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

                                    FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 1996

                                       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      0-27802

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

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

5355 Skylane Boulevard, 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                30,984,383 as of November 4, 1996


<PAGE>

<TABLE>


                               INDEX TO FORM 10-Q


<CAPTION>

                                                                                                                Page
                                                                                                                ----
<S>                                                                                                              <C>
PART I          FINANCIAL INFORMATION

                Item 1.    Financial Statements

                           Condensed Consolidated Balance Sheets as of September 30, 1996                         3
                                 and June 30, 1996

                           Condensed Consolidated Statements of Operations for the three                          4
                                 months ended September 30, 1996 and 1995

                           Condensed Consolidated Statements of Cash Flows for the                                5
                                 three months ended September 30, 1996 and 1995

                           Notes to Condensed Consolidated Financial Statements                                   6

                Item 2.    Management's Discussion and Analysis of Financial Condition                           11
                                 and Results of Operations


PART II         OTHER INFORMATION

                Item 1.    Legal Proceedings                                                                     15

                Item 6.    Exhibits and Reports on Form 8-K                                                      15


SIGNATURES                                                                                                       16
</TABLE>
                                       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>

                                                                                                  September 30,            June 30,
                                                                                                      1996                   1996
                                                                                                   ---------              ---------
<S>                                                                                                <C>                    <C>
                                                               ASSETS
Current assets:
     Cash and cash equivalents                                                                     $  14,907              $  59,238
     Short-term investments                                                                           80,833                 32,354
     Trade accounts receivable, net                                                                   15,248                 13,213
     Inventories                                                                                       4,569                  3,352
     Deferred income tax                                                                               2,016                  2,016
     Prepaid expenses and other current assets                                                         3,639                  2,338
                                                                                                   ---------              ---------
        Total current assets                                                                         121,212                112,511

Deferred income tax                                                                                      172                    172
Property, plant and equipment, net                                                                    11,691                  8,974
Purchased technology and other intangible assets, net                                                    462                    500
                                                                                                   ---------              ---------
        Total assets                                                                               $ 133,537              $ 122,157
                                                                                                   =========              =========


                                                             LIABILITIES
Current liabilities:
     Accounts payable                                                                              $   2,222              $   1,671
     Accrued expenses                                                                                  1,948                  2,479
     Income taxes payable                                                                              5,069                  1,436
                                                                                                   ---------              ---------
        Total current liabilities                                                                      9,239                  5,586
                                                                                                   ---------              ---------

                                                        STOCKHOLDERS' EQUITY
Common Stock                                                                                              31                     31
Additional paid-in capital                                                                            91,776                 91,776
Notes receivable for common stock                                                                       (301)                  (301)
Deferred compensation                                                                                    (75)                   (87)
Cumulative translation adjustment                                                                        (50)                    --
Retained earnings                                                                                     32,917                 25,152
                                                                                                   ---------              ---------
        Total stockholders' equity                                                                   124,298                116,571
                                                                                                   ---------              ---------
        Total liabilities and stockholders' equity                                                 $ 133,537              $ 122,157
                                                                                                   =========              =========


<FN>
                             See accompanying notes

</FN>
</TABLE>
<PAGE>

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

                                                            Three Months Ended
                                                               September 30,
                                                           ---------------------
                                                             1996        1995
                                                           -------       -------
Net sales                                                  $18,568       $10,572
Cost of sales                                                2,911         2,491
                                                           -------       -------
Gross profit                                                15,657         8,081
                                                           -------       -------

Operating expenses:
   Research and development                                  1,855           548
   Selling, general and administrative                       3,132           446
                                                           -------       -------
       Total operating expenses                              4,987           994
                                                           -------       -------

Operating income                                            10,670         7,087
Interest and other income                                    1,275           122
                                                           -------       -------
Income before provision for income taxes                    11,945         7,209
Provision for income taxes                                   4,180         2,453
                                                           =======       =======
Net income                                                 $ 7,765       $ 4,756
                                                           =======       =======

Net income per share                                       $  0.25       $  0.17

Shares used in per share calculation                        31,632        27,221








                             See accompanying notes


                                        4
<PAGE>


<TABLE>

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

                                                                                                            Three Months Ended
                                                                                                               September 30,
                                                                                                       -----------------------------
                                                                                                          1996              1995
                                                                                                       -----------       -----------
<S>                                                                                                    <C>                 <C>     
Cash flows from operating activities:
     Net income                                                                                        $  7,765            $  4,756
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities:
            Depreciation and amortization                                                                   335                 134
            Provision for doubtful accounts                                                                  22                  71
            Provision for obsolete inventory                                                               --                   218
            Amortization of deferred compensation                                                            12                 129
            Foreign currency translation                                                                    (50)               --
            Changes in assets and liabilities:
                Short-term investments                                                                  (48,479)               --
                Accounts receivable                                                                      (2,057)             (3,707)
                Inventories                                                                              (1,217)               (465)
                Prepaids and other current assets                                                        (1,301)               (380)
                Accounts payable                                                                            551                 237
                Accrued liabilities                                                                        (531)               (173)
                Customer deposits                                                                          --                   (55)
                Income taxes payable                                                                      3,633               1,128
                                                                                                       --------            --------
                   Net cash provided by (used in) operating activities                                  (41,317)              1,893
                                                                                                       --------            --------

Cash flows from investing activities:
     Acquisition of property, plant and equipment                                                        (3,014)               (771)
                                                                                                       --------            --------
                   Net cash used in investing activities                                                 (3,014)               (771)
                                                                                                       --------            --------

Net increase (decrease) in cash and cash equivalents                                                    (44,331)              1,122
Cash and cash equivalents, at beginning of period                                                        59,238               2,533
                                                                                                       ========            ========
Cash and cash equivalents, at end of period                                                            $ 14,907            $  3,655
                                                                                                       ========            ========



<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 and
           results  of  operations  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, 1996.

           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 months ended  September 30, 1996 are
           not  necessarily  indicative  of the results to be  expected  for any
           other interim period or for the full year.

2.         Inventories (in thousands):

                                                September 30,        June 30,
                                                    1996              1996
                                                 ------------      -----------
                                           
                    Raw materials                $      784        $     456
                    Work in process                   1,226            1,211
                    Finished goods                    2,559            1,685
                                                 ------------      -----------
                                                 $    4,569        $   3,352
                                                 ============      ===========
                                          
3.         Computation of Net Income Per Share

           Net income per share is computed using the weighted average number of
           common and  common  equivalent  shares,  when  dilutive,  outstanding
           during the period.  Common  equivalent  shares comprise stock options
           using the  treasury  stock  method.  Pursuant to the  Securities  and
           Exchange  Commission  Staff Accounting  Bulletins,  common and common
           equivalent  shares  issued by the Company at prices below the initial
           public  offering  price during the  twelve-month  period prior to the
           offering  have  been  included  in the  calculation  as if they  were
           outstanding  for all periods  presented  prior to the  offering  date
           (using the  treasury  stock  method and the initial  public  offering
           price).


                                       6
<PAGE>


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




4.         Stock Repurchase Program

           During  the first  quarter  of fiscal  1997,  the Board of  Directors
           authorized a stock  repurchase  program pursuant to which the Company
           may repurchase  shares of its common stock with an aggregate value of
           up to $10 million.  The repurchases will be made from time to time on
           the  open  market  at  prevailing  market  prices  or  in  negotiated
           transactions  off the market.  The repurchase  program is expected to
           continue over the next several  months,  unless extended or shortened
           by the Board of  Directors.  The Company  plans to use existing  cash
           balances  to  finance  the  repurchases.  The  Company  may  use  the
           repurchased  shares to satisfy  its  obligations  under its  employee
           equity  incentive plan. As of September 30, 1996, the Company had not
           repurchased  any shares of its common stock.  Subsequent to September
           30 and as of November 4, 1996,  the  Company had  repurchased  20,000
           shares of its common stock at an aggregate cost of $290,000.

5.         Contingencies

           ESS  Litigation.  In  October  1992,  a  subsidiary  of  the  Company
           purchased   substantially  all  the  assets  of  Endothelial  Support
           Systems,  Inc.  (subsequently known as Endovascular  Support Systems,
           Inc.) ("ESS") in consideration of certain royalty payments payable by
           the Company based on the net sales of products  using or adapted from
           such assets.  The  purchased  assets  included the  technology  which
           resulted in the Company's only issued  patents.  Following such asset
           purchase,  the Company  between June 1993 and March 1995 purchased in
           several  transactions 100% of the shares of capital stock of ESS from
           its  shareholders in  consideration  of shares of common stock of the
           Company and, in certain instances,  other consideration,  and ESS was
           merged into the Company. In June 1996, the Company received notice of
           a lawsuit filed by Dr. Azam Anwar and Benito Hidalgo, each of whom is
           a former  shareholder of ESS (who together held  approximately 48% of
           ESS's outstanding  shares of common stock) and each of whom currently
           holds shares of common stock of the Company, in the District Court of
           Dallas  County,  Texas.  The suit names as  defendants  the  Company,
           Bradly A. Jendersee and John D. Miller, each a director,  officer and
           principal  stockholder  of the  Company,  Dr.  Simon H.  Stertzer,  a
           director and  principal  stockholder  of the Company,  and Dr. Gerald
           Dorros,  a principal  stockholder  of the  Company.  The suit alleges
           common  law fraud,  misrepresentation,  securities  fraud,  breach of
           fiduciary duty and constructive fraud by the defendants in connection
           with the Company's  acquisition of ESS and the Company's  acquisition
           of shares of ESS capital stock from the  plaintiffs.  The  plaintiffs
           seek unspecified damages,  rescission of the Company's acquisition of
           the ESS  assets  and its  subsequent  acquisition  of the ESS  stock,
           reconstitution of ESS, punitive damages, interest and attorneys' fees
           and other relief. The defendants,  including the Company,  have filed
           special  appearances  and  motions  objecting  to  jurisdiction  and,
           subject  thereto,  motions to dismiss  based on forum non  conveniens
           and, subject thereto, original answers. The Company has also received
           notice  of a  lawsuit  filed by  Messrs.  Anwar  and  Hidalgo  in the
           Superior  Court of Sonoma  County,  California,  which names the same
           defendants as in the Texas action and alleges  claims for  securities
           fraud and  unregistered  securities  under the California  securities
           laws,

                                       7

<PAGE>


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


           breach of fiduciary duty and fraud.  The plaintiffs seek  unspecified
           damages,  rescission of the Company's  acquisition  of the ESS assets
           and its subsequent  acquisition of the ESS stock,  reconstitution  of
           ESS and other relief.  The  defendants,  including the Company,  have
           filed an answer denying  plaintiff's  claims. The Company believes it
           has  meritorious  defenses  to the  claims  in  both  the  Texas  and
           California actions and intends to vigorously defend itself.  However,
           no  assurance  can be given as to the outcome of either  action.  The
           inability of the Company to prevail in these  actions,  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.

           On July 11, 1996, the Company,  along with the individual  defendants
           named in the Texas and California actions,  filed two actions against
           Mr.  Hidalgo in the Superior  Court of San Mateo County,  California.
           The first action alleges claims for specific  performance,  breach of
           contract,  breach  of the  implied  covenant  of good  faith and fair
           dealing,  and  declaratory  relief based on  indemnity.  These claims
           arise out of a stock  exchange  agreement  entered  into  between Mr.
           Hidalgo  and the  Company,  and  out of Mr.  Hidalgo's  actions  as a
           director  of ESS.  The second  action  alleges  claims  for  specific
           performance,  breach of contract,  and breach of the implied covenant
           of  good  faith  and  fair  dealing.  These  claims  arise  out  of a
           separation and release agreement entered into between Mr. Hidalgo and
           the Company. The Company has also filed a cross-complaint against Mr.
           Hidalgo and Dr. Anwar in the action in the  Superior  Court of Sonoma
           County,  California.  The cross-complaint  alleges claims against Mr.
           Hidalgo for specific performance,  breach of contract,  breach of the
           implied  covenant  of good faith and fair  dealing,  and  declaratory
           relief based on comparative  indemnity,  contribution  and absence of
           fraud.  The  cross-complaint  alleges  claims  against Dr.  Anwar for
           intentional  and  negligent  interference  with  contract,  equitable
           estoppel  and  declaratory  relief  based on  absence  of fraud.  Mr.
           Hidalgo  and Dr.  Anwar have filed an answer  generally  denying  the
           claims contained in the cross-complaint.  The Company believes it has
           meritorious  claims in both  actions.  However,  no assurance  can be
           given as to the outcome of either action.

           The Company has agreed to indemnify each of the individuals  named as
           defendants  in the lawsuits  against the Company  relating to the ESS
           transaction.

           Claims of Terminated  Distributors.  In connection with the Company's
           termination  of certain  distributor  relationships,  several of such
           distributors  have filed, or have threatened to file,  claims against
           the Company with respect to such terminations.

           In early 1996, in connection  with the Company's  termination  of its
           distribution  relationship  with  Cardiologic GmbH effective April 8,
           1996, the Company received notice from such  distributor  alleging an
           exclusive  distribution  agreement  between the  parties  with a term
           expiring in December  1998.  The  distributor  threatened  to file an
           action for breach of the alleged agreement,  including making a claim
           for compensation  equal to one year's average  commission and seeking
           to enjoin distribution of the Company's products in Germany.

                                       8


<PAGE>


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


           On July 3, 1996, in connection with the Company's  termination of its
           distribution  relationship  with  Alfatec-Medicor  N.V.  and  Medicor
           Nederland  B.V.  in  Belgium  and  The   Netherlands,   respectively,
           effective  September 30, 1996, the Company  received notice from such
           distributors   alleging  insufficient  notice  of  termination  of  a
           distribution  agreement between the parties.  The distributors sought
           compensation  of  BF168,509,312   (approximately  US$5,500,000  using
           current  exchange  rates).   The  Company  has  requested  from  such
           distributors   information   that  would  support  their  claims  for
           indemnification,  but has  not yet  received  such  information.  The
           distributors have threatened litigation with respect to their claims.

           On August 19, 1996, in connection  with the Company's  termination of
           its  distribution  relationship  in  Switzerland  with Medicor AG and
           Medicor Zug AG, effective  September 30, 1996, such distributor filed
           an action against the Company in the United States District Court for
           the Northern District of California alleging breach of written,  oral
           and  implied-in-fact  contracts,  inducement  to breach an employment
           contract  with  one  of  such  distributor's  employees,  intentional
           interference  with contractual  relations,  intentional and negligent
           interference with prospective economic advantage, misappropriation of
           trade secrets, and intentional and negligent  misrepresentation.  The
           distributor seeks damages of in excess of $5,000,000,  incidental and
           consequential  damages,  injunctions  restraining  the  Company  from
           hiring  the  employee  for one year from his last date of  employment
           with such  distributor and from using purported trade secrets of such
           distributor in connection  with the Company's  sales efforts,  unjust
           enrichment  damages,  punitive damages,  interest and attorneys' fees
           and other costs.  On October 11, the court  denied the  distributor's
           request for preliminary and temporary injunctive relief.

           In connection  with the  Company's  termination  of its  distribution
           relationship  in  France  with  Medi  Service,   S.A.R.L./Fournitures
           Hospitalieres S.A. effective September 30, 1996, the Company received
           notice from such  distributor  that it had filed an action before the
           Tribunal  de  Grande   Instance   of   Mulhouse  in  France   seeking
           compensation  for  breach  of  an  alleged   exclusive   distribution
           agreement  for an  indeterminate  period  between  the  parties.  The
           Company    counterclaimed   for   unpaid   accounts   receivable   of
           approximately   $1.6  million  and  for  damages  for  abusive  legal
           proceedings.  On  September  23,  1996,  the  Tribunal  rejected  the
           distributor's  claims for damages for unlawful termination as well as
           the  Company's  counterclaim  for  abusive  legal  proceedings.   The
           Tribunal  reserved  judgement  with respect to the  repurchase of the
           distributor's  inventory  of AVE  products  and the payment of unpaid
           accounts receivable sought by the Company. The Tribunal has requested
           briefs from the parties on these issues by November  29,  1996,  with
           oral arguments yet to be scheduled.

           With respect to each of the aforementioned distributors,  the Company
           has  consulted  with local  counsel  in the  applicable  country  and
           believes   that   the   termination   of  each  of  the   distributor
           relationships was lawful. The Company understands that under the laws
           of certain  countries,  including Belgium and The Netherlands,  under
           certain   circumstances,   certain  indemnities  may  be  claimed  by
           distributors for insufficient  notice of termination  and/or goodwill
           compensation. The Company intends to vigorously

                                       9

<PAGE>


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


           defend itself against pending claims and any other claims that may be
           brought by such distributors.  However,  no assurance can be given as
           to the  outcome of any  pending  or  threatened  litigation,  and any
           successful  claim for damages or injunctive  relief by one or more of
           such  distributors  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,  the  Company is not a party to any other  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.

                                       10

<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  the  extent  and  timing  of new
            product    introductions,    competition,    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.

            Since its  inception  in 1991,  the Company has been  engaged in the
            design,  development,  manufacturing  and marketing of stent systems
            and  balloon  angioplasty  catheters  designed  to  be  utilized  in
            connection with the treatment of atherosclerosis.  The Company began
            commercial  sales of its balloon  angioplasty  catheters  in October
            1993 and its coronary stents in October 1994. The Company's products
            are currently  commercially  sold only outside of the United States,
            primarily in Europe and Japan. In Japan, the Company currently sells
            only balloon catheters.  The Company is seeking regulatory  approval
            for sale of  certain of its stent  systems  in Japan and  Spain.  In
            November  1995,  the Company  received  United  States Food and Drug
            Administration ("FDA") clearance to conduct clinical trials with the
            Company's  Micro  Stent and Micro  Stent II  systems  in the  United
            States   under  an   Investigational   Device   Exemption   ("IDE").
            Subsequently,  the Company received FDA approval to include in these
            trials patients  afflicted with restenotic lesions and also patients
            with long  lesions  that can be treated  with the Micro Stent II XL.
            The Company does not expect FDA  approval of its stent  products for
            sale in the  United  States  prior  to  1998,  and  there  can be no
            assurance  when or if such approval  will be obtained.  As a result,
            the Company expects international sales to account for substantially
            all of its  revenues  for at least the next 18 months.  The  Company
            expects to incur  substantial  clinical  research and other costs in
            connection with obtaining regulatory approvals for its stents in the
            United States and other countries.

            The Company has a limited  history of  operations  and only began to
            generate  positive  net income in fiscal  1995.  The increase in the
            Company's  sales  to date has been  due to  greater  demand  for the
            Company's  stent  systems  and,  to a lesser  degree,  its  coronary
            balloon catheter  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.

                                       11
<PAGE>

            The  Company has also  experienced  higher  administrative  expenses
            resulting from its obligations as a public reporting company.

            Until April 1996,  substantially  all of the Company's sales were to
            international  distributors  who  resell  products  to  health  care
            providers. The Company terminated its relationship with distributors
            in  Germany   and  the  United   Kingdom  in  April  and  May  1996,
            respectively,   and  in  France,   Switzerland,   Belgium   and  The
            Netherlands on October 1, 1996. The Company has established a direct
            sales  force  in each of  those  countries.  The  establishment  and
            maintenance of direct sales forces will require  significant ongoing
            expenditures,  additional  management  resources  and may  result in
            additional  costs to eliminate  existing  distributor  relationships
            (including litigation by former  distributors),  and there can be no
            assurance that any such direct sales force will be  successful.  See
            Note 5 to the Condensed Consolidated Financial Statements in Item 1.

            The Company  currently  manufactures and ships product shortly after
            the  receipt of orders,  and  anticipates  that it will do so in the
            future.  Accordingly,  the Company has not  developed a  significant
            backlog and does not  anticipate it will develop a material  backlog
            in the future.

            The Company anticipates that its results of operations may fluctuate
            for  the  foreseeable  future  due  to  several  factors,  including
            competition (including pricing pressures), the timing of new product
            introductions  or transitions to new products,  costs and the timing
            of establishing direct sales operations, sales by distributors,  the
            mix of sales  among  distributors  and the  Company's  direct  sales
            force, timing of regulatory and third party reimbursement approvals,
            the level of  third-party  reimbursement,  the Company's  ability to
            manufacture  its  products  efficiently,  the timing of research and
            development    expenses    (including    clinical    trial   related
            expenditures), and seasonal factors impacting the number of elective
            angioplasty  procedures.  In  addition,  the  Company's  results  of
            operations   could  be   affected  by  the  timing  of  orders  from
            distributors,   expansion  of  the  Company's   distributor  network
            (including   expenses  in  connection  with  termination  of  former
            distributors),   the  ability  of  the  Company's   distributors  to
            effectively  promote the  Company's  products and the ability of the
            Company to quickly and  cost-effectively  establish  a direct  sales
            force in targeted countries.  Failure to quickly or cost-effectively
            establish  or maintain  and manage  effective  sales  forces in such
            countries, particularly in France and Germany, could have a material
            adverse effect on the Company's  business,  financial  condition and
            results of operations. 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,  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 previously experienced,
            and may experience in one or more future quarters, operating results
            which 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.


                                       12

<PAGE>

            Results of Operations - Three Months Ended September 30, 1996 and 
            1995

            Net sales.  For the first  three  months of fiscal  1997,  net sales
            increased  to $18.6  million  from $10.6  million in the first three
            months  of  fiscal  1996.  The  increase  in net  sales  was  due to
            significant  increases  in sales  of the  Company's  stent  systems,
            particularly the Micro Stent II family of products.  The Micro Stent
            II was  released  in certain  countries  internationally  in October
            1995. The Company  anticipates that stent system sales will continue
            to constitute  the vast  majority of total net sales.  In the fourth
            quarter  of  fiscal  1996,  the  Company   commenced   direct  sales
            operations in the United  Kingdom and Germany.  All other sales made
            by the Company were through unaffiliated distributors;  however, the
            Company began selling directly in France,  Switzerland,  Belgium and
            The  Netherlands  in the second  quarter of fiscal 1997. The Company
            believes that 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,  which  could cause the
            Company to reduce prices on some or all of its stent systems.  Price
            reductions  in response to  competitive  pressure  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 $2.9 million in the first
            three  months of fiscal  1997 from $2.5  million in the first  three
            months of fiscal 1996, and decreased as a percentage of net sales to
            16% in the 1997 period from 24% in the 1996 period.  The increase in
            absolute  dollars 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 increased
            sales  volume.  The  decrease  as a  percentage  of  net  sales  was
            primarily the result of leveraging  certain fixed overhead  expenses
            across a higher  base of sales  and as a result of a change in sales
            mix.

            Research and Development.  Research and development expenses,  which
            include  clinical  study and  regulatory  costs,  increased  to $1.9
            million in the first three  months of fiscal  1997 from  $548,000 in
            the first three months of fiscal 1996, and increased as a percentage
            of net sales to 10% in the 1997 period  from 5% in the 1996  period.
            The  increase  was  primarily  due to the  addition of research  and
            development  personnel,  increased  levels of spending in connection
            with clinical studies relating to the Micro Stent II and Micro Stent
            II XL systems and costs incurred in connection  with the development
            of additional  products,  including  the AVE gfx Stent.  The Company
            expects research and development expenses to continue to increase in
            absolute dollars as the Company increases  clinical trial activities
            and  pursues  development  of  next  generation  products. 

            Selling,   General   and   Administrative.   Selling,   general  and
            administrative  expenses  increased  in  absolute  dollars  to  $3.1
            million in the first three  months of fiscal  1997 from  $446,000 in
            the first three months of fiscal 1996, and increased as a percentage
            of net sales to 17% in the 1997 period  from 4% in the 1996  period.
            The  increase  in  absolute  dollars  and as a  percentage  of sales
            primarily   reflected   additional  costs  of  marketing  and  other
            personnel  necessary  to  support  the  Company's  higher  level  of
            operations  and  increased   legal  costs   relating   primarily  to
            litigation with former  shareholders of Endothelial Support Systems,
            Inc.,  subsequently known as Endovascular Support Systems,  Inc. The
            Company  expects  selling,   general  and  administrative  costs  to
            continue to increase in absolute dollars in the future primarily due
            to the recent  commencement  of direct sales  operations  in certain
            European

                                       13

<PAGE>

            countries,  the  increased  level  of  sales,  product  support  and
            manufacturing  operations,  and  increases  in  finance,  legal  and
            administrative  costs in connection with public company  obligations
            and ongoing litigation.

            Interest and Other Income. The Company had interest and other income
            of $1.3 million in the first three  months of fiscal 1997,  compared
            to $122,000 in the first three months of fiscal  1996.  The increase
            was  primarily  due to interest  income  received  on the  Company's
            increased  cash  and  cash  equivalents  and  short-term  investment
            balances.

            Provision for Income Taxes. The Company's provision for income taxes
            was $4.2 million in the first three months of fiscal 1997,  compared
            to $2.5  million  in the first  three  months of  fiscal  1996.  The
            increase  in this  provision  was a result of the  Company's  higher
            earnings during the 1997 period.

            Net Income. The Company had net income of $7.8 million for the first
            three  months of fiscal 1997  compared to net income of $4.8 million
            for the  first  three  months  of fiscal  1996.  Earnings  per share
            increased  to $0.25 in the first  three  months of fiscal  1997 from
            $0.17 in the first three months of fiscal 1996.

            Liquidity and Capital Resources

            Net cash used in  operating  activities  was $41.3  million  for the
            three months ended September 30, 1996,  which included the Company's
            purchase of short-term investments totaling $48.5 million. Excluding
            these  investments,  the Company had net cash  provided by operating
            activities  of $7.2  million,  principally  arising  as a result  of
            positive  net income for the  period.  Cash,  cash  equivalents  and
            short-term  investments  totaled $95.7 million at September 30, 1996
            as  compared  to $91.6  million at June 30,  1996.  Working  capital
            increased  to $112.0  million at  September  30, 1996 as compared to
            $106.9  million  at June 30,  1996.  Inventories  increased  to $4.6
            million at  September  30, 1996 from $3.4  million at June 30, 1996,
            primarily  due to the  commencement  of direct sales  operations  in
            France,  Switzerland,  Belgium  and The  Netherlands  in the  second
            quarter of fiscal 1997. Of the $15.2 million in accounts  receivable
            at  September  30,  1996,  approximately  $2.4  million was due from
            former distributors of the Company that have threatened or commenced
            litigation  in  connection  with  the  termination  of  distribution
            relationships.  See Note 5 to the Condensed  Consolidated  Financial
            Statements in Item 1. The Company  expects  accounts  receivable and
            inventories  to  increase  in  absolute   dollar  amounts  as  sales
            increase.  As of  the  date  of  this  report,  the  Company  had no
            outstanding debt.

            The Company expects to incur substantial additional costs, including
            costs related to increased sales and marketing activities (including
            the establishment of direct sales forces internationally), increased
            research and  development,  expenditures  in connection with seeking
            regulatory  approvals and  conducting  additional  clinical  trials,
            capital  equipment and other costs  associated with expansion of the
            Company's  manufacturing  capabilities.  The  Company  believes  its
            existing funds and funds  expected to be generated from  operations,
            will be sufficient to meet its projected  working  capital and other
            cash  requirements  through at least  fiscal 1997.  Thereafter,  the
            Company may require  additional  equity or debt financing to address
            its  working  capital  needs  or  to  provide  funding  for  capital
            expenditures.  However, there can be no assurance that events in the
            future  will not  require  the  Company to seek  additional  capital
            sooner  or,  if so  required,  that it will be  available  on  terms
            acceptable to the Company.

                                       14

<PAGE>


PART II           OTHER INFORMATION

                  Item 1.    Legal Proceedings

                             Reference  is  made  to  Note  5 to  the  Condensed
                             Consolidated  Financial  Statements  in  this  Form
                             10-Q.

                  Item 6.    Exhibits and Reports on Form 8-K

                  (a)        Exhibits

                             10.24    Lease,  dated August 5, 1996, between Ruth
                                      Waltenspiel, Dixie Walker and the Company,
                                      concerning the  facilities at 5341,  5343,
                                      5345 and  5347  Skylane  Boulevard,  Santa
                                      Rosa, California.
                             10.25    Form of Indemnification  Agreement between
                                      the  Company  and  each  of its  executive
                                      officers and directors.
                             11.1     Statement  regarding  calculation  of  net
                                      income per share.
                             27       Financial Data Schedule

                  (b)        Reports on Form 8-K

                             No  reports  on Form  8-K  were  filed  during  the
                             quarter ended September 30, 1996.

                                       15
<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:    November 11, 1996    /s/ John D. Miller
                              --------------------------------------------------
                              John D. Miller
                              Vice President of Finance, Chief Financial Officer
                              (Principal Financial and Accounting Officer)


                                       16
<PAGE>


                                INDEX TO EXHIBITS


Exhibit

10.24             Lease, dated August 5, 1996,  between Ruth Waltenspiel,  Dixie
                  Walker and the Company,  concerning  the  facilities  at 5341,
                  5343, 5345 and 5347 Skylane Boulevard, Santa Rosa, California.
10.25             Form of Indemnification Agreement between the Company and
                  each of its executive officers and directors.
11.1              Statement regarding calculation of net income per share.
27                Financial Data Schedule