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, 1997

                         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)

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                   30,980,633 as of April 30, 1997


<PAGE>

<TABLE>
<CAPTION>

                                                 INDEX TO FORM 10-Q


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

                Item 1.    Financial Statements

                           Condensed Consolidated Balance Sheets as of March 31, 1997                             3
                                 and June 30, 1996

                           Condensed Consolidated Statements of Operations for the three                          4
                                 months and nine months ended March 31, 1997 and 1996

                           Condensed Consolidated Statements of Cash Flows for the                                5
                                 nine months ended March 31, 1997 and 1996

                           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                                                                     16

                Item 2.    Changes in Securities                                                                 16

                Item 6.    Exhibits and Reports on Form 8-K                                                      16


SIGNATURES                                                                                                       18
</TABLE>

                                                   2

<PAGE>


PART I          FINANCIAL INFORMATION

                Item 1.    Financial Statements


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


                                                            March 31,   June 30,
                                                              1997       1996
                                                            --------   --------
                                     ASSETS
Current assets:
     Cash and cash equivalents                              $ 21,624   $ 59,238
     Short-term investments                                   61,689     32,354
     Trade accounts receivable, net                           22,200     13,213
     Inventories                                               6,297      3,352
     Deferred income tax                                       2,016      2,016
     Prepaid expenses and other current assets                 8,729      2,338
                                                            --------   --------
        Total current assets                                 122,555    112,511

Deferred income tax                                              172        172
Property, plant and equipment, net                            18,604      8,974
Purchased technology and other intangible assets, net            390        500
                                                            --------   --------
        Total assets                                        $141,721   $122,157
                                                            ========   ========


                                   LIABILITIES
Current liabilities:
     Accounts payable                                       $  3,303   $  1,671
     Accrued expenses                                          5,333      2,479
     Income taxes payable                                       --        1,436
                                                            --------   --------
        Total current liabilities                              8,636      5,586
                                                            --------   --------

                              STOCKHOLDERS' EQUITY
Common stock                                                     31          31
Additional paid-in capital                                   92,650      91,776
Notes receivable for common stock                              (301)       (301)
Deferred compensation                                           (47)        (87)
Treasury stock                                                 (390)       --
Cumulative translation adjustment                            (1,014)       --
Retained earnings                                            42,156      25,152
                                                            --------   --------
        Total stockholders' equity                          133,085     116,571
                                                            --------   --------
        Total liabilities and stockholders' equity         $141,721    $122,157
                                                            ========   ========


                             See accompanying notes

                                       3

<PAGE>

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


                                           Three Months Ended  Nine Months Ended
                                                 March 31,         March 31,
                                           -----------------   -----------------
                                            1997      1996      1997      1996
                                           -------   -------   -------   -------

Net sales                                  $20,402   $15,589   $57,197   $37,303
Cost of sales                                4,596     2,896    11,240     7,814
                                           -------   -------   -------   -------
Gross profit                                15,806    12,693    45,957    29,489
                                           -------   -------   -------   -------

Operating expenses:
     Research and development                3,186     3,783     7,300     4,988
     Selling, general and administrative     6,363     4,285    15,698     5,542
                                           -------   -------   -------   -------
        Total operating expenses             9,549     8,068    22,998    10,530
                                           -------   -------   -------   -------

Operating income                             6,257     4,625    22,959    18,959
Interest and other income                      871       145     3,200       404
                                           -------   -------   -------   -------
Income before provision for income taxes     7,128     4,770    26,159    19,363
Provision for income taxes                   2,495     1,669     9,155     6,635
                                           -------   -------   -------   -------
Net income                                 $ 4,633   $ 3,101   $17,004   $12,728
                                           =======   =======   =======   =======

Net income per share                       $  0.15   $  0.11   $  0.54   $  0.46

Shares used in per share calculation        31,588    27,513    31,603    27,347


                             See accompanying notes

                                       4

<PAGE>

<TABLE>

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

                                                                                     Nine Months Ended
                                                                                         March 31,
                                                                                -----------------------------
                                                                                   1997              1996
                                                                                -----------       -----------
Cash flows from operating activities:
<S>                                                                              <C>               <C>  
     Net income                                                                  $ 17,004          $ 12,728
     Adjustments to reconcile net income to net cash
        provided by (used in) operating activities:
            Depreciation and amortization                                           1,141               572
            Provision for doubtful accounts                                           417               146
            Provision for obsolete inventory                                          (75)              300
            Amortization of deferred compensation                                      40               197
            Income tax reduction relating to stock plans                              823             2,148
            Deferred income taxes                                                       -               316
            Foreign currency translation                                           (1,014)                -
            Changes in assets and liabilities:
                Short-term investments                                            (29,335)                -
                Accounts receivable                                                (9,404)           (4,816)
                Inventories                                                        (2,870)           (1,811)
                Prepaids and other current assets                                  (2,194)           (2,222)
                Accounts payable                                                    1,632               513
                Accrued liabilities                                                 2,854             1,093
                Customer deposits                                                       -            (1,405)
                Income taxes payable                                               (5,633)           (2,039)
                                                                                -----------       -----------
                   Net cash provided by (used in) operating activities            (26,614)            5,720
                                                                                -----------       -----------

Cash flows from investing activities:
     Proceeds from sale of investments                                                  -              100
     Acquisition of property, plant and equipment                                 (10,661)           (2,313)
                                                                                -----------       -----------
                   Net cash used in investing activities                          (10,661)           (2,213)
                                                                                -----------       -----------

Cash flows from financing activities:
     Proceeds from issuance of common stock                                            51             1,356
     Acquisition of treasury stock                                                   (390)                -
                                                                                -----------       -----------
                   Net cash provided by (used in) financing activities               (339)            1,356
                                                                                -----------       -----------

Net increase (decrease) in cash and cash equivalents                              (37,614)            4,863

Cash and cash equivalents, at beginning of period                                  59,238             2,533
                                                                                -----------       -----------
Cash and cash equivalents, at end of period                                      $ 21,624          $  7,396
                                                                                ===========       ===========

<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 and nine months ended March 31, 1997
           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,
                                                   1997              1996
                                                ------------      -----------

                           Raw materials          $     984        $     456
                           Work in process            1,848            1,211
                           Finished goods             3,465            1,685
                                                ------------      -----------
                                                  $   6,297        $   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 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 may be made from time to time on
           the  open  market  at  prevailing  market  prices  or  in  negotiated
           transactions off the market.  Although the Company does not currently
           intend to repurchase a significant  number of additional shares under
           the repurchase program,  the program will continue until discontinued
           by the Board of  Directors.  The Company has used,  and plans to use,
           existing  cash balances to finance any  repurchases.  The Company may
           use the repurchased shares to offset grants under its employee equity
           incentive  plan.  As of March 31, 1997,  the Company had  repurchased
           30,000 shares of its common stock at an aggregate cost of $390,000.

5.         Contingencies

           ESS  Litigation.  Effective as of 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 Company was informed that the  shareholders  of ESS
           ratified  the  transaction  on May 27,  1993.  The  purchased  assets
           included an application for a stent patent which resulted in a patent
           owned by the  Company.  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. In January 1997, the
           plaintiffs  filed an  amended  petition  alleging  common  law fraud,
           negligent  misrepresentation,  securities fraud pursuant to the Texas
           Securities  Act,  fraud pursuant to the Texas Business and Commercial
           Code,  control person  liability,  aider and abetter liability of the
           individual  defendants,  civil conspiracy,  breach of fiduciary duty,
           and constructive  fraud 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. On
           February 10 and 12, 1997,  the court  overruled  defendants'  special
           appearances and denied motions objecting to jurisdiction,  motions to
           dismiss based on forum non  conveniens,  and motions to abate or stay
           the Texas proceedings. The

                                       7

<PAGE>

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

           Company  believes  it has  meritorious  defenses to the claims in the
           Texas action and intends to vigorously  defend  itself.  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.

           The Company also received notice in August 1996 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,  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,  and also filed a  cross-complaint  against  the
           plaintiffs.  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.

           On July 11, 1996, the Company,  along with the individual  defendants
           named in the Texas  and  Sonoma  County  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.

           On December 6, 1996, the Superior Court of Sonoma County, California,
           pursuant to the  stipulation of the parties,  transferred  the Sonoma
           County action to the Superior Court of San Mateo County.  On December
           11, 1996,  the Superior  Court of San Mateo  County,  pursuant to the
           stipulation of the parties, consolidated all three pending California
           actions into a single action (the "Consolidated Action"), and ordered
           that  the  pleadings  from  the  Sonoma  County  action  shall be the
           operative  pleadings  in the  Consolidated  Action.  A motion  by the
           Company and the individual  defendants for summary  judgment  against
           Mr.  Hidalgo in the  Consolidated  Action was denied by the  Superior
           Court of San Mateo  County on May 5, 1997 with respect to each of the
           plaintiffs'  claims.  The Company  believes  that it has  meritorious
           defenses  to the claims  alleged by the  plaintiffs,  and that it has
           meritorious  claims  against  the  plaintiffs,  in  the  Consolidated
           Action.  However,  no assurance can be given as to the outcome of the

                                       8

<PAGE>

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

           Consolidated  Action.  The inability of the Company to prevail in the
           Consolidated 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.

           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 November 1996, in connection with the Company's termination of its
           distribution      relationship     with      Alfatec-Medicor     N.V.
           ("Alfatec-Medicor")  and Medicor Nederland B.V. ("Medicor Nederland")
           in Belgium and The Netherlands, respectively, effective September 30,
           1996,   the   Company   received   notice  of  a  lawsuit   filed  by
           Alfatec-Medicor  in the  Second  Chamber of the  Commercial  Court of
           Brussels,  Belgium,  alleging insufficient notice of termination of a
           distribution   agreement   between  the  parties,   promotion  costs,
           personnel   restructuring   claims   and   additional   compensation.
           Alfatec-Medicor  seeks  compensation of BF189,389,135  (approximately
           $5.3 million using current  exchange  rates),  of which  BF30,000,000
           (approximately  $843,000)  is sought as a  provisional  payment.  The
           Company has entered  counterclaims  for  $257,000 in unpaid  accounts
           receivable and has requested from  Alfatec-Medicor  information  that
           would  support  its  claims  for  indemnification,  but  has  not yet
           received such information. Following a hearing on April 18, 1997, the
           court postponed further consideration of the matter until the parties
           have  conducted an appropriate  exchange of information  and prepared
           written pleadings.  On February  20, 1997,  the Company  commenced an
           action against Medicor Nederland before the Amsterdam  District Court
           for payment of $269,000 in unpaid accounts receivable. A statement of
           defense from Medicor Nederland is due by May 14, 1997.

           On August 19, 1996, in connection  with the Company's  termination of
           its  distribution   relationship  in  Switzerland  with  Medicor  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.  On
           October 11,  1996,  the court  denied the  distributor's  request for
           preliminary and temporary injunctive relief. On January 30, 1997, the
           court  entered an order  dismissing  the  entire  action on forum non
           conveniens  grounds.  As part of the  dismissal,  AVE has  agreed  to
           submit to the  jurisdiction of the appropriate  forum in Switzerland,
           waive any  defense  of statute of  limitations  to any  substantially
           similar  claims made there,  make  available  witnesses and documents
           there and satisfy any judgment  entered  against it there. On January
           27, 1997, the Company filed an action in the debt  collection  office
           of Cham, Switzerland against the distributor for $93,000 plus accrued
           interest in  connection  with  unpaid  accounts  receivable  from the
           distributor relationship. The distributor obtained a preliminary stay
           on the debt

                                       9

<PAGE>

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

           collection  proceedings  and a hearing with respect to the  Company's
           motion to lift such stay was held on March 11, 1997.

           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   $1.8  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 parties have submitted
           briefs on these issues and a procedural hearing was held on March 10,
           1997,  at  which  time  the  distributor  filed a  revised  brief.  A
           scheduling  hearing is set for May 9, 1997. On February 10, 1997, the
           distributor  filed an appeal of the Tribunal's  decision of September
           23, 1996 with the Court of Appeal of Colmar.

           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 defend itself against
           pending  claims  and any other  claims  that may be  brought  by such
           distributors  and to pursue  claims  for unpaid  accounts  receivable
           against 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,  or the  failure by the Company to succeed on its
           claims against its former French  distributor,  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  and is  seeking  regulatory  approval  for  sale  there of
           certain of its stent systems.  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,
           patients  with long  lesions that can be treated with the Micro Stent
           II XL, and patients with abrupt or  threatened  vessel  closure.  The
           Company  has also  received  approval  to  include  in the trials its
           single-operator stent delivery system. In addition, in December 1996,
           the  Company  received  clearance  from the FDA to  conduct  clinical
           trials with the  Company's  Peak balloon  angioplasty  catheter.  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  until  at  least  1998.   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  balloon
           angioplasty  catheter  systems.  The  Company  believes  that  it  is
           currently   one  of  the   leading   providers   of   stent   systems
           internationally. 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
           effective  September 30, 1996.  The Company has  established a direct
           sales  force  in each  of  those  countries.  The  establishment  and
           maintenance  of direct sales forces has required and will continue to
           require  significant  ongoing  expenditures,   additional  management
           resources and has resulted, and may continue to result, in additional
           costs to  eliminate  existing  distributor  relationships  (including
           litigation  by  former  distributors).   Sales  in  Belgium  and  The
           Netherlands  continue to be  significantly  below  levels  originally
           anticipated for the three months ended March 31, 1997, due in part to
           the Company's  conversion to direct sales forces there, and there can
           be no assurance  that any such direct sales force will be  successful
           in the future.  See Note 5 to the  unaudited  Condensed  Consolidated
           Financial Statements in Item 1.

           Generally,  the Company  manufactures and ships product shortly after
           the  receipt of  orders,  and  anticipates  that it will do so in the
           future. The Company developed a significant short-term backlog during
           January 1997 in connection with the scale-up of  manufacturing of its
           AVE gfx Stent product.  This backlog was significantly reduced during
           the  quarter  ending  March  31,  1997.  There  can be no  assurance,
           however, that the Company will be successful in scaling up production
           of  new  products  or  that  it  will  not  experience  manufacturing
           difficulties in the future.

           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,  competition (including pricing pressures), costs and the
           timing  of  establishing  direct  sales  operations,  the  timing  of
           research and development  expenses  (including clinical trial related
           expenditures), the timing of new product introductions or transitions
           to new  products,  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,  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, changes in 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  an  effective  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 experienced,  and may experience
           in one or more future quarters, operating results which are below the

                                       12

<PAGE>

           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.

           Results of  Operations  - Three and Nine Months  Ended March 31, 1997
           and 1996

           Net sales.  For the three  months  ended  March 31,  1997,  net sales
           increased  to $20.4  million  from $15.6  million  in the  comparable
           period in fiscal 1996.  For the first nine months of fiscal 1997, net
           sales increased to $57.2 million from $37.3 million in the first nine
           months  of  fiscal  1996.  The  increase  in  net  sales  was  due to
           significant  increases  in  sales  of the  Company's  stent  systems,
           particularly  the AVE gfx and the Micro Stent II family of  products.
           The AVE gfx was  released  in certain  countries  internationally  in
           September  1996,  and 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,  and in the  second  quarter of
           fiscal  1997  the   Company   began   selling   directly  in  France,
           Switzerland,  Belgium and The Netherlands. All other commercial sales
           made by the  Company  were  through  unaffiliated  distributors.  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,
           particularly  in the second and third quarters of fiscal 1997,  which
           has caused the Company to reduce prices on its stent  systems.  Price
           reductions in response to competitive  pressure  reduced net sales in
           the second  quarter of fiscal 1997, but were offset by increased unit
           sales in the third quarter of fiscal 1997.  The Company  expects such
           price  competition  to  continue.  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 $4.6 million in the three
           months  ended  March 31,  1997 from $2.9  million  in the  comparable
           period in fiscal 1996,  and increased as a percentage of net sales to
           23% in the fiscal 1997  period  from 19% in the fiscal  1996  period.
           Cost of sales  increased to $11.2 million in the first nine months of
           fiscal  1997 from $7.8  million  in the first  nine  months of fiscal
           1996,  and  decreased as a percentage of net sales to 20% in the 1997
           period from 21% in the 1996 period.  The increase in absolute dollars
           during the three- and  nine-month  periods 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 increase as a percentage of net
           sales during the three-month period was primarily the result of lower
           unit  pricing  compared  to  the  prior  period.  The  decrease  as a
           percentage  of net sales during the  nine-month  period was primarily
           the result of leveraging  certain fixed  overhead  expenses  across a
           higher  base of sales  and an  increase  in stent  system  sales as a
           percentage of total sales.

           The Company expects cost of sales to continue to increase in absolute
           dollars as the Company increases the volume of products sold and adds
           additional manufacturing capacity and personnel.

           Research and Development.  Research and development  expenses,  which
           include  clinical  study  and  regulatory  costs,  decreased  to $3.2
           million in the three months ended March 31, 1997 from $3.8 million in
           the  comparable  period in fiscal 1996, and decreased as a percentage
           of net sales to 16% in the fiscal 1997 period from 24% in the

                                       13

<PAGE>

           fiscal 1996 period. A one-time charge of $2.6 million was included in
           the  comparable   period  in  fiscal  1996  in  connection  with  the
           termination  of certain patent  royalty  obligations.  Excluding this
           charge, research and development expenses increased from $1.1 million
           in the fiscal 1996 period and  increased as a percentage of net sales
           from 7% in the fiscal 1996 period.  Research and development expenses
           increased  to $7.3  million in the first nine  months of fiscal  1997
           from $5.0  million  in the first  nine  months of fiscal  1996  ($2.3
           million if the one-time  charge is excluded),  and constituted 13% of
           net sales in the 1997 period,  a decrease from 14% in the 1996 period
           (but an increase  from 6% if the one-time  charge in the prior period
           is excluded). The increase in absolute dollars and as a percentage of
           net sales during the three- and nine-month  periods (after  excluding
           the one-time  charge in the fiscal 1996 period) was  primarily due to
           the addition of research and development personnel,  increased levels
           of spending in connection with clinical  studies  relating to the AVE
           gfx Stent, the Micro Stent II and Micro Stent II XL systems and costs
           incurred in connection with the development of additional products.

           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 $6.4 million
           in the three  months  ended March 31,  1997 from $4.3  million in the
           comparable  period in fiscal 1996,  and  increased as a percentage of
           net sales to 31% in the 1997  period from 27% in the 1996  period.  A
           one-time charge of $2.6 million was included in the comparable period
           in fiscal 1996 in connection  with the  termination of certain patent
           royalty  obligations.  Excluding  this charge,  selling,  general and
           administrative  expenses  increased  from $1.6  million in the fiscal
           1996 period and  increased as a  percentage  of net sales from 11% in
           the fiscal 1996 period. Selling,  general and administrative expenses
           increased  in  absolute  dollars  to $15.7  million in the first nine
           months of fiscal  1997 from $5.5  million in the first nine months of
           fiscal 1996 (from $2.9 million if the one-time  charge is  excluded),
           and  increased as a percentage of net sales to 27% in the 1997 period
           from  15% in the  1996  period  (from 8% if the  one-time  charge  is
           excluded).  The increase during the three- and nine-month  periods 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,  including  the
           recent  commencement of direct sales  operations in Belgium,  France,
           Germany,  The  Netherlands,   Switzerland  and  the  United  Kingdom.
           Additionally,  the increase  reflects  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 $1.2 million  during
           the quarter.

           The Company  expects  selling,  general and  administrative  costs to
           continue to increase in absolute  dollars in the future primarily due
           to  direct  sales  operations  in  certain  European  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 ESS and other
           ongoing litigation.

           Interest and Other Income.  The Company had interest and other income
           of $871,000 in the three  months  ended March 31,  1997,  compared to
           $145,000 in the  comparable  period in fiscal  1996.  The Company had
           interest and other income of $3.2 million in the

                                       14

<PAGE>

           first nine months of fiscal  1997,  compared to $404,000 in the first
           nine months of fiscal  1996.  The  increase  during such  periods was
           primarily due to interest income earned from 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 $2.5 million in the three  months ended March 31, 1997,  compared
           to  $1.7  million  in the  comparable  period  in  fiscal  1996.  The
           Company's  provision  for income  taxes was $9.2 million in the first
           six months of fiscal 1997, compared to $6.6 million in the first nine
           months of fiscal  1996.  The increase in this  provision  during such
           periods  was a result of the  Company's  higher  earnings  during the
           fiscal 1997 period.

           Net Income.  The Company had net income of $4.6 million for the three
           months  ended March 31, 1997  compared to net income of $3.1  million
           for the  comparable  period  in  fiscal  1996  ($6.5  million  if the
           one-time  charge is excluded).  Earnings per share increased to $0.15
           in the three months ended March 31, 1997 from $0.11 in the comparable
           period  in fiscal  1996 (but  decreased  from  $0.24 if the  one-time
           charge is excluded).

           The Company had net income of $17.0 million for the first nine months
           of fiscal 1997  compared to net income of $12.7 million for the first
           nine months of fiscal 1996 ($16.2  million if the one-time  charge is
           excluded).  Earnings  per share  increased to $0.54 in the first nine
           months of fiscal  1997 from $0.46 in the first nine  months of fiscal
           1996 (but decreased from $0.59 if the one-time charge is excluded).

           Liquidity and Capital Resources 

           Net cash used in operating  activities was $26.6 million for the nine
           months ended March 31, 1997, which included the Company's purchase of
           short-term  investments  totaling  $29.3  million.   Excluding  these
           investments,   the  Company  had  net  cash   provided  by  operating
           activities  of $2.7 million for the  nine-month  period,  principally
           arising as a result of positive net income for the period. Cash, cash
           equivalents and short-term investments totaled $83.3 million at March
           31,  1997 as  compared  to $91.6  million at June 30,  1996.  Working
           capital  increased to $113.9 million at March 31, 1997 as compared to
           $106.9  million  at June  30,  1996.  Inventories  increased  to $6.3
           million  at March  31,  1997  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 $22.2  million in accounts  receivable
           at March 31,  1997,  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.  The Company has  commenced  litigation  against  such
           terminated  distributors  to collect such amounts.  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 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  may  require
           additional  equity or debt  financing to address its working  capital
           needs or to provide funding for capital

                                       15

<PAGE>

           expenditures in the future.  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.


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 2.    Changes in Securities

                             The company has adopted a  shareholder  rights plan
                             that is described in the Form 8-K set forth in Item
                             6.

                  Item 6.    Exhibits and Reports on Form 8-K

                  (a)        Exhibits

                             3.4      Certificate  of  Designation  of  Series A
                                      Junior  Participating  Preferred  Stock of
                                      the Company  (incorporated by reference to
                                      Exhibit 2 to the Company's  report on Form
                                      8-K filed February 27, 1997).

                             10.29    Rights Agreement, dated as of February 26,
                                      1997,  between  the  Company and The First
                                      National Bank of Boston  (incorporated  by
                                      reference  to  Exhibit 1 to the  Company's
                                      report  on Form  8-K  filed  February  27,
                                      1997).

                             10.30    Second  Amendment  to Lease,  dated May 5,
                                      1997,  to  that  certain  industrial  Real
                                      Estate Lease, dated August 5, 1996, by and
                                      between Dixie Walker and Ruth  Waltenspiel
                                      and Arterial Vascular  Engineering,  Inc.,
                                      as amended.

                             11.1     Statement  regarding  calculation  of  net
                                      income per share.

                             27       Financial Data Schedule.

                                       16

<PAGE>

                  (b)        Reports on Form 8-K

                             The Company filed the following  report on Form 8-K
                             relating to the adoption of a share purchase rights
                             plan:

                             Form 8-K

                             Report Date: February 25, 1997
                             Filing Date: February 27, 1997
                             Item 5 - Other Events
                             Item 7 - Exhibits

                                       17

<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: May 13, 1997                     /s/ John D. Miller
                                      ------------------------------------------
                                      John D. Miller
                                      Vice President of Finance, Chief Financial
                                      Officer    (Principal     Financial    and
                                      Accounting Officer)

                                       18

<PAGE>


                                INDEX TO EXHIBITS


Exhibit
-------

 3.4              Certificate of  Designation  of Series A Junior  Participating
                  Preferred Stock of the Company  (incorporated  by reference to
                  Exhibit 2 to the Company's  report on Form 8-K filed  February
                  27, 1997).

10.29             Rights Agreement,  dated as of February 26, 1997,  between the
                  Company and The First National Bank of Boston (incorporated by
                  reference  to  Exhibit 1 to the  Company's  report on Form 8-K
                  filed February 27, 1997).

10.30             Second Amendment to Lease,  dated May 5, 1997, to that certain
                  Industrial  Real Estate  Lease,  dated August 5, 1996,  by and
                  between  Dixie  Walker  and  Ruth   Waltenspiel  and  Arterial
                  Vascular Engineering, Inc., as amended.

11.1              Statement regarding computation of net income per share.

27                Financial Data Schedule