<PAGE>   1
 
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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
                            ------------------------
 
(MARK ONE)
 
[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
     OF THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 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: 0-26748
                            ------------------------
 
                              CARDIOMETRICS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                             <C>
                  DELAWARE                                       77-0095687
          (STATE OF INCORPORATION)                  (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
 
               645 CLYDE AVENUE, MOUNTAIN VIEW, CALIFORNIA 94043
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (415) 961-6993
                            ------------------------
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
 
     INDICATE BY CHECK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS 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 PERIODS AS 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 BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OF INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K.  [ ]
 
     AS OF FEBRUARY 14, 1997, THERE WERE 6,949,210 SHARES OF COMMON STOCK
OUTSTANDING. THE AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES
OF THE REGISTRANT WAS APPROXIMATELY $32,291,280 BASED UPON THE CLOSING PRICE OF
THE COMMON STOCK ON FEBRUARY 14, 1997 ON THE NASDAQ STOCK MARKET. SHARES OF
COMMON STOCK HELD BY EACH OFFICER, DIRECTOR AND HOLDER OF FIVE PERCENT OR MORE
OF THE OUTSTANDING COMMON STOCK HAVE BEEN EXCLUDED IN THAT SUCH PERSONS MAY BE
DEEMED TO BE AFFILIATES. THIS DETERMINATION OF AFFILIATE STATUS IS NOT
NECESSARILY A CONCLUSIVE DETERMINATION FOR OTHER PURPOSES.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
================================================================================
<PAGE>   2
 
                                     PART I
 
ITEM 1.  BUSINESS
 
GENERAL
 
     Cardiometrics, Inc. ("Cardiometrics" or the "Company") develops,
manufactures and markets intravascular medical devices to measure blood flow
impairment caused by coronary artery disease. Cardiometrics' principal products,
the FloWire(R) Doppler guide wire and FloMap(R) ultrasound instrument, represent
an advance in functional testing of blood flow impairment, enabling
cardiologists to evaluate the appropriateness of angioplasty interventions and
assess post-procedural results directly in the cardiac catheterization
laboratory ("cath lab"). Clinical experience demonstrates that the measurement
of blood flow impairment downstream from (distal to) an obstruction, which
Cardiometrics calls functional angiometry, provides information to improve the
quality of patient care and procedure outcomes in the diagnosis and treatment of
cardiovascular disease. The FloWire/FloMap system has received clearance from
the U.S. Food and Drug Administration ("FDA") and many corresponding European
and Pacific Rim regulatory agencies. As of December 1996, more than 65,000
FloWire guide wires have been sold and cumulative FloMap shipments were
approximately 490.
 
     Cardiometrics has also developed the WaveWire(TM)/WaveMap(TM) intracoronary
blood pressure measurement system, which was first used in a clinical case in
Europe in December 1996. Cardiometrics submitted a 510(k) application for the
WaveWire/WaveMap system in December 1996 and expects the product will be
available for sale in international markets as early as the second half of 1997.
 
     Cardiometrics' goal is to improve the quality of care and patient outcomes
by enhancing cost-effective diagnostic and interventional decision making for
patients with intravascular diseases. Key elements of Cardiometrics' business
strategy are to: (i) establish functional angiometry as a new "gold standard" in
the diagnosis of coronary artery disease to be used in conjunction with
angiography; (ii) establish functional angiometry as a primary tool for
assessing the results of interventions and the need for stent placement; (iii)
increase the reimbursement of functional angiometry; (iv) increase the rate of
FloWire usage with the installed base of FloMap instruments; and (v) utilize
Cardiometrics' core technologies to develop devices for other markets and
applications.
 
POTENTIAL MERGER
 
     On January 26, 1997, Cardiometrics, EndoSonics Corporation, a Delaware
Corporation ("EndoSonics"), and River Acquisition Corporation, a Delaware
Corporation and a wholly owned subsidiary of Endosonics ("Merger Sub"), entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
pursuant to which Merger Sub will be merged with and into Cardiometrics (the
"Merger"), with Cardiometrics surviving the Merger and becoming a wholly owned
subsidiary of EndoSonics. The consummation of the Merger is subject, among other
things, to the approval of the Merger by the stockholders of Cardiometrics, at a
stockholders meeting currently expected to be held in May 1997, and the
satisfaction of certain other closing conditions.
 
     Pursuant to the Merger, each outstanding share of Common Stock of
Cardiometrics ("Cardiometrics Common Stock") will be converted, without any
action on the part of the holder thereof, into the right to receive 0.35
newly-issued shares of EndoSonics Common Stock, 0.20 shares of CardioVascular
Dynamics, Inc. ("CVD") Common Stock held by Endosonics (subject to adjustment as
described below, the "CVD Exchange Ratio"), and $2.00 in cash (subject to
adjustment as described below, the "Cash Consideration," and together with such
shares of EndoSonics Common Stock and CVD Common Stock, the "Merger
Consideration"); with the CVD Exchange Ratio subject to increase, such that
based on the average of the closing prices of EndoSonics Common Stock and CVD
Common Stock to the ten trading days immediately preceding (and including) the
third trading day prior to the Cardiometrics Meeting, the Merger Consideration
shall equal $9.00; provided that, if the CVD Exchange Ratio obtained thereby
would exceed 0.2636, the CVD Exchange Ratio shall be 0.2636; provided further,
that EndoSonics has the right to substitute additional cash instead of
increasing the
 
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CVD Exchange Ratio; and provided further, that the CVD Exchange Ratio shall not
be less than 0.20 and the Cash Consideration shall not be less than $2.00. If,
after such increase of the CVD Exchange Ratio or Cash Consideration, the Merger
Consideration is valued (based on the ten day averages described above) at less
than $8.00, then Cardiometrics may terminate the Reorganization Agreement. Each
outstanding option to purchase shares of Cardiometrics Common Stock (a
"Cardiometrics Option") will, pursuant to its terms, accelerate immediately
prior to the consummation of the Merger and become fully exercisable for all the
shares of Cardiometrics Common Stock at the time subject to that option. Upon
the consummation of the Merger, each Cardiometrics Option will be assumed in
part by EndoSonics and converted into an option to purchase 0.35 shares of
EndoSonics Common Stock for each share of Cardiometrics Common Stock subject to
that option immediately prior to the Merger, and the exercise price per share
payable under the assumed option will be appropriately adjusted to reflect such
conversion ratio. The balance of each Cardiometrics Option will be converted
into the right to receive a payment from EndoSonics, to be made in cash and
shares of CVD Common Stock, equal in value to (i) the portion of the Merger
Consideration paid in cash and shares of CVD Common Stock per outstanding share
of Cardiometrics Common Stock multiplied by the number of shares of
Cardiometrics Common Stock subject to the option immediately prior to the
Merger, less (ii) the difference between the aggregate option exercise price in
effect for that option immediately prior to the Merger and the aggregate
exercise price in effect for that option immediately after the partial
assumption by EndoSonics. Cardiometrics stockholders will receive cash in lieu
of fractional shares of EndoSonics Common Stock and CVD Common Stock. See the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on February 10, 1997 for further information regarding the Merger.
 
BACKGROUND
 
     Heart disease is the leading cause of death and disability in the United
States. Atherosclerosis, a principal form of heart disease, is a progressive and
degenerative process in which cholesterol and other fatty materials are
deposited on the walls of arteries, forming a build-up of plaque known as a
lesion. The accumulation of plaque, in turn, narrows the interior passage, or
lumen, of the blood vessels and in many cases impairs blood flow beyond the
blockage. Atherosclerosis in the coronary arteries, which carry oxygenated blood
to the heart, results in chest pain, known as angina, and can ultimately lead to
heart attack and death. In peripheral arteries atherosclerosis can lead to
decreased mobility, chronic pain and amputation. In the cerebrovasculature
atherosclerosis can lead to stroke.
 
  Treatment
 
     The primary treatment options for atherosclerosis are drug therapy,
Coronary Artery Bypass Grafting ("CABG") and Percutaneous Transluminal Coronary
Angioplasty ("PTCA" or "balloon angioplasty"). In addition, a variety of new
catheter based treatments have been developed to augment or replace balloon
angioplasty, including atherectomy, laser angioplasty and, most predominantly,
stent placement. Some drug therapies act directly to reduce the accumulation of
plaque or prevent additional plaque from forming, while others merely relieve
angina without eradicating the plaque itself. CABG surgery redirects blood flow
around one to four arterial blockages. Conduit vessels taken from elsewhere in
the body are grafted to the blocked vessels so blood can bypass the occlusion.
PTCA is a procedure in which a balloon tipped catheter is guided to the lesion
and then inflated and deflated several times to compress the plaque against the
vessel wall. The blockage is reduced by rupturing the plaque and stretching it
against the vessel wall.
 
     Although angioplasty is generally successful in initially opening the
blockage, between 30% and 40% of angioplasty patients suffer a significant
renarrowing of the treated blood vessel within six months after the procedure, a
process known as restenosis. Coronary blockages can also be treated with
atherectomy, which uses a mechanical device at the tip of a catheter to cut or
grind away plaque, and laser angioplasty, which delivers laser energy to break
down or ablate plaque. These devices are also associated with a high rate of
restenosis. The most significant recent development in the treatment of
 
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coronary artery disease is the placement of stents. Stents are small metal
frames delivered to the lesion using a catheter and a guide wire, deployed
(i.e., expanded) and permanently left in the artery as an implant to maintain
the open lumen and improve blood flow. Because stents have been shown to reduce
the rate of restenosis from approximately 30-40% down to 20% or less, they are
rapidly gaining acceptance among and are increasingly being used by
cardiologists. However, due to the high cost of stenting and the difficulty of
reopening an area of restenosis which has already been stented, Cardiometrics
believes a new practice pattern of provisional or conditional stenting is
developing. Provisional stenting is the technique of identifying only those
lesions in which stents would provide optimum results given the increased cost
and improved clinical outcomes, rather than a blanket strategy of stenting each
lesion. Under provisional or conditional stenting, if aggressive balloon
angioplasty does not achieve satisfactory results, then stenting is performed.
 
  Diagnosis
 
     Coronary angiography is considered the "gold standard" in the diagnosis of
coronary artery disease. Coronary angiography is performed in the cath lab to
evaluate the location, size and shape of atherosclerotic lesions by injecting a
radiopaque dye via a catheter into the coronary arteries so that the relative
degree of narrowing of the vessels causing obstruction of blood flow may be
observed on an x-ray monitor. Based on a visual observation of the distribution
of the dye throughout the arteries, the cardiologist locates the lesion and
estimates the extent to which the obstructed artery is narrowed. The number and
distribution of lesions and the degree of narrowing of the affected arteries are
used to determine the course of treatment.
 
     While angiography is a vital tool in the diagnosis of coronary artery
disease, it requires subjective analysis and provides only limited information
about the affected vessels. Angiography provides no objective functional
information about the actual extent to which a lesion, regardless of its size,
interrupts blood flow to the myocardium. It is the disruption of blood
flow -- not the lesion itself -- that causes angina, heart attacks and
potentially death. In patients with lesions in more than one vessel, angiography
may not indicate which lesion is causing the patient's symptoms (the "culprit"
lesion). While some patients with multi-vessel disease need all of their lesions
treated, others have only one or more culprit lesions in need of treatment.
 
     Intravascular ultrasound imaging ("IVUS") is designed to augment
angiography. IVUS uses high frequency ultrasound to determine the position,
distribution, amount and composition of cardiovascular lesions. IVUS provides a
highly detailed anatomical view of a lesion and assists interventional
cardiologists in selecting which treatment option has the greatest chance of
success, in positioning therapeutic devices, especially stents, and in assessing
post-procedural results. However, like angiography, IVUS is an anatomical tool
that does not directly measure a lesion's effect on blood flow.
 
     Recognizing the limitations of angiography and other anatomical testing
such as IVUS, a joint committee of the American College of Cardiology ("ACC")
and American Heart Association ("AHA") published guidelines in 1993 that call,
in nearly all cases, for objective evidence of ischemia, or blood flow
impairment, as a justification for angioplasty. In addition, Medicare, in its
Coverage Issues Manual, specifies that Medicare covers balloon angioplasty only
if objective evidence of myocardial ischemia has been demonstrated.
 
     The traditional forms of functional testing, stress electrocardiography
("stress ECG"), stress echocardiography and stress perfusion imaging are each
performed outside of the cath lab. Functional angiometry with the FloWire/FloMap
system, however, is performed in the cath lab and, unlike the more traditional
functional tests, is a vessel specific test and thus can accurately determine
which blocked vessel impairs blood flow to the heart. The most common functional
test is stress electrocardiography, in which the electrical impulses of the
heart are recorded, usually while the patient exercises on a stationary bike or
treadmill. The ECG directly identifies the location of any electrical
disturbances, which is indirect evidence of impairment of blood flow to the
myocardium. Stress ECGs are often unreliable, especially in patients with single
vessel disease, among whom a large percentage falsely test
 
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negative. Additionally, stress ECG may not identify the culprit lesion in
patients with multi-vessel disease. Stress echocardiography uses ultrasound to
create a visual representation of the heart. Since muscle motion or
contractility are affected by insufficient blood flow, areas with poor motion or
contractility provide indirect evidence of blood flow impairment. While the
results are more reliable than with stress ECG, stress echocardiography results
may vary from one institution to another and are susceptible to false negatives.
In addition, stress echocardiography is not appropriate for certain individuals
due to their body size or fat content. Stress perfusion imaging is a functional
test that measures impairment of blood flow to the myocardium, also known as a
perfusion defect. A radioactive substance, usually radionuclide thallium, is
injected intravenously. The heart is then scanned radiographically to determine
which areas of the myocardium the radionuclide reaches. If a particular region
of the myocardium shows little or no uptake of the radionuclide, there is
probably a flow limiting lesion in the artery that supplies that region with
blood.
 
     In addition to their individual limitations, each of these three stress
tests share a common limitation in that they must be performed outside of the
cath lab, often by a physician other than the interventional cardiologist. The
ability to perform functional testing of blood flow impairment in the cath lab
is significant because it enables the cardiologist to perform the test during
angiography. The blockage (a "lesion") within a diseased vessel can then be
appropriately treated without delay based on the results of functional
angiometry.
 
PRODUCTS
 
     The following table identifies Cardiometrics' commercially available
products and their principle applications.
 
<TABLE>
<CAPTION>
                                                                                     DATE OF
                                                                                   COMMERCIAL
   CARDIOVASCULAR PRODUCTS                   PRINCIPAL APPLICATION                AVAILABILITY
-----------------------------  -------------------------------------------------  -------------
<S>                            <C>                                                <C>
FloWire Doppler guide wire     Assessment of coronary blood flow before, during   Second
(0.014" size)                  and immediately after interventions while          quarter 1993
                               replacing conventional angioplasty guide wire;
                               most commonly used size in clinical interventions
FloWire Doppler guide wire     Same functionality as 0.014" FloWire               Third
(0.018" size)                                                                     quarter 1991
FloMap ultrasound instrument   Transmission, analysis and display of Doppler      Third
                               signals; documentation of functional angiometry    quarter 1991
                               with coronary applications software; portable,
                               free-standing unit
FloMap II ultrasound           Same functionality as FloMap; compact unit for     Third
instrument                     installation in cath lab and compatible with       quarter 1995
                               existing monitors to display blood flow velocity
                               information
FloWire XT Doppler             Extra support FloWire for stent applications       First
guide wire                                                                        quarter 1996
(0.014" size)
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                     DATE OF
                                                                                   COMMERCIAL
   NEUROVASCULAR PRODUCTS                    PRINCIPAL APPLICATION                AVAILABILITY
-----------------------------  -------------------------------------------------  -------------
<S>                            <C>                                                <C>
SmartWire Doppler              Assessment of cerebrovascular blood flow           Fourth
guide wire                     abnormalities while replacing conventional guide   quarter 1993
(0.014" size)                  wire
SmartMap ultrasound            Transmission, analysis and display of Doppler      Fourth
instrument                     signals, documentation of functional angiometry    quarter 1993
                               with cerebrovascular applications software;
                               portable free-standing unit
</TABLE>
 
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  FloWire
 
     The FloWire Doppler guide wire functions as an angioplasty guide wire for
crossing lesions and does not add to the number of devices required for
interventional applications. Previously developed catheter-based systems were so
large that once the lesion was crossed, the device itself interfered with blood
flow. Although these catheter-based systems can measure blood flow velocity
proximal to a lesion, such measurements are inadequate because they are
typically affected by flow through other branches of the vessel upstream from
the blockage.
 
     The FloWire uses Doppler ultrasound to perform blood flow velocity
measurements within blood vessels. An ultrasonic Doppler transducer mounted at
the tip of the FloWire transmits a signal that is reflected back by the red
blood cells flowing past the FloWire. The change in frequency between the
transmitted and reflected signals, the Doppler shift, is directly proportional
to the velocity of the moving red blood cells. The accuracy of FloWire
measurements is enhanced by a patented miniaturized sensor designed to provide a
wide ultrasound beam, which allows for a large sample volume encompassing the
central axis of small or medium size arteries. In addition, the Doppler sample
volume is positioned to ensure that the measurement is not affected by the wake
from the blood flowing around the wire.
 
     Under normal circumstances, blood flow increases during exertion to meet
the increased myocardial oxygen demand and coronary flow reserve is high. In the
presence of a flow limiting lesion, however, blood flow cannot increase to meet
the increased oxygen demand and coronary flow reserve is low. Low coronary flow
reserve provides objective, quantitative evidence that a coronary artery lesion
impairs blood flow and thus requires intervention.
 
     The patented electrical connection on the FloWire is designed to allow
complete compatibility with other devices, such as balloon catheters. This
design helps make use of the FloWire in the cath lab quick, convenient and easy
to integrate with other therapeutic devices. Use of the FloWire typically adds
no more than 5-10 minutes to the procedure.
 
     The electrical interface between the FloWire and the instrumentation is
accomplished using the disposable rotary connector cable. In 1994, after
receiving 510(k) clearance, Cardiometrics released a new cable which makes it
easier to insert the FloWire or SmartWire into the electrical connection. It
also improves the electrical continuity of the interface during handling.
 
  FloMap
 
     The FloMap ultrasound instrument transmits pulsed ultrasound signals to the
transducer at the tip of the FloWire, receives the returning Doppler signals and
processes the information using Doppler electronics. The FloMap analyzes the
frequency spectrum of the signals and converts the information to a velocity
measurement expressed in centimeters per second. The information is delivered
both graphically and numerically and is easily understood by physicians and
other trained personnel. The key functional measures obtained are average peak
velocity, diastolic-to-systolic flow velocity ratio, Doppler blood flow velocity
trend monitoring and distal coronary flow reserve, which is the ratio of
myocardial blood flow upon exertion to that at rest, measured distal to coronary
artery blockages. The continuous graphic display using a scrolling spectral
display on the monitor screen provides more valuable information regarding
signal reliability and accuracy than a simple mean or peak velocity trace. The
display is especially beneficial during interventions so that blood flow trends
may be continuously monitored.
 
     The FloMap was originally developed as a freestanding, portable unit with
its own monitor. The newly developed FloMap II, a smaller unit about the size of
a video cassette recorder, is attached to existing cath lab equipment and
transmits the display information and video to the existing cath lab monitors.
Once installed, the FloMap II becomes an integral part of the cath lab with its
own printer for documentation.
 
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<PAGE>   7
 
     The FloMap and FloMap II can be and usually are operated via a hand held
remote control unit, called the FloMote(TM). Cardiometrics released in 1996 a
modified remote control in which the keys have been reconfigured for improved
ease of use. In particular, alphanumeric keys have been added for faster patient
data entry prior to a procedure. The new FloMote is also more ergonomic, with
the most important keys being larger and ideally placed for simple, one handed
operation.
 
  SmartWire
 
     The SmartWire uses the same ultrasound technology as the FloWire to assess
blood flow abnormalities in the cerebrovasculature. The physical design
characteristics of the SmartWire guide wire, such as the longer flexible distal
coil segment relative to the FloWire, make it suitable for use in the
cerebrovasculature.
 
  SmartMap
 
     The SmartMap ultrasound instrument is a portable, freestanding unit similar
to the FloMap ultrasound instrument with minor modifications for the
cerebrovascular application. The SmartMap software has been specifically
configured to include parameters of interest to the interventional
neuroradiologist during cerebrovascular diagnostic procedures and interventions.
 
     FloMap(R), FloWire(R), SmartWire(R) and SmartMap(R) are registered
trademarks of Cardiometrics. FloMote(TM), WaveWire(TM) and WaveMap(TM) are
trademarks of Cardiometrics.
 
MARKETS
 
     The worldwide market potential for the FloWire/FloMap system is estimated
to be approximately 1,200,000 procedures annually for diagnostic and
interventional applications (assuming the same FloWire guide wire would be used
in the estimated 30% of balloon angioplasty procedures which are performed in
connection with diagnostic angiography outside of the United States). The
WaveWire/WaveMap system, when commercially introduced, will address these same
markets.
 
  Diagnostic Applications in the U.S. Market
 
     There were approximately 1,560,000 coronary angiographies performed in the
U.S. in 1994 according to MDI. The results of a published study indicate that
approximately 53% of all angiography patients have intermediate lesions.
Accordingly, Cardiometrics estimates that in 1994 approximately 825,000
angiography patients in the U.S. had intermediate lesions. Cardiometrics further
estimates that approximately one-half, or 410,000, of the patients were not
functionally tested prior to a treatment decision. Many of these patients who
are not functionally tested either receive angioplasty without the justification
called for in published professional guidelines or do not receive angioplasty
even though a functional test might have demonstrated intervention was
clinically appropriate.
 
  Diagnostic Application in the International Market
 
     There were approximately 1,200,000 coronary angiographies performed outside
the U.S. in 1994 according to MDI. Of these angiographies, there were
approximately 435,000 multi-vessel disease patients with at least one
intermediate lesion based on Cardiometrics' analysis of published studies and
MDI market data. While these patients typically undergo stress ECG testing prior
to angiography, the FloWire/FloMap system enables the cardiologist to determine
in the cath lab the functional severity of each individual vessel involved to
identify the culprit lesion for intervention.
 
  Interventional Applications in the Worldwide Market
 
     There were approximately 947,000 percutaneous coronary interventions
worldwide in 1996, with 565,000 in the U.S. and an additional 382,000 such
procedures internationally according to Cowen & Company. The FloWire can be
integrated into angioplasty procedures by replacing the conventional
 
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<PAGE>   8
 
angioplasty guide wire. Since approximately 60% of percutaneous coronary
interventions involve balloon angioplasty, according to Cowen & Company, there
are an estimated 568,000 worldwide balloon angioplasty procedures. In these
procedures, FloWire measures of coronary flow reserve (CFR), combined with
angiography, can potentially be used to predict the recurrence of coronary
artery blockages, called restenosis, requiring a repeat angioplasty and may be
used to determine the need for further balloon angioplasty and stent placement
to optimize clinical outcomes.
 
  Applications for Patients with Normal Coronary Angiography
 
     A potential application of the FloWire is in diagnosing patients with
classic symptoms of angina, yet have no angiographic evidence of coronary artery
disease. Cardiometrics estimates that approximately 15%, or approximately
300,000 patients per year in the U.S., who undergo angiography fall into this
category. The symptoms in these patients are often caused by atherosclerosis of
the microvasculature or spasms of one or more coronary arteries, neither of
which can be detected with angiography. Either condition may be detected with
the FloWire. This diagnostic procedure has been adopted as a standardized
clinical protocol at the Mayo Clinic; however, Cardiometrics believes that
future publication of the Mayo Clinic's clinical outcomes and a simpler, faster
protocol will need to be developed prior to widespread adoption of the FloWire
for this application.
 
SALES AND MARKETING
 
     Cardiometrics directs its marketing efforts to interventional cardiologists
who diagnose and treat coronary artery disease. Cardiometrics also markets to
hospital and cath lab administrators in light of their expanding roles in
purchase decisions.
 
  Domestic Sales and Marketing
 
     A cumulative total of 139 FloMap instruments have been shipped within the
United States. Cardiometrics offers the option of providing the FloMap
instrument to institutions that agree to minimum FloWire purchase commitments at
non-discounted prices, thereby assuring consistent usage. The sales effort
focuses on routine clinical usage and the support of new clinical protocols
designed to expand markets and usage.
 
     Domestic sales are handled by a direct sales force headed by management
with extensive background and experience in the interventional cardiology
market. Cardiometrics currently has six regional field representatives who have
previous experience with interventional cardiology companies. The sales force
also includes one national training specialist dedicated to creating and
servicing educational sites. Cardiometrics is also exploring possible
distribution arrangements with major U.S. medical device companies.
 
     Cardiometrics has training centers at clinical sites with the most
experience with the FloWire/FloMap system. National training programs have been
held at Allegheny General Hospital and St. Louis University Hospital.
Experienced physicians often visit new installation sites to provide educational
support. Cardiometrics conducts training courses for cath lab personnel at its
home offices in California.
 
  International Sales and Marketing
 
     More than 300 FloMap instruments have been shipped to sites in more than 20
countries outside the U.S. International sales accounted for 75% of
Cardiometrics' 1996 revenues. Japan alone accounted for 41% of 1996 revenues.
Europe accounted for 29% and the rest of the world accounted for 5% of revenues
in 1996. Cardiometrics' success in Japan is due in part to the official
reimbursement status granted to the FloWire/FloMap system by the Ministry of
Health in 1992. The FloMap is installed in more than 100 cath labs in Japan.
 
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<PAGE>   9
 
     Cardiometrics' international sales are managed by an international sales
and marketing group with extensive background and experience in the
interventional cardiology market. Cardiometrics also utilizes a network of 20
international distributors with experience in cardiology products, most of whom
represent other cardiology products. Cardiometrics' internal sales and marketing
staff manage these distributor relationships to coordinate overall sales efforts
and direct end user marketing. Cardiometrics also sponsors international
clinical studies and major European and Japanese symposiums to market its
products internationally. Three regional clinical managers, one in Paris, one in
Amsterdam and one in Seoul, train distributors and key customers overseas in the
clinical use of Cardiometrics' products.
 
     Cardiometrics typically enters into distribution agreements with its
international distributors, many of which are cancelable upon 90 days notice.
Most of Cardiometrics' international sales are made pursuant to individual
purchase orders placed by distributors.
 
     In Japan, Cardiometrics distributes its products through Goodman Co., Ltd.
("Goodman") and Kaneko Enterprises, Inc. ("Kaneko") pursuant to a distribution
agreement appointing Goodman and Kaneko as Cardiometrics' exclusive distributors
for its products in Japan through September 1999. In Germany, Cardiometrics
distributes FloWire devices and FloMap instruments through A.D. Krauth pursuant
to a distribution agreement which will expire at the end of 1997.
 
     In September 1995, Cardiometrics entered into an exclusive distribution
agreement with Cordis Europa, N.V., a subsidiary of Cordis, which was
subsequently acquired by Johnson & Johnson ("Cordis/Johnson & Johnson"), to
distribute the FloMap and SmartMap instruments and FloWire and SmartWire guide
wires in the United Kingdom, France, Spain, Scandinavia, South Africa and
certain Middle Eastern countries. Cordis/Johnson & Johnson is required to make
certain minimum purchases of these products during the term of the distribution
agreement in order to maintain its exclusive distribution rights. In 1996, the
Cordis/Johnson & Johnson agreement was extended through 1997 and Beneluex was
added to the Cordis/Johnson & Johnson's distribution territory. The distribution
agreement also provides that either party may immediately terminate the
agreement in the event that one of the parties is acquired by a third party.
Cardiometrics has entered into the Reorganization Agreement with EndoSonics and
upon the consummation of the Merger there can be no assurance that
Cardiometrics' distribution agreement with Cordis/Johnson & Johnson will not be
terminated. However, in light of EndoSonics' worldwide distribution
relationships with Johnson & Johnson, Cardiometrics believes the risk of
termination due to the Merger is very low. Also, Cordis/Johnson & Johnson is
Cardiometrics' exclusive distributor of the FloWire/FloMap system in Canada.
 
MANUFACTURING
 
     Cardiometrics purchases from outside vendors certain of the components
utilized in the manufacture of its products. These items are generally produced
to Cardiometrics' specifications and in many instances to Cardiometrics'
designs. Cardiometrics performs inspections and product tests at various steps
in its vendors' manufacturing process to ensure compliance with Cardiometrics'
specifications.
 
     Currently Cardiometrics produces transducer sensor fabrications and certain
mechanical parts in-house and maintains its in-house capability for all
fabrication and assembly processes. Many of the fabrication processes are
performed on specialized equipment which was designed and built specifically to
manufacture Cardiometrics' products. Guide wire assembly, testing, packaging and
final inspection occurs in a 2,300 square foot clean room. Packaged and
inspected guide wires are moved into a boxing area outside the clean room where
the product is boxed, labeled and prepared for shipment to Cardiometrics'
contract sterilizer. The product is ethylene oxide sterilized.
 
     Cardiometrics maintains rigorous quality control standards. All
manufacturing and testing is performed in accordance with FDA-issued Good
Manufacturing Practices ("GMP"), and Cardiometrics completed a successful GMP
inspection in January 1995. All materials are lot controlled and each FloWire
guide wire is serialized for full traceability. To date, Cardiometrics has not
needed to perform a voluntary or involuntary product recall. Cardiometrics has
made modifications to its
 
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<PAGE>   10
 
operations to comply with the ISO 9000 standards (European standards analogous
to GMP) and obtained the CE mark (European clearance analogous to FDA clearance)
under the European Medical Device Directive (93/42/EEC) and ISO 9000 standards
in January 1996.
 
     Most of the electrical assembly processes for the FloMap and SmartMap
instruments have been outsourced to allow Cardiometrics to focus on final
product assembly and testing. Cardiometrics configures instruments to the
customer's power and video requirements and functionally tests them at the
system level prior to shipment. The instruments are designed and manufactured to
meet or exceed required industry design and performance standards.
 
RESEARCH AND DEVELOPMENT
 
     Cardiometrics' research and development projects include enhancements to
existing products, the development of new products and clinical outcome studies
to support existing products, such as those discussed below.
 
  Product Enhancements and Development
 
     Cardiometrics has developed the WaveWire(TM)/WaveMap(TM) intracoronary
blood pressure measurement system to permit analysis of mean intracoronary
pressures as well as diastolic, systolic and other hemodynamic parameters. First
used in a clinical case in Europe in December 1996, the WaveWire is a 0.014 inch
clinical angioplasty guide wire with an electronic pressure sensor mounted 3
centimeters from the tip. The WaveMap is an instrument for processing and
displaying blood pressure information received from the WaveWire. Cardiometrics
submitted a 510(k) application for the WaveWire/WaveMap system in December 1996.
The WaveWire guide wire is undergoing manufacturing process improvements to
achieve production yields required to prepare for commercial-scale
manufacturing. Cardiometrics expects the product will be available for sale in
international markets as early as the second half of 1997. In addition,
Cardiometrics is developing a combination blood pressure sensing and blood flow
velocity device for enhanced functional testing capabilities. Like the FloWire
and the WaveWire, the combination device will be capable of replacing
conventional angioplasty guide wires with similar mechanical characteristics as
the FloWire.
 
     Cardiometrics is developing a 300 cm FloWire guide wire, an additional
version of the FloWire, in order to better support coronary stent placement
procedures. The longer version of the FloWire guide wire will allow the guide
wire to function as a guide for removing the initial balloon catheter and
introducing the stent catheter to complete the procedure, a so-called "over the
wire" exchange, without the need to extend the guide wire's length during the
procedure. The 300 cm FloWire is currently undergoing final design and
development and will then be submitted to the FDA for 510(k) review.
 
     The FloWire proprietary transducer design distinguishes itself from other
intravascular Doppler technologies in that it has a divergent beam pattern,
making it easier to sample the flow in the center of the vessel. Modifications
to this transducer design, increasing ease of signal acquisition and signal
stability and improving the product's manufacturability, received 510(k)
clearance in October 1996 and will replace the current tranducer sometime during
1997.
 
     Based on the same technology as the FloWire and FloMap, Cardiometrics has
developed products, the SmartWire Doppler guide wire and SmartMap ultrasound
instrument, which assess blood flow abnormalities in the cerebrovasculature for
the interventional neuroradiology market. Cardiometrics believes that this
information will assist in the diagnosis and treatment of cerebrovascular
blockages and the management of strokes, brain aneurysms, arteriovenous
malformations and other blood flow abnormalities. To date, only approximately
670 SmartWire guide wires have been sold for clinical research. Cardiometrics
expects that substantial clinical outcome studies demonstrating the efficacy of
the SmartWire/SmartMap system will likely be required to create significant for
Cardiometrics to significantly access this market and currently such studies are
not planned.
 
                                       10
<PAGE>   11
 
     In 1995 Cardiometrics introduced a primary 0.014" angioplasty guide wire
then market under the name AccuTrac. Based on customer response, Cardiometrics
no longer actively markets this product and is examining improvements in the
lubricious coating for the product. Cardiometrics expects that any such coating
improvements would also be utilized on Cardiometrics' other guide wire products.
 
  Clinical Outcome Studies
 
     Cardiometrics' research and development efforts include the sponsorship of
clinical outcome studies regarding Cardiometrics' products, such as the recently
completed Doppler Endpoints Balloon Angioplasty Trial Europe ("DEBATE") clinical
study. The DEBATE study, whose principal investigator was Professor Patrick
Serruys, M.D., Ph.D., of Erasmus University, Rotterdam, the Netherlands,
demonstrated that use of the FloWire guide wire (in conjunction with
quantitative coronary angiography) after balloon angioplasty can help identify
patients who are at high risk of restenosis. Based on the findings of the DEBATE
study, Cardiometrics initiated in 1996, among other studies, two major
clinical/economical outcome studies, DESTNI-CFR and DEBATE II, to validate the
findings of the DEBATE study in broader and larger patient populations. These
new studies are designed to demonstrate the benefits of physiologically guided
interventions using the FloWire, and to support the use of the FloWire in the
growing practice pattern of provisional stenting. Both studies feature clinical
and economic endpoints, and are being performed in many of the largest
interventional cardiology centers around the world. As is typical in medical
research, Cardiometrics funds the study costs of independent researchers and
clinicians.
 
COMPETITION
 
     Competition from products which help to diagnose and treat cardiovascular
disease is intense and may increase. In addition to functional stress testing,
competition currently comes from three sources: pressure devices, intravascular
ultrasound imaging and catheter based Doppler systems. As with stress testing
performed outside the cath lab, Cardiometrics does not view any of these other
three technologies as fulfilling the need for functional testing in the cath
lab, but they do compete for limited capital budgets and reimbursement funds and
for physician endorsement and adoption.
 
     When balloon angioplasty was first performed, the procedure was often
evaluated by the measurement of pressure drops across the lesion. However, the
measurements were often inaccurate due to the reduced diameter of the
angioplasty catheters. Furthermore, the physical presence of the catheter across
the lesion obstructed blood flow, thereby affecting the measurements.
Cardiometrics believes that although pressure devices can provide a valid
functional assessment of the degree of stenosis, when combined with the FloWire
derived information it can provide a more clinically useful functional
assessment of blood flow impairment.
 
     Cardiometrics is aware that other companies have developed or may be
developing pressure sensor-based guide wire systems, and Cardiometrics itself is
researching the possible application of its own technology to create a
combination pressure/flow assessment system. Radi Medical Systems, located in
Sweden, has been marketing a fiber optic version of a pressure guide wire
outside the U.S., but the product does not have the mechanical properties of a
primary guide wire for use in angioplasty and therefore is used mainly as a
research rather than clinical guide wire. Cardiometrics believes the
capabilities of this particular product are limited and does not consider it a
competing factor in the market. Cardiometrics believes that Scimed/Boston
Scientific and Schneider are developing and preparing to market guide wires with
pressure measurement capabilities. To the Company's knowledge, details regarding
these potential new product offerings are not yet publicly available.
 
     Intravascular ultrasound imaging ("IVUS"), like angiography, is an anatomic
tool. Therefore, from a clinical standpoint IVUS is complementary to, rather
than competitive with, functional angiometry. However, from a business
standpoint, IVUS is competitive with Cardiometrics' products since some
cardiologists may perform angioplasty without a functional test based only on
anatomical results and since both technologies could be competing for limited
hospital budgets, payor reimburse-
 
                                       11
<PAGE>   12
 
ment funds and physician endorsement and adoption. The primary competitors in
this market include Cardiovascular Imaging Systems, Inc. ("CVIS"), a subsidiary
of Boston Scientific Corporation, EndoSonics Corporation and a joint marketing
relationship between Hewlett-Packard Co. and ACS/Guidant.
 
     Schneider, NuMed Inc. and Millar Instruments Inc. market or have marketed
catheters with distally-mounted Doppler ultrasound sensors. These larger
diameter products are limited to measuring coronary flow reserve proximal to the
lesion, because they are too large to cross the lesion without the device itself
interfering with flow. According to clinical data obtained using the FloWire
device, proximal measurements often do not show the flow limiting effects of a
lesion. Cardiometrics believes that distal measurements, which may be obtained
with the significantly smaller FloWire device, are necessary to accurately
assess impairment of flow. Cardiometrics believes its FloWire/FloMap system
competes favorably against these catheter based Doppler systems because of the
catheters' comparatively large size and less advanced hardware and software used
to obtain and interpret the signal.
 
PATENTS AND PROPRIETARY TECHNOLOGY
 
     Cardiometrics holds 17 issued patents in the United States associated with
the FloWire/FloMap and WaveWire/WaveMap systems and has eight U.S. patents
pending. Associated with the U.S. patents, there are a number of patents pending
in the major foreign markets. In addition to its patent positions, Cardiometrics
seeks to protect its proprietary information, especially manufacturing
processes, under applicable laws that protect trade secrets.
 
     The field of devices for the diagnosis and treatment of cardiovascular
disease is covered by a large and increasing number of patents and patent
applications, and there has been substantial litigation regarding patent and
intellectual property rights among medical device companies.
 
GOVERNMENT REGULATION
 
     Clinical testing, manufacture and sale of Cardiometrics' products are
subject to regulation by numerous governmental authorities, principally the FDA
and corresponding state and foreign regulatory agencies. Pursuant to the Federal
Food, Drug, and Cosmetic Act, and the regulations promulgated thereunder (the
"Act"), the FDA regulates the clinical testing, manufacture, labeling,
distribution and promotion of medical devices. Noncompliance with applicable
requirements can result in, among other things, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, failure of the government to grant premarket clearance or premarket
approval for devices, withdrawal of marketing approvals and criminal
prosecution.
 
     In the U.S., medical devices are classified into one of three classes
(i.e., Class I, II, or III) on the basis of the controls deemed necessary by the
FDA to reasonably ensure their safety and effectiveness. Class I devices are
subject to general controls (e.g., labeling, premarket notification and
adherence to GMPs) and Class II devices are subject to general and special
controls (e.g., performance standards, postmarket surveillance, patient
registries and FDA guidelines). Generally, Class III devices are those which
must receive premarket approval by the FDA to ensure their safety and
effectiveness (e.g., life-sustaining, life-supporting and implantable devices,
or new devices which have been found not to be substantially equivalent to
legally marketed devices).
 
     Before a new device can be introduced to the market, the manufacturer
generally must obtain FDA clearance through either a 510(k) premarket
notification or a premarket approval application ("PMA"). A 510(k) clearance
will be granted if the submitted information establishes that the proposed
device is "substantially equivalent" to a legally marketed Class I or Class II
medical device, or to a preamendment Class III medical device for which the FDA
has not called for PMAs. The FDA has recently been requiring a more rigorous
demonstration of substantial equivalence than in the past, including requiring
clinical data more frequently. It generally takes from four to 12 months from
submission to obtain 510(k) clearance, but it may take longer. The FDA may
determine that a proposed device is not substantially equivalent to a legally
marketed device, or that additional data are
 
                                       12
<PAGE>   13
 
needed before a substantial equivalence determination can be made. A "not
substantially equivalent" determination, or a request for additional data, could
delay the market introduction of new products that fall into this category and
could have a material adverse effect on Cardiometrics' business, financial
condition and results of operations. For any of Cardiometrics' devices that are
cleared through the 510(k) process, modifications or enhancements that could
significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device will require a new
510(k) submission. There can be no assurance that Cardiometrics will obtain
510(k) premarket clearance within the above time frames, if at all, for any of
the devices for which it may file a 510(k).
 
     If human clinical trials of a device are required, and the device presents
a "significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) will have to file an IDE application prior to
commencing human clinical trials. The IDE application must be supported by data,
typically including the results of animal and laboratory testing. If the IDE
application is approved, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. A PMA application must be filed if a proposed device is not eligible for
510(k) clearance. A PMA application must be supported by extensive data,
including preclinical and clinical trial data, to demonstrate the safety and
effectiveness of the device, as well as extensive manufacturing information.
Upon receipt of a PMA application, the FDA makes a threshold determination as to
whether the application is sufficiently fileable, and that it is complete to
permit a substantive review. If the FDA determines that the PMA application is
sufficiently complete to permit a substantive review, the FDA will accept the
application for filing.
 
     The FDA review of a PMA application can be expensive, lengthy and
uncertain. It generally takes one to two years from the date the PMA is accepted
for filing, but may take significantly longer. The FDA can ask for additional
information and generally will conduct a GMP inspection. Modifications to a
device that is the subject of an approved PMA, its labeling, or manufacturing
process may require approval by the FDA of PMA supplements or new PMAs.
Supplements to a PMA often require the submission of the same type of
information required for an initial PMA, except that the supplement is generally
limited to that information needed to support the proposed change from the
product covered by the original PMA.
 
     There can be no assurance that Cardiometrics will be able to obtain
necessary regulatory approvals or clearances on a timely basis or at all, and
delays in receipt of or failure to receive such approvals, the loss of
previously received approvals, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on Cardiometrics'
business, financial condition and results of operations.
 
     Intravascular guide wires generally have been regulated as Class II devices
eligible for 510(k) clearance. The Company's current FloWire, Accutrac and
SmartWire product lines have all been cleared through the 510(k) process. In
December 1996, the Company submitted a 510(k) notification for the
WaveWire/WaveMap System and Wave Wire XT, which remains pending. The Company
believes that this submission adequately established that this product is
eligible for 510(k) clearance without clinical data. The Company believes the
300 cm FloWire also will be eligible for 510(k) clearance and plans to submit a
510(k) notification for the 300 cm FloWire once final design and development of
the product has been completed. However, there can be no assurance that FDA will
not require the Company to conduct a clinical study to support the Wave
Wire/Wave Map submission, or submissions regarding future products, which could
delay the market introduction of this product or future products, assuming
510(k) clearance can be obtained at all. There also can be no assurance that FDA
will not require that this product or future products undergo the more costly,
lengthy and uncertain PMA approval process.
 
     Labeling and promotion activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. Cardiometrics
has recommended the use of its FloWire/FloMap system with drugs that induce
maximum hyperemia, such as adenosine, to measure the functional significance of
coronary artery lesions. Cardiometrics believes that its original 510(k)
clearance for the FloWire/FloMap system and subsequent clinical studies support
the use of the FloWire/FloMap system with these types of drugs in lieu of
conducting stress perfusion imaging, which involves the
 
                                       13
<PAGE>   14
 
injection of a radioactive substance such as radionuclide thallium, to measure
the impairment of blood flow to the myocardium. Adenosine has been approved by
the FDA as a coronary vasodilator for use as a pharmacological agent for stress
testing but not specifically with the FloWire/FloMap system. There can be no
assurance that the FDA will not require Cardiometrics to submit a new 510(k) or
PMA application for the FloWire/FloMap system for use with these drugs to
measure the functional significance of coronary artery lesions. If the FDA
requires such a submission, Cardiometrics could be prohibited from making claims
regarding the use of these drugs with the FloWire/FloMap system until such
submission were approved by the FDA. Such a prohibition could have a material
adverse effect upon Cardiometrics' business, financial condition or results of
operations. Cardiometrics has also made other modifications to its cleared
devices which Cardiometrics believes do not require the submission of new 510(k)
notices. There can be no assurance, however, that the FDA would agree with any
of Cardiometrics' determinations not to submit a new 510(k) notice for any of
these changes or would not require Cardiometrics to submit a new 510(k) notice
for any of the changes made to these devices. If the FDA requires Cardiometrics
to submit a new 510(k) notice for any device modification, Cardiometrics may be
prohibited from marketing the modified device until the 510(k) is cleared by the
FDA.
 
     Any products manufactured or distributed by Cardiometrics pursuant to the
FDA clearances or approvals are subject to pervasive and continuing regulation
by the FDA including record keeping requirements and reporting of adverse
experiences with the use of the device. Cardiometrics is subject to inspection
on a routine basis for compliance with the FDA's GMP regulations. These
regulations impose certain procedural and documentation requirements upon
Cardiometrics with respect to manufacturing and quality assurance activities.
The FDA has recently finalized changes to GMP requirements that, among other
thing, add requirements for purchasing and pre-production design controls and
maintenance of service records, and may therefore increase the cost of
compliance. Cardiometrics is also subject to FDA's radiological health
requirements which impose record keeping, reporting and safety requirements on
manufacturers of ultrasound products. A GMP inspection of Cardiometrics'
manufacturing facility was last completed in January 1995.
 
     Changes in existing requirements or adoption of new requirements could have
a material adverse effect on Cardiometrics' business, financial condition and
results of operations. Cardiometrics also is subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that Cardiometrics will not be required to incur significant costs to
comply with such laws and regulations in the future or that such laws or
regulations will not have a material adverse effect upon Cardiometrics' ability
to do business.
 
     International sales are subject to foreign government regulation, the
requirements of which vary substantially from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval, and the requirements may differ. The
FloWire/FloMap system is approved in 17 countries in addition to the U.S.,
including all major European countries, Canada, Australia, New Zealand, and
Japan. The SmartWire/SmartMap system has been registered in Germany and France.
The WaveWire/WaveMap system is undergoing registration in Japan and Europe.
 
     In the European Community ("EC"), a device approval process is being
implemented to facilitate regulation. By June 1998, all devices will be required
to have a Conformite Europeene "CE" mark to be sold in the EC. To receive a CE
mark, a device must be evaluated by a Notified Body for conformity with the
European Medical Device Directive (93/42/EEC). Cardiometrics received the CE
mark approval for its intravascular medical devices (FloWire and SmartWire) in
January 1996 after successfully undergoing an ISO 9002 quality system assessment
by T.U.V. Product Service, a Munich, Germany-based Notified Body. Cardiometrics'
FloMap, FloMap II, and SmartMap instruments received the CE mark approval in May
1996 and its FloWire XT guide wire received the CE mark approval in October
1996. Cardiometrics has applied for CE marks for the WaveWire guide wire and
WaveMap instrument. As is the case with GMP inspections in the U.S.,
surveillance audits by Cardiometrics' notified body will continue in the EC on a
periodic basis after receipt of CE marks.
 
                                       14
<PAGE>   15
 
     There can be no assurance that the necessary approvals for the use of
existing and new generations of Cardiometrics' products will be granted by the
FDA or other authorities on a timely basis or at all, and delays in receipt of
or failure to receive such approvals, or the loss of previously received
approvals, could result in the cessation of operations relating to a product or
group of products and could have a material adverse effect on the business,
financial condition and results of operations of Cardiometrics.
 
     In addition, in the U.S. there are federal and state laws which regulate
the financial relationships between manufacturers of medical devices, such as
Cardiometrics, and hospitals, physicians and other potential purchasers of
medical devices or sources of referral related to the purchase of medical
devices. The federal Medicare and Medicaid antikickback statute prohibits
financial relationships designed to induce the purchase, or arranging for or
recommending of the purchase, of items or services for which payment may be made
under Medicare, Medicaid, or other federally funded state health care programs.
Under current law, courts and the Office of Inspector General of the United
States Department of Health and Human Services have stated that the statute is
violated where even one purpose, as opposed to a primary or sole purpose, of the
arrangement is to induce purchases. The antikickback statute contains exceptions
for, among other things, properly reported discounts and compensation for bona
fide employees. In addition, federal regulations establish certain "safe
harbors" from liability under the antikickback statute, including further
refinements of the exceptions for discounts and employee compensation.
Cardiometrics' practices may not in all cases meet all of the criteria for a
safe harbor from antikickback law liability. Other provisions of state and
federal law provide civil and/or criminal penalties for presenting or causing to
be presented for payment claims that are false or fraudulent or for items or
services that were not provided as claimed. Because of the breadth of the
statutory provisions described above, it is possible that some of Cardiometrics'
business practices could be subject to scrutiny and challenge under one or more
such laws. Such a challenge could have a material adverse effect on the
business, financial condition and results of operations of Cardiometrics.
 
PRODUCT LIABILITY INSURANCE
 
     Medical device companies are subject to the risk of product liability and
other claims in the event that the use of their products results in personal
injury claims. Although Cardiometrics has not experienced any product liability
claims to date, any such claims could have an adverse effect on Cardiometrics.
Cardiometrics maintains liability insurance with per occurrence and an annual
aggregate maximum coverage of $5,000,000. There can be no assurance that product
liability or other claims will not exceed such insurance coverage limits or that
insurance will continue to be available on commercially acceptable terms, or at
all.
 
THIRD-PARTY REIMBURSEMENT
 
     Cardiometrics assists physicians and hospitals in seeking to obtain third
party reimbursement for professional fees and hospital costs in connection with
the use of the FloWire. In addition, Cardiometrics is working with managed care
organizations and capitated providers to have the FloWire incorporated into
practice guidelines. To date, use of the FloWire has received only limited
reimbursement from Medicare and other third party payors. In general, when
reimbursement has been denied, it has been denied because the payor has
considered functional angiometry to still be investigational or has concluded
that payment for the service is already bundled into payment that already has
been made to the physician for other cardiac procedures.
 
  Professional Fees
 
     In the U.S., physician payment for medical services is generally based on
the CPT coding system developed and maintained by the AMA. Because use of the
FloWire does not currently have its own CPT code, most physicians code
functional angiometry under a nonspecific cardiovascular code, which does not
assure reimbursement.
 
                                       15
<PAGE>   16
 
     Cardiometrics is also pursuing the creation of a separate CPT code for the
use of the FloWire. The AMA, which updates the CPT coding system annually, will
typically request input from the ACC on coding issues related to cardiology. In
past years, the ACC/AHA has advised the AMA that use of the FloWire was still
considered experimental. However, Cardiometrics believes that published data of
clinical outcomes involving the FloWire guide wire and the wider usage of the
FloWire guide wire should result in an ACC/AHA recommendation to the AMA
regarding a CPT code for functional angiometry; however, even with such ACC
recommendation there can be no assurance of the AMA's adoption of a CPT code.
Cardiometrics has undertaken a prospective, randomized clinical study comparing
the cost of using the FloWire to the cost of performing stress perfusion imaging
with thallium to determine the significance of intermediate coronary lesions
identified by angiography. Preliminary presentations of the results of the
Physiological Evaluation After Coronary Hyeremia ("PEACH") study indicate a
significant cost advantage for the FloWire. In the event a CPT code is assigned
by the AMA, the PEACH study should provide helpful guidance regarding the level
of payment to be made by third party payors under such a CPT code.
 
     However, even if the Company is successful in obtaining a new CPT code,
payees may still deny payment for use of the FloWire. With respect to Medicare,
in the absence of a national coverage determination by the Health Care Financing
Administration ("HCFA"), decisions concerning whether a particular item or
service is "reasonable and necessary," and therefore covered, is left to the
discretion of the various local Medicare carriers and fiscal intermediaries
("FIs") which administer the Medicare program. HCFA has not made a national
coverage determination concerning functional angiometry. Cardiometrics believes
that approximately 10 local carriers have thus far assessed the procedure. All
but two have denied coverage for the procedure on the basis that the device is
experimental or that the physician should not receive a separate fee for the use
of the device in addition to the fee received by the physician for the
angiography or angioplasty procedure. Other third-party payors have payment
policies that are similar to Medicare which may result in the denial of payment
for items or services that the payors determine are not medically necessary or
which preclude a separate payment for the angiography procedure with the FloWire
device. The scope of such payment policies and how they are applied varies
across payors.
 
     In 1995, Aetna Life Insurance Company ("Aetna"), the country's third
largest healthcare insurer, adopted a policy to provide coverage when the
FloWire is used consistent with published studies to determine the significance
of intermediate coronary lesions. Aetna joins General American Life Insurance
Co., a Medicare Carrier in Missouri, which had earlier adopted a formal policy
to cover this use of the FloWire. One other Medicare carrier will honor
professional claims for the FloWire pending a formal technology assessment which
is underway. Several other regional and national insurers are currently
conducting formal technology assessments of the FloWire.
 
  Hospital Claims
 
     In the United States, approximately 80% of angiography procedures, and
virtually all angioplasty procedures, are performed on an inpatient basis.
Medicare and many private insurers reimburse hospitals for inpatient services
under a prospective payment system based on DRGs. Under PPS, a hospital is paid
a fixed amount for each inpatient admission based on the DRG to which the
patient is assigned, which is in turn based on such factors as the patient's
diagnoses and surgical procedures. There is no established separate DRG for
functional angiometry. Accordingly, inpatient use of the FloWire will generally
fall under the DRGs for angiography or angioplasty, and there will be no
separate reimbursement for the cost of the FloWire. Similarly, Medicare and most
private insurers offer no separate hospital reimbursement for other stress
tests, such as stress perfusion imaging with thallium or stress
echocardiography, when they are performed during the same hospital stay as
angiography or angioplasty.
 
     At some centers, outpatient angiograms represent a significant portion of
all angiograms. Unlike with inpatient procedures, Medicare currently reimburses
covered hospital outpatient diagnostic procedures using a blended payment
methodology that is based in part on a fee schedule amount and in
 
                                       16
<PAGE>   17
 
part based on the hospital's reasonable costs of the procedure. Under this
payment methodology, assuming that the procedure is considered to be reasonable
and necessary, hospitals can be reimbursed by Medicare separately for the costs
associated with the FloWire on the same basis as they are reimbursed for other
diagnostic cardiac procedures performed on an outpatient basis. Private third-
party payors vary in their methodologies for reimbursing hospital outpatient
costs, but many payors employ methodologies that would allow for separate
reimbursement of the costs associated with functional angiometry. Cardiometrics
is working with hospital outpatient departments to assist them in obtaining
reimbursement from Medicare and other third-party payors. In addition, the
President's Budget Request for fiscal year 1998 calls for Congress to pass a
prospective payment system for hospital outpatient services. If Congress were to
enact such a provision, it might have an adverse impact on reimbursement for
this segment of the Company's market.
 
     Cardiometrics is unaware of whether Medicare or any third party payors
reimbursing hospitals for the costs of the FloWire have done so on the basis of
a formal coverage determination. Prudential Insurance Company informed
Cardiometrics in 1995 that, based on a formal technology assessment, they will
provide coverage for the FloWire in these situations.
 
  International Reimbursement
 
     In international markets, Cardiometrics works with its local distributors
to obtain necessary regulatory and reimbursement approvals. Cardiometrics
engages local investigators to perform regionally tailored clinical outcome
studies with a goal of obtaining positive review from local reimbursement
agencies. In Japan, the FloWire guide wire has been approved for reimbursement
by Japan's Ministry of Health since 1992.
 
EMPLOYEES
 
     As of February 15, 1997, Cardiometrics had 109 full-time employees, of whom
19 were involved in research and development, 55 in manufacturing, 22 in sales
and marketing and 13 in regulatory affairs, finance and administration.
Cardiometrics' employees are not covered by a collective bargaining agreement.
Cardiometrics believes its relationship with its employees is good.
 
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
 
     Cardiometrics operates in a highly competitive environment that involves a
number of risks, some of which are beyond Cardiometrics' control. The following
discussion highlights some of these risks. These risks should be read in
conjunction with the "Risk Factors" section included in the Company's
Registration Statement on Form S-1 as declared effective by the Securities and
Exchange Commission on November 1, 1995 (Registration No. 33-96690).
 
  Limited Market Acceptance; User Training
 
     The clinical use of Cardiometrics' FloWire/FloMap system in cardiovascular
applications is relatively new. The commercial success of the FloWire/FloMap
system will depend, in part, upon functional angiometry achieving broader
acceptance within the medical community as a clinically useful and
cost-effective procedure. There can be no assurance that functional angiometry
and the FloWire/FloMap system will achieve broader acceptance within the medical
community. Failure of functional angiometry and the FloWire/FloMap system to
achieve broader market acceptance would have a material adverse effect on
Cardiometrics' business, financial condition and results of operations.
 
     The FloWire/FloMap, WaveWire/WaveMap and SmartWire/SmartMap systems
introduce new technologies to intravascular diagnostic and interventional
procedures, and new users of these products must be trained in their proper use.
Accordingly, broader acceptance of Cardiometrics' principal products will
depend, in part, on the number of interventional cardiologists who become
trained in the use of the FloWire/FloMap system. However, there can be no
assurance of the ultimate number of such persons who will become trained or the
rate at which such training will occur, and the failure to train
 
                                       17
<PAGE>   18
 
sufficient numbers of users could have a material adverse effect on
Cardiometrics' business, financial condition and results of operations.
Cardiometrics' WaveWire/WaveMap system has yet to be commercially introduced and
currently there is only limited use of Cardiometrics' SmartWire/SmartMap system
for cerebrovascular applications. Accordingly, market acceptance of the
WaveWire/WaveMap and SmartWire/SmartMap systems and related user training
present the same and perhaps greater risks as those associated with the
FloWire/FloMap system.
 
  Acceptance of Cardiometrics' Products Depends Upon Results of Clinical Studies
  and Acceptance by Medical Community
 
     Clinical studies of the FloWire are in various stages of completion, and
further clinical studies of the FloWire and Cardiometrics' other products are
expected to be conducted in the future. Clinical studies of Cardiometrics'
products which result in unfavorable or inconclusive findings could have a
material adverse effect on Cardiometrics' business, financial condition and
results of operations. In addition, there can be no assurance that favorable
results derived from clinical studies will be conclusive enough for the medical
community and payors to react positively to such findings and change practice
patterns and reimbursement decisions based on such findings.
 
  History of Losses; Likelihood of Additional Losses; Limited Operating History
 
     Cardiometrics has incurred net losses since its incorporation in October
1985. As of December 31, 1996, Cardiometrics' accumulated deficit was $34.0
million, $24.2 million of which has been incurred since Cardiometrics
restructured its operations in 1990. Cardiometrics expects to incur additional
losses until sufficient sales of its FloWire guide wires are achieved.
Cardiometrics did not begin shipping products in volume until 1991.
Cardiometrics' limited operating history makes the prediction of future
operating results difficult or impossible to make. There can be no assurance
that Cardiometrics will be able to achieve significant growth in sales or
generate profits in the future and failure to do so would have a material
adverse effect on Cardiometrics' business, financial condition and results of
operations.
 
  Uncertainties Relating to Merger
 
     There can be no assurance that the pending Merger will be consummated or
that if consummated that it will result in any operating or strategic benefits.
In addition, in connection with the Reorganization Agreement entered into with
EndoSonics and the pending Merger, Cardiometrics has incurred and expects to
incur substantial direct transaction costs, including investment banking, legal,
accounting, registration and printing fees. These transaction costs will have a
short-term adverse effect upon the financial results of Cardiometrics.
 
  Dependence on Third Party Reimbursement
 
     In the U.S., demand for Cardiometrics' products is dependent in part on the
reimbursement policies of various public and private third-party payors.
Physicians generally are paid for medical services based upon the Current
Procedural Terminology ("CPT") coding system developed and maintained by the
American Medical Association ("AMA"). Currently, there is no CPT code
specifically for functional angiometry, and physicians using the FloWire are not
assured payment from third party payors for their professional services in
connection with the FloWire.
 
     Under the Medicare statute, Medicare generally will not cover items or
services that are "not reasonable or necessary" for the diagnosis or treatment
of illness or injury. The Health Care Financing Administration ("HCFA"), has not
made a national coverage determination concerning functional angiometry. All but
two local Medicare carriers and fiscal intermediaries ("FIs") which have
assessed the procedure have denied coverage for the procedure on the basis that
the device is experimental or that the physician should not receive a separate
fee for the use of the device in addition to the fee received by the physician
for the angiography or angioplasty procedure. There is no assurance that the
 
                                       18
<PAGE>   19
 
Medicare carriers and FIs will conclude that functional angiometry should be
covered by Medicare and that separate reimbursement should be made to physicians
for functional angiometry in addition to the reimbursement they receive for
other cardiac procedures. Other third-party payors have payment policies that
are similar to Medicare which may result in the denial of payment for the
FloWire or services related to the FloWire.
 
     Medicare and many private insurers reimburse hospital inpatient services
through a prospective payment system ("PPS") based on Diagnostic Related Groups
("DRGs"). Under PPS, a hospital is paid a fixed amount for each inpatient
admission based on the DRG to which the patient is assigned, which is based on
such factors as the patient's diagnoses and surgical procedures. There is no
established separate DRG for functional angiometry; accordingly, performance of
functional angiometry on an inpatient basis during angiography and angioplasty
typically will be reimbursed under the DRGs for such procedures, but would not
result in separate reimbursement for the cost of the FloWire guide wire.
 
     Internationally, there are various national and regional reimbursement
systems and policies which influence demand for Cardiometrics' products.
Accordingly, broader international demand for Cardiometrics' products will
depend, in part, on Cardiometrics' ability to develop and implement specific
reimbursement strategies for each nation or region where a potential market for
Cardiometrics' products exists.
 
     There can be no assurance that separate reimbursement for the FloWire will
ever be available under an existing or newly established DRG or CPT code, or
that future reimbursement policies of payors will not adversely affect
Cardiometrics' ability to sell the FloWire on a profitable basis in the U.S. or
abroad. The failure of hospitals and other users of Cardiometrics' products to
obtain sufficient reimbursement from third party payors or adverse changes in
the reimbursement policies of government and private third party payors toward
procedures employing Cardiometrics' products could have a material adverse
effect on Cardiometrics' business, financial condition and results of
operations.
 
  Uncertainty of Health Care Cost Constraints
 
     There are widespread efforts to control health care costs in the U.S. and
worldwide. Cardiometrics believes that government and private efforts to contain
or reduce health care costs are likely to continue. These trends may lead
third-party payors to decline or limit reimbursement for Cardiometrics'
products, which could negatively impact the pricing and profitability of, or
demand for, Cardiometrics' products. There can be no assurance that legislative
or regulatory health care reform, if enacted, would not result in a material
adverse impact on the business, financial condition or results of operations on
Cardiometrics.
 
  Reliance on Patents and Proprietary Technology; Risk of Patent Infringement
  and Litigation
 
     Cardiometrics holds 17 issued U.S. patents associated with its principal
products and has eight pending U.S. patent applications. Cardiometrics has also
filed a number of counterpart patent applications internationally. There can be
no assurance, however, that Cardiometrics' patent applications will issue as
patents or that any issued patents will provide competitive advantages for
Cardiometrics' products or will not be successfully challenged or circumvented
by competitors. The field of devices for the diagnosis and treatment of
cardiovascular disease is covered by a large and increasing number of patents
and patent applications. There can be no assurance that Cardiometrics' products
do not infringe upon the patent rights and other intellectual property rights of
others. Since patent applications in the U.S. are maintained in secrecy until
patents issue, and since publications of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months,
Cardiometrics cannot be certain that it was the first creator of inventions
covered by pending patent applications or that it was the first to file patent
applications for such inventions.
 
     There has been substantial litigation regarding the infringement of patent,
trademark and other intellectual property rights among medical device companies.
In the future, Cardiometrics may find
 
                                       19
<PAGE>   20
 
such litigation necessary to enforce patents issued to Cardiometrics, to protect
trade secrets, trademarks and other intellectual property rights held by
Cardiometrics, to defend Cardiometrics against claims of infringement of the
rights of others or to determine the scope and validity of the proprietary
rights of others. Any such litigation could involve significant expense to
Cardiometrics and could divert the attention of Cardiometrics' technical and
management personnel. Moreover, agreements with a number of its distributors
require that Cardiometrics indemnify such distributors against costs, expenses
and liabilities relating to such litigation and, despite these obligations of
Cardiometrics, distributors may decide to reduce or end their selling efforts
until an infringement dispute is resolved or settled. Cardiometrics may be
required to participate in interference proceedings declared by the U.S. Patent
and Trademark Office to determine the priority of inventions, which could also
result in substantial cost to Cardiometrics. Adverse determinations in
connection with such litigation or proceedings could subject Cardiometrics to
significant liabilities, prevent Cardiometrics from manufacturing or selling its
products or result in distributors becoming unwilling to distribute
Cardiometrics' products. In such events, Cardiometrics may seek licenses from
third parties or attempt to redesign its products or processes to avoid
infringement; however, there can be no assurance that such licenses would be
available or, if available, would be on terms acceptable to Cardiometrics or
that Cardiometrics would be successful in any attempt to redesign its products
or processes to avoid infringement.
 
     Cardiometrics is dependent upon its proprietary technology and seeks to
protect such technology through a combination of confidentiality agreements and
trade secrets, in addition to patents and patent applications covering various
aspects of its existing and future technology. In connection with Cardiometrics'
trade secrets and confidentiality agreements, there can be no assurance that the
obligation to maintain the confidentiality of trade secrets or other proprietary
information of Cardiometrics will not be breached by employees or consultants or
that Cardiometrics' trade secrets or proprietary technology will not otherwise
become known or be independently developed by competitors in such a manner that
Cardiometrics has no practical recourse.
 
  International Sales; Currency Fluctuations
 
     Cardiometrics sells its products outside of the U.S. through 20
international distributors. International sales represented approximately 72%,
76% and 75% of Cardiometrics' total sales in 1994, 1995 and 1996, respectively.
Cardiometrics believes that international sales will continue to represent a
significant portion of its sales and play a significant role in its future
growth and success. Accordingly, if a significant number of its international
distributors were to experience financial difficulties, or otherwise become
unable or unwilling to promote, sell or pay for Cardiometrics' products,
Cardiometrics' business, financial condition, and results of operations could be
adversely affected. Although Cardiometrics' sales to international distributors
are denominated in U.S. dollars, its international business may be affected by
changes in demand resulting from fluctuations in currency exchange rates.
Additional risks inherent in Cardiometrics' international business activities
include the burdens of monitoring and complying with a wide variety of foreign
laws, regulatory requirements and reimbursement practices, costs of localizing
products for foreign countries, lack of acceptance of localized products in
foreign countries, longer accounts receivable payment cycles, difficulties in
collecting payment, difficulties in managing international operations and
potentially reduced protection for intellectual property. There can be no
assurance that such factors will not have a material adverse effect on
Cardiometrics' future international sales and, consequently, Cardiometrics'
business, financial condition or results of operations.
 
  Concentration of Sales in Japan
 
     Sales to its distributor for Japan represented approximately 34%, 37% and
41% of Cardiometrics' total sales in 1994, 1995 and 1996, respectively.
Cardiometrics expects that sales in Japan will continue to represent a
significant portion of its sales. Cardiometrics believes that its sales in Japan
are due, in part, to the official reimbursement status granted to the
FloWire/FloMap system by Japan's Ministry of Health in 1992. Regulatory
approvals for the FloWire/FloMap system were obtained in the name of
 
                                       20
<PAGE>   21
 
Cardiometrics' distributor for Japan, who has agreed to assign the approvals to
Cardiometrics upon termination of the distribution agreement, which under its
current terms will expire in 1999, and upon reimbursement by Cardiometrics of
reasonable expenses incurred by the distributor in obtaining the official
reimbursement status and other government approvals in connection with the
FloWire/FloMap system. Cardiometrics' sales in Japan could decline materially as
a result of a change in the official reimbursement status of the FloWire/FloMap
system or difficulties in obtaining the assignment of regulatory approvals upon
termination of the existing exclusive distribution agreement for Japan, as well
as by factors generally influencing international sales. There can be no
assurances that such developments will not occur. A material decline in
Cardiometrics' sales in Japan would have a material adverse effect on
Cardiometrics' business, financial condition and results of operations.
 
  Risk of Technological Obsolescence
 
     The interventional cardiology market is characterized by rapid
technological innovation and change. Many companies are engaged in research and
development of new devices and alternative methods to diagnose and treat
coronary artery disease, including new or improved medical devices and
pharmaceutical products. Cardiometrics' products could be rendered obsolete as a
result of future innovations.
 
  Dependence on Limited Number of Products; Risk of New Product Development
 
     Virtually all of Cardiometrics' sales have been derived from sales of the
FloWire/FloMap system. Although additional products are being developed, such as
the WaveWire/WaveMap system, such development efforts are subject to significant
risks, including the risks of obtaining regulatory approvals and manufacturing
new products in commercial volumes. There can be no assurance that
Cardiometrics' development efforts will be successful or, even if successful,
that resulting products would receive market acceptance, generate significant
sales or result in gross profits. Accordingly, Cardiometrics believes that the
FloWire/FloMap system will continue to account for a significant portion of
Cardiometrics' total revenue for at least the foreseeable future. Cardiometrics'
future operating results, particularly in the near term, are significantly
dependent upon market acceptance of the FloWire/FloMap system and the successful
introduction of the WaveWire/WaveMap system. Because virtually all of
Cardiometrics' sales are derived from the FloWire/FloMap system, failure to
achieve broader market acceptance of the FloWire/FloMap system as a result of
competition, technological change or other factors and the failure to
successfully market any new or enhanced products would have a material adverse
effect on the business, operating results and financial condition of
Cardiometrics.
 
  Competition
 
     Competition from products which help to diagnose and treat cardiovascular
disease is intense and may increase. Stress testing systems, intravascular
pressure devices, intravascular ultrasound imaging devices and catheter based
Doppler systems are currently being used in diagnosing and assessing
cardiovascular disease and compete directly or indirectly with the
FloWire/FloMap system and the WaveWire/WaveMap system under development. Many of
the companies selling products which employ such technologies have developed an
installed base significantly larger than Cardiometrics' installed base. The high
purchase prices paid for equipment associated with these technologies may make
current users of products employing such technologies reluctant to abandon
investments in such equipment to use the FloWire/FloMap system. Moreover, there
can be no assurance that existing and future competitors of Cardiometrics will
not modify existing products or develop new products that compete with
Cardiometrics' FloWire/FloMap system and the WaveWire/WaveMap system.
 
     Companies whose products employ competing technologies or who may develop
products which could directly compete with Cardiometrics' products may
ultimately offer products that are more effective or less costly than those
developed and marketed by Cardiometrics. Many of Cardiometrics' competitors and
potential competitors have substantially greater financial, manufacturing,
marketing,
 
                                       21
<PAGE>   22
 
distribution and technical resources than Cardiometrics and are engaged in
research and development of new devices and alternative methods to diagnose,
treat and prevent cardiovascular disease, including new or improved angioplasty,
atherectomy and other devices and pharmaceutical agents. Introduction of such
devices and alternative methods could hinder Cardiometrics' ability to compete
effectively and could have a material adverse effect on its business, financial
condition and results of operations.
 
  Quarterly Fluctuations in Operating Results
 
     Results of operations have varied and may continue to fluctuate
significantly from quarter to quarter and will depend upon numerous factors,
including (i) timing of regulatory approvals, (ii) new product introductions,
(iii) competition, (iv) sales under distributor agreements, (v) Cardiometrics'
ability to manufacture its products efficiently, (vi) timing of research and
development expenses, including clinical outcome studies, and (vii) seasonal
factors in markets, particularly Europe. Since typically there are fewer
elective interventional procedures during the summer months due to vacation
schedules of patients and health care providers, especially in Europe, sales of
Cardiometrics' products frequently slow during July and August. Cardiometrics
expects that its quarterly operating results will fluctuate in the future as a
result of these and other factors. Due to such past and future quarterly
fluctuations in operating results, quarter-to-quarter comparisons of
Cardiometrics' operating results are not necessarily meaningful and should not
be relied upon as indicators of likely future performance or annual operating
results.
 
  FDA and Other Government Regulation
 
     The manufacturing and marketing of Cardiometrics' products are subject to
extensive and rigorous regulation by numerous governmental authorities,
principally the U.S. Food and Drug Administration (the "FDA") and corresponding
state and foreign agencies. The regulatory process is lengthy, expensive and
uncertain. Prior to commercial sale in the U.S., most medical devices, including
Cardiometrics' products under development, must be cleared or approved by the
FDA. Product clearances and approvals can be withdrawn for failure to comply
with regulatory standards or the occurrence of unforeseen problems following
initial marketing. Foreign governments also have review processes for new
products which present many of the same risks. There can be no assurance that
Cardiometrics will be able to obtain necessary regulatory clearances or
approvals on a timely basis, if at all, for any of its products under
development, and delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on Cardiometrics' business, financial condition and results of
operations. Cardiometrics also is subject to routine inspection by the FDA and
certain foreign and state agencies, such as the Food and Drug Branch of the
California Department of Health Services, for compliance with Good Manufacturing
Practices ("GMP") requirements and other applicable regulations. Noncompliance
with applicable regulatory requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing approvals,
and criminal prosecution.
 
     Cardiometrics believes that its success will be significantly dependent
upon commercial sales of improved versions and new applications of its guide
wires. Cardiometrics will not be able to market these new products in the U.S.
unless and until Cardiometrics obtains 510(k) premarket clearance or premarket
approval ("PMA") from the FDA. In general, it takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but it may take longer. The FDA
review of a PMA application generally takes one to two years from the date the
PMA application is accepted for filing, but also may take significantly longer.
The review time is often significantly extended by the FDA asking for more
information, including additional clinical trials, or clarification of
information already provided. A number of devices for which FDA approval has
been sought by other companies have never been approved for marketing. The time
required to obtain approval from a foreign country may be
 
                                       22
<PAGE>   23
 
longer or shorter than that required for FDA approval, and the requirements may
differ. In the near future, all devices will be required to have a "CE Mark" to
be sold in the European Community ("EC"). Cardiometrics recently obtained the CE
Mark for its FloWire and SmartWire products, but there can be no assurance that
CE Marks will be obtained for Cardiometrics' other or future products.
 
     Intravascular guide wires generally have been regulated as Class II devices
eligible for 510(k) clearance. Cardiometrics' current FloWire, AccuTrac and
SmartWire product lines have all been cleared through the 510(k) process. In
December 1996, the Cardiometrics submitted a 510(k) notification for the
WaveWire/WaveMap System and Wave Wire XT, which remains pending. Cardiometrics
believes that this submission adequately establishes that this product is
eligible for 510(k) clearance without clinical data. The Company believes the
300 cm FloWire also will be eligible for 510(k) clearance and plans to submit a
510(k) notification for the 300 cm FloWire once final design and development of
the product has been completed. However, there can be no assurance that FDA will
not require Cardiometrics to conduct a clinical study to support the
WaveWire/WaveMap submission, or submissions regarding future products, which
could delay the market introduction of this product or future products, assuming
510(k) clearance can be obtained at all. There also can be no assurance that FDA
will not require that this product or future products undergo the more costly,
lengthy and uncertain PMA approval process.
 
     Labeling and promotion activities are subject to scrutiny by the FDA and,
in certain instances, by the Federal Trade Commission. The FDA actively enforces
regulations prohibiting marketing of products for unapproved uses. Cardiometrics
has recommended the use of its FloWire/FloMap system with drugs that induce
maximum hyperemia (maximum blood flow), such as adenosine and papaverine, to
measure the functional significance of coronary artery lesions. There can be no
assurance that the FDA will not require Cardiometrics to submit a new 510(k) or
PMA application for the FloWire/FloMap system for use with these drugs to
measure the functional significance of coronary artery lesions. If the FDA
requires such a submission, Cardiometrics could be prohibited from making claims
regarding the use of these drugs with the FloWire/FloMap system until such
submission were approved by the FDA. Such a prohibition could have a material
adverse effect upon Cardiometrics' business, financial condition and results of
operations. Cardiometrics has also made other modifications to its cleared
devices which Cardiometrics believes do not require the submission of new 510(k)
notices. There can be no assurance, however, that the FDA would agree with any
of Cardiometrics' determinations and not require Cardiometrics to submit a new
510(k) notice for any of the changes made to these devices. If the FDA requires
Cardiometrics to submit a new 510(k) notice for any device modification,
Cardiometrics may be prohibited from marketing the modified device until the
510(k) is cleared by the FDA.
 
     In addition, in the U.S. there are federal and state antikickback laws
which regulate the financial relationships between manufacturers of medical
devices, such as Cardiometrics, and hospitals, physicians and other potential
purchasers of medical devices or sources of referral related to the purchase of
medical devices. Cardiometrics' practices may not in all cases meet all of the
criteria that have been established for a safe harbor from antikickback law
liability. Other provisions of state and federal law provide civil and/or
criminal penalties for presenting or causing to be presented for payment claims
that are false or fraudulent, or for items or services that were not provided as
claimed. Because of the breadth of such statutory provisions, it is possible
that some of Cardiometrics' business practices could be subject to scrutiny and
challenge under one or more such laws. Such a challenge could have a material
adverse effect on the business, financial condition and results of operations of
Cardiometrics.
 
  Dependence on Key Personnel
 
     Cardiometrics is dependent upon a limited number of key management, sales
and technical personnel. Cardiometrics' future success will depend in part upon
its ability to attract and retain highly qualified personnel. Cardiometrics
faces competition for such personnel from other companies, academic
institutions, government entities and other organizations. As a result, there
can be no assurance that Cardiometrics will be successful in hiring or retaining
qualified personnel. Cardiometrics carries key man insurance on each of its
officers. The employment agreements Cardiometrics has with its officers do not
provide for a specific term of employment. Therefore, officers and other key
personnel could leave the employ of Cardiometrics with little or no prior
notice. Loss of key personnel, especially
 
                                       23
<PAGE>   24
 
if such loss is without advance notice, or the inability to hire or retain
qualified personnel could have a material adverse effect on Cardiometrics'
business, financial condition and results of operations.
 
  Financial Exposure to Product Liability Claims
 
     Cardiometrics faces the risk of financial exposure to product liability
claims alleging that the use of Cardiometrics' products resulted in adverse
effects. Cardiometrics' products are often used in life-threatening situations
and are used in the brain, where there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale.
Cardiometrics has taken and will continue to take what it believes are
appropriate precautions, including obtaining product liability insurance, to
minimize its exposure to liability. However, there can be no assurance that
Cardiometrics will avoid significant product liability claims and attendant
adverse publicity. Furthermore, there can be no assurance that Cardiometrics'
product liability insurance is adequate or that such insurance coverage will
remain available at acceptable costs. A successful claim brought against
Cardiometrics in excess of its insurance coverage could have a material adverse
effect on Cardiometrics' business, financial condition and results of
operations. Additionally, adverse product liability actions could negatively
affect market acceptance of Cardiometrics' products, third-party payors'
willingness to reimburse Cardiometrics' customers for use of Cardiometrics'
products, and Cardiometrics' ability to obtain and maintain regulatory approval
for its products.
 
  Limited Manufacturing Experience
 
     To date, Cardiometrics' manufacturing activities have consisted primarily
of manufacturing and assembling components of the FloWire/FloMap system and has
not yet manufactured the WaveWire/WaveMap system in commercial quantities. In
the event that sales of the FloWire/FloMap system increases substantially,
Cardiometrics would be required to increase its current production volumes and
in the event the WaveWire/WaveMap system achieves regulatory approval,
Cardiometrics plans to establish commercial scale manufacturing of such product.
There can be no assurance that current FloWire/FloMap manufacturing yields and
efficiencies will be maintained at increased production volumes or that adequate
WaveWire/WaveMap manufacturing yields and efficiencies will be achieved. Failure
to increase or establish production volumes in a timely or cost-effective manner
could have a material adverse effect on sales of Cardiometrics' products and on
Cardiometrics' business, financial condition and results of operations.
 
  Single Source Components and Processes
 
     Cardiometrics purchases certain components and processes from single-source
vendors, with whom Cardiometrics does not have long-term supply agreements. Any
supply interruption from these vendors would have a material adverse effect on
Cardiometrics' ability to manufacture its products until a new qualified source
of supply is obtained and, as a result, could have a material adverse effect on
Cardiometrics' business, financial condition and results of operations. While
Cardiometrics has a long-term contract with a single-source vendor of a critical
component of Cardiometrics' WaveWire guide wire; Cardiometrics is not aware of
an alternative source for such component. Accordingly, a disruption in the
operations of such vendor could have an adverse effect on Cardiometrics'
business, financial condition and results of operations.
 
                                       24
<PAGE>   25
 
EXECUTIVE OFFICERS
 
     The executive officers of Cardiometrics, and their ages as of March 1,
1997, are as follows:
 
<TABLE>
<CAPTION>
NAME                              AGE                           POSITION
------------------------------    ----    ----------------------------------------------------
<S>                               <C>     <C>
Menahem Nassi, Ph.D...........     48     President, Chief Executive Officer, Director
Claire Andrews................     42     Vice President, Regulatory, Quality and Clinical
Robert C. Colloton............     38     Vice President, Marketing
Jeffrey S. Frisbie............     47     Vice President, Research and Development
Stanley Levy, Jr..............     44     Vice President, Manufacturing
Robert Y. Newell, IV..........     48     Vice President, Finance and Administration, Chief
                                            Financial Officer and Secretary
Kevin P. Rhatigan.............     42     Vice President, U.S. Sales
Michael J. Sorna..............     54     Vice President, International Sales and Operations
</TABLE>
 
     The officers of Cardiometrics are appointed by the Board of Directors and
serve at the discretion of the Board. There are no family relationships between
any of the directors or executive officers of Cardiometrics.
 
     MENAHEM NASSI, PH.D. has served as President and Chief Executive Officer
since 1991 and as a Director since 1990. In 1990, Dr. Nassi was named General
Manager and became responsible for building Cardiometrics under its new FloWire
product focus. Prior to that, he was Cardiometrics' Vice President, Research and
Development from 1988 to 1990. From 1981 to 1988, Dr. Nassi worked at Diasonics,
Inc., a medical imaging company, most recently as Director of Engineering and
Research and Development. Prior to Diasonics, Dr. Nassi worked in both the x-ray
imaging and ultrasound divisions of Varian Associates and Elscint, Inc. Dr.
Nassi received B.S. and M.S. degrees in mechanical engineering from the
Technion, Israel Institute of Technology, and a M.S. degree in electrical
engineering and a Ph.D. degree in bioengineering from Stanford University.
 
     CLAIRE ANDREWS has served as Vice President Regulatory, Quality and
Clinical since January 1997 and as Director, Regulatory, Quality and Clinical
from February 1996 to 1997. Before joining Cardiometrics, Ms. Andrews held
various management positions in regulatory, quality and clinical affairs at
Physiometrix, Lumisys and Diasonics. Ms. Andrews has over fifteen years
experience in the medical device industry, including obtaining the first
marketing approval for an MRI scanner in the United States.
 
     ROBERT C. COLLOTON has served as Vice President, Marketing since January
1996 and from 1993 to 1994. During 1994 and 1995, he was Vice President,
Marketing and U.S. Sales. Prior to joining Cardiometrics, Mr. Colloton worked in
a variety of marketing positions at SciMed Life Systems, Inc., a manufacturer of
angioplasty devices, from 1989 to 1993, most recently as SciMed's Group Product
Marketing Director for balloon angioplasty catheters. He has also held sales and
marketing positions with Boston Scientific and Johnson & Johnson. Mr. Colloton
earned a B.S. degree in marketing from Miami University, Ohio.
 
     JEFFREY S. FRISBIE has served as Vice President, Research and Development
since 1993, as Director of Research and Development, Disposables from 1991 to
1993 and as a Senior Project Engineer from 1988 to 1991. He was also manager of
the Dilatation Catheter Development Group at Advanced Cardiovascular Systems for
several years. Mr. Frisbie received a B.S. degree in bioengineering from the
University of California, San Diego and is the inventor or co-inventor of over
ten U.S. and foreign patents.
 
     STANLEY LEVY, JR. has served as Vice President, Manufacturing since
September 1996, as Director of Research and Development, Instrumentation, from
1992 to 1996, and as Manager of Research and Development, Instrumentation, from
1988 to 1992, and as Senior Project Engineer from 1987 to 1988. Mr. Levy has
directed instrument manufacturing since 1991. Mr. Levy has held engineering
design,
 
                                       25
<PAGE>   26
 
consulting and management positions at Phase 2 Automation, Diasonics and
Measurex Corporation. Mr. Levy received a B.S. and M.S. degree in Electrical
Engineering from Stanford University.
 
     ROBERT Y. NEWELL, IV has served as Vice President, Finance and
Administration, and Chief Financial Officer since 1992 and as Secretary since
1995. Prior to joining Cardiometrics, Mr. Newell co-founded Beta Phase, Inc., a
high performance connector company, in 1985, where he served as a director and
Vice President of Finance. Mr. Newell received a B.A. degree in mathematics from
the College of William and Mary and an M.B.A. degree from Harvard University.
 
     KEVIN P. RHATIGAN has served as Vice President, U.S. Sales since January
1996. Prior to Cardiometrics, Mr. Rhatigan spent ten years with Baxter
Healthcare Corporation in various sales, sales training and product and sales
management positions, most recently as Director of Sales for the interventional
products division. Mr. Rhatigan received a B.A. in economics from the University
of South Florida.
 
     MICHAEL J. SORNA has served as Vice President, International Sales and
Operations since 1994 and as Vice President of Sales and Marketing from 1991 to
1994. Before joining Cardiometrics, Mr. Sorna served as Director of Sales at
Cardiovascular Imaging Systems, Inc., a leading intravascular ultrasound imaging
company, from 1989 to 1991. Mr. Sorna has more than 20 years of experience in
the cardiovascular industry. Mr. Sorna earned a B.S. degree in
premedicine/dentistry from Eastern Michigan University.
 
ITEM 2.  PROPERTIES
 
     Cardiometrics leases two facilities in Mountain View, California with a
combined total of 20,000 square feet. The larger facility, encompassing 16,000
square feet, includes a 2,300 square foot Class 100,000 clean room as well as
guide wire manufacturing, inventory storage, laboratory and office space. The
smaller 4,000 square foot facility includes space for instrument manufacturing
and research and development. Cardiometrics' lease for the smaller facility
expires in March 1997, upon which Cardiometrics will occupy such facility
pursuant to a month-to-month tenancy. Cardiometrics believes its facilities will
be adequate through 1997.
 
ITEM 3.  LEGAL PROCEEDINGS
 
     On or about January 28, 1997, an alleged class action complaint was filed
by a Cardiometrics stockholder in the New Castle County Delaware Court of
Chancery. The complaint names Cardiometrics, EndoSonics, the directors of
Cardiometrics, two officers of Cardiometrics (one of whom is a director), and a
former director of Cardiometrics as defendants, and alleges, among other things,
that the individual defendants breached and are breaching their fiduciary and
other duties to plaintiff and other members of the purported class and that
EndoSonics knowingly aided and abetted such breaches. Plaintiff seeks (i)
injunctive relief to prevent the consummation of the Merger, (ii) if the Merger
is consummated, rescission of the Merger or payment of rescissory damages, (iii)
an accounting by the defendants, individually and severally, to members of the
class for their damages and defendants' profits by reason of the allegations
contained in the complaint, (iv) payment to the plaintiff of the costs and
expenses of the action, including reasonable counsel and expert fees, and (v)
any other and further relief as the Court deems just and proper. Cardiometrics
believes the complaint is without merit and intends to vigorously defend itself
and the named individual defendants against the allegations in the complaint.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     None.
 
                                       26
<PAGE>   27
 
                                    PART II
 
ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS
 
     Cardiometrics Common Stock is traded on the Nasdaq National Market under
the symbol "CFLO." The following table sets forth, for the periods indicated,
the quarterly high and low sales prices per share of Cardiometrics Common Stock.
 
<TABLE>
<CAPTION>
                                                                 HIGH         LOW
                                                               --------     --------
        <S>                                                    <C>          <C>
        Fiscal 1995*
          Fourth Quarter.....................................  $  9.250     $  5.500
        Fiscal 1996
          First Quarter......................................     9.250        6.375
          Second Quarter.....................................     8.000        5.625
          Third Quarter......................................     6.375        4.000
          Fourth Quarter.....................................     6.000        3.875
</TABLE>
 
---------------
* The Common Stock of Cardiometrics was not publicly traded until November 1995.
 
     As of March 18, 1997, there were approximately 104 stockholders of record
and approximately 700 beneficiary holders of Cardiometrics' Common Stock.
Cardiometrics' stock price may be subject to significant volatility.
 
DIVIDEND POLICY
 
     Cardiometrics has never paid cash dividends on its Common Stock and does
not anticipate the payment of such dividends in the foreseeable future. The
Board of Directors of Cardiometrics presently intends to continue a policy of
retaining all earnings to finance the further development of its business.
 
ITEM 6.  SELECTED FINANCIAL DATA
 
     The data set forth below should be read in conjunction with the financial
statements, related notes and other financial information included elsewhere in
this Form 10-K.
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                         -------------------------------------------------------
                                          1996        1995        1994        1993        1992
                                         -------     -------     -------     -------     -------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Sales..................................  $14,003     $11,112     $ 9,006     $ 8,510     $ 5,045
Cost of sales..........................    5,214       4,730       4,213       4,853       2,854
                                         -------     -------     -------     -------     -------
Gross profit...........................    8,789       6,382       4,793       3,657       2,191
Operating expenses:
  Research and development.............    3,279       2,259       2,960       2,296       1,754
  Selling, general and
     administrative....................    8,682       6,549       5,375       5,709       3,449
                                         -------     -------     -------     -------     -------
Total operating expenses...............   11,961       8,808       8,335       8,005       5,203
                                         -------     -------     -------     -------     -------
Loss from operations...................   (3,172)     (2,426)     (3,542)     (4,348)     (3,012)
Other income (expense), net............      994         220         (27)         24          99
                                         -------     -------     -------     -------     -------
Net loss...............................  $(2,178)    $(2,206)    $(3,569)    $(4,324)    $(2,913)
                                         =======     =======     =======     =======     =======
Pro forma net loss per share(1)........  $ (0.32)    $ (0.45)    $ (0.83)
                                         =======     =======     =======
Shares used in computing pro forma net
  loss per share(1)....................    6,834       4,850       4,295
                                         =======     =======     =======
</TABLE>
 
                                       27
<PAGE>   28
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                          1996        1995        1994        1993        1992
                                         -------     -------     -------     -------     -------
                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                      <C>         <C>         <C>         <C>         <C>
GEOGRAPHIC SALES DATA:
Japan..................................  $ 5,800     $ 4,061     $ 3,022     $ 2,741     $ 1,668
United States..........................    3,446       2,701       2,549       3,486       2,093
Europe and other.......................    4,757       4,350       3,435       2,283       1,284
SUPPLEMENTAL OPERATING DATA:
Cumulative shipments of FloMap
  instruments at end of period.........      491         388         296         201         110
FloWire devices sold in period.........   20,709      14,369      13,208      11,924       4,416
</TABLE>
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                   ------------------------------------------------------------
                                     1996         1995         1994         1993         1992
                                   --------     --------     --------     --------     --------
                                                          (IN THOUSANDS)
<S>                                <C>          <C>          <C>          <C>          <C>
BALANCE SHEET DATA:
Cash and cash equivalents........  $ 17,439     $ 20,725     $  3,773     $  4,057     $  3,179
Working capital..................    21,954       24,008        5,806        6,202        4,469
Total assets.....................    25,039       26,730        8,826        8,712        6,433
Total long term obligations......        47          223          398          614          414
Accumulated deficit..............   (34,031)     (31,853)     (29,647)     (26,078)     (21,754)
Stockholders' equity.............    22,843       24,694        6,440        6,908        5,072
</TABLE>
 
---------------
(1) See Note 1 of Notes to Cardiometrics' Financial Statements for information
    concerning the computation of pro forma net loss per share.
 
                                       28
<PAGE>   29
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     The discussion in this Report contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "Risk
Factors That May Affect Future Results" in Item 1 of this Report beginning on
page 17, and the risks discussed in the "Risk Factors" sections included in the
Company's Registration Statement on Form S-1 as declared effective by the
Securities and Exchange Commission on November 1, 1995 (Reg. No. 33-96690).
 
GENERAL
 
     Cardiometrics was founded in 1985 to develop a catheter based system for
the continuous measurement of cardiac output utilizing Doppler ultrasound
techniques. In 1990, Cardiometrics discontinued development of its continuous
cardiac output measurement device due to Cardiometrics' assessment of the
product's inability to meet the performance expectations of the market. At this
time, Cardiometrics restructured its operations under new management to focus on
a new business strategy: the development and commercialization of the
FloWire/FloMap system.
 
     In 1991, Cardiometrics received FDA 510(k) clearance for its 0.018" FloWire
and began marketing and selling the FloWire primarily to clinical research sites
in the U.S., Europe and Japan. During 1992, the Japanese Ministry of Health
granted the FloWire/FloMap system official reimbursement status, resulting in
significant sales growth in Japan and in the U.S., and Cardiometrics received
FDA clearance for its 0.014" FloWire. In 1993, Cardiometrics substantially
increased its manufacturing capacity, including adding a second shift, to meet
significant back orders for the 0.014" FloWire product in Japan. After supplying
the FloWire devices to meet the back orders, Cardiometrics adjusted its
manufacturing capacity to one shift and reduced its manufacturing headcount.
 
     During 1993, increasing uncertainty concerning health care reform slowed
capital expenditures on medical equipment in the United States. In response,
Cardiometrics changed its U.S. marketing approach in 1994, from a capital
equipment focus to an emphasis on routine clinical usage of the FloWire and
resulting sales of disposable devices. In the U.S. market, Cardiometrics began
offering hospitals the option to obtain the use of the FloMap in exchange for a
commitment to purchase a minimum number of FloWire devices per month for a
period of one to two years. This change was accompanied by a reduction and
reorganization of the U.S. sales force and resulted in a decrease in FloMap
sales.
 
     In 1994 Cardiometrics continued to invest in clinical outcome studies and
to develop its sales and marketing capabilities. In August 1995, Cardiometrics
introduced its FloMap II product, a compact version of the FloMap, for
installation in each cath lab room, at a lower price point than the portable but
freestanding FloMap.
 
     In November 1995, Cardiometrics completed an initial public offering of
2,200,000 shares of common stock with net proceeds of $17.6 million.
 
     Based on the outcome of the DEBATE clinical study presented in early 1996,
Cardiometrics began to focus its sales and marketing efforts on the use of the
FloWire to assess post-procedural results of angioplasty. To support this new
focus, two new clinical studies, DESTINI-CFR and DEBATE II, were started in the
second half of 1996. In December 1996, Cardiometrics filed a FDA 510(k)
premarket notification for the WaveWire/WaveMap pressure system, and its first
clinical use was demonstrated in Europe during the same month.
 
     On January 26, 1997, Cardiometrics, EndoSonics Corporation, a Delaware
Corporation ("EndoSonics"), and River Acquisition Corporation, a Delaware
Corporation and a wholly owned subsidiary of EndoSonics ("Merger Sub"), entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
pursuant to which Merger Sub will be merged with and into Cardiometrics (the
"Merger"), with Cardiometrics surviving the Merger and becoming a wholly owned
subsidiary of EndoSonics. The consummation of the Merger is subject, among other
things, to the
 
                                       29
<PAGE>   30
 
approval of the Merger by the stockholders of Cardiometrics, at a stockholders
meeting currently expected to be held in May 1997 and the satisfaction of
certain other closing conditions.
 
     Cardiometrics has not been profitable since inception and, as of December
31, 1996, had an accumulated deficit of $34.0 million, $24.2 million of which
has been incurred since Cardiometrics restructured its operations in 1990.
Further growth in the sales volume of Cardiometrics' products and the resulting
gross profit will be needed to offset future investments in research and
development, principally clinical outcome studies, and selling, general and
administrative expenses.
 
RESULTS OF OPERATIONS
 
     The following table sets forth certain selected statement of operations
information of Cardiometrics as a percentage of sales for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER
                                                                             31,
                                                                    ---------------------
                                                                    1996     1995     1994
                                                                    ---      ---      ---
    <S>                                                             <C>      <C>      <C>
    Percentage of Sales
    Sales.........................................................  100%     100%     100%
    Cost of sales.................................................   37       43       47
                                                                    ---      ---      ---
    Gross margin..................................................   63       57       53
    Operating expenses:
      Research and development....................................   24       20       33
         Selling, general and administrative......................   62       59       60
                                                                    ---      ---      ---
    Total operating expenses......................................   86       79       93
    Loss from operations..........................................  (23)     (22)     (40)
    Interest income (expense), net................................    7        2       --
                                                                    ---      ---      ---
    Net loss......................................................  (16)%    (20)%    (40)%
                                                                    ===      ===      ===
</TABLE>
 
  Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
     Sales.  Sales increased 26% during the period ended December 31, 1996 over
the period ended December 31, 1995 to $14,003,000 from $11,112,000. This
increase was primarily the result of an increase in sales of FloWire units,
primarily in Japan and the U.S., and, to a lesser extent, an increase in the
average realized selling price of FloWire units. These increases were partially
offset by decreases in sales of AccuTrac, SmartMap and SmartWire units.
 
     Cost of sales.  Cost of sales increased 10% during the period ended
December 31, 1996 over the period ended December 31, 1995 to $5,214,000 from
$4,730,000. Cost of sales as a percentage of sales decreased to 37% in the
period ended December 31, 1996 from 43% in the period ended December 31, 1995.
This decrease was the result of a greater percentage of FloWire sales, which
carry higher gross margins than instrument sales. The decrease was also the
result of unit manufacturing cost reductions for FloWire devices. These cost
reductions were achieved through lower manufacturing overhead cost per unit due
to increased volumes.
 
     Research and development.  Research and development expenses increased 45%
for the period ended December 31, 1996 over the period ended December 31, 1995
to $3,279,000 from $2,259,000. As a percentage of sales, research and
development expenses increased to 24% in the period ending December 31, 1996
from 20% in the period ended December 31, 1995. The increase was primarily the
result of increased spending on clinical studies, which Cardiometrics includes
in research and development expenses. These studies include DESTINI-CFR and
DEBATE II, which were new studies commenced in 1996 and which will continue in
1997 and 1998. The increase in research and development was also the result of
and increased spending for personnel and outside services related to new product
development. Cardiometrics plans to continue its expenditures in research and
development, including additional clinical studies.
 
                                       30
<PAGE>   31
 
     Selling, general and administrative.  Selling, general and administrative
expenses increased 33% in the period ended December 31, 1996 over the period
ended December 31, 1995 to $8,682,000 from $6,549,000. As a percentage of sales,
selling, general and administrative expenses increased to 62% in the period
ending December 31, 1996 from 59% in the period ended December 31, 1995. This
increase relates primarily to expenses associated with increased sales volumes,
marketing programs, external corporate reporting and increased staffing and
associated expenses.
 
  Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
 
     Sales.  Sales increased 23% during the period ended December 31, 1995 over
the period ended December 31, 1994 to $11,112,000 from $9,006,000. This was
primarily the result of an increase in the average realized selling price for
the FloWire units and, to a lesser extent, an increase in sales volume of
FloWire units and to the introduction of the AccuTrac angioplasty guide wire.
 
     Cost of sales.  Cost of sales increased 12% during the period ended
December 31, 1995 over the period ended December 31, 1994 to $4,730,000 from
$4,213,000. Cost of sales as a percentage of sales decreased to 43% in the
period ended December 31, 1995 from 47% in the period ended December 31, 1994.
This decrease is principally the result of unit manufacturing cost reductions
for FloWire devices. These cost reductions were achieved through lower
manufacturing overhead cost per unit due to increased volumes and manufacturing
efficiencies, such as Just In Time techniques to reduce throughput time,
improved yields, reduced scrap costs and out-sourcing of non-proprietary
fabrication and assembly processes.
 
     Research and development.  Research and development expenses decreased 24%
for the period ended December 31, 1995 over the period ended December 31, 1994
to $2,259,000 from $2,960,000. As a percentage of sales, research and
development expenses decreased to 20% in the period ending December 31, 1995
from 33% in the period ended December 31, 1994. The decrease was primarily due
to a temporary reduction in spending on clinical studies, which Cardiometrics
includes in research and development expenses, as a result of the completion of
patient recruitment for major studies started in 1993 and 1994.
 
     Selling, general and administrative.  Selling, general and administrative
expenses increased 22% in the period ended December 31, 1995 over the period
ended December 31, 1994 to $6,549,000 from $5,375,000. As a percentage of sales,
selling, general and administrative expenses increased 1%. The increase in
selling and marketing expenses relates primarily to increased sales volume and
additional sales and marketing programs commenced in late 1994 and early 1995.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Since inception, Cardiometrics has financed its operations primarily
through the private sales of equity securities, raising approximately $38.5
million, and through an initial public offering in November 1995 with net
proceeds of approximately $17.6 million. In addition, Cardiometrics has financed
a substantial portion of its capital equipment requirements to date through
notes payable issued under a $1.5 million equipment loan and security agreement.
 
     In 1996, 1995 and 1994, Cardiometrics' cash used in operations was
$2,761,000, $2,717,000 and $3,134,000, respectively. The decrease in cash used
in operations from 1994 to 1996 was primarily due to increases in product sales
and gross margin improvements which were partially offset by increases in net
inventory and accounts receivable.
 
     At December 31, 1996, Cardiometrics' principal sources of liquidity
included an aggregate of $17,439,000 in cash, cash equivalents and short term
investments. Cardiometrics expects to incur substantial additional costs,
including costs related to sales and marketing and research and development,
including additional clinical outcome studies and the purchase of capital
equipment. Cardiometrics believes that the remaining net proceeds of the
November 1995 initial public offering will provide sufficient funds for
Cardiometrics' anticipated funding requirements through at least 1997 and for
the foreseeable future. However, there can be no assurance that Cardiometrics
will not require additional financing, or that if required, such financing will
be available on terms acceptable to Cardiometrics.
 
                                       31
<PAGE>   32
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
To the Board of Directors and Stockholders
Cardiometrics, Inc.
 
     We have audited the accompanying balance sheets of Cardiometrics, Inc., as
of December 31, 1996 and 1995, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on theses
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cardiometrics, Inc. at
December 31, 1996 and 1995 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
 
                                          /s/ ERNST & YOUNG LLP
Palo Alto, California
February 17, 1997
 
                                       32
<PAGE>   33
 
                              CARDIOMETRICS, INC.
 
                                 BALANCE SHEETS
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                        ---------------------
                                                                          1996         1995
                                                                        --------     --------
<S>                                                                     <C>          <C>
ASSETS
Current assets:
  Cash, cash equivalents and short term investments..................   $ 17,439     $ 20,725
  Accounts receivable, net...........................................      2,462        1,771
  Accounts receivable, related party.................................      1,331        1,342
  Inventories........................................................      2,542        1,758
  Other current assets...............................................        329          225
                                                                         -------      -------
Total current assets.................................................     24,103       25,821
 
Property and equipment, net..........................................        935          878
Other assets.........................................................          1           31
                                                                         -------      -------
Total assets.........................................................   $ 25,039     $ 26,730
                                                                         =======      =======
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable...................................................   $    712     $    746
  Accrued employee compensation......................................        569          470
  Accrued clinical trial expenses....................................        518          282
  Current portion of note payable....................................        176          175
  Deferred revenue and other current liabilities.....................        174          140
                                                                         -------      -------
Total current liabilities............................................      2,149        1,813
 
Note payable, less current portion...................................         47          223
 
Commitments
Stockholder's equity:
  Preferred stock $0.01 par value; 5,000 shares authorized, none
     issued and outstanding..........................................         --           --
  Common stock, $0.01 par value; 15,000 shares authorized, 6,926 and
     6,689 shares issued and outstanding as of December 31, 1996 and
     1995 respectively...............................................         69           67
  Additional paid-in capital.........................................     57,354       57,241
  Deferred compensation..............................................       (549)        (761)
  Accumulated deficit................................................    (34,031)     (31,853)
                                                                         -------      -------
Total stockholders' equity...........................................     22,843       24,694
                                                                         -------      -------
Total liabilities and stockholders' equity...........................   $ 25,039     $ 26,730
                                                                         =======      =======
</TABLE>
 
                            See accompanying notes.
 
                                       33
<PAGE>   34
 
                              CARDIOMETRICS, INC.
 
                            STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                               -------------------------------
                                                                1996        1995        1994
                                                               -------     -------     -------
<S>                                                            <C>         <C>         <C>
Sales (including related party sales)........................  $14,003     $11,112     $ 9,006
Cost and expenses:
  Cost of sales..............................................    5,214       4,730       4,213
  Research and development...................................    3,279       2,259       2,960
  Selling, general and administration........................    8,682       6,549       5,375
                                                               -------     -------     -------
Total costs and expenses.....................................   17,175      13,538      12,548
                                                               -------     -------     -------
Loss from operations.........................................   (3,172)     (2,426)     (3,542)
Interest and other income....................................    1,045         328         137
Interest expense.............................................      (51)       (108)       (164)
                                                               -------     -------     -------
Net loss.....................................................  $(2,178)    $(2,206)    $(3,569)
                                                               =======     =======     =======
Net loss per share...........................................  $ (0.32)         --          --
                                                               =======     =======     =======
Pro forma net loss per share.................................       --     $ (0.45)    $ (0.83)
                                                               =======     =======     =======
Shares used in computing per share amounts (see Note 1)......    6,834       4,850       4,295
                                                               =======     =======     =======
</TABLE>
 
                            See accompanying notes.
 
                                       34
<PAGE>   35
 
                              CARDIOMETRICS, INC.
 
                       STATEMENT OF STOCKHOLDERS' EQUITY
                      (In thousands, except share amounts)
 
<TABLE>
<CAPTION>
                       CONVERTIBLE PREFERRED
                               STOCK               COMMON STOCK        ADDITIONAL                                       TOTAL
                       ---------------------    -------------------     PAID-IN        DEFERRED      ACCUMULATED    STOCKHOLDERS'
                          SHARES      AMOUNT      SHARES     AMOUNT     CAPITAL      COMPENSATION      DEFICIT         EQUITY
                       ------------   ------    ----------   ------    ----------    ------------    -----------    -------------
<S>                    <C>            <C>       <C>          <C>       <C>           <C>             <C>            <C>
Balances at December
  31, 1993..........     10,566,392   $ 105         94,570    $  1      $ 32,880        $   --        $ (26,078)       $ 6,908
  Issuance of common
    stock, net of
    repurchases.....             --      --         17,596      --            16            --               --             16
  Issuance of Series
    D preferred
    stock, net of
    issuance costs
    of $15..........        620,000       6             --      --         3,079            --               --          3,085
  Net loss..........             --      --             --      --            --            --           (3,569)        (3,569)
                        -----------   -----      ---------     ---       -------         -----         --------        -------
Balances at December
  31, 1994..........     11,186,392     111        112,166       1        35,975            --          (29,647)         6,440
  Issuance of common
    stock...........             --                 75,248       1            42            --               --             43
  Issuance of Series
    D preferred
    stock, net of
    issuance costs
    of $4...........        500,000       5             --      --         2,491            --               --          2,496
  Exercise of
    warrants for
    Series A
    preferred
    stock...........         75,156       1             --      --            65            --               --             66
  Conversion of
    preferred stock
    to common
    stock...........   (11,761,548)    (117)     4,301,932      43            74            --               --             --
  Issuance of
    2,200,000 shares
    of common stock
    in connection
    with initial
    public offering,
    net of issuance
    costs of
    $2,034..........             --      --      2,200,000      22        17,744            --               --         17,766
  Deferred
    compensation
    related to the
    grant of certain
    stock options...             --      --             --      --           850          (850)              --             --
  Amortization of
    deferred
    compensation....             --      --             --      --            --            89               --             89
  Net loss..........             --      --             --      --            --            --           (2,206)        (2,206)
                        -----------   -----      ---------     ---       -------         -----         --------        -------
Balances at December
  31, 1995..........             --      --      6,689,346      67        57,241          (761)         (31,853)        24,694
  Issuance of common
    stock...........             --      --        236,596       2           276            --               --            278
  Additional initial
    public offering
    issuance
    costs...........             --      --             --      --          (163)           --               --           (163)
  Amortization of
    deferred
    compensation....             --      --             --      --            --           212               --            212
  Net loss..........             --      --             --      --            --            --           (2,178)        (2,178)
                        -----------   -----      ---------     ---       -------         -----         --------        -------
Balances at December
  31, 1996..........             --   $  --      6,925,942    $ 69      $ 57,354        $ (549)       $ (34,031)       $22,843
                        ===========   =====      =========     ===       =======         =====         ========        =======
</TABLE>
 
                            See accompanying notes.
 
                                       35
<PAGE>   36
 
                              CARDIOMETRICS, INC.
 
                            STATEMENTS OF CASH FLOWS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                  ----------------------------
                                                                    1996      1995      1994
                                                                  --------   -------   -------
<S>                                                               <C>        <C>       <C>
Cash flows from operating activities:
Net loss........................................................  $ (2,178)  $(2,206)  $(3,569)
Adjustments to reconcile net loss to net cash used in operating
  activities:
  Depreciation and amortization.................................       413       431       448
  Amortization of deferred compensation.........................       212        89        --
  Gain on disposal of fixed assets..............................        (5)       --        (6)
  Changes in operating assets and liabilities:
     Accounts receivable........................................      (691)     (440)     (656)
     Accounts receivable, related parties.......................        11      (401)     (322)
     Inventories................................................      (784)      (70)      232
     Other assets...............................................       (74)     (164)       60
     Accounts payable...........................................       (34)      367       127
     Accrued employee compensation..............................        99        59       160
     Accrued clinical trial expenses............................       236      (340)      482
     Deferred revenue and other current liabilities.............        34       (42)      (90)
                                                                  --------   -------    ------
Net cash used in operating activities...........................    (2,761)   (2,717)   (3,134)
                                                                  --------   -------    ------
 
Cash flows from investing activities:
Purchases of available-for-sale securities......................   (30,795)  (64,620)  (10,856)
Maturities of available-for-sale securities.....................    22,731    58,244    11,967
Expenditures for property and equipment.........................      (470)     (299)     (134)
Proceeds from sale of equipment.................................         5        --        12
Other assets....................................................        --        --       (31)
                                                                  --------   -------    ------
Net cash (used in) provided by investing activities.............    (8,529)   (6,675)      958
                                                                  --------   -------    ------
 
Cash flows from financing activities:
Proceeds from sale of common stock, net of stock repurchases....       115    17,809        16
Proceeds from sale of preferred stock...........................        --     2,562     3,085
Proceeds from issuance of note payable..........................        --        --       217
Principal payments on note payable..............................      (175)     (394)     (313)
Principal payments on capital leases............................        --        (9)       (2)
                                                                  --------   -------    ------
Net cash (used in) provided by financing activities.............       (60)   19,968     3,003
                                                                  --------   -------    ------
Net increase in cash and cash equivalents.......................   (11,350)   10,576       827
Cash and cash equivalents at beginning of year..................    11,898     1,322       495
                                                                  --------   -------    ------
Cash and cash equivalents at end of year........................  $    548   $11,898   $ 1,322
                                                                  ========   =======    ======
 
Supplemental disclosure of cash flow information:
Cash paid for interest..........................................  $     51   $   108   $   164
                                                                  ========   =======    ======
</TABLE>
 
                            See accompanying notes.
 
                                       36
<PAGE>   37
 
                              CARDIOMETRICS, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  Description of Business and Basis of Presentation
 
     Cardiometrics, Inc. (the "Company"), a Delaware corporation, develops,
manufactures and markets intravascular medical devices to measure blood flow
impairment caused by coronary artery and vascular disease.
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior period amounts may have been adjusted for consistency and presentation
purposes.
 
  Reincorporation
 
     In August 1995, the board of directors of the Company authorized the
reincorporation of the Company in the State of Delaware and a 1-for-3.2 reverse
stock split, in which 3.2 shares of common stock were exchanged for one share of
common stock. Following stockholder approval, the reincorporation was completed
on October 25, 1995.
 
     Upon the reincorporation, the Company became authorized to issue 5,000,000
shares of $0.01 par value preferred stock and 15,000,000 shares of $0.01 par
value common stock. All par value, share and per share amounts, as well as the
dividend and liquidation preferences for preferred stock, included in the
accompanying financial statements, have been retroactively adjusted to reflect
the reverse stock split and the Company's reincorporation in Delaware.
 
  Cash, Cash Equivalents and Short Term Investments
 
     The Company invests its excess cash in investment grade, short term,
interest bearing investments. Cash equivalents and short term investments
consist of investment grade corporate obligations and money market funds. The
Company considers highly liquid investments with original maturities of less
than three months to be cash equivalents.
 
     The Company's marketable securities are sold if cash is needed and,
therefore, are considered "available-for-sale." At December 31, 1996 and 1995,
the amortized cost of marketable securities approximated market value. Realized
gains and losses on marketable securities were insignificant during 1994, 1995
and 1996. The weighted average maturity on the short-term investments held as of
December 31, 1996 does not exceed twelve months. The following table details the
estimated fair market value of available-for-sale securities (in thousands).
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                  -------------------
                                                                   1996        1995
                                                                  -------     -------
        <S>                                                       <C>         <C>
        US Government agencies..................................  $ --        $   965
        Corporate commercial paper..............................   11,884       7,825
        US corporate bonds......................................    2,503       1,016
        Money market funds......................................      226       9,511
                                                                  -------     -------
                  Total available-for-sale securities...........  $14,613     $19,317
                                                                  =======     =======
</TABLE>
 
                                       37
<PAGE>   38
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Company also held $2,504,000 and $1,000,000 in certificates of deposit
as of December 31, 1996 and 1995 respectively. The estimated fair market value
amounts have been determined by the Company using available market information.
 
  Inventories
 
     Inventories are stated at the lower of cost or market. Cost is based on the
first-in, first-out method and is determined using standard costs which
approximate actual cost.
 
  Property and Equipment
 
     Equipment, including leasehold improvements, is recorded at cost. Equipment
is depreciated using the straight-line method over the estimated useful lives of
the assets, generally three to five years. Leasehold improvements are amortized
using the straight-line method over the shorter of the life of the related asset
or the term of the lease.
 
  Concentration of Credit Risk
 
     The Company sells its products primarily to members of the health services
industry and distributors and generally requires no collateral. The Company
maintains reserves for potential credit losses, and to date such losses have
been within management's expectations.
 
  Revenue Recognition
 
     The Company recognizes revenue from the sale of its products when the
products are shipped to its customers.
 
  Net Loss Per Share
 
     Except as noted below, historical net loss per share is computed using the
weighted average number of shares of common stock outstanding. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is antidilutive, except that, pursuant to the Securities and
Exchange Commission Staff Accounting Bulletins, common and common equivalent
shares issued at prices substantially below the public offering price during the
12-month period prior to the initial filing of the initial public offering have
been included in the calculation as if they were outstanding for all periods
through November 3, 1995 (using the treasury stock method). The historical net
loss per share information is calculated below:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                                 1995          1994
                                                              ----------     --------
        <S>                                                   <C>            <C>
        Net loss per share..................................  $    (1.65)    $ (12.40)
                                                                ========
        Shares used in net loss per share calculation.......   1,334,218      287,806
                                                                ========
</TABLE>
 
     Pro forma net loss per share for 1995 and 1994 has been computed as
described above and also gives effect to the conversion of convertible preferred
shares not included above that were automatically converted upon the completion
of the Company's initial public offering (using the if-converted method from the
original date of issuance).
 
  Stock Based Compensation
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which encourages, but does not require, companies to record
compensation expense for stock-based employee
 
                                       38
<PAGE>   39
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
compensation plans at fair value. The Company has chosen to continue to apply
Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock based plans
and, accordingly, does not recognize compensation expense related to employees
under its stock option plans for options granted to employees with an exercise
price equal to the fair value of the underlying stock on the grant date or under
its stock purchase plan. Note 5 contains a summary of the pro forma effects to
reported net loss and loss per share for 1996 and 1995 if the Company had
elected to recognize compensation expense based on the fair value of the options
granted as described by SFAS 123.
 
2.  BALANCE SHEET INFORMATION
 
<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                  -------------------
                                                                   1996        1995
                                                                  -------     -------
                                                                    (IN THOUSANDS)
        <S>                                                       <C>         <C>
        Cash, cash equivalents and short term investments:
          Cash and cash equivalents.............................  $   548     $11,898
          Short term investments................................   16,891       8,827
                                                                  --------    -------
                                                                  $17,439     $20,725
                                                                  ========    =======
        Accounts receivable:
          Accounts receivable...................................  $ 2,577     $ 1,877
          Allowance for doubtful accounts.......................     (115)       (106)
                                                                  --------    -------
                                                                  $ 2,462     $ 1,771
                                                                  ========    =======
        Inventories:
          Raw materials.........................................  $   784     $   417
          Work-in-process.......................................      428         400
          Finished goods........................................    1,330         941
                                                                  --------    -------
                                                                  $ 2,542     $ 1,758
                                                                  ========    =======
        Property and equipment:
          Equipment.............................................  $ 3,117     $ 2,681
          Furniture and fixtures................................      433         430
          Leasehold improvements................................      153         151
                                                                  --------    -------
                                                                    3,703       3,262
        Accumulated depreciation and amortization...............   (2,768)     (2,384)
                                                                  --------    -------
                                                                  $   935     $   878
                                                                  ========    =======
</TABLE>
 
3.  LEASE COMMITMENTS
 
     The Company leases its facility under a lease agreement that expires in
March 2001 which contains a provision for the Company to cancel the lease
effective March 31, 1998. The future noncancelable minimum lease payments for
its facilities are $174,000 for 1997 and $43,000 for 1998. Total rental expense
amounted to $252,000, $231,000 and $226,000 for the years ended December 31,
1996, 1995 and 1994, respectively.
 
                                       39
<PAGE>   40
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  NOTE PAYABLE
 
     At December 31, 1996, the Company had a remaining balance of $223,000 on a
loan and security agreement with a financing company, which has been used to
finance equipment purchases. The loan is secured by the financed equipment. The
interest rate is approximately 10% per annum. Scheduled future payments on the
outstanding balance are as follows:
 
<TABLE>
<CAPTION>
                                                                          NOTE PAYABLE
                                                                         --------------
                                                                         (IN THOUSANDS)
        <S>                                                              <C>
        1997...........................................................      $  199
        1998...........................................................          49
                                                                              -----
        Total payments.................................................         248
        Amount representing interest...................................         (25)
                                                                              -----
        Net present value of note payments.............................         223
        Less current portion...........................................        (176)
                                                                              -----
        Long-term portion..............................................      $   47
                                                                              =====
</TABLE>
 
5.  STOCKHOLDERS' EQUITY
 
  Common Stock
 
     In November 1995, the Company completed its initial public offering of
2,200,000 shares of common stock. The net proceeds to the Company were
approximately $17.6 million. Upon completion of the offering, all of the
preferred stock outstanding automatically converted into 4,301,932 shares of
common stock.
 
  Warrants
 
     The following warrants to purchase common stock were issued in connection
with various lending and equipment lease arrangements.
 
<TABLE>
<CAPTION>
                             AS OF DECEMBER 31, 1996
----------------------------------------------------------------------------------
NUMBER OF SHARES     RESERVED FOR ISSUANCE     PRICE PER SHARE     EXPIRATION DATE
----------------     ---------------------     ---------------     ---------------
<C>                  <C>                       <C>                 <S>
     16,406                  16,406                 $8.54          November 2000
      7,500                   7,500                  8.00          November 2000
     11,250                  11,250                  8.00          November 2000
</TABLE>
 
  1985 and 1995 Employee Stock Option Plans
 
     In October 1985, the Company adopted an Employee Stock Option and Purchase
Plan (the "1985 Plan"). In August 1995, the Company adopted a 1995 Stock Option
Plan (the "1995 Plan"). Under the 1985 Plan and 1995 Plan (collectively the
"Predecessor Plans"), employees, directors or consultants could be granted, at
the discretion of the board of directors, options (incentive stock and/or
nonqualified stock options) to purchase common stock at the then current fair
market value or discounts to their current fair market value, respectively. All
outstanding options and shares available for grant under the Predecessor Plans
were transferred to the 1995 Stock Incentive Plan (see below).
 
  1995 Stock Incentive Plan
 
     The Company's 1995 Stock Incentive Plan (the "Plan") succeeded the
Predecessor Plans. The Plan was adopted by the Board of Directors on September
5, 1995 and approved by the stockholders in October 1995. There are 1,399,914
shares of common stock authorized for issuance under the Plan.
 
                                       40
<PAGE>   41
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
This share reserve is comprised of the shares which remained available for
issuance under the Predecessor Plans, including the shares subject to
outstanding options thereunder. Outstanding options under the Predecessor Plans
were incorporated into the Plan and no further option grants will be made under
the Predecessor Plans. Options granted before October 15, 1995 were immediately
exercisable upon grant, and, options granted after October 15, 1995 were
exercisable upon vesting, which is generally ratable over a four year period.
 
     The Plan is divided into four separate components: (i) the Discretionary
Option Grant Program under which employees and consultants are granted options
to purchase shares of common stock at an exercise price per share not less than
85% of fair market value on the grant date, (ii) the Stock Issuance Program
under which such individuals may be issued shares of common stock directly,
through the purchase of such shares at a price per share not less than 85% fair
market value per share at the time of issuance or as a fully-paid bonus for
services rendered the Company; (iii) the Salary Investment Option Grant Program
under which the Company's officers may elect to have a portion of their base
salary applied each year to the acquisition of special below-market option
grants; and (iv) the Automatic Option Grant Program under which option grants
will automatically be made at periodic intervals to eligible non-employee board
members to purchase shares of Common Stock at an exercise price equal to 100% of
the fair market value of the option shares on the grant date.
 
     A summary of stock option activity for all plans is as follows:
 
<TABLE>
<CAPTION>
                                                                   OPTIONS OUTSTANDING
                                                     -----------------------------------------------
                                                                               WEIGHTED    WEIGHTED
                                          SHARES                               AVERAGE     AVERAGE
                                         AVAILABLE    NUMBER      PRICE PER    EXERCISE   GRANT DATE
                                         FOR GRANT   OF SHARES      SHARE       PRICE     FAIR VALUE
                                         ---------   ---------   -----------   --------   ----------
<S>                                      <C>         <C>         <C>           <C>        <C>
Balances at December 31, 1993..........     40,268     757,626   $0.32-$4.80    $ 1.47          --
  Authorized...........................         --          --       --             --          --
  Granted..............................   (324,941)    324,941   $1.60-$1.92    $ 1.62          --
  Exercised............................         --     (17,794)  $0.32-$1.60    $ 0.91          --
  Repurchased..........................        198          --   $  0.32        $ 0.32          --
  Canceled.............................    307,310    (307,310)  $0.32-$4.80    $ 3.15          --
                                          --------    --------
Balances at December 31, 1994..........     22,835     757,463   $0.32-$1.92    $ 0.87          --
  Authorized...........................    343,750          --       --             --          --
  Granted at fair value................   (115,430)    115,430   $1.92-$9.00    $ 5.60      $ 2.58
  Granted below fair value.............   (219,677)    219,677   $  4.00        $ 4.00      $ 5.09
  Exercised............................         --     (75,248)  $0.32-$1.92    $ 0.58          --
  Canceled.............................     26,351     (26,351)  $0.32-$4.00    $ 2.25          --
                                          --------    --------
Balances at December 31, 1995..........     57,829     990,971   $0.32-$9.00    $ 2.10          --
  Authorized...........................    225,000          --       --             --          --
  Granted at fair value................   (225,300)    225,300   $4.38-$7.38    $ 5.60      $ 3.42
  Exercised............................         --    (204,953)  $0.32-$4.00    $ 0.69          --
  Canceled.............................     85,804     (85,804)  $0.64-$8.50    $ 4.27          --
                                          --------    --------
Balances at December 31, 1996..........    143,333     925,514   $0.32-$9.00    $ 3.06          --
                                          ========    ========
</TABLE>
 
                                       41
<PAGE>   42
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes information regarding stock options
outstanding at December 31, 1996:
 
<TABLE>
<CAPTION>
                                                                                   EXERCISABLE OPTIONS
                                                                              ------------------------------
   RANGE OF         SHARES OUTSTANDING AT     WEIGHTED AVERAGE REMAINING       NUMBER       WEIGHTED AVERAGE
EXERCISE PRICES       DECEMBER 31, 1996        CONTRACTUAL LIFE (YEARS)       OF SHARES      EXERCISE PRICE
---------------     ---------------------     ---------------------------     ---------     ----------------
<S>                 <C>                       <C>                             <C>           <C>
$0.32 - $1.60              443,515                        5.4                   443,515          $ 0.95
$1.92 - $4.88              310,299                        9.0                   195,899          $ 3.63
$5.63 - $9.00              171,700                        9.1                    44,534          $ 7.40
-------------              -------
$0.32 - $9.00              925,514                        7.3                   683,948          $ 2.14
=============              =======
</TABLE>
 
     In January 1994, the Company authorized an exchange of stock options for a
like number of stock options at the then-fair value. The exchange was voluntary
and open to all employees holding options granted subsequent to certain dates.
All stock options received in exchange remain under the same vesting terms as
the previous options. In 1994, 235,081 options at an average option price of
$3.52 were exchanged for a like number of options at an option price of $1.60
per share.
 
     The Company recorded deferred compensation for the difference between the
grant price and the deemed fair value for financial statement presentation
purposes of the Company's common stock for certain options granted in July and
August 1995. Amortization of the deferred compensation was $212,000 and $89,000
in the years ended December 31, 1996 and 1995, respectively. The deferred
compensation amount is amortized over a four-year period, the vesting period of
the related stock options.
 
  Employee Stock Purchase Plan
 
     The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
approved by the stockholders in October 1995. The Purchase Plan is designed to
allow eligible employees of the Company and participating subsidiaries to
purchase shares of common stock, at semi-annual intervals, through their
periodic payroll deductions under the Purchase Plan, and 100,000 shares of
common stock have been reserved for this purpose. The Company has issued 31,643
shares under this plan through December 31, 1996.
 
  Pro Forma Information -- Stock Based Compensation
 
     As of December 31, 1996, the Company has two stock based compensation
plans, which are described above. The Company has elected to follow APB 25 and
related interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123 requires use of option valuation models that were not developed for use in
valuing employee stock options and employee stock purchase plans. Under APB 25,
when the exercise price of the Company's employee stock option equals the market
price of the underlying stock on the date of the grant, no compensation expense
is recognized.
 
     Pro forma information regarding net loss and net loss per share is required
by SFAS 123, and has been determined as if the Company had accounted for its
employee stock purchase plan and employee stock options granted subsequent to
December 31, 1994 under the fair value method of SFAS 123. The fair value for
these options was estimated at the date of grant using the minimum value method
for the options granted from January 1, 1995 through November 2, 1995 and the
Black-Scholes option pricing model for the options granted from November 3, 1995
to December 31, 1996. The following are the weighted-average assumptions for
1995 and 1996, respectively: risk free interest rate of 6.22% and 6.16%;
volatility factor of the expected market price of the Company's common stock of
 .70 for the
 
                                       42
<PAGE>   43
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
period from November 3, 1995 to December 31, 1996 and a weighted-average
expected life of the options of 5.74 and 4.87 years.
 
     The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock option and stock purchase plans
have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of the Company's
employee stock options and the employee stock purchase plan.
 
     For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net loss over the options' vesting period. The
Company's historical and pro forma information follows (in thousands, except for
net loss per share information):
 
<TABLE>
<CAPTION>
                                                                       1995     1996
                                                                      ------   ------
        <S>                                                           <C>      <C>
        Net loss
          Historical................................................  $2,206   $2,178
          Pro forma.................................................  $2,335   $2,748
        Net loss per share
          Historical (See Note 1)...................................  $ 0.45   $ 0.32
          Pro forma.................................................  $ 0.48   $ 0.40
</TABLE>
 
     Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully realized until 1997.
 
  Shareholder Rights Plan
 
     On December 3, 1996, the Board of Directors adopted a Shareholder Rights
Plan (the Rights Plan). Under the Rights Plan one preferred share purchase right
(a "Right") is attached to each share of common stock of the Company. The Rights
Plan is designed to assist the Company's stockholders in realizing fair value
and equal treatment in the event of any attempted takeover of the Company and to
protect the Company and its stockholders against coercive takeover tactics. In
the event of certain changes in the Company's ownership, the Rights Plan allows
stockholders to purchase the Company's or the potential acquiror's common stock
with a market value of twice the Rights' then-current exercise price.
 
6.  401(K) SAVINGS AND RETIREMENT PLAN
 
     The Company has adopted a 401(k) Savings and Retirement Plan (the "Savings
Plan") to provide for voluntary salary deferral contributions on a pretax basis
in accordance with Section 401(k) of the Internal Revenue Code of 1986, as
amended. The Company has the option of matching a certain percentage of each
participant's contribution to the Savings Plan. As of December 31, 1996, the
Company has not made any matching contributions.
 
7.  INCOME TAXES
 
     Due to the Company's loss position, there was no provision or benefit for
income taxes for the years ended December 31, 1996, 1995 and 1994.
 
                                       43
<PAGE>   44
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     A reconciliation of the income tax provision at the U.S. federal statutory
rate (34%) to the income tax provision at the effective tax rate is as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                          1996      1995       1994
                                                          -----     -----     -------
        <S>                                               <C>       <C>       <C>
        Income tax benefit computed at the federal
          statutory rate................................  $(741)    $(750)    $(1,213)
        Operating losses not utilized...................    741       750       1,213
                                                          -----     -----     -------
                                                             --        --          --
                                                          =====     =====     =======
</TABLE>
 
     As of December 31, 1996, the Company has federal and state net operating
loss carryforwards of $17,000,000 and $5,000,000, respectively, that will expire
in the years 1997 through 2011, if not utilized. The Company also has federal
and state research and experimentation credits of approximately $619,000 and
$335,000, respectively, that will expire in the years 2001 through 2011, if not
utilized.
 
     The utilization of the federal net operating loss and the deduction
equivalent of federal tax credit carryforwards of approximately $3,900,000
included in the above amounts will be subject to a cumulative annual limitation
of approximately $1,375,000 per year pursuant to the stock ownership change
provision of the Tax Reform Act of 1986. Future changes in ownership may result
in additional limitations.
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER
                                                                          31,
                                                                  -------------------
                                                                   1996        1995
                                                                  -------     -------
        <S>                                                       <C>         <C>
        Deferred tax assets:
          Net operating loss carryforwards......................  $ 6,000     $ 5,000
          Research credits......................................      841         740
          Capitalized research costs............................      552         520
          Other individually immaterial items...................      621         640
                                                                  -------     -------
        Total deferred tax assets...............................    8,014       6,900
        Valuation allowance for deferred tax assets.............   (8,014)     (6,900)
                                                                  -------     -------
        Net deferred tax assets.................................  $ --        $ --
                                                                  =======     =======
</TABLE>
 
     The valuation allowance increased by $638,000 during 1995.
 
8.  RELATED PARTY
 
     In November 1994 and June 1995, the Company issued a total of 1,100,000
shares of Series D preferred stock and granted certain distribution rights to
its distributor in Japan, Goodman Company, Ltd. The shares were converted into
350,000 shares of common stock upon completion of the initial public offering.
Sales to Goodman Co. Ltd. totaled $5,800,000, $4,061,000 and $3,022,000 or 41%,
37% and 34% of sales for the years ended December 31, 1996, 1995 and 1994,
respectively. The costs of sales to this distributor amounted to $1,750,000,
$1,381,000 and $1,346,000 for 1996, 1995 and 1994, respectively. Accounts
receivable related to these transactions were $1,331,000 and $1,342,000 at
December 31, 1996 and 1995, respectively.
 
                                       44
<PAGE>   45
 
                              CARDIOMETRICS, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
9.  SEGMENT INFORMATION
 
     The Company conducts its business within one industry segment. One customer
comprised 41%, 37% and 34% of the Company's sales for the years ended December
31, 1996, 1995 and 1994, respectively. A separate customer comprised 18%, 19%,
less than 10% of the Company's sales for the years ended December 31, 1996, 1995
and 1994, respectively. International sales, primarily export sales to
distributors, outside the United States, are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                         -----------------------------
                                                          1996        1995       1994
                                                         -------     ------     ------
        <S>                                              <C>         <C>        <C>
        Japan..........................................  $ 5,800     $4,061     $3,022
        Europe.........................................    4,073      3,780      2,542
        Rest of world..................................      684        570        893
                                                         -------     ------     ------
        Total non-U.S. sales...........................  $10,557     $8,411     $6,457
                                                         =======     ======     ======
</TABLE>
 
10.  SUBSEQUENT EVENTS
 
  Reorganization Agreement
 
     On January 26, 1997, Cardiometrics, EndoSonics Corporation, a Delaware
Corporation ("EndoSonics"), and River Acquisition Corporation, a Delaware
Corporation and a wholly owned subsidiary of EndoSonics ("Merger Sub"), entered
into an Agreement and Plan of Reorganization (the "Reorganization Agreement"),
pursuant to which Merger Sub will be merged with and into Cardiometrics (the
"Merger"), with Cardiometrics surviving the Merger and becoming a wholly owned
subsidiary of EndoSonics. The consummation of the Merger is subject, among other
things, to the approval of the Merger by the stockholders of Cardiometrics, at a
stockholders' meeting currently expected to be held in May 1997 and the
satisfaction of certain other closing conditions. Pursuant to the Reorganization
Agreement, shareholders of Cardiometrics will receive shares in EndoSonics,
shares in CardioVascular Dynamics, Inc. and cash, which, based on closing prices
on the last trading day prior to the execution of the Reorganization Agreement
(which values are subject to change), approximated $9.00 per share of
Cardiometrics common stock held by them. In the event Cardiometrics terminates
the Merger, under certain circumstances, Cardiometrics is obligated to pay up to
$3,500,000 in cash as a termination fee.
 
     On January 26, 1997, EndoSonics and Cardiometrics entered into a Stock
Option Agreement, pursuant to which, under limited circumstances, EndoSonics has
the right to acquire up to 1,379,717 shares of authorized, unissued shares of
Cardiometrics common stock at $9.00 per share. Under the terms of the Stock
Option Agreement, EndoSonics will remit to Cardiometrics any proceeds otherwise
payable to EndoSonics from any disposition of the Stock Option or the shares of
Cardiometrics Common Stock issued upon exercise of the Stock Option which are in
excess of the exercise price paid by EndoSonics to exercise the Stock Option.
 
  Litigation
 
     On January 28, 1997, an alleged class action complaint was filed in the New
Castle County Delaware Court of Chancery against the Company and other parties
seeking injunctive relief to prevent the consummation of the acquisition of the
Company by EndoSonics, or if the Merger is consummated, seeking rescission of
the Merger and payment of damages. The complaint, among other allegations,
alleges that the directors of the Company, two officers of the Company (one of
whom is a director), and a former director of the Company breached their
fiduciary and other duties to the Company's stockholders and that EndoSonics
knowingly aided and abetted such breaches. Cardiometrics believes the complaint
is without merit and intends to vigorously defend itself and the named
individual defendants against the allegations in the complaint.
 
                                       45
<PAGE>   46
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE
 
     Not Applicable.
 
                                    PART III
 
ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
DIRECTORS
 
     Set forth below, as of March 1, 1997, is information regarding Registrant's
directors, including their ages, the periods during which they have served as
directors, and information furnished by them as to principal occupations and
directorships held by them in corporations whose shares are publicly registered.
 
  Board Members Whose Terms End in 1998
 
     Menahem Nassi, Ph.D., 48, has served as the Company's President and Chief
Executive Officer since 1991 and as a Director since 1990. In 1990, Dr. Nassi
was named General Manager and became responsible for building the Company under
its new FloWire product focus. Prior to that, he was the Company's Vice
President, Research and Development from 1988 to 1990. From 1981 to 1988, Dr.
Nassi worked at Diasonics, Inc., a medical imaging company, most recently as
Director of Engineering and Research and Development. Prior to Diasonics, Dr.
Nassi worked in both the x-ray imaging and ultrasound divisions of Varian
Associates and Elscint, Inc. Dr. Nassi received B.S. and M.S. degrees in
mechanical engineering from the Israel Institute of Technology and a M.S. degree
in electrical engineering and a Ph.D. degree in bioengineering from Stanford
University.
 
     Neal Dempsey, 55, has served as a Director of the Company since 1992. Mr.
Dempsey has been a Partner of Bay Partners, a venture capital firm that owns
approximately five percent of the Company's Common Stock, since 1989. Mr.
Dempsey is also a director of GeoWorks, the developer of the GEOS operating
system and application software utilized by consumer computing products such as
digital cellular phones and Internet access devices. Mr. Dempsey earned a B.A.
degree in economics from the University of Washington.
 
     Jeffrey M. Folick, 49, has served as a director of the Company since
November 1995 and has been a consultant to the Company since September 1995. Mr.
Folick has served as Executive Vice President and Chief Operating Officer of
PacifiCare Health Systems, a managed health care division of PacifiCare Health
Systems, Inc. ("PacifiCare"), since 1994. Mr. Folick served as the President of
PacifiCare of California from 1993 to 1994. Mr. Folick joined PacifiCare in
December 1989 as Vice President of Secure Horizons, a Medicare health plan
provider, and served as President of Secure Horizons of California from 1991 to
1993. Mr. Folick received a B.S. degree in business from California State
University, Los Angeles.
 
  Board Members Whose Terms End in 1997
 
     H. Raymond Wallace, 61, has served as Chairman of the Board since 1994 and
served as a Director of the Company from 1993 to 1994. Mr. Wallace's experience
in the healthcare industry includes more than 20 years in various divisions of
Abbott Laboratories, most recently as Vice President and General Manager of
Abbott Critical Care Systems, a position he held until his retirement in 1993.
Mr. Wallace is also Chairman of the Board of Directors of Somanetics Corp., a
manufacturer of non-invasive cerebral oxygen saturation monitors. Mr. Wallace
earned a B.S. degree in business administration from Ohio State University and
an M.B.A. degree from the University of California, Berkeley.
 
     Robert J. Erra, 54, has served as a Director of the Company since 1993. Mr.
Erra has been a Partner at MCG/HealthCare, a health care compensation consulting
firm since 1993. Before joining MCG, Mr. Erra served as Senior Vice President
and Chief Operating Officer of clinic operations at Scripps Clinic and Research
Foundation from 1987 to 1993. Mr. Erra is also a director of TheraTx,
Incorporated, an acute rehabilitation services company, and Quantum Health
Resources, Inc., a chronic
 
                                       46
<PAGE>   47
 
disease management company. Mr. Erra received a B.B.A. degree in business
administration from Pace University.
 
     David M. Musket, 38, has served as a Director of the Company since 1994.
Mr. Musket has been President of Musket Research Associates, Inc., an investment
banking firm that specializes in financing smaller capitalization health care
companies since 1991. From 1989 to 1991, Mr. Musket was employed by EGS
Partners, a money management firm. During the prior five years, Mr. Musket
served as a drug analyst in the Equity Research department of Goldman Sachs &
Co. Mr. Musket received a B.A. degree in psychology and biology from Boston
College and completed four years in a doctoral program in pharmacology and
neurobiology at Cornell University Medical College.
 
     Gary S. Petersmeyer, 50, has served as a director of the Company since
November 1995 and has been a consultant to the Company since September 1995. Mr.
Petersmeyer has been President and Chief Executive Officer of Collagen
Corporation, a medical device and biomaterials company, since February 1997.
From 1995 to 1997, Mr. Petersmeyer was President and Chief Operating Officer of
Collagen Corporation. From 1993 to 1994, Mr. Petersmeyer was Vice President,
Managed Health Care of the Syntex Labs, a subsidiary of Syntex Corporation, a
pharmaceuticals company. Mr. Petersmeyer was National Sales Director for Syntex
Labs between 1992 and 1993 and Director of Corporate Development for Syntex
Corporation from 1991 to 1992. From 1986 to 1990, Mr. Petersmeyer was President
and Chief Executive Officer of Beta Phase, Inc., a medical and electronic device
company. Mr. Petersmeyer is a director of Collagen Corporation. Mr. Petersmeyer
received a B.A. degree in political science from Stanford University and a M.A.
degree in teaching and an M.B.A. degree from Harvard University.
 
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
 
     The members of the Board of Directors, the executive officers of the
Company and persons who hold more than 10% of the Company's outstanding Common
Stock are subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, which require them to file reports
with respect to their ownership of the Company's Common Stock and their
transactions in such Common Stock. Based upon (i) the copies of Section 16(a)
reports which the Company received from such persons for their 1996 fiscal year
transactions in the Common Stock and their Common Stock holdings and (ii) the
written representations received from one or more of such persons that no annual
Form 5 reports were required to be filed by them for the 1995 fiscal year, the
Company believes that all reporting requirements under Section 16(a) for such
fiscal year were met in a timely manner by its executive officers, Board members
and greater than ten-percent stockholders, except that a Form 3 for Mr. Stanley
Levy, Jr., an officer of the Company, was not filed in a timely fashion in which
nine stock options were reported.
 
EXECUTIVE OFFICERS
 
     Information regarding Registrant's executive officers is set forth in this
Form 10-K Part I, Item 1.
 
                                       47
<PAGE>   48
 
ITEM 11.  EXECUTIVE COMPENSATION
 
EXECUTIVE COMPENSATION
 
     The following table sets forth the compensation earned by the Company's
Chief Executive Officer ("CEO") and the four most highly compensated executive
officers in 1996 other than the CEO (collectively, the "Named Officers"):
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                     LONG-TERM
                                                                    COMPENSATION
                                                                    ------------
                                                                     NUMBER OF
                                           ANNUAL COMPENSATION       SECURITIES
                                          ---------------------      UNDERLYING         ALL OTHER
  NAME AND PRINCIPAL POSITION    YEAR     SALARY(1)      BONUS        OPTIONS        COMPENSATION(2)
-------------------------------  ----     ---------     -------     ------------     ---------------
<S>                              <C>      <C>           <C>         <C>              <C>
Menahem Nassi..................  1996     $ 162,578     $20,000             0            $518.82
  President and                  1995       154,453      25,000        34,375             441.00
  Chief Executive Officer        1994       153,268      12,000         7,812             441.00
Michael Sorna..................  1996     $ 195,486(3)  $ 7,500             0            $853.24
  Vice President,                1995       195,778(3)   10,000        29,687             752.00
  International                  1994       192,917(3)   10,000         6,250             752.00
  Sales and Operations
Robert Y. Newell, IV...........  1996     $ 131,296     $15,000             0            $566.40
  Vice President, Finance        1995       115,706      17,500        18,750             439.00
  and Administration,            1994       108,318       7,500         4,687             439.00
  Chief Financial Officer and
     Secretary
Kevin Rhatigan.................  1996     $ 160,315(4)  $ 7,500        25,000            $ 78.00
  Vice President, U.S. Sales     1995            --          --            --                 --
     and Operations              1994            --          --            --                 --
Jeffrey Frisbie................  1996     $ 124,292     $ 3,750             0            $524.84
  Vice President, Research       1995       116,926      10,000        18,750             415.00
  and Development                1994       107,875           0         4,687             415.00
</TABLE>
 
---------------
(1) Salary includes amounts deferred under Cardiometrics' 401(k) Plan.
 
(2) Represents life insurance premiums paid by Cardiometrics.
 
(3) Includes $75,000, $75,680 and $72,429 of commissions earned in 1996, 1995
    and 1994, respectively.
 
(4) Includes $53,168 of commissions earned in 1996.
 
OPTION GRANTS IN LAST FISCAL YEAR
 
     The following table contains information concerning the stock option grants
made to each of the Named Officers for the fiscal year ended December 31, 1996.
No stock appreciation rights were granted to these individuals during such year.
 
<TABLE>
<CAPTION>
                                                                                          POTENTIAL
                                                 INDIVIDUAL GRANTS                        REALIZABLE
                                ---------------------------------------------------    VALUE AT ASSUME
                                NUMBER OF                                              ANNUAL RATES OF
                                SECURITIES    % OF TOTAL                                    STOCK
                                UNDERLYING     OPTIONS       EXERCISE                 PRICE APPRECIATION
                                 OPTIONS      GRANTED TO        OR                    FOR OPTION TERM(3)
                                 GRANTED     EMPLOYEES IN   BASE PRICE   EXPIRATION   ------------------
             NAME                 (#)(1)     FISCAL YEAR    ($/SH)(2)       DATE       5%($)     10%($)
------------------------------  ----------   ------------   ----------   ----------   -------   --------
<S>                             <C>          <C>            <C>          <C>          <C>       <C>
Menahem Nassi.................         0           --             --             --        --         --
Michael Sorna.................         0           --             --             --        --         --
Robert Y. Newell..............         0           --             --             --        --         --
Kevin Rhatigan................    10,000         4.44%        $5.625        7/17/06   $35,375   $ 89,648
                                  15,000         6.66%         4.875        12/2/06    45,988    116,542
Jeffrey Frisbie...............         0           --             --             --        --         --
</TABLE>
 
                                       48
<PAGE>   49
 
---------------
(1) Each of the options listed in the table becomes exercisable as to 25% of the
    option shares upon completion of one year of service from the vesting date
    and the balance in a series of equal monthly installments over the next 36
    months of service thereafter. The option shares will vest upon an
    acquisition of Cardiometrics by merger, consolidation or asset sale. Each
    option has a maximum term of ten (10) years, subject to earlier termination
    in the event of the optionee's cessation of employment with Cardiometrics.
 
(2) The exercise price may be paid in cash, in shares of Cardiometrics' Common
    Stock valued at fair market value on the exercise date or through a cashless
    exercise procedure involving a same-day sale of the purchased shares.
    Cardiometrics may also finance the option exercise by loaning the optionee
    sufficient funds to pay the exercise price for the purchased shares,
    together with any federal and state income tax liability incurred by the
    optionee in connection with such exercise.
 
(3) The 5% and 10% assumed annual rates of compounded stock price appreciation
    are mandated by rules of the Securities and Exchange Commission. There can
    be no assurance provided to any executive officer or any other holder of
    Cardiometrics' securities that the actual stock price appreciation over the
    10-year option term will be at the assumed 5% and 10% levels or at any other
    defined level. Unless the market price of the Common Stock appreciates over
    the option term, no value will be realized from the option grants made to
    the executive officers.
 
OPTION EXERCISES AND FISCAL YEAR-END VALUES
 
     The following table sets forth information concerning option exercises and
option holdings for the fiscal year ended December 31, 1996 with respect to each
of the Named Officers. No options were exercised by the Named Officers during
such year. No stock appreciation rights were exercised during such year or were
outstanding at the end of that year.
 
<TABLE>
<CAPTION>
                                                                    NUMBER OF
                                                                    SECURITIES            VALUE OF
                                                                    UNDERLYING           UNEXERCISED
                                                                   UNEXERCISED          IN-THE-MONEY
                                              VALUE REALIZED         OPTIONS               OPTIONS
                                SHARES       (MARKET PRICE AT     AT FY-END (#)         AT FY-END(1)
                               ACQUIRED       EXERCISE LESS     ------------------   -------------------
           NAME             ON EXERCISE(#)   EXERCISE PRICE)    VESTED    UNVESTED    VESTED    UNVESTED
--------------------------  --------------   ----------------   -------   --------   --------   --------
<S>                         <C>              <C>                <C>       <C>        <C>        <C>
Menahem Nassi.............      30,000           $211,650       126,607     33,985   $591,037   $ 71,331
Michael Sorna.............           0                 --        57,421     28,516    256,381     51,524
Robert Newell.............           0                 --        35,578     19,108    141,255     34,520
Kevin Rhatigan............           0                 --         8,750     66,250         --      9,375
Jeffrey Frisbie...........      13,000             66,715        29,679     20,444    124,190     38,949
</TABLE>
 
---------------
(1) Based on the fair market value of Cardiometrics' Common Stock at year-end
    ($5.50 per share, as reported on Nasdaq) less the exercise price payable for
    such shares.
 
(2) All of the options, except options held by Mr. Rhatigan for 66,250 shares,
    are immediately exercisable for all of the option shares, but any shares
    purchased under those options will be subject to repurchase by Cardiometrics
    at the original exercise price per share upon the optionee's cessation of
    service. The table shows the number of shares no longer subject to
    repurchase (vested) and the number of shares subject to repurchase
    (unvested).
 
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
 
     The Company and Menaham Nassi, the Company's President and Chief Executive
Officer, have entered into an Employment Agreement dated December 13, 1990,
which was subsequently amended and restated on numerous occasions (the "Nassi
Employment Agreement"). Under the Nassi Employment Agreement, certain options
granted to Mr. Nassi will vest in full if Mr. Nassi is terminated without cause
(as defined in the Nassi Employment Agreement) or if the Company is acquired
before such options are fully vested. As of December 31, 1996, Mr. Nassi held
unvested options for a total of 33,985 shares, all of which will accelerate if
Mr. Nassi is terminated without cause (as defined in the
 
                                       49
<PAGE>   50
 
Nassi Employment Agreement) or if the Company is acquired and, accordingly, will
become fully vested upon consummation of the Merger.
 
     All of the Company's outstanding stock options and shares purchased under
options will vest in full upon a Corporate Transaction (as such term is defined
in the Company's 1995 Stock Incentive Plan) pursuant to resolutions adopted by
the Compensation Committee of the Company's Board of Directors on January 3,
1997. The acquisition of the Company by EndoSonics pursuant to the
Reorganization Agreement will constitute a Corporate Transaction and,
accordingly, all of the Company's outstanding stock options and shares purchased
under options will vest in full upon the closing of the Merger.
 
     SEVERANCE PLAN. On January 3, 1997, Cardiometrics adopted the Change in
Control Severance Plan ("Severance Plan"), which provides certain severance
benefits for eligible employees of Cardiometrics, including the Named Officers,
upon an Involuntary Termination (as defined in the Severance Plan) from
employment without cause within the 12 month period following a Change in
Control (as defined in the Severance Plan). The acquisition of the Company by
EndoSonics pursuant to the Reorganization Agreement will constitute a Change in
Control under the Severance Plan. The Severance Plan provides for the payment of
a cash severance benefit as a percentage of the eligible employee's annual base
pay at the time of termination and ranges from a low of 16 2/3% of annual base
pay to a high of 100% of annual base pay. If the employment of the Named
Officers were terminated in the 12-month period following the consummation of
the Merger, each would be entitled to a benefit (estimated as follows based on
the individual's current annual base pay): Dr. Nassi: $175,000, Mr. Sorna:
$65,000, Mr. Newell: $72,500, Mr. Frisbie: $66,000, and Mr. Rhatigan: $57,500.
The benefit payable under the Severance Plan is subject to reduction to avoid
imposition of excise taxes applicable to certain parachute payments under the
Federal tax laws.
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following table sets forth certain information regarding the beneficial
ownership of Cardiometrics common stock as of February 14, 1997 by (i) each
person who is known by Cardiometrics to beneficially own more than 5% of the
outstanding shares of Cardiometrics Common Stock, (ii) each of the directors of
Cardiometrics, (iii) the Named Officers and (iv) all of Cardiometrics' directors
and executive officers as a group.
 
                                       50
<PAGE>   51
 
<TABLE>
<CAPTION>
                                                                        NUMBER OF
                                                                          SHARES          PERCENT
                                                                       BENEFICIALLY     BENEFICIALLY
                     NAME OF BENEFICIAL OWNER(1)                         OWNED(2)          OWNED
---------------------------------------------------------------------  ------------     ------------
<S>                                                                    <C>              <C>
Lindner Growth Fund(3)...............................................     688,400            9.9%
  7711 Carondelet Avenue,
  Suite 700
  Saint Louis, MO 63105
St. Paul Fire and Marine Insurance Co.(4)............................     597,144            8.6%
  8500 Normandale Lake Blvd.
  Suite 1940
  Bloomington, MN 55437
INVESCO PLC(5).......................................................     567,500            8.2%
  11 Devonshire Square
  London EC2M 4YR
  England
Goodman Co., Ltd.....................................................     468,750            6.8%
  108 Fujigaoka
  Meito-Ku, Nagoya,
  465 Japan
Menahem Nassi(6).....................................................     190,988            2.7%
Jeffrey Frisbie(7)...................................................      66,220            1.0%
Robert Newell(8).....................................................      59,315               *
Kevin Rhatigan(9)....................................................      19,292               *
Michael Sorna(10)....................................................      88,937            1.3%
Neal Dempsey(11).....................................................     338,599            4.9%
Robert Erra(12)......................................................       9,895               *
Jeffrey Folick(13)...................................................      15,625               *
David Musket(14).....................................................      16,145               *
Gary Petersmeyer(15).................................................      15,625               *
H. Raymond Wallace(16)...............................................      11,457               *
All current directors and executive officers as a group (14
  persons)(17).......................................................     908,033           12.2%
</TABLE>
 
---------------
* Less than 1 percent.
 
 (1) Except as indicated in the footnotes to this table and pursuant to
     applicable community property laws, the persons named in the table have
     sole voting and investment power with respect to all shares of
     Cardiometrics Common Stock set forth opposite their respective names.
 
 (2) Number of Cardiometrics Shares Beneficially Owned includes shares of
     Cardiometrics Common Stock issuable upon exercise of options which are
     exercisable within 60 days after February 14, 1997.
 
 (3) Pursuant to a Schedule 13G filed with the Commission on February 1, 1997,
     Ryback Management Corporation ("Ryback") an Investment Company Advisor
     registered under Section 203 of the Investment Advisers Act of 1940, has
     reported that Lindner Growth Fund, a registered investment company, and a
     separate series of the Lindner Investment Series Trust, an Investment
     Company registered under Section 8 of the Investment Company Act, had sole
     power to dispose of and vote 688,400 shares as of December 31, 1996.
 
 (4) Pursuant to a Schedule 13G filed with the Commission on February 14, 1997,
     the St. Paul Companies, Inc. has reported that its wholly-owned subsidiary,
     St. Paul Fire and Marine Insurance Co., beneficially owned 597,144 shares
     as of December 31, 1996, which includes 7,188 shares issuable upon the
     exercise of options exercisable within 60 days of December 31, 1996. These
     options to purchase 7,188 shares are held by Brian D. Jacobs, an employee
     of St. Paul Fire and Marine Insurance Co. and a former director of
     Cardiometrics.
 
                                       51
<PAGE>   52
 
 (5) Pursuant to a Schedule 13G filed with the Commission on February 15, 1997,
     Invesco PLC, a parent holding company in accordance with Section
     240.13d-1(b)(ii)(G) of the Employee Retirement Income Security Act of 1974,
     and its subsidiaries Invesco Funds Group, Inc., an investment advisor
     registered under Section 203 of the Investment Advisors Act of 1940,
     Invesco North American Group, Ltd., Invesco, Inc., and Invesco North
     American Holdings, Inc. reported that they have shared power to dispose of
     and vote such 567,500 shares as of December 31, 1996.
 
 (6) Number of Cardiometrics Shares Beneficially Owned includes 160,592 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
 (7) Number of Cardiometrics Shares Beneficially Owned includes 50,123 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
 (8) Number of Cardiometrics Shares Beneficially Owned includes 1,000 shares
     held by Mr. Newell's wife; Mr. Newell disclaims beneficial ownership of
     such shares. Also includes 54,686 shares issuable upon exercise of options
     exercisable within 60 days of February 14, 1997.
 
 (9) Number of Cardiometrics Shares Beneficially Owned includes 18,792 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(10) Number of Cardiometrics Shares Beneficially Owned includes 85,937 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(11) Number of Cardiometrics Shares Beneficially Owned includes 304,730 shares
     owned by Bay Partners IV, L.P. and 26,499 shares owned by California BPIV,
     L.P. Mr. Dempsey, a Director of Cardiometrics, is a General Partner of Bay
     Management Company IV, L.P., the General Partner of Bay Partners IV, L.P.
     and of California BPIV, L.P. Because of such relationships, Mr. Dempsey may
     be deemed to share voting and investment powers over the shares held by Bay
     Partners. Mr. Dempsey disclaims beneficial ownership of the shares held by
     Bay Partners IV, L.P. and California BPIV, L.P., except to the extent of
     his pecuniary interest therein. Also includes (i) 100 shares held by Mr.
     Dempsey, (ii) 500 shares held by Mr. Dempsey's children and (iii) 6,770
     shares issuable pursuant to stock options held by Mr. Dempsey, exercisable
     within 60 days of February 14, 1997.
 
(12) Number of Cardiometrics Shares Beneficially Owned includes 9,895 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(13) Number of Cardiometrics Shares Beneficially Owned includes 15,625 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(14) Number of Cardiometrics Shares Beneficially Owned includes 9,895 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(15) Number of Cardiometrics Shares Beneficially Owned includes 15,625 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(16) Number of Cardiometrics Shares Beneficially Owned includes 7,420 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
(17) Number of Cardiometrics Shares Beneficially Owned includes 508,351 shares
     issuable upon exercise of options exercisable within 60 days of February
     14, 1997.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     In December 1996, the Company received a purchase order for approximately
$1 million from Goodman Co. Ltd. ("Goodman") for purchase of the Company's
WaveWire/WaveMap intracoronary blood pressure measurement system for delivery in
the second half of 1997 (the "Goodman Purchase Order"). Goodman owns more than
five percent of the Company's outstanding Common Stock. The Company believes
that the Goodman Purchase Order was made on terms no less favorable to the
Company than could have been obtained from unaffiliated third parties.
 
     In August 1996, the Company entered into an amendment to the employment
agreement with its President and Chief Executive Officer, Menahem Nassi ("Nassi
Employment Amendment"). The
 
                                       52
<PAGE>   53
 
Nassi Employment Amendment provides that commencing on February 1, 1996, Dr.
Nassi's gross salary shall be $13,958.33 per month. In addition, the Nassi
Employment Amendment also provides that Dr. Nassi is an at will employee,
however in the event that he is terminated without cause (as defined in the
Nassi Employment Agreement), Dr. Nassi shall be entitled to receive (i) salary
continuation for up to twelve (12) months (subject to discontinuation after six
(6) months should Dr. Nassi find another full-time job) and (ii) benefit
continuation for up to twelve (12) months (subject to discontinuation should Dr.
Nassi find another full-time job).
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K
 
     (a) CERTAIN DOCUMENTS FILED AS PART OF THIS FORM 10-K
 
<TABLE>
<CAPTION>
                                                                                             PAGE
                                                                                             ---
    <S>  <C>                                                                                 <C>
    1.   Financial Statements:
    Report of Ernst & Young LLP, Independent Auditors......................................   32
    Balance Sheets at December 31, 1996 and 1995...........................................   33
    Statements of Operations for the years ended December 31, 1996, 1995 and 1994..........   34
    Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and
      1994.................................................................................   35
    Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994..........   36
    Notes to Financial Statements..........................................................   37
 
    2.   Financial Statement Schedules:
</TABLE>
 
     Financial statement schedules have been omitted because the information
     required to be set forth therein is not applicable.
 
     (b) REPORTS ON FORM 8-K
 
     On December 4, 1996, the Company filed a Form 8-K, reporting that on
December 3, 1996, (i) the Board of Directors of Cardiometrics adopted and
approved Amended and Restated Bylaws of the Company eliminating the right of
stockholders to call a special stockholders meeting and deleting a provision
purporting to allow the removal of directors without cause and (ii) the Company
filed a Restated Certificate of Incorporation with the Secretary of State of the
State of Delaware.
 
     (c) EXHIBITS
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                        DESCRIPTION
---------   ---------------------------------------------------------------------------------
<S>         <C>
 2.1(1)     Agreement and Plan of Reorganization by and among Registrant, EndoSonics
            Corporation and River Acquisition Corporation dated January 26, 1997, including
            the form of Certificate of Merger, Voting Agreement, Stock Option Agreement, and
            Non-Competition Agreement attached thereto as Exhibits A, B, C, and D,
            respectively.
 3.1(2)     Certificate of Incorporation of Registrant.
 3.2(3)     Restated Certificate of Incorporation, filed with the Secretary of State of the
            State of Delaware on December 3, 1996.
 3.3(3)     Amended and Restated Bylaws of Registrant.
 3.4        Certificate of Designation of Series A Junior Participating Preferred Stock (see
            Exhibit A to Exhibit 4.5 below).
 4.1        Reference is made to Exhibits 3.1, 3.2 and 3.3.
 4.3(2)     Second Amended and Restated Investors' Rights Agreement, dated November 4, 1994,
            as amended, among Registrant and the investors named therein.
 4.4(2)     Agreement and Plan of Merger dated October 25, 1995.
</TABLE>
 
                                       53
<PAGE>   54
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                        DESCRIPTION
---------   ---------------------------------------------------------------------------------
<S>         <C>
 4.5(4)     Rights Agreement, dated as of December 3, 1996 between the Company and The First
            National Bank of Boston, including the Certificate of Designation of Series A
            Junior Participating Preferred Stock, Form of Right Certificate and Summary of
            Rights to Purchase Preferred Shares attached thereto as exhibits A, B and C,
            respectively.
4.6(1)      Amendment to Rights Agreement between Registrant and The First National Bank of
            Boston dated January 26, 1997.
10.1(2)     Registrant's 1985 Stock Option Plan, as amended.
10.2        Registrant's 1995 Stock Incentive Plan, as amended.
10.3(2)     Registrant's 1995 Employee Stock Purchase Plan.
10.4(2)     Business Loan Agreement between Registrant and Silicon Valley Bank, dated
            September 14, 1994, including Promissory Note and commercial Security Agreement.
10.5(2)     Export-Import Bank of the United States Working Capital Guarantee Program
            Borrower Agreement, by and between Registrant and Export-Import Bank of the
            United States and acknowledged by Silicon Valley Bank, dated as of April 25,
            1995.
10.6(2)     Foreign Accounts Receivable Business Loan Agreement between Registrant and
            Silicon Valley Bank, Dated April 25, 1995.
10.7(2)     Foreign Accounts Receivable Commercial Security Agreement between Registrant and
            Silicon Valley Bank, dated April 25, 1995.
10.8(2)     Lease by and between Property Management Systems and Registrant, dated as of
            February 9, 1987, as amended.
10.9(2)     Sublease Agreement by and between Registrant and Acurex Environmental
            Corporation, executed July 2, 1992.
10.10(2)    Loan and Security Agreement by and Registrant and The Northern Leasing Fund,
            dated March 1, 1992, as amended.
10.11(2)    Form of International Distributor Agreement.
10.12**(2)  International Distributor Agreement by and among Registrant and Goodman Co., Ltd.
            and Kaneko Enterprises, Inc., dated September 17, 1994, as amended.
10.13**(2)  Letter of Understanding by and among Goodman Co., Ltd., Kaneko Enterprises, Inc.
            and Registrant, dated November 9, 1994.
10.14**(2)  Exclusive Distributor Agreement by and between Registrant and Cordis Corporation,
            dated September 1, 1994.
10.15(2)    Form of Indemnification Agreement entered into between Registrant and its
            directors and officers.
10.16(2)    Employment Agreement between Registrant and Menahem Nassi, Ph.D., dated December
            13, 1990, as amended.
10.18(2)    Employment Agreement between Registrant and Robert C. Colloton, dated January 29,
            1993.
10.19(2)    Employment Agreement between Registrant and Robert Y. Newell, IV, dated July 23,
            1992.
10.20(2)    Employment Agreement between Registrant and Michael J. Sorna, dated June 10,
            1991.
10.21**(2)  Exclusive Distribution Agreement by and between Registrant and Cordis Europa
            N.V., executed September 10, 1995 and effective as of April 1, 1995.
10.22(2)    Registrant's 1995 Stock Option Plan.
10.23(5)    Offer letter between Registrant and Kevin Rhatigan, dated December 12, 1995.
10.24(6)    Fifth Amendment to Lease by and between Prudential Insurance Company and
            Registrant, dated March 29, 1996.
10.25(7)*   Addendum dated April 22, 1996 to the Exclusive Distribution Agreement by and
            between Registrant and Cordis Europa N.V., executed September 10, 1995 and
            effective as of April 1, 1995.
10.26(8)    Amendment dated August 7, 1996 to the Employment Agreement between Registrant and
            Menahem Nassi, Ph.D., dated December 13, 1990, as amended.
</TABLE>
 
                                       54
<PAGE>   55
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                                        DESCRIPTION
---------   ---------------------------------------------------------------------------------
<S>         <C>
10.27(8)*   Addendum dated September 26, 1996 to the Exclusive Distribution Agreement by and
            between Registrant and Cordis/Johnson & Johnson Medical NV/SA, formerly Cordis
            Europa N.V., executed September 10, 1995 and effective as of April 1, 1995.
10.28       Change in Control Severance Plan and Summary Plan Description, effective on
            January 3, 1997.
11.1        Statement of Computation of Net Loss Per Share.
23.1        Consent of Ernst & Young LLP, Independent Auditors.
24.1        Power of Attorney (see page 57).
27.1        Financial Data Schedule.
</TABLE>
 
                                       55
<PAGE>   56
 
---------------
(1) Incorporated by reference to exhibits filed with the Company's Form 8-K
    filed on February 10, 1997.
 
(2) Incorporated by reference to exhibits filed with the Company's Registration
    Statement (No. 33-96690) filed on September 8, 1995, or with Amendment Nos.
    1, 2 or 3 thereto, which registration statement was declared effective on
    November 1, 1995.
 
(3) Incorporated by reference to exhibits filed with the Company's Form 8-K
    filed on December 4, 1996.
 
(4) Incorporated by reference to exhibits filed with the Company's Form 8-A
    Registration Statement filed on December 4, 1996.
 
(5) Incorporated by reference to exhibits filed with the Company's Form 10-K for
    the period ended December 31, 1995 filed on April 1, 1996.
 
(6) Incorporated by reference to exhibits filed with the Company's Form 10-Q for
    the period ended March 31, 1996 filed on May 6, 1996.
 
(7) Incorporated by reference to exhibits filed with the Company's Form 10-Q for
    the period ended June 30, 1996 filed on August 15, 1996.
 
(8) Incorporated by reference to exhibits filed with the Company's Form 10-Q for
    the period ended September 30, 1996 filed on November 14, 1996.
 
 *  Confidential treatment requested as to certain portions of this exhibit.
 
**  The Company has received confidential treatment of certain portions of these
agreements.
 
                                       56
<PAGE>   57
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) 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.
 
                                          CARDIOMETRICS, INC.
                                          (REGISTRANT)
 
Date: March 27, 1997                      By: /s/ MENAHEM NASSI, PH.D.
 
                                          --------------------------------------
                                              Menahem Nassi, Ph.D.
                                            President and Chief Executive
                                              Officer
 
Date: March 27, 1997                      By: /s/ ROBERT Y. NEWELL, IV
 
                                          --------------------------------------
                                              Robert Y. Newell, IV
                                            Vice President, Finance &
                                              Administration
                                            Chief Financial Officer
 
                                       57
<PAGE>   58
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Menahem Nassi and Robert Y. Newell, IV,
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
 
<TABLE>
<CAPTION>
                SIGNATURE                                 TITLE                     DATE
------------------------------------------  ---------------------------------  ---------------
<C>                                         <S>                                <C>
 
            /s/ MENAHEM NASSI               President, Chief Executive         March 27, 1997
------------------------------------------  Officer and Director
              Menahem Nassi                 (Principal Executive Officer)
 
         /s/ ROBERT Y. NEWELL, IV           Vice President, Finance and        March 27, 1997
------------------------------------------  Administration, Chief Financial
           Robert Y. Newell, IV             Officer (Principal Financial and
                                            Accounting Officer) and Secretary
 
          /s/ H. RAYMOND WALLACE            Chairman of the Board, Director    March 27, 1997
------------------------------------------
            H. Raymond Wallace
 
             /s/ NEAL DEMPSEY               Director                           March 27, 1997
------------------------------------------
               Neal Dempsey
 
            /s/ ROBERT J. ERRA              Director                           March 27, 1997
------------------------------------------
              Robert J. Erra
 
          /s/ JEFFREY M. FOLICK             Director                           March 27, 1997
------------------------------------------
            Jeffrey M. Folick
 
           /s/ DAVID B. MUSKET              Director                           March 27, 1997
------------------------------------------
             David B. Musket
 
                                            Director                           March   , 1997
------------------------------------------
           Gary S. Petersmeyer
</TABLE>
 
                                       58
<PAGE>   59
                                EXHIBIT INDEX


Exhibit 10.2    Registrant's 1985 Stock Incentive Plan, as amended.
Exhibit 10.28   Change in Control Severance plan and Summary Plan Description,
                effective on January 3, 1997.
Exhibit 11.1    Statement of Computation of Net Loss Per Share.
Exhibit 23.1    Consent of Ernst & Young, LLP Independent Auditors.
Exhibit 27.1    Financial Data Schedule.