in certain countries  internationally in September 1996,
           and the GFX  2.5(TM)  and the GFX  XL(TM)  were  released  in certain
           countries  internationally  in June  1997.  In late March  1998,  the
           Company  released its GFX(TM)  coronary  stent  systems in the United
           States.  The  Company  expects  that  coronary  stent  system  sales,
           particularly  of the  Company's  GFX(TM)  family  of  products,  will
           constitute the vast majority of total net sales in the near future.

                  The  Company  experienced  sales  growth  in all of its  major
           markets, including the United States, Europe, and Japan. Net sales in
           the United  States for the three  months  ended  March 31,  1998 were
           $105.9 million,  an increase of $103.0 million,  or 3,578%, from $2.9
           million for the three  months ended  December  31, 1997.  The Company
           received in late December 1997 a PMA from the FDA in connection  with
           its commencement of commercial sales of its coronary stent systems in
           the United  States.  The Company  expects  that,  in the future,  the
           United States will  continue to produce a significant  portion of the
           Company's total net sales. Net sales in Europe (including both direct
           operations and independent  distributors)  for the three months ended
           March 31, 1998 were $19.6 million, an increase of $870,000,  or 4.7%,
           from $18.7 million for the three months ended  December 31, 1997. Net
           sales in Japan for the three  months  ended March 31, 1998 were $11.8
           million, an increase of $474,000, or 4.2%, from $11.3 million for the
           three months ended December 31, 1997. No single  customer  (either in
           the United States or internationally)  accounted for more than 10% of
           the  Company's  total net sales for the three  months ended March 31,
           1998.

                  The Company's increase in net sales for the three months ended
           March 31, 1998 reflected increases in unit volume and price stability
           for the Company's coronary stent systems in each of the United States
           and Japan. In other international territories,  including Europe, the
           Company  suffered slight price  reductions  during the period.  These
           price reductions were attributable both to competitive pressures and,
           in those countries outside of the United States where the Company has
           direct sales operations,  exchange rate fluctuations.  If the Company
           is forced to effect further price  reductions,  such reductions would
           reduce net sales in future  periods if not offset by  increased  unit
           sales or other factors.

                  Cost of Sales. Cost of sales increased to $27.5 million in the
           three months ended March 31, 1998 from $4.6 million in the comparable
           period in fiscal 1997,  and decreased as a percentage of net sales to
           19.5% in the fiscal 1998 period from 22.5% in the fiscal 1997 period.
           Cost of sales  increased  to $40.7  million in the nine months  ended
           March 31, 1998 from $11.2 million in the comparable  period in fiscal
           1997,  and  increased  as a  percentage  of net sales to 19.8% in the
           fiscal 1998 period from 19.7% in the fiscal 1997 period. The increase
           in absolute dollars during the three- and nine-month periods, and the
           increase as a percentage of sales during the nine-month  period,  was
           primarily a result of the increased volume of products sold and, to a
           lesser  extent,  the costs of additional  manufacturing  capacity and
           personnel necessary to support

                                       12

<PAGE>


           increased sales volume and a $9.6 million  special  general  employee
           bonus  accrued in March 1998.  The  decrease as a  percentage  of net
           sales  during  the  three-month  period was  primarily  the result of
           increased  aggregate  average  selling prices  (primarily due to U.S.
           sales),  leveraging  certain fixed overhead  expenses across a higher
           base of  sales  and,  to a  lesser  extent,  decreased  average  unit
           manufacturing  costs  (excluding  the effect of the  special  general
           employee bonus).

                  The Company expects cost of sales (excluding the effect of the
           special  general  employee bonus) to continue to increase in absolute
           dollars as the Company increases the volume of products sold and adds
           additional  manufacturing  capacity and personnel.  If the Company is
           successful in continuing to leverage certain fixed overhead  expenses
           across  a  higher   base  of  sales  and  to  reduce   average   unit
           manufacturing   costs,  the  Company  expects  cost  of  sales  as  a
           percentage  of net sales to remain at a level  generally  similar  to
           that experienced in the three months ended March 31, 1998.

                  Research and Development.  Research and development  expenses,
           which include clinical study and regulatory costs, increased to $11.2
           million in the three months ended March 31, 1998 from $3.2 million in
           the  comparable  period in fiscal 1997, and decreased as a percentage
           of net sales to 7.9% in the  fiscal  1998  period  from  15.6% in the
           fiscal 1997 period.  Research and development  expenses  increased to
           $24.6  million  in the nine  months  ended  March 31,  1998 from $7.3
           million in the  comparable  period in fiscal 1997, and decreased as a
           percentage of net sales to 12.0% in the fiscal 1998 period from 12.8%
           in the fiscal 1997 period.  The increase in absolute  dollars  during
           the three- and  nine-month  periods was primarily due to the addition
           of research and development  personnel,  increased levels of spending
           in connection with clinical studies relating to the GFX, GFX 2.5, and
           GFX XL coronary stent systems and costs  incurred in connection  with
           the  development  of  additional  products.  In addition,  during the
           three-month   period  ended  March  31,  1998  the  Company  incurred
           approximately  $1.5  million in legal  expenses  relating  to ongoing
           patent  litigation and a $2.5 million special general employee bonus.
           The  decrease  as a  percentage  of net sales  during  the three- and
           nine-month  periods was primarily  the result of leveraging  research
           and development expenses across a higher base of sales.

                  The  Company  expects   research  and   development   expenses
           (excluding  the  effect of the  special  general  employee  bonus) to
           continue to increase  in  absolute  dollars as the Company  increases
           clinical trial  activities,  pursues the  development of new products
           and incurs increased legal costs related to patent litigation. If the
           Company  is  successful  in  continuing  to  leverage   research  and
           development  expenses  across a higher  base of  sales,  the  Company
           expects  such  expenses as a  percentage  of net sales to remain at a
           level generally similar to that experienced in the three months ended
           March 31, 1998.

                  Selling,  General  and  Administrative.  Selling,  general and
           administrative  expenses  increased  in  absolute  dollars  to  $35.7
           million in the three months ended March 31, 1998 from $6.4 million in
           the  comparable  period in fiscal 1997, and decreased as a percentage
           of net  sales  to 25.3% in the  1998  period  from  31.2% in the 1997
           period.  Selling,  general and  administrative  expenses increased in
           absolute  dollars to $55.1 million in the nine months ended March 31,
           1998 from $15.7 million in the comparable  period in fiscal 1997, and
           decreased  as a  percentage  of net sales to 26.8% in the 1998 period
           from 27.4% in the 1997  period.  The  increase  during the three- and
           nine-month periods in absolute dollars primarily reflected additional
           costs of sales,

                                       13

<PAGE>


           marketing  and other  personnel  necessary  to support the  Company's
           higher level of  operations,  including  the  commencement  of direct
           sales  operations in the United States in late December 1997, as well
           as  sales  and  marketing   assistance  to  the  Company's   Japanese
           distributor  and  increased  reserves  against,  among other  things,
           unpaid   accounts   receivable   attributable   to  former   European
           distributors  of the Company.  Additionally,  during the  three-month
           period  ended March 31,  1998,  the Company  incurred a $4.9  million
           special  general  employee  bonus expense and  increased  legal costs
           relating   primarily  to  litigation  with  former   shareholders  of
           Endothelial Support Systems, Inc., subsequently known as Endovascular
           Support Systems, Inc. ("ESS"), and certain distributor  terminations,
           which together resulted in related legal expenses of $2.1 million for
           the period.  The decrease in  percentage  of sales for the three- and
           nine-month  periods was  primarily  the result of  leveraging  sales,
           general and administrative expenses across a higher base of sales.

                  The Company expects selling,  general and administrative costs
           (excluding  the  effect of the  special  general  employee  bonus) to
           continue to increase in absolute  dollars in the future primarily due
           to  increased  levels of sales,  product  support  and  manufacturing
           operations, as well as increases in finance, legal and administrative
           costs.  If the Company is successful in continuing to leverage sales,
           general and  administrative  expenses  across a higher base of sales,
           the Company  expects such  expenses as a  percentage  of net sales to
           remain at a level generally  similar to that experienced in the three
           months ended March 31, 1998.

                  Interest and Other Income.  The Company had interest and other
           income of $1.3  million in the three  months  ended  March 31,  1998,
           compared to $0.9 million in the comparable period in fiscal 1997. The
           Company had  interest  and other  income of $3.4  million in the nine
           months  ended  March  31,  1998,  compared  to  $3.2  million  in the
           comparable period in fiscal 1997. The increases during the three- and
           nine-month periods were primarily due to higher short-term investment
           balances.

                  Provision for Income Taxes. The Company's provision for income
           taxes was $25.9  million in the three  months  ended March 31,  1998,
           compared to $2.5 million in the comparable period in fiscal 1997. The
           Company's  provision  for income taxes was $33.1  million in the nine
           months  ended  March  31,  1998,  compared  to  $9.2  million  in the
           comparable  period in fiscal  1997.  The  increase in this  provision
           during  the  three-  and  nine-month  periods  was a  result  of  the
           Company's higher earnings during the fiscal 1998 periods.

                  Net Income.  The Company had net income of $42.2  million,  or
           29.9% of net sales, in the three months ended March 31, 1998 compared
           to net  income  of $4.6  million,  or  22.7%  of net  sales,  for the
           comparable period in fiscal 1997. The Company had net income of $55.7
           million,  or 27.1% of net sales,  in the nine months  ended March 31,
           1998 compared to net income of $17.0 million,  or 29.7% of net sales,
           for the comparable period in fiscal 1997.

           Liquidity and Capital Resources

                  Net cash  provided by operating  activities  was $35.7 million
           for the nine months  ended March 31,  1998.  Excluding  the effect of
           transactions  in  short-term  investments,  the  Company had net cash
           provided by operating  activities of $54.0 million for the nine-month
           period,  principally  arising as a result of positive  net income for
           the period.

                                       14

<PAGE>


           Cash,  cash  equivalents  and short-term  investments  totaled $130.1
           million at March 31, 1998 as  compared  to $87.2  million at June 30,
           1997.  Working capital  increased to $161.7 million at March 31, 1998
           as compared to $114.5 million at June 30, 1997. Inventories increased
           to $9.7 million at March 31, 1998 from $7.3 million at June 30, 1996,
           primarily  due to  increased  levels of sales  activity.  The Company
           expects  accounts  receivable and inventories to increase in absolute
           dollar amounts to the extent sales increase.

                  In connection  with the  construction  of a new  manufacturing
           facility,  in August  1997 the  Company  entered  into a bank  credit
           agreement  for a  revolving  credit  facility  of $20  million.  Such
           revolving  credit  facility  is secured  by certain of the  Company's
           short-term investments and is due and payable on August 31, 1998. The
           bank credit agreement contains no material restrictive covenants.  As
           of March 31,  1998,  the Company had drawn down  approximately  $17.5
           million of such revolving credit facility.  The interest rate on such
           facility is LIBOR plus one-half of one percent.  The Company  expects
           to repay the facility during the  three-month  period ending June 30,
           1998. The Company incurred $33.1 million in capital  expenditures for
           the nine  months  ended  March 31,  1998,  primarily  relating to the
           construction of such new manufacturing facility.

                  The Company  expects to incur  substantial  additional  costs,
           including  costs  relating  to  capital  equipment  and  other  costs
           associated   with   expansion   of   the   Company's    manufacturing
           capabilities, increased sales and marketing activities (including the
           establishment of direct sales forces internationally),  and increased
           research and  development  expenditures  in  connection  with seeking
           regulatory  approvals and conducting  additional clinical trials. The
           Company also  intends to expand its  operations  by promoting  new or
           complementary  products and by expanding the breadth and depth of its
           product   offerings,   and  may  do  so  by  entering  into  business
           combinations,  acquisitions,  investments,  joint  ventures  or other
           strategic  alliances  with third  parties.  The  Company  may require
           additional  equity or debt  financing to address its working  capital
           needs, to provide  funding for capital  expenditures in the future or
           to finance any such acquisitions or strategic alliances. Furthermore,
           any additional equity financing may be dilutive to stockholders,  and
           debt financing,  if available,  may involve restrictive covenants and
           may increase the Company's  leverage.  There can be no assurance that
           events in the future will not require the Company to seek  additional
           capital  or,  if so  required,  that it will be  available  on  terms
           acceptable to the Company.

                                       15

<PAGE>


PART II           OTHER INFORMATION

      Item 1.     Legal Proceedings

                  Reference is made to Part II, Item 1 ("Legal  Proceedings") of
           the Company's  previously filed Form 10-Qs for the quarterly  periods
           ended September 30, 1997 and December 31, 1997.

                  ESS Litigation.  As previously  disclosed,  a number of claims
           have been  brought  against the Company and certain of its  officers,
           directors  and  shareholders  in Texas  courts by Dr.  Azam Anwar and
           Benito Hidalgo  concerning  the Company's  acquisition of Endothelial
           Support Systems,  Inc.  (subsequently  known as Endovascular  Support
           Systems,  Inc.)  ("ESS"),  as more fully  described  in Note 5 to the
           Consolidated   Financial  Statements  in  Item  1  of  the  Company's
           previously  filed Form 10-Q for the quarterly  period ended  December
           31, 1997. At various times between  December 1997 and March 1998, the
           defendants,  including the Company, filed motions for partial summary
           judgment and special  exemptions in connection with various claims in
           the action.  A trial date of June 1, 1998 has been  scheduled for the
           action and the Company's  related  counterclaim  against Mr. Hidalgo.
           The Company  believes that it has meritorious  defenses to the claims
           alleged by the plaintiffs in the action. However, no assurance can be
           given as to the outcome of the action.  The  inability of the Company
           to prevail in the action,  including  the loss or  impairment  of the
           right to produce  products  based on the  Company's  issued  patents,
           could  have a  material  adverse  effect on the  Company's  business,
           financial condition and results of operations.

                  As previously disclosed,  claims similar to those in the Texas
           action were brought  against the Company and certain of its officers,
           directors and shareholders by Dr. Anwar and Mr. Hidalgo in California
           courts,  and the  defendants  brought  certain  other  actions  there
           against Dr.  Anwar and Mr.  Hidalgo.  After  having all such  actions
           consolidated into a single action,  the parties agreed to dismiss the
           California  action on the condition  that the Texas action be allowed
           to proceed.

                  U.S. Patent Litigation.  As previously disclosed,  the Company
           has been named as an  additional  defendant  in a lawsuit  originally
           filed by Cordis Corporation  ("Cordis")  against Guidant  Corporation
           and Advanced  Cardiovascular Systems, Inc. A hearing on Cordis' claim
           for  preliminary  injunctive  relief against the Company is scheduled
           for June 22,  1998.  The  Company  believes  that it has  meritorious
           defenses to the claims alleged by Cordis in the action.  However,  no
           assurance can be given as to the outcome of the action. The inability
           of the  Company  to  prevail  in the  action,  including  the loss or
           impairment  of the right to produce  products  in the United  States,
           could  have a  material  adverse  effect on the  Company's  business,
           financial condition and results of operations.

                  As previously disclosed, Advanced Cardiovascular Systems, Inc.
           ("ACS"),  a subsidiary  of Guidant  Corporation,  has filed a lawsuit
           against the Company in federal district court in San Jose, California
           alleging,  among  other  things,  that the  Company is selling in the
           United  States  stents that  infringe on certain  patents of ACS. The
           Company is aware that on April 10, 1998,  ACS filed a second  lawsuit
           against  the  Company  alleging  infringement  of a  patent  that was
           granted subsequent to the filing of the initial lawsuit.

                                       16

<PAGE>


           This  second  lawsuit,  also filed in federal  district  court in San
           Jose,  involves a division  application  that is within the family of
           patents  that are the  subject  of the  initial  lawsuit.  ACS  seeks
           injunctive  relief,  unspecified  damages,  attorneys' fees and other
           relief. The Company believes that it has meritorious  defenses to the
           claims  alleged by ACS in the action.  However,  no assurance  can be
           given as to the outcome of the action.  The  inability of the Company
           to prevail in the action,  including  the loss or  impairment  of the
           right to produce products in the United States, could have a material
           adverse  effect on the Company's  business,  financial  condition and
           results of operations.

                  From time to time,  the  Company is  involved  in other  legal
           proceedings arising in the ordinary course of its business. As of the
           date hereof,  except as previously disclosed or discussed herein, the
           Company is not a party to any legal proceedings with respect to which
           an adverse outcome would, in  management's  opinion,  have a material
           adverse  effect on the  Company's  business,  financial  condition or
           results of operations.

      Item 2.     Change in Securities and Use of Proceeds

                  The  effective  date of the Company's  registration  statement
           filed on Form S-1 under the  Securities  Act of 1933 (No.  333-00824)
           was  April 2,  1996  (the  "Registration  Statement").  The  class of
           securities  registered  was Common Stock.  The offering  commenced on
           April 2,  1996 and all  securities  were  sold in the  offering.  The
           managing  underwriters  for the offering were Cowen & Company,  Bear,
           Stearns & Co. Inc. and J.P. Morgan & Co.

                  Pursuant  to the  Registration  Statement,  the  Company  sold
           8,500,000  shares  of  Common  Stock  for  its  own  account,  for an
           aggregate  offering  price of  $89,250,000,  and 3,000,000  shares of
           Common Stock for the account of certain selling stockholders,  for an
           aggregate offering price of $31,500,000.

                  The Company incurred  expenses of approximately  $7,897,500 in
           connection  with  the  offering,  of  which  $6,247,500   represented
           underwriting  discounts and  commissions  and $1,650,000  represented
           estimated other  expenses.  All such expenses were direct or indirect
           payments to others.  The net offering  proceeds to the Company  after
           total expenses was approximately $81,352,000.

                  The  Company  has used  approximately  $22,300,000  of the net
           proceeds of the offering,  of which  $7,400,000  represents  payments
           relating to the  construction  of plant,  building and facilities and
           $14,900,000  represents  payments  relating  to the  purchase of real
           estate. All such payments were direct or indirect payments to others.
           All other net proceeds of the offering  have been invested in various
           short-term investments.  The use of the proceeds of the offering does
           not represent a material  change in the use of proceeds  described in
           the prospectus that formed a part of the Registration Statement.

                                       17

<PAGE>


      Item 6.     Exhibits and Reports on Form 8-K

                  (a)   Exhibits

                        11.1     Statement  regarding calculation  of net income
                                 per share.
 
                        27       Financial Data Schedule.

                  (b)   Reports on Form 8-K

                        None.

                                       18

<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.


                                             ARTERIAL VASCULAR ENGINEERING, INC.


Date:    April 24, 1998                      /s/ John D. Miller
                                             -----------------------------------
                                             John D. Miller
                                             Chief Financial Officer
                                             (Principal Financial and Accounting
                                             Officer)

                                       19

<PAGE>


                                INDEX TO EXHIBITS


Exhibit
-------

11.1            Statement regarding computation of net income per share.

27              Financial Data Schedule