CARDIOVASCULAR DYNAMICS INC, S-1MEF, 1996-11-29

CARDIOVASCULAR DYNAMICS INC
S-1MEF, 1996-11-29
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 29, 1996.

REGISTRATION NO. 333-15901

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

POST-EFFECTIVE AMENDMENT NO. 1

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CARDIOVASCULAR DYNAMICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
DELAWARE 3841 68-0328265
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
</TABLE>

13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92718
(714) 457-9546
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------

MICHAEL R. HENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CARDIOVASCULAR DYNAMICS, INC.
13900 ALTON PARKWAY, SUITE 122
IRVINE, CALIFORNIA 92718
(714) 457-9546
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:

EDWARD M. LEONARD, ESQ.
BROBECK, PHLEGER & HARRISON LLP
TWO EMBARCADERO PLACE
2200 GENG ROAD
PALO ALTO, CALIFORNIA 94303
(415) 424-0160

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [X] 333-15901

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE
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Common Stock, $.001 par
value...................... 155,822 shares $12.125 $1,889,342 $572.53(2)
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</TABLE>

(1) Calculated based on the average of the high and low reported sale prices of
a share of the Company's Common Stock as of November 25, 1996 in accordance
with the provisions of Rule 457(c) under the Securities Act of 1933, as
amended.

(2) $541.30 has been previously paid.

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155,822 SHARES

CARDIOVASCULAR DYNAMICS, INC.
COMMON STOCK
------------------------

This Prospectus relates to the public offering, which is not being
underwritten, of 155,822 shares of Common Stock, $.001 par value per share, of
CardioVascular Dynamics, Inc. ("CVD", the "Company" or the "Registrant"). All
155,822 shares (the "Shares") may be offered by certain stockholders of the
Company or by pledgees, donees, transferees or other successors in interest that
receive such shares as a gift, partnership distribution or other non-sale
related transfer (the "Selling Stockholders"). 93,322 of the Shares were
originally issued by the Company in connection with the acquisition by statutory
merger of Intraluminal Devices, Inc. ("IDI") through a merger of IDI with and
into a wholly-owned subsidiary of the Company. See "The Merger." In addition,
62,500 of the Shares were originally issued to Fukuda Denshi Co., Ltd. upon
conversion of a $750,000 convertible obligation. The Shares were issued pursuant
to an exemption from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"), provided by Section 4(2) thereof. The
Shares are being registered by the Company pursuant to a registration rights
agreement with the Selling Stockholders.

The Shares may be offered by the Selling Stockholders from time to time in
transactions in the over-the-counter market, in negotiated transactions, or a
combination of such methods of sale, at fixed prices which may be changed, at
market prices prevailing at the time of sale, at prices related to prevailing
market prices or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions). See "Plan of Distribution."

The Company will not receive any of the proceeds from the sale of the
Shares. The Company has agreed to bear certain expenses in connection with the
registration of the Shares being offered and sold by the Selling Stockholders.

The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CCVD." On November 25, 1996 the average of the high and low price
for the Common Stock was $12.125.

------------------------

The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" herein for a description of
indemnification arrangements.
------------------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 5-12.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is November 29, 1996

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No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offering made hereby, and if given or made, such information or
representations must not be relied upon as having been authorized by the
Company, any Selling Stockholder or by any other person. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that information herein is correct as of any time
subsequent to the date hereof. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any security other than the securities
covered by this Prospectus, nor does it constitute an offer to or solicitation
of any person in any jurisdiction in which such offer or solicitation may not
lawfully be made.

Bullett is a registered trademark of CardioVascular Dynamics, Inc.
Trademark applications are pending for the CVD logo, FACT, CAT, ARC, Focus, LYNX
and Periflow. All other trademarks and trade names referred to in this
Prospectus are the property of their respective owners.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 75 Park Place, New York, New York
10007 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference Branch
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. The Common Stock of the Company is quoted on the Nasdaq
National Market, and such material may also be inspected at the offices of
Nasdaq Operations, 1735 K Street N.W. Washington, D.C. 20006. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov.

The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information regarding the Company and
the Common Stock offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith. The Registration
Statement, including the exhibits and schedules thereto, may be inspected at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and copies of all or any part thereof may
be obtained from such office upon payment of the prescribed fees.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those described in the forward-looking statements. Investors
should carefully consider the information under the heading "Risk Factors" in
addition to the other information contained in this Prospectus before purchasing
the Common Stock offered hereby.

THE COMPANY

CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary Focus and Multiple Microporous Membrane ("M(3)")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a
multiple-purpose catheter enables physicians to effectively perform challenging
interventional procedures, resulting in improved treatment outcomes and lower
costs. The Company has ten issued U.S. patents covering certain aspects of its
catheter technologies.

CardioVascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque.
Treatments for atherosclerosis include drug therapy and open-heart bypass
surgery. In addition, cardiologists are increasingly utilizing minimally
invasive catheter-based treatments such as balloon angioplasty, atherectomy and
laser angioplasty to treat atherosclerosis.

Although catheter-based interventional therapies are generally successful
in initially increasing blood flow, studies indicate that after a traditional
coronary balloon angioplasty up to 50% of treated patients experience restenosis
(generally defined as a 50% or greater reduction in the lumen, or interior,
diameter of the treated vessel at the lesion site). In addition, studies show
that 5% to 8% of elective coronary balloon angioplasty patients may experience
acute reclosure of the treated vessel. Acute reclosure is an increase in the
severity of the vessel closure accompanied by a reduction in blood flow within
the vessel as a consequence of the intervention which occurs within 24 hours of
the procedure. A study has also indicated that angioplasty of chronic total
occlusions represents 10% to 20% of all coronary angioplasty procedures. A
chronic total occlusion is a complete blockage of the vessel preventing blood
flow beyond the lesion site. The Company believes that these challenges are
inadequately addressed with existing, single function, uniform diameter
angioplasty balloons. However, while the Company believes that its products
address certain disadvantages of existing catheter technology, limitations
remain in the use of balloon angioplasty to treat atherosclerosis. The Company's
products may not be suitable for the treatment of all forms of atherosclerosis.
For example, in many cases the existence of a total occlusion limits treatment
options to bypass surgery.

CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular diseases.
The Company's catheters are designed to address three principal challenges
facing cardiologists: restenosis of a treated vessel, chronic total occlusions
and acute reclosure of a vessel during or soon after a procedure. The Company's
patented Focus technology combines compliant and non-compliant balloon materials
on a single catheter, creating an angioplasty balloon that has an adjustable,
larger center diameter with fixed, smaller diameters at each end. These
characteristics allow a single balloon to expand to multiple diameters, enabling
the physician to perform interventional procedures in vessels of varying
diameters and anatomical locations. The Company's proprietary M(3) technology
combines multiple membranes of polymeric balloon material to form a single
balloon that enables the accurate delivery of drugs or contrast agents to the
lesion or thrombus site. The M(3) technology can also be utilized to provide
perfusion of blood during an interventional procedure. The Company believes that
the Focus and M(3) technologies may

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enable physicians to cost-effectively treat vascular diseases by reducing the
cost of those procedures which require more than one catheter.

THE MERGER

On October 16, 1996, the Company acquired Intraluminal Devices, Inc.
("IDI") by the statutory merger (the "Merger") of IDI with and into IDI
Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of
the Company ("Sub"). The Merger was accomplished pursuant to the Agreement and
Plan of Reorganization, dated as of October 2, 1996, among the Company, IDI and
Sub, and a related Certificate of Merger (collectively, the "Merger
Agreements"). The Merger of IDI with and into Sub occurred following the
approval of the Merger Agreements by the shareholders of IDI and satisfaction of
certain other closing conditions. As a result of the Merger, the Company became
the owner of 100% of the issued and outstanding common stock of IDI (after
conversion of IDI Preferred Stock into IDI Common Stock). The terms of the
Merger Agreements were the result of arm's-length negotiations among the
parties. Of the shares being registered hereby, 93,322 were issued to former IDI
shareholders in exchange for the acquisition of all outstanding IDI capital
stock. The shares issued to IDI shareholders were issued pursuant to the
exemption from the registration requirements of the Securities Act provided by
Section 4(2) thereof.

IDI is a medical device company engaged in the development of medical
stents for the treatment of patients with vascular disease caused by aneurysms
or atherosclerosis. These diseases include abdominal aortic aneurysms, coronary
artery disease, and peripheral vascular disease (iliac artery aneurysms and
stenosis). There can be no assurance that IDI will successfully complete the
development of any products or that any such products will receive any required
regulatory approvals.

RISK FACTORS

An investment in the Common Stock offered hereby is subject to numerous
risks. The Company has a history of operating losses, expects to continue to
incur operating losses and may require additional funding. In addition, the
Company has experienced and expects to continue to experience significant
fluctuations in quarterly operating results. The Company has limited sales to
date and there can be no assurance that the Company's products will achieve
market acceptance or that the Company's products will not be rendered obsolete
as a result of technological change. There can be no assurance that the
Company's intellectual property will provide competitive advantages or that the
Company's products do not infringe the intellectual property rights of others.
The Company's products compete with or will compete with products marketed by a
number of other manufacturers, many of whom have established market positions
and significantly greater resources than the Company. The Company has very
limited experience manufacturing its products and may experience difficulties in
manufacturing scale-up. The Company also has limited marketing and sales
resources and depends upon the marketing capabilities of certain strategic
partners for the distribution of its products. Products offered by the Company
are subject to approval by regulatory authorities and failure to obtain or
maintain such approvals may delay or prevent the introduction or marketing of
the Company's products. Investors should carefully consider the information set
forth under the heading "Risk Factors" in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered hereby.

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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
PERIOD FROM MARCH NINE MONTHS ENDED
16, 1992 YEAR ENDED DECEMBER 31, SEPTEMBER 30,
(INCEPTION) TO --------------------------- ------------------
DECEMBER 31, 1992(1) 1993(1) 1994 1995 1995 1996
-------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $ -- $ 126 $ 2,389 $ 4,103 $ 2,798 $ 6,186
Charge for acquired in-process
research and development(2).... -- (2,001) -- (488) (488) --
Loss from operations............. (323) (2,878) (1,022) (2,976) (2,355) (2,576)
Net loss......................... $ (313) $(2,849) $ (971) $(2,874) $(2,278) $(1,845)
Pro forma net loss per
share(3)....................... $ (0.25) $ (0.65) $ (0.51) $ (0.29)
Shares used in computing
pro forma net loss per
share(3)....................... 3,876 4,441 4,433 6,462
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
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<S> <C>
BALANCE SHEET DATA:
Cash............................................................................ $47,377
Working capital................................................................. 47,440
Total assets.................................................................... 52,991
Convertible obligation.......................................................... 750
Accumulated deficit............................................................. (8,270)
Total stockholders' equity...................................................... $47,989
</TABLE>

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(1) The period from March 16, 1992 (inception) to December 31, 1992 and the
period from January 1, 1993 to June 9, 1993 reflect the operations of the
predecessor to the Company. See Note 1 of Notes to Financial Statements.

(2) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company. See
Note 1 of Notes to Financial Statements.

(3) See Note 1 of Notes to Financial Statements for information regarding the
calculation of pro forma net loss per share.

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RISK FACTORS

In evaluating the Company's business, prospective investors should consider
carefully the following risk factors in addition to the other information
presented in this Prospectus. This Prospectus contains forwardlooking statements
that involve risks and uncertainties. The Company's actual results may differ
materially from those described in the forward-looking statements. Investors
should carefully consider the following risk factors in addition to the other
information contained in this Prospectus before purchasing the Common Stock
offered hereby.

History of Operating Losses; Anticipated Future Losses; Future Capital
Requirements. The Company was founded in 1992 and has experienced annual
operating losses since its inception. Its net loss was $2.9 million and $1.8
million in 1995 and in the nine months ended September 30, 1996, respectively.
The Company's accumulated deficit at September 30, 1996 was $8.3 million. The
Company expects to continue to incur operating losses through at least 1997 and
there can be no assurance that the Company will ever be able to achieve or
sustain profitability in the future. The Company expects to incur substantially
increased costs related to, among other things, clinical testing, product
development, manufacturing scale-up and sales and marketing activities. The
Company anticipates that its existing capital resources will be sufficient to
fund its operations through 1997. The Company's future capital requirements will
depend on many factors, including its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in obtaining and enforcing patents or
any litigation by third parties regarding intellectual property, the status of
competitive products, the establishment and scale-up of manufacturing capacity,
the establishment of sales and marketing capabilities, the establishment of
collaborative relationships with other parties and costs related to the
acquisition of new technologies and product development. The Company may require
additional funds to finance these activities and for working capital
requirements. The Company may seek such funds through financings, including
private or public equity or debt offerings and collaborative arrangements with
corporate partners. There can be no assurance that funds will be raised on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would not
otherwise relinquish. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Dependence Upon New Products; Rapid Technological Change; Risk of
Obsolescence. The medical device industry generally, and the interventional
catheter market in particular, are characterized by rapid technological change,
changing customer needs, and frequent new product introductions. As a result,
the useful lives of both the technology and products for the treatment of
cardiovascular and peripheral vascular diseases are limited, in some instances
to as little as twelve months. The Company's future success will depend upon its
ability to develop, manufacture and introduce new products that address the
needs of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products that achieve market
acceptance or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products. In addition, there can be no assurance that the Company's existing
products will not be rendered obsolete as a result of technological developments
or that the products that the Company has under development will not be rendered
obsolete prior to the introduction of such products. See "Business -- Products."

Limited Sales to Date; Uncertainty of Market Acceptance. The Company's
catheters are used in conjunction with angioplasty and other intravascular
procedures such as vascular stenting and drug delivery. Although the Company has
received regulatory clearance for a total of fifty-two products, only fourteen
of such products have been marketed. Of those products which have been marketed,
many have been marketed only in limited quantities or in certain markets, or are
allowed to be marketed only in certain countries. In addition, while
interventional catheters are widely used technologies, the Company's catheter
designs are relatively new. The commercial success of the Company's products
will depend upon their acceptance by the medical community as useful,
cost-effective components of interventional cardiovascular and peripheral
vascular procedures, including the acceptance by the medical community of stents
and the availability and acceptance of therapeutic drugs for use in
interventional procedures. The Company currently relies upon

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relationships with certain prominent doctors and researchers in the medical
community to promote the uses and acceptance of its approved products. There can
be no assurance that the Company will be able to maintain such relationships or
establish additional relationships in the future. The erosion or loss of any
such relationship could detrimentally affect the market acceptance of the
Company's products. Failure of the Company's products to achieve such market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products."

Fluctuations in Quarterly Operating Results. CVD's results of operations
have varied significantly from quarter to quarter. The Company has experienced
an operating loss for each of the last three years and for the nine months ended
September 30, 1996. Quarterly operating results will depend upon several
factors, including the timing and amount of expenses associated with expanding
the Company's operations, the conduct of clinical trials and the timing of
regulatory approvals, new product introductions both in the United States and
internationally, the mix between pilot production of new products and full-scale
manufacturing of existing products, the mix between domestic and export sales,
variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent on orders received within that quarter. In addition,
the Company cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. The Company's expenses are relatively fixed and
difficult to adjust in response to fluctuating revenues. As a result of these
and other factors, the Company expects to continue to experience significant
fluctuations in quarterly operating results, and there can be no assurance that
the Company will be able to achieve or maintain profitability in the future. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement. While the Company owns certain issued and allowed U.S. patents
and has additional U.S. and foreign patent applications pending, there can be no
assurance that the Company's patent applications will issue as patents or that
any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The interventional cardiovascular and peripheral vascular markets
in general and the market for balloon angioplasty catheters (including the type
of catheters offered by CVD) in particular has been characterized by substantial
litigation regarding patent and other intellectual property rights. There can be
no assurance that the Company's products do not infringe such patents or rights.
The Company recently received a notice of potential trademark infringement
regarding the Company's use of the term "focal" in connection with the Company's
balloon angioplasty technology and entered into an agreement which prohibits the
Company from using this term. The Company has since ceased any use thereof. In
the event that any parties assert claims against the Company for patent
infringement and such patents are upheld as valid and enforceable, the Company
could be prevented from utilizing the subject matter claimed in such patents, or
would be required to obtain licenses from the owners of any such patents or
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be so on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. In
addition, foreign intellectual property laws may not provide protection
commensurate with that provided by U.S. intellectual property laws, and there
can be no assurance that foreign intellectual property laws will adequately
protect the Company's intellectual property rights abroad. The Company also
relies on trade secrets and proprietary technology and enters into
confidentiality and non-disclosure agreements with its employees, consultants
and advisors. There can be no assurance that the confidentiality of such trade
secrets or proprietary information will be maintained by employees, consultants,
advisors or others, or that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors in such a manner that the Company has no practical recourse.
Litigation may be necessary to defend against claims of infringement or
invalidity, to enforce patents issued to the Company or to protect trade
secrets, and there can be no assurance that any such litigation would be
successful. Any litigation could result in substantial costs to, and diversion
of resources by, the Company and its officers, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Patents and Proprietary Information."

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Significant Competition. Competition in the market for devices used in the
treatment of cardiovascular and peripheral vascular disease is intense, and is
expected to increase. The interventional cardiology market is characterized by
rapid technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters and
other products under development compete or will compete with products marketed
by a number of manufacturers, including Advanced Cardiovascular Systems, Inc., a
subsidiary of Guidant Corporation ("ACS"), SCIMED Life Systems, Inc., a
subsidiary of Boston Scientific Corporation ("SCIMED"), Johnson & Johnson
Interventional Systems ("JJIS") and Cordis Corporation, subsidiaries of Johnson
& Johnson, Medtronic, Inc., C.R. Bard, Inc. and Schneider USA, a subsidiary of
Pfizer, Inc. Such companies have significantly greater financial, management and
other resources, established market positions, and significantly larger sales
and marketing organizations than does the Company. The Company also faces
competition from manufacturers of other catheter-based devices, vascular stents
and pharmaceutical products intended to treat vascular disease. In addition, the
Company believes that many of the customers and potential customers of the
Company's products prefer to purchase catheter products from a single source.
Accordingly, many of the Company's competitors, because of their size and range
of product offerings, have a competitive advantage over the Company. There can
be no assurance that the Company's competitors will not succeed in developing or
marketing technologies or products that are more clinically effective or cost
effective than any that are being marketed or developed by the Company, or that
such competitors will not succeed in obtaining regulatory approval for
introducing or commercializing any such products prior to the Company. See
"Business -- Competition."

Limited Manufacturing Experience. The Company's success will depend in
part on its ability to manufacture its products in compliance with ISO 9001, the
FDA's Good Manufacturing Practices ("GMP") regulations, California Department of
Health Services ("CDHS") licensing and other regulatory requirements, in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. The Company began manufacturing certain of
its products at its facilities in July 1995. The Company has also introduced a
significant number of new products in 1996. Accordingly, the Company has very
limited experience in manufacturing its products. In addition, on July 15, 1996,
the Company entered into co-distribution agreements with Medtronic, Inc.
("Medtronic") which granted Medtronic certain non-exclusive rights to distribute
the Company's FACT, CAT and ARC catheters. Under the terms of these agreements,
if the Company is unable to meet its delivery obligations with respect to the
purchased catheters, up to 60% of the Company's manufacturing capacity will be
devoted to manufacturing such catheters for Medtronic. The Company has undergone
and expects to continue to undergo regular GMP inspections in connection with
the manufacture of its products at the Company's facilities. The Company's
success will depend, among other things, on its ability to efficiently manage
the simultaneous manufacture of different products and to integrate the
manufacture of new products with existing products. There can be no assurance
that the Company will not encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. The Company's
failure to successfully commence the manufacturing of these new products, or to
increase production volumes of new or existing products in a timely manner,
would materially adversely affect the Company's business, financial condition
and results of operations. Failure to increase production volumes in a timely or
cost-effective manner or to achieve or maintain compliance with ISO 9001, GMP
regulations, CDHS licensing or other regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company purchases many standard and custom built components from
independent suppliers and subcontracts certain manufacturing processes from
independent vendors. Most of these components and processes are available from
more than one vendor. However, certain manufacturing processes are currently
performed by single vendors. An interruption of performance by any of these
vendors could have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have an adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing" and
"Business -- Government Regulation."

Potential Inability to Manage Growth. The Company has historically relied
on EndoSonics Corporation ("EndoSonics") to perform certain activities on its
behalf, including manufacturing, financial, regulatory and

7
<PAGE> 10

administrative functions. Since July 1995, CVD has conducted its manufacturing
operations at its facilities in Irvine and also currently performs the
financial, regulatory and administrative functions previously performed by
EndoSonics. Accordingly, the Company has experienced a period of significant
expansion of its operations that has placed a significant strain upon its
management systems and resources. The Company has recently implemented a number
of new financial and management controls, reporting systems and procedures. In
addition, the Company has recently hired a significant number of employees and
plans to further increase its total head count. The Company also plans to expand
the geographic scope of its customer base and operations. This expansion has
resulted and will continue to result in substantial demands on the Company's
management resources. The Company's ability to manage future expansion of its
operations will require the Company to continue to improve its financial and
management controls, reporting systems and procedures on a timely basis and to
expand, train and manage its employee work force. There can be no assurance that
the Company will be able to do so successfully. The failure to do so would have
a material adverse effect on the Company's business, financial condition and
results of operations.

Government Regulation. The manufacturing and marketing of the Company's
products are subject to extensive and rigorous government regulation in the
United States and in other countries. The Company believes that its success will
be significantly dependent upon commercial sales of improved versions of its
catheter products. The Company will not be able to market these new products in
the United States unless and until the Company obtains approval or clearance
from the FDA. Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.

If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a premarket
approval ("PMA"), the manufacturer may seek clearance from the FDA to market the
device by filing a premarket notification with the FDA under Section 510(k) of
the Federal Food, Drug, and Cosmetic Act ("510(k)"). All of the 510(k)
clearances received for the Company's catheters were based on substantial
equivalence to legally marketed devices. There can be no assurance that 510(k)
clearance for any future product or significant modification of an existing
product will be granted or that the process will not be unduly lengthy. In
addition, if the FDA has concerns about the safety or effectiveness of any of
the Company's products, it could act to withdraw approval or clearances of those
products or request that the Company present additional data. Any such actions
would have a material adverse effect on the Company's business, financial
condition and results of operations.

If substantial equivalence cannot be established, or if the FDA determines
that the device or the particular application for the device requires a more
rigorous review to assure safety and effectiveness, the FDA will require that
the manufacturer submit a PMA application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and always requires the submission of clinical data. It
is expected that certain of the Company's products under development will be
subject to this PMA process. The Company currently has a non-exclusive,
royalty-free right to submit PMA supplement applications utilizing an EndoSonics
PMA as a reference and to manufacture and distribute CVD products as a
supplement to the EndoSonics PMA. This agreement may be terminated in the event
of breach upon 60 days notice by the non-breaching party, subject to the
breaching party's right to cure. In the event of termination, the Company would
be prohibited from submitting new PMA supplements referencing the EndoSonics PMA
and would be required to seek independent FDA approval for any such products,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.

8
<PAGE> 11

Medical Device Reporting laws and regulations require that the Company provide
information to the FDA on deaths or serious injuries alleged to have been
associated with the use of its devices, as well as product malfunctions that
would likely cause or contribute to death or serious injury if the malfunction
were to recur. In addition, the FDA prohibits an approved device from being
marketed for unapproved applications. CVD has received FDA approval to market
the FACT catheters, which utilize the Focus technology, for coronary balloon
angioplasty. These catheters are marketed outside the United States for use in
stent deployment. However, without specific FDA approval for stent deployment,
these catheters may not be marketed by the Company in the United States for such
use.

Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of the Company's products. Delays in receipt of clearances or
approvals, failure to receive clearances or approvals or the loss of previously
received clearances or approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.

The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products" and "Business -- Government Regulation."

International sales of the Company's products are subject to the
registration requirements of each country. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. The Company typically relies on its distributors in such foreign countries
to obtain the requisite regulatory approvals. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all. In
addition, the FDA must approve the export to certain countries of devices that
require a PMA but are not yet approved domestically.

The Company is in the process of implementing policies and procedures which
are intended to allow the Company to receive ISO 9001 certification of its
quality system. The ISO 9000 series of standards for quality operations has been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive by mid-1998 the right to affix the
CE mark, an international symbol of adherence to quality assurance standards and
compliance with applicable European medical device directives. ISO 9001
certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prevent the Company from selling its
products in member countries of the European Union. While the Company is in the
process of becoming ISO 9001 certified, there can be no assurance that the
Company will be successful in meeting these or any other certification
requirements on a timely basis, or at all.

Limited Marketing and Sales Resources; Dependence Upon Strategic
Partners. CVD intends to rely primarily on certain strategic relationships,
medical device distributors and its direct sales organization to distribute its
products. The Company's ability to distribute its products successfully depends
in part on the marketing capabilities of its strategic partners. In recent years
there has been significant consolidation among medical device suppliers as the
major suppliers have attempted to broaden their product lines in order to
respond to cost pressures from health care providers. This consolidation has
made it increasingly difficult for smaller suppliers, such as the Company, to
effectively distribute their products without a relationship with one or more of
the major suppliers. The Company is currently marketing certain of its products
through licensing agreements with SCIMED and ACS and through co-distribution
agreements with Medtronic. In addition, Fukuda Denshi Company, Ltd. ("Fukuda")
is the Company's exclusive distributor in Japan for certain of the Company's
products. Fukuda is also responsible for obtaining regulatory approval for the
Company's products in Japan. The Company's revenue from these relationships is
dependent upon the efforts made by such parties and there can be no assurance
that such efforts will be successful. There can be no assurance that the

9
<PAGE> 12

Company will be able to maintain or expand its relationships with its strategic
partners or to replace its strategic partners in the event any such relationship
were terminated. In the event of such a termination, the Company's ability to
distribute its products would be materially adversely affected, which would have
a material adverse effect on the Company's business, financial condition and
results of operations.

CVD currently has a limited marketing and sales staff. The Company intends
to expand its direct sales force to market the Company's products expansion.
However, there can be no assurance that CVD will successfully expand its direct
sales and marketing organization, or that if expanded, such organization will be
able to effectively distribute CVD's products. If CVD is unable to achieve
distribution of its products through its direct sales organization, the
Company's business, financial condition and results of operations would be
materially adversely affected.

The Company also has product development relationships with SCIMED and ACS.
SCIMED currently funds certain research and development efforts undertaken by
CVD in the area of combined drug delivery and coronary angioplasty. ACS conducts
development work on the Company's perfusion technology. If CVD is unable to
maintain its relationships with these or future strategic partners its product
development efforts could be materially adversely affected, which would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Marketing and Sales" and "Business --
Strategic Relationships."

Dependence Upon International Sales. The Company derives, and expects to
continue to derive, a significant portion of its revenue from international
sales. In 1995 and the nine months ended September 30, 1996, the Company's
international sales were $2.1 million and $2.6 million, respectively, or 59% and
44% respectively, of product sales. The Company expects to continue to derive
significant revenue from international sales and therefore a significant portion
of the Company's revenues will continue to be subject to the risks associated
with international sales, including economic or political instability, shipping
delays, changes in applicable regulatory policies, inadequate protection of
intellectual property, fluctuations in foreign currency exchange rates and
various trade restrictions, all of which could have a significant impact on the
Company's ability to deliver products on a competitive and timely basis. Future
imposition of, or significant increases in the level of, customs duties, import
quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operation. In foreign
countries, the Company's products are subject to governmental review and
certification. The regulation of medical devices, particularly in the European
Union, continues to expand and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."

Limitations on Third-Party Reimbursement. In the United States, the
Company's products are purchased primarily by medical institutions, which then
bill various third-party payors, such as Medicare, Medicaid, and other
government programs and private insurance plans, for the health care services
provided to patients. Government agencies, private insurers and other payors
determine whether to provide coverage for a particular procedure and reimburse
hospitals for medical treatment at a fixed rate based on the diagnosis-related
group ("DRG") established by the U.S. Health Care Financing Administration
("HCFA"). The fixed rate of reimbursement is based on the procedure performed,
and is unrelated to the specific devices used in that procedure. If a procedure
is not covered by a DRG, payors may deny reimbursement. In addition, some payors
may deny reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication. Reimbursement of interventional procedures utilizing
the Company's products is currently covered under a DRG. There can be no
assurance that reimbursement for such procedures will continue to be available,
or that future reimbursement policies of payors will not adversely affect the
Company's ability to sell its products on a profitable basis. In addition,
reimbursement may be denied if the product use is not in accordance with
approved FDA labeling. Failure by hospitals and other users of the Company's
products to obtain reimbursement from third-party payors, or changes in
government and private third-party payors' policies toward reimbursement for
procedures employing the Company's products, would have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Third-Party Reimbursement."

10
<PAGE> 13

Control by Existing Stockholder; Limitations on Pooling-of-Interests
Accounting in Merger Transactions. EndoSonics owns approximately 45% of the
Company's outstanding Common Stock. As a result, EndoSonics is able to elect at
least two members to the Company's five person board of directors and has the
ability to effectively control the Company and influence its affairs and the
conduct of its business. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company. In
accordance with applicable accounting standards, the Company is prohibited from
accounting for a merger transaction, of or by the Company, as a
pooling-of-interests for a period of two years following June 25, 1996, the date
on which EndoSonics ceased to control 50% of the outstanding voting Common Stock
of the Company. As a result, any business combination consummated prior to the
expiration of such period would have to be accounted for using the purchase
method. Under the purchase method, the excess of the purchase price over the net
book value of the assets acquired would be amortized to expense, which could
result in a significant negative impact on the acquiror's results of operations
and, therefore, reduce the attractiveness of, or the price paid in, a particular
acquisition transaction.

EndoSonics has informed the Company that EndoSonics presently intends to
distribute or otherwise transfer to EndoSonics stockholders a portion of the CVD
shares it holds. While EndoSonics indicated that it may so distribute or
transfer up to a majority of the shares it holds, it also indicated that the
precise amount and timing of any such distribution or transfer will depend upon,
among other matters, an analysis of the tax consequences to EndoSonics and its
stockholders. Any such distribution or transfer may result in a change of
control of CVD. Notwithstanding EndoSonics' stated intent, EndoSonics is not
obligated to make any such distribution or transfer nor is it obligated to take
any action or refrain from taking any action with respect to the shares of CVD
which it holds. See "Certain Transactions."

Dependence Upon Key Personnel. The Company depends to a significant extent
upon key management and technical personnel. The Company's growth and future
success will depend in large part upon its ability to hire, motivate and retain
highly qualified personnel. Competition for such personnel is intense and there
can be no assurance that the Company will be successful in hiring, motivating or
retaining such qualified personnel. The loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Marketing and Sales," "Business -- Employees" and "Management."

Potential Product Liability; Limited Insurance. The Company faces the risk
of financial exposure to product liability claims. The Company's products are
often used in situations in which 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.
The Company is currently covered under a product liability insurance policy with
coverage limits of $2.0 million per occurrence and $2.0 million per year in the
aggregate. There can be no assurance that the Company's product liability
insurance is adequate or that such insurance coverage will remain available at
acceptable costs. There can be no assurance that the Company will not incur
significant product liability claims in the future. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, adverse product liability actions could negatively
affect the reputation and sales of the Company's products and the Company's
ability to obtain and maintain regulatory approval for its products and
substantially divert the time and effort of management away from the Company's
operations.

Volatility of Stock Price. Since the Company's initial public offering in
June 1996, the price of the Company's Common Stock has fluctuated significantly.
The Company believes that factors such as variations in quarterly results of
operations, any future litigation involving the Company, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors, could cause the price of the Company's Common
Stock to fluctuate, perhaps substantially. In addition, in recent years the
stock market in general, and the market for small capitalization stocks in
particular, has experienced extreme price fluctuations which have often been
unrelated to the operating performance of affected companies. Such fluctuations
could adversely affect the market price of the Company's Common Stock.

11
<PAGE> 14

Shares Eligible for Future Sale; Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market during and after this
offering could adversely affect the market price of the Common Stock. As of
November 26, 1996, the Company had 8,941,822 shares outstanding. Including the
shares registered for sale hereby, 4,065,822 of these shares are freely tradable
without restriction. Beginning December 17, 1996, approximately 4,076,000
additional shares will be eligible for sale, including 3,240,000 shares held by
EndoSonics and 760,000 shares held by SCIMED. Sales of any such shares in the
public market could adversely affect the market price of the Common Stock. The
Company has also registered 1,200,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option/Stock Issuance Plan and 200,000
shares under the Company's Employee Stock Purchase Plan. As of November 4, 1996,
there were outstanding options under the Company's stock option plans to acquire
1,162,000 shares, all of which are subject to lock-up agreements which expire on
December 16, 1996. After the expiration of the lock-up period, SCIMED will be
entitled to certain demand and piggyback registration rights with respect to its
shares. If SCIMED, by exercising its demand registration rights, causes a large
number of shares to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by SCIMED pursuant to the exercise of its piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Shares Eligible for Future Sale."

Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate
of Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company, which could adversely affect the market price of the Company's
Common Stock. See "Description of Capital Stock."

Absence of Dividends. The Company has never paid any cash dividends on the
Common Stock and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. Purchasers of the Common Stock offered hereby
will incur immediate substantial dilution in the net tangible book value per
share of Common Stock. See "Dividend Policy."

THE COMPANY

The Company was originally incorporated in California in March 1992 and
became a Delaware corporation in June 1993 after being acquired by EndoSonics.
The Company's principal executive offices are located at 13900 Alton Parkway,
Suite 122, Irvine, California 92718 and its telephone number is (714) 457-9546.

USE OF PROCEEDS

12
<PAGE> 15

dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Shares
for whom such broker-dealers may act as agents or to whom they sell as
principals, or both (which compensation as to a particular broker-dealer might
be in excess of customary commissions).

In order to comply with the securities laws of certain states, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
Shares may not be sold unless they have been registered or qualified for sale in
the applicable state or an exemption from the registration or qualification
requirement is available and is complied with.

The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act.

Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to the Common Stock of the Company for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, each Selling Stockholder will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Rules 10b-6 and 10b-7,
which provisions may limit the timing of purchases and sales of shares of the
Company's Common Stock by the Selling Stockholders.

Of the Shares, 93,322 were originally issued to former stockholders of IDI
in connection with the statutory merger of IDI with and into IDI Acquisition
Corporation, a wholly-owned subsidiary of the Company, pursuant to an exemption
from the registration requirements of the Securities Act provided by Section
4(2) thereof. The remaining 62,500 Shares were originally issued to Fukuda upon
conversion of a $750,000 convertible obligation. The Company agreed to register
the Shares under the Securities Act and to indemnify and hold the Selling
Stockholders harmless against certain liabilities under the Securities Act that
could arise in connection with the sale by the Selling Stockholders of the
Shares. The Company has agreed to pay all reasonable fees and expenses incident
to the filing of this Registration Statement.

PRICE RANGE OF COMMON STOCK

The Company's Common Stock commenced trading on the National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq") National Market
on June 20, 1996 and is traded under the symbol "CCVD". The following table sets
forth for the periods indicated the high and low sale prices for the Common
Stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1996
Second Quarter........................................ $12 3/4 $10 1/2
Third Quarter......................................... 17 1/2 10 1/4
Fourth Quarter (through November 26, 1996)............ 17 1/2 9 5/8
</TABLE>

On November 26, 1996, the closing sale price of the Common Stock as
reported on the Nasdaq National Market was $12.00 per share. As of November 26,
1996, there were approximately 20 holders of record of the Common Stock.

DIVIDEND POLICY

The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any dividends in the
foreseeable future.

13
<PAGE> 16

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the Company's Financial Statements and Notes thereto and with Management's
Discussion and Analysis of Financial Condition and Results of Operations, which
are included elsewhere in this Prospectus. The statement of operations data for
the years ended December 31, 1993, 1994 and 1995, and the balance sheet data at
December 31, 1994 and 1995, are derived from financial statements that have been
audited by Ernst & Young LLP, independent auditors, included elsewhere in this
Prospectus. The balance sheet data at December 31, 1992 and 1993 and the
statement of operations data for the period from March 16, 1992 (inception) to
December 31, 1992 are derived from audited financial statements not included in
this Prospectus. The statement of operations data for the nine month periods
ended September 30, 1995 and 1996, and the balance sheet data at September 30,
1996 are derived from unaudited financial statements included elsewhere in this
Prospectus and include, in the opinion of the Company, all adjustments
consisting of only normal recurring adjustments necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date. The Company has not paid dividends since its
inception. The results for the nine month period ended September 30, 1996 are
not necessarily indicative of the results to be obtained in any future period.

<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1992 NINE MONTHS ENDED
(DATE OF YEAR ENDED DECEMBER 31, SEPTEMBER 30,
INCEPTION) TO ----------------------------- -------------------
DECEMBER 31, 1992(1) 1993(1) 1994 1995 1995 1996
-------------------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Sales............................... $ -- $ 126 $ 1,169 $ 3,462 $ 2,156 $ 5,836
License fee and other from related
party............................. -- -- 1,220 641 230 200
Contract............................ -- -- -- -- 412 150
---- ------- ------- ------- ------- -------
Total revenue.......................... -- 126 2,389 4,103 2,798 6,186
Costs and expenses:
Cost of sales....................... -- 79 848 2,051 1,143 3,136
Charge for acquired in-process
research and development(2)....... -- 2,001 -- 488 488 --
Research and development............ 294 734 1,228 1,683 1,420 2,610
Marketing and sales................. -- 94 748 1,526 1,120 2,094
General and administrative.......... 29 96 587 1,331 982 922
---- ------- ------- ------- ------- -------
Total operating costs and expenses..... 323 3,004 3,411 7,079 5,153 8,762
---- ------- ------- ------- ------- -------
Loss from operations................... (323) (2,878) (1,022) (2,976) (2,355) (2,576)
Other income........................... 10 29 51 102 77 731
---- ------- ------- ------- ------- -------
Net loss............................... $ (313) $(2,849) $ (971) $(2,874) $(2,278) $ (1,845)
==== ======= ======= ======= ======= =======
Pro forma net loss per share(3)........ $ (0.25) $ (0.65) $ (0.51) $ (0.29)
======= ======= ======= =======
Shares used in computing pro forma net
loss per share(3)................... 3,876 4,441 4,433 6,462
======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996
-------------------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................... $ 650 $ 547 $ 3,379 $ 1,568 $47,377
Working capital (deficit).......... 583 (75) 1,366 (774) 47,440
Total assets....................... 678 690 4,340 4,002 52,991
Convertible obligation............. -- -- -- 750 750
Accumulated deficit................ (313) (2,580) (3,551) (6,425) (8,270)
Total stockholders' equity (net
capital deficiency)............. 607 (241) 1,288 (1,098) 47,989
</TABLE>

(3) See Note 1 of Notes to Financial Statements for information regarding the
calculation of pro forma net loss per share.

14
<PAGE> 17

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Prospectus contains certain forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Investors should carefully consider the information set forth under
the heading "Risk Factors" in addition to the other information contained in
this Prospectus before purchasing the Common Stock offered hereby.

OVERVIEW

CVD designs, develops, manufactures and markets catheters used to treat
certain vascular diseases. The Company's patented catheters utilize its Focus
and M(3) technologies to deliver therapeutic radial pressure, stents, drugs or
contrast media and improved blood flow during angioplasty and stent placement
procedures. To date, the majority of the Company's revenue has been derived from
sales of its angioplasty and angioplasty-related catheters.

From inception (March 16, 1992) through the first quarter of 1994, the
Company operations were limited and consisted primarily of research and
development and other start-up activities. On June 15, 1992, EndoSonics acquired
a 40% interest in CVD in exchange for $0.5 million in cash. Pursuant to an
Agreement and Plan of Reorganization between EndoSonics and CVD signed on June
9, 1993, EndoSonics acquired all of the outstanding capital stock of CVD in
exchange for $0.3 million in cash and 250,000 shares of EndoSonics' Common Stock
with an aggregate market value of $1.6 million. The acquisition by EndoSonics
resulted in a new basis for CVD's assets and liabilities. Accordingly, the
purchase price paid by EndoSonics has been allocated to CVD's identifiable
assets and liabilities, including $2.0 million to acquired in-process research
and development, which was immediately expensed, as no CVD products had received
regulatory approval and the technology did not have alternative future uses.
Pursuant to the terms of the Agreement and Plan of Reorganization, in June 1995,
EndoSonics became obligated to issue 50,000 shares of its Common Stock with an
aggregate market value of $0.5 million, to the former shareholders of CVD
because the market price of EndoSonics' stock did not exceed a specified price
for a specified period during the two-year period following the acquisition. The
fair value of such shares was charged to acquired in-process technology. In
March 1996, EndoSonics purchased 400,000 shares of CVD's Series B Preferred
Stock for a purchase price of $8.0 million, which converted into 800,000 shares
of Common Stock upon the consummation of the initial public offering. See
"Certain Transactions -- Relationship with EndoSonics Corporation."

In September 1994, CVD and SCIMED entered into a Stock Purchase and
Technology License Agreement to develop and license CVD's patented combination
balloon angioplasty/site-specific drug delivery technology (the Transport
product line) for use in the coronary vessels. Through September 30, 1996 the
Company had received in the aggregate approximately $2.2 million in license
fees, research and development funding and technical assistance from SCIMED
under this agreement. SCIMED also purchased a 19% equity position in the Company
for a purchase price of $2.5 million. See "Business -- Strategic Relationships."

In January 1995, the Company and ACS entered into an agreement pursuant to
which the Company acquired certain rights to ACS' SmartNeedle Technology,
subject to the payment of certain royalties. The parties subsequently confirmed
their understanding with respect to certain matters in a second agreement dated
March 4, 1996 (collectively, the "ACS Agreements"). Pursuant to the ACS
Agreements, ACS was granted the option to acquire the exclusive worldwide rights
to certain CVD perfusion technology, which ACS exercised on February 14, 1996.
In exchange for this perfusion technology, ACS is obligated to make milestone
and minimum annual royalty payments to CVD, and also has certain obligations to
develop and market the perfusion technology. Through September 30, 1996 the
Company had received approximately $0.35 million in milestone payments under the
ACS Agreements. See "Business -- Strategic Relationships."

The Company currently sells its products through a combination of medical
device distributors and a limited number of direct sales personnel. The Company
is a party to three agreements for the U.S. distribution of products
incorporating its Focus and M(3) technologies. CVD distributes certain products
in Japan through an exclusive distribution agreement with Fukuda. CVD also has
distribution agreements with 25 companies covering 41 countries outside the
United States and Japan. See "Business -- Strategic Relationships."

15
<PAGE> 18

On July 15, 1996, CVD and Medtronic, Inc. entered into agreements providing
for the co-distribution by Medtronic of the Company's balloon angioplasty
catheters. These catheters employ the Company's patented Focus Technology. Under
the agreements, Medtronic will purchase a minimum number of angioplasty
catheters manufactured by the Company for distribution worldwide for a period of
up to three years. If the Company is unable to meet its delivery obligations
with respect to the purchased catheters, up to 60% of the Company's
manufacturing capacity will be devoted to manufacturing such catheters for
Medtronic. Specific products to be distributed by Medtronic will differ in
individual country markets. The Company will continue to sell Focus Technology
products through its own direct and indirect sales force network. These products
are currently sold under the names, FACT, CAT and ARC. See
"Business -- Strategic Relationships."

Based on the Company's limited operations in 1993, the Company believes
that a year-to-year comparison of 1994 to 1993 is not meaningful and has not
included such a comparison in the discussion that follows.

RESULTS OF OPERATIONS

Years Ended December 31, 1994 and December 31, 1995

Sales Revenue. Sales revenue increased to $3.5 million in 1995 from $1.2
million in 1994, representing an increase of 196%. Sales revenue in 1994
resulted primarily from sales of the Company's Transport products, which were
subsequently licensed to SCIMED in 1995. The Company no longer receives sales
revenue for the Transport. Sales revenue in 1995 was due to sales of the
Company's CAT catheter, which was introduced in the first quarter of 1995, and
sales of the SmartNeedle vascular access products beginning in the second
quarter of 1995. Sales of products in Japan through the Company's exclusive
distribution relationship with Fukuda accounted for 18% of the Company's revenue
in 1995. In addition, sales to JJIS accounted for 12% of the Company's revenue
in 1995.

License Fee and Other Revenue from Related Party. License fee and other
revenue represents amounts earned under the aforementioned agreement with
SCIMED. The 1994 amount consists of a $1.0 million license fee and $0.2 million
of development and other revenue. The 1995 amount consists of $0.6 million of
development and other revenue. Future revenue under this agreement will be
derived primarily from royalties earned on SCIMED's sales of the Transport.

Cost of Sales. Cost of sales increased to $2.1 million in 1995 from $0.8
million in 1994, representing an increase of 142%. This increase resulted
primarily from increased manufacturing volumes related to increased product
sales. In July 1995, the Company transferred its product manufacturing from
EndoSonics' facility to the Company's facility in Irvine, California.

Charge for Acquired In-process Research and Development. The Company
incurred a charge of $0.5 million in 1995 in connection with the 1995 payment by
EndoSonics of additional consideration related to the original acquisition by
EndoSonics of CVD stock. This portion of the excess of the purchase price of CVD
over the fair market value of the net assets acquired was recorded as in-process
research and development. The acquired in-process research and development was
immediately written off as CVD was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition.

Research and Development. Research and development expenses increased to
$1.7 million in 1995 compared to $1.2 million in 1994, representing an increase
of 37%. This increase was due primarily to increased expenditures related to
development of the Company's Focus and M(3) technology products. These expenses
also increased due to clinical trials and studies related to the Focus
technology products. The Company believes that it must maintain a substantial
commitment to research and development to remain competitive and expects
expenditures related to research and development to increase.

Marketing and Sales. Marketing and sales expenses increased to $1.5
million in 1995 from $0.7 million in 1994, representing an increase of 104%.
This increase resulted from the development and expansion of the Company's U.S.
sales organization and marketing expenses related to the product launch of the
SmartNeedle

16
<PAGE> 19

products. The Company expects to expand its marketing and sales force and
expects expenses associated with marketing and sales to increase in the future.

General and Administrative. General and administrative expenses increased
to $1.3 million in 1995 from $0.6 million in 1994, representing an increase of
127%. This increase resulted from expenses incurred as the Company commenced
operations as an independent entity, rather than as a division of EndoSonics,
and included the addition of a full-time Chief Executive Officer, increased
legal and accounting expenses, increased support staff and increased travel
expenses.

Other Income. Total other income remained relatively constant from 1994 to
1995.

Nine Months Ended September 30, 1995 and September 30, 1996

Sales Revenue. Sales revenue increased to $5.8 million in the nine months
ended September 30, 1996 from $2.2 million in the nine months ended September
30, 1995, representing increased sales of the Company's Focus catheters, and the
introduction of additional products. Sales of products in Japan through the
Company's exclusive distribution relationship with Fukuda accounted for 21% of
total product sales in the nine months ended September 30, 1996.

License Fee and Other Revenue. License fee and other revenue from SCIMED
remained constant at $0.2 million in both the nine months ended September 30,
1996 and 1995.

Contract Revenue. Contract revenue was $0.2 million and $0.4 million in
the nine months ended September 30, 1996 and September 30, 1995, respectively.

Cost of Sales. Cost of sales increased to $3.1 million in the nine months
ended September 30, 1996 from $1.1 million in the comparable period in 1995.
This increase resulted primarily from increased manufacturing volumes related to
increased product sales. In July 1995, the Company transferred its product
manufacturing from EndoSonics' facility to the Company's facility in Irvine,
California.

Research and Development. Research and development increased to $2.6
million in the nine months ended September 30, 1996 compared to $1.4 million in
the nine months ended September 30, 1995, representing an increase of 84%. This
increase resulted primarily from expenditures on the development of vascular
access and Focus technology products. The Company believes it must maintain a
substantial commitment to research and development to remain competitive and
expects expenditures related to research and development to increase.

Marketing and Sales. Marketing and sales increased to $2.1 million in the
nine months ended September 30, 1996 from $1.1 million in the comparable period
in 1995, representing an increase of 87%. This increase resulted mainly from the
expansion of the Company's direct sales force in the United States and marketing
expenses related to the product launch of the FACT catheter. The Company expects
to expand its marketing and sales resources and expects expenses associated with
these activities to increase in the future.

General and Administrative. General and administrative expenses remained
unchanged at approximately $1.0 million in both the nine months ended September
30, 1996 and 1995.

Other Income. Other income, principally interest income, increased to $0.7
million in the nine months ended September 30, 1996 from $0.1 million in the
comparable period in 1995. This increase resulted from the investment of the net
proceeds of the Company's initial public offering which amounted to
approximately $42.8 million.

The Company has experienced an operating loss for each of the last three
years. The Company expects to continue to incur operating losses through at
least 1997 and there can be no assurance that the Company will ever be able to
achieve or sustain profitability in the future. CVD's results of operations have
varied significantly from quarter to quarter. Quarterly operating results will
depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the conduct of clinical
trials and the timing of regulatory approvals, new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing

17
<PAGE> 20

products, the mix between domestic and export sales, variations in foreign
exchange rates, changes in third-party payors' reimbursement policies and
healthcare reform. The Company does not operate with a significant backlog of
customer orders, and therefore revenues in any quarter are significantly
dependent on orders received within that quarter. In addition, the Company
cannot predict ordering rates by distributors, some of whom place infrequent
stocking orders. The Company's expenses are relatively fixed and difficult to
adjust in response to fluctuating revenues. As a result of these and other
factors, the Company expects to continue to experience significant fluctuations
in quarterly operating results, and there can be no assurance that the Company
will be able to achieve or maintain profitability in the future.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed its operations primarily from the
sale of its equity securities, advances from EndoSonics, licensing its
technologies and through international product distribution agreements. Prior to
the Company's initial public offering, the Company had raised in aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital from EndoSonics. The Company repaid
EndoSonics during the third quarter of 1996. In the third quarter of 1996, the
Company closed its initial public offering of common stock, resulting in net
offering proceeds of $42.8 million after deducting underwriting discounts and
commissions and other expenses of the offering. For the years ended December 31,
1995, and 1994, the Company's net cash used in operating activities was $2.1
million and $1.5 million, respectively. For the nine months ended September 30,
1996, the Company's net cash used in operating activities was $1.5 million, as
compared to $1.4 million for the same period of 1995. These increases were
primarily due to funding of operating losses.

On September 30, 1996, CVD had cash and cash equivalents of $47.4 million.
The Company expects to incur substantial costs related to, among other things,
clinical testing, product development, marketing and sales expenses, and
increased working capital, prior to achieving positive cash flow from
operations. The Company anticipates that its existing capital resources will be
sufficient to fund its operations through 1997. CVD's future capital
requirements will depend on many factors, including its research and development
programs, the scope and results of clinical trials, the regulatory approval
process, the costs involved in intellectual property rights enforcement or
litigation, competitive products, the establishment of manufacturing capacity,
the establishment of sales and marketing capabilities, and the establishment of
collaborative relationships with other parties. The Company may need to raise
funds through additional financings, including private or public equity
offerings and collaborative arrangements with existing or new corporate
partners. There can be no assurance that funds will be raised on favorable
terms, or at all. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to grant rights to certain technologies or
products that the Company would not otherwise grant.

18
<PAGE> 21

BUSINESS

OVERVIEW

CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary Focus and Multiple Microporous Membrane ("M(3)")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a multiple
purpose catheter enables physicians to more effectively perform challenging
interventional procedures, which may result in improved treatment outcomes and
lower costs. The Company's catheters are designed to address three principal
challenges facing cardiologists: restenosis of a treated vessel, chronic total
occlusions and acute reclosure of a vessel during or soon after a procedure. The
Company has ten issued U.S. patents covering certain aspects of its catheter
technologies.

INDUSTRY BACKGROUND

Cardiovascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque. The
accumulation of plaque narrows the interior of the blood vessels, thereby
reducing blood flow. Atherosclerosis in the coronary arteries can lead to heart
attack and death. In peripheral vessels, atherosclerosis can lead to decreased
mobility, loss of function and other complications of the affected limb.

Traditional treatments for atherosclerosis include drug therapy and
open-heart bypass surgery. Currently available drug therapies may alleviate some
of the symptoms of atherosclerosis but may be ineffective with severe disease
and may cause adverse side effects. Traditional open-heart bypass surgery
involves opening a patient's chest, cutting through the sternum, connecting the
patient to a heart/lung machine and grafting a blood vessel to redirect blood
flow around the occluded portion of an artery. Such a procedure is costly and
generally requires up to a week of hospitalization and an extensive recovery
period. In addition, certain companies are developing methods and devices for
performing bypass surgery using minimally invasive techniques.

The need for less invasive and less costly treatments for atherosclerosis
has led to the development of minimally invasive catheter-based treatments such
as balloon angioplasty ("PTCA" in the coronary arteries and "PTA" in the
peripheral arteries), atherectomy and laser angioplasty. These treatments
involve making a small incision in a patient's leg to access an artery and
inserting a catheter. Balloon angioplasty is a procedure in which a
balloon-tipped catheter is guided to the lesion (the site of the plaque) and
then inflated and deflated several times, delivering therapeutic radial force,
which cracks or reshapes the plaque and increases blood flow. Balloons used to
perform such procedures are characterized by their response to pressure as
either compliant (balloon diameter increases with increased pressure) or
non-compliant (balloon diameter remains relatively constant with increasing
pressure). Conventional balloon technology only allows the balloon to expand to
a single, uniform diameter along the length of the balloon. Because of
variations in vessel diameters at the lesion site, multiple catheters are often
required to treat a single lesion. In addition, conventional catheter
technologies often are unable to limit the delivery of therapeutic radial force
specifically to the lesion site and may damage the adjacent vessel wall.
Conventional catheter technology also interrupts blood flow when the balloon is
inflated, which may cause tissue damage, heart attack or death, particularly if
the balloon inflation required is of significant duration. Existing catheters
that do not perfuse blood require cardiologists to inflate and deflate the
balloon multiple times which may reduce the clinical effectiveness of the
treatment. Other treatments include the use of atherectomy catheters, which cut
or grind away the plaque, and laser angioplasty catheters, which deliver laser
energy to break down the plaque.

19
<PAGE> 22

experience restenosis (generally defined as a 50% or greater reduction in the
lumen, or interior, diameter of the treated vessel at the lesion site). In
addition, studies show that 5% to 8% of elective coronary balloon angioplasty
patients may experience acute reclosure of the treated vessel. Acute reclosure
is an increase in the severity of the vessel closure accompanied by a reduction
in blood flow within the vessel as a consequence of the intervention which
occurs within 24 hours of the procedure. A study has also indicated that
angioplasty of chronic total occlusions represents 10% to 20% of all coronary
angioplasty procedures. A chronic total occlusion is a complete blockage of the
vessel preventing blood flow beyond the lesion site. The Company believes that
these challenges are inadequately addressed with existing, single function,
uniform diameter angioplasty balloons. However, while the Company believes that
its products address certain disadvantages of existing catheter technology,
limitations remain in the use of balloon angioplasty to treat atherosclerosis.
The Company's products may not be suitable for the treatment of all forms of
atherosclerosis. For example, in many cases the existence of a total occlusion
limits treatment options to bypass surgery.

Coronary stents have recently emerged as an additional minimally invasive
device for the treatment of atherosclerosis. Stents were used initially for
treating failed angioplasty procedures and acute or threatened vessel closures.
However, improved techniques for the deployment and assessment of stents,
changes in accompanying drug therapy and advancements in stent technology have
led to the increased use of stents to treat restenosis. After an angioplasty,
atherectomy or other catheter-based treatment, a stent, which is a small metal
prostheses, is then advanced along a guidewire to the desired position, expanded
against the inside of the vessel wall and left in place. While certain stents
are self-expanding, most are deployed through the expansion of a compliant or
semi-compliant balloon. Following this deployment, physicians have increasingly
adopted the technique of using a second, high pressure non-compliant balloon to
further expand the stent. Despite advancements in stent technology, existing
compliant or semi-compliant balloons used for stent delivery are designed to
achieve a uniform diameter along the length of the balloon, and their use may
result in sub-optimal stent deployment or damage of the vessel adjacent to the
lesion.

Although there continue to be significant technological and clinical
advances in the treatment of cardiovascular disease, challenges remain in
cost-effectively treating certain conditions, including restenosis of a treated
vessel, chronic total occlusions and acute reclosure of a vessel during or soon
after a procedure. The Company believes that these challenges are inadequately
addressed with existing, single function, uniform diameter angioplasty balloons.

THE CARDIOVASCULAR DYNAMICS SOLUTION

CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular disease.
The Company's proprietary Focus and M(3) technologies, which may be utilized
alone or in combinations on a single catheter, enable physicians to deliver
therapeutic radial force, stents, drugs or contrast media accurately to the
treatment site, and also allow the perfusion of blood during an interventional
procedure. The Company believes that the combination of these technologies on a
single catheter enables physicians to cost-effectively treat vascular diseases
by reducing the cost of those procedures that require more than one catheter.

The Company's patented Focus technology combines compliant and
non-compliant balloon materials on a single catheter, creating a balloon that
has an adjustable, larger center diameter with fixed, smaller diameters at each
end. These characteristics allow a single balloon to expand to multiple
diameters, enabling the physician to perform interventional procedures in
vessels of varying diameters and anatomical locations. In particular, the Focus
technology enables cardiologists to incrementally increase the angioplasty
balloon's center diameter during a procedure to enhance the effectiveness of the
treatment in vessels that have uncertain or varying diameters or irregular
plaque deposits. Use of conventional catheter technology in these situations may
require multiple catheters to achieve a similar outcome. The Focus technology
may also reduce the incidental damage to the artery wall adjacent to the lesion,
as the therapeutic radial force is applied more accurately to the treatment
site.

The Company's proprietary M(3) technology combines multiple membranes of
polymeric balloon material to form a single balloon that enables the accurate
delivery of drugs or contrast agents to the lesion or thrombus

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<PAGE> 23

site. Drugs are utilized by cardiologists to reduce the occurrence of restenosis
and acute reclosure, and to dissolve blood clots. Typically, therapeutic drug
delivery is accomplished by means of an intravenous injection, a method that
requires larger amounts of drug than is clinically required because the drug is
diffused throughout the body. The accurate delivery of drugs to the treatment
site may enhance the effectiveness of these pharmacological agents, thereby
reducing the quantity of drug required to achieve an acceptable clinical outcome
and potentially reducing the incidence of acute reclosure and restenosis. In
addition, the Company has developed M(3) catheters with multiple inner lumens,
providing the cardiologist with flexibility in drug treatment regimens. The
multiple lumens of the catheter may also be used to deliver contrast media for
angiographic viewing when advancing a catheter along a totally occluded vessel.
Traditional catheters must be removed to inject contrast media into a total
occlusion. Finally, the M(3) technology can be utilized to provide perfusion of
blood during an interventional procedure. The interruption in blood flow caused
by a conventional angioplasty balloon may cause tissue damage, heart attack or
death, particularly if the balloon inflation required is of significant
duration. Existing catheters that do not perfuse blood require cardiologists to
inflate and deflate the balloon multiple times for shorter periods which may
reduce the clinical effectiveness of the treatment.

STRATEGY

The Company's objective is to be a leader in the design, development and
commercialization of clinically effective solutions for certain vascular
diseases. While there can be no assurance that the Company will achieve this
objective, following are the key elements of CVD's strategy.

Maintain Technological Leadership and Product Technology
Advantages. CVD's strategy is to be a technological leader in the
treatment of vascular diseases through product innovation. The Company
believes that its products have significant performance advantages over
alternative catheter technologies. The Company intends to maintain and
advance its position of technology leadership through aggressive research,
development and clinical testing programs. The Company owns ten issued U.S.
patents related to key aspects of its catheter technologies and has applied
for additional U.S. patents as well as foreign patent protection.

Market Products through Independent Distributors and a Direct
Salesforce. The Company currently markets its products through a
combination of independent distributors and a dedicated salesforce. The
Company currently employs eighteen direct sales people, fourteen of whom
operate in the United States, and four of whom operate internationally. The
Company plans to significantly expand its direct sales force over the next
eighteen months. CVD utilizes independent distributors internationally and
in selected U.S. markets. In addition, the Company entered into
co-distribution agreements with Medtronic, under which Medtronic will
purchase a minimum number of the Company's angioplasty catheters for
distribution worldwide for a period of up to three years.

Establish Relationships with Clinical Opinion Leaders. The Company
believes that establishing relationships with clinical opinion leaders in
the field of interventional cardiology may raise the awareness of the
clinical and cost benefits of the Company's products. CVD is currently
conducting or planning two post-marketing clinical studies with certain of
such leaders. In addition, the Company consults with certain cardiologists
who assist the Company in ongoing product and technology development.

Target International Markets. CVD seeks to commercialize its products
in those international markets where regulatory approval can be obtained
more quickly than in the United States. This enables CVD to generate
revenue more quickly from its product development efforts, to fund its
operations and increase awareness of its products within the international
interventional cardiology community.

Establish Strategic Partnerships. The Company attempts to identify
and evaluate potential strategic relationships where such relationships may
complement and expand the Company's research, development, sales and
marketing capabilities. The Company believes that such strategic
relationships may facilitate the market acceptance of the Company's
products.

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<PAGE> 24

PRODUCTS

Catheter Products

The Company has utilized its Focus and M(3) technologies to develop
catheter products that address the challenges physicians experience in treating
vascular diseases. These technologies are available in various combinations on a
multiple-purpose catheter, thereby enabling physicians to cost-effectively treat
vascular disease. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, and flexible and trackable, enabling cardiologists to advance and
control them accurately within the vasculature.

The following table lists CVD's currently marketed products:

<TABLE>
<CAPTION>
FIRST
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS COMMERCIAL SALE
- - ------------------------- -------------------------- ------------------------ ---------------
<S> <C> <C> <C>
Focus Catheters
ARC
Over-the-wire design PTCA PMA Supplement Approved Q3 1996
CAT/CAT 15
Rail design PTCA or Stent Delivery(2) N/A(1) Q1 1995
Over-the-wire design PTCA PMA Supplement Q1 1996
FACT/FACT 15
Over-the-wire design Stent Delivery(2) Approved
Focus
Over-the-wire design PTA 510(k) Clearance Q3 1995
M(3) Catheters
Bullett Hi-Flo
Over-the-wire design Total Occlusion 510(k) Clearance Q2 1996
Drug Delivery
(coronary)
Bullett F/X
Rail design Total Occlusion 510(k) Clearance Q2 1996
Drug Delivery
(coronary)
Periflow Small Vessel
Over-the-wire design PTA/Drug Delivery 510(k) Clearance Q1 1996
</TABLE>

- - ---------------

(1) Available only outside the United States due to patent restrictions.

(2) Not approved in the United States for stent delivery. The marketing of this
product in the United States for such use will require the Company to
obtain a PMA supplement approval. The Company is not currently seeking such
approval.

Focus Catheters. The Company's Focus products have a catheter balloon that
has an adjustable, larger center diameter and smaller, fixed, distal and
proximal diameters. This characteristic provides increased utility in a variety
of therapeutic treatments and anatomical locations. Existing uniform diameter
catheters require cardiologists to use multiple balloons to treat vessels of
varying diameters, resulting in unnecessary costs. In

22
<PAGE> 25

addition, the Focus catheters may deliver stents more effectively by focusing
the radial deployment force on the stented section, rather than along the entire
balloon, which may reduce the damage to the adjacent vessel.

M(3) Catheters. The Company's M(3) catheters offer cardiologists the
ability to deliver drugs or contrast media to the treatment site accurately, and
enable the perfusion of blood during angioplasty procedures. These capabilities
may be combined on an interventional catheter to provide cardiologists the
functionality of multiple catheters, in a single, cost-effective device. The
accurate delivery of drugs to the treatment site may enhance the effectiveness
of these pharmacological agents and may reduce the quantity of drug required to
achieve an acceptable outcome. Drugs are utilized by cardiologists to reduce the
occurrence of restenosis and acute reclosure, and to dissolve blood clots.
Typically, therapeutic drug delivery is accomplished by means of an intravenous
injection, a method that requires larger amounts of drug than is clinically
required because the drug is diffused throughout the body. The Company's M(3)
technology enables cardiologists to deliver drugs directly to the treatment site
through a catheter's lumen, or interior channel. While CVD's M(3) site-specific
drug delivery catheters are currently marketed internationally, they can only be
used in the United States to administer drugs specifically approved by the FDA
for administration by such catheters. The multiple lumens of the catheter may
also be used to deliver contrast media for angiographic viewing when advancing
the catheter along a totally occluded vessel. Traditional catheters must be
removed to inject contrast media into a total occlusion. Finally, the M(3)
technology can be utilized to provide perfusion of blood during an
interventional procedure. This perfusion capability allows the balloon to be
inflated for longer durations and reduces the number of inflations and
deflations required in certain procedures, and may increase the clinical
effectiveness of the treatment.

Vascular Access Products

The Company's vascular access products utilize patented technology to
provide rapid, accurate access to the body's vascular system for guidewire and
catheter entry. The principal current product, called the SmartNeedle, was
acquired from ACS and is based on Doppler ultrasound technology. A miniaturized
ultrasound chip is placed at the tip of a disposable ultrasonic probe which is
then placed inside a conventional vascular access needle. The probe is then
connected to a separate reusable monitor. Once placed in the body as a part of
the access needle, the Doppler chip emits an audible signal which enables the
physician to more accurately determine whether or not the needle resides in the
proper location within the intended arterial or venous lumen. Once positioned
properly, the probe is removed, leaving the conventional access needle in place
within the artery or vein. Since introduction, the SmartNeedle's primary use has
been in interventional cardiology and radiology procedures.

NEW PRODUCT DEVELOPMENT

The Company focuses its research and development efforts on utilizing the
Company's proprietary processes and patented technologies to develop
cost-effective products that address existing and emerging clinical demands. The
Company's strategy is to refine its existing technologies and to enhance the
performance of its existing product offerings, including efforts to make its
Focus and M(3) products lower profile, more flexible and trackable, and operable
at a broader range of inflation pressures. In addition, the Company is
developing additional products utilizing combinations of its technologies that
may provide cardiologists greater therapeutic applicability in a single device.
The Company is also in the process of developing unique catheter designs
intended to provide enhanced delivery of therapeutic radial force and
pharmacological agents. The Company will be required to seek FDA approval for
any new product and it is

23
<PAGE> 26

expected that some of these products will be subject to the PMA process. The
Company's current new product development efforts are summarized in the table
below.

<TABLE>
<CAPTION>
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS
- - ------------------------------------ ------------------------------------ ----------------------
<S> <C> <C>
Focus Catheters
Lynx
Over-the-wire design PTCA or Stent Delivery Development Stage
Rail design PTCA or Stent Delivery Development Stage
Facilitated Force Controlled Plaque Incision and PTCA Development Stage
Angioplasty
FOCUSTENT Coronary Stent Development Stage
Vascular Stent
IDI Stent Peripheral Vascular Stent Development Stage
M(3) Catheters
Transport(1) PTCA/Drug Delivery Development Stage
Periflow Large-Vessel PTA/Drug Delivery 510(k) Clearance
MicroMembrane Radiation Delivery of Radioactive Materials Development Stage
for Restenosis Prevention
MAC I(2) Perfusion/PTCA Development Stage
MAC II Perfusion/Drug Delivery Development Stage
MAC III Perfusion/PTCA/Drug Delivery Development Stage
</TABLE>

- - ---------------

(1) Licensed to SCIMED. See "-- Strategic Relationships."

(2) Licensed to ACS. See "-- Strategic Relationships."

The M(3) technology is being utilized in various experimental clinical
programs to administer the site-specific delivery of therapeutic agents
following angioplasty or stent delivery for the purpose of reducing or
eliminating restenosis. The Company is also using M(3) technology in its
MicroMembrane Radiation Therapy development program for restenosis prevention.
This program is evaluating CVD's M(3) technology to more accurately deliver
radioactive substances specifically to the treatment site.

TECHNOLOGY

The Company has developed proprietary material manufacturing processes that
it has utilized to develop patented interventional catheters. Traditional
balloon extrusion technology does not enable the combination of compliant and
non-compliant materials, resulting in a catheter that can be inflated only to a
uniform diameter. The Company's Focus technology bonds a membrane between
compliant and non-compliant materials, resulting in a balloon with a large
center diameter and smaller, fixed diameters at each end. The center compliant
section of the Focus catheter enlarges predictably at a rate of 0.1mm per
atmosphere of pressure when inflation pressures exceed six atmospheres. The ends
of the balloon remain at their nominal diameters and do not expand with
increased pressure. The Focus capability enables cardiologists to deliver stents
or therapeutic radial force accurately to the treatment site, while minimizing
the force applied to adjacent tissue. Conventional uniform diameter catheters
may damage healthy vessel sections, as these sections receive as much radial
force as do the diseased sites. It is widely believed that vessel wall damage
may lead to acute reclosure of the vessel or restenosis.

The Company's M(3) technology creates a membrane by applying mechanical and
radiation treatment to standard polymeric balloon material during the extrusion
process. Microporous holes are then drilled in the resulting material by
proprietary mechanical or laser drilling processes. CVD's M(3) technology also
enables blood to flow through a coil lumen or inner shaft of the catheter,
allowing perfusion to the distal vessels (those beyond the treatment site)
during angioplasty or drug delivery. Prior to inflation, the balloon acts as a
shaft for the distal portion of the catheter. Once the balloon is inflated, the
cardiologist advances a coil into and through the inner lumen of the inflated
balloon. The coil supports the balloon during balloon angioplasty or drug
delivery and facilitates the perfusion of the distal vessels. The M(3)technology
enables the Company to combine

24
<PAGE> 27

balloon angioplasty and perfusion capabilities on a single catheter in a profile
comparable to standard balloon angioplasty catheters without perfusion
capability. The Company believes that the M(3) technology also enables it to
combine PTCA and perfusion capabilities on a single catheter with a lower
profile than any currently marketed catheter with similar capabilities.

The Company's IDI subsidiary is engaged in the development of medical
stents for the treatment of patients with vascular disease caused by aneurysms
or artherosclerosis. IDI is developing a compact, self-expanding metallic stent
with a micro-porous surface for use as either a stent or a stent graft. By
selecting metal foil of the proper thickness and tensile strength, and
heat-treating it in the proper shape, the Company believes it will be able to
form devices with low profiles, high expansion ratios and excellent hoop
strength, which are factors critical for successful device placement. There can
be no assurance that IDI will successfully complete the development of any
products or that any such products will receive any required regulatory
approvals.

MANUFACTURING

With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States, and the
manufacture of those products which the Company has licensed to third parties,
all of the Company's products are produced in its facilities in Irvine,
California. The Company fabricates certain proprietary components, then
assembles, inspects, tests and packages all components into finished products.
By designing and assembling its catheter products, the Company believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and manage manufacturing process enhancements and new
product introductions. In addition, the Company purchases many standard and
custom-built components from independent suppliers and subcontracts certain
processes from independent vendors. Most of these components and processes are
available from more than one vendor. However, certain manufacturing processes
are currently performed by single vendors. While the Company believes that there
are other vendors available to perform these processes, an interruption of
performance by any of these vendors could have a material adverse effect on the
Company's ability to manufacture its products until a new source of supply were
qualified and, as a result, could have an adverse effect on the Company's
business, financial condition and results of operations.

The Company's success will depend in part upon its ability to manufacture
its products in compliance with ISO 9001, the FDA's GMP regulations, CDHS
licensing and other regulatory requirements, in sufficient quantities and on a
timely basis, while maintaining product quality and acceptable manufacturing
costs. The Company began manufacturing certain of its products at its facilities
in July 1995. The Company has also introduced a significant number of new
products in 1996. Accordingly, the Company has very limited experience in
manufacturing its products. In addition, on July 15, 1996, the Company entered
into co-distribution agreements with Medtronic which granted Medtronic certain
non-exclusive rights to distribute the Company's FACT, CAT and ARC catheters.
Under the terms of these agreements, if the Company is unable to meet its
delivery obligations with respect to the purchased catheters, up to 60% of the
Company's manufacturing capacity will be devoted to manufacturing such catheters
for Medtronic. The Company has undergone and expects to continue to undergo
regular GMP inspections in connection with the manufacture of its products at
the Company's facilities. The Company's success will depend, among other things,
upon its ability to efficiently manage the simultaneous manufacture of different
products and to integrate the manufacture of new products with existing
products. There can be no assurance that the Company will not encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company's failure to successfully commence
the manufacturing of these new products, or to increase production volumes of
new and existing products in a timely manner, would materially adversely affect
the Company's business, financial condition and results of operations. Failure
to increase production volumes in a timely or cost-effective manner or to
maintain compliance with ISO 9001, GMP regulations, CDHS or other regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Limited
Manufacturing Experience."

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<PAGE> 28

MARKETING AND SALES

The Company's products are sold in the United States and international
markets, principally Europe and Japan. However, certain of the Company's
products are not available in each market due to regulatory and intellectual
property restrictions. The Company currently sells its products through a
combination of strategic partners, medical device distributors and nine direct
sales personnel. The Company is a party to three agreements for the U.S.
distribution of products incorporating its Focus and M(3) technologies. CVD also
has distribution agreements with 25 companies covering 41 countries outside the
United States and Japan. CVD distributes certain products in Japan through an
exclusive distribution agreement with Fukuda. Sales of the Company's products
through Fukuda accounted for 18% and 20% of the Company's revenue in 1995 and
the first nine months of 1996, respectively. In addition, sales to JJIS
accounted for 12% of revenue in 1995. The Company intends to expand its sales
and marketing capability and to distribute selected new products through
strategic partnerships. See "Risk Factors -- Limited Marketing and Sales
Resources; Dependence Upon Strategic Relationships."

In 1993, 1994, 1995 and the first nine months of 1996, total export sales
were $101,000, $970,000, $2,054,000 and $2,581,000 respectively, or
approximately 80%, 83%, 59% and 44% respectively, of total product sales. In
1993, 1994, 1995 and the first nine months of 1996 sales to Europe accounted for
$101,000, $255,000, $1,179,000 and $999,000, respectively; sales to Japan
represented $0, $715,000, and $744,000 and $1,227,000 respectively; and sales to
Latin America represented $0, $0, $131,000 and $127,000, respectively. The
Company expects to continue to derive significant revenue from international
sales and therefore a significant portion of the Company's revenues will
continue to be subject to the risks associated with international sales,
including economic or political instability, shipping delays, changes in
applicable regulatory policies, inadequate protection of intellectual property,
fluctuations in foreign currency exchange rates and various trade restrictions,
all of which could have a significant impact on the Company's ability to deliver
products on a competitive and timely basis. Future imposition of, or significant
increases in the level of, customs duties, export quotas or other trade
restrictions, could have an adverse effect on the Company's business, financial
condition and results of operation. In foreign countries, the Company's products
are subject to a wide variety of governmental review and certification. The
regulation of medical devices, particularly in the European Community, continues
to expand and there can be no assurance that new laws or regulations will not
have an adverse effect on the Company. See Note 1 of Notes to Financial
Statements. See "Risk Factors -- Dependence Upon International Sales."

POST-MARKETING CLINICAL STUDIES

The Company has completed the clinical trials required for FDA approval of
those products which are marketed in the United States. In addition to those
trials, the Company is also sponsoring a controlled, randomized, multicenter
clinical study in the United States to continue to evaluate the clinical and
economic value of its core technologies. Data from this study is being
accumulated and analyzed to support the marketing of the Company's current
products.

In a Comparative Performance and Pathological Study conducted by the
Division of Cardiology at the University of Texas Department of Medicine, the
Company's FACT catheter was compared with conventional PTCA catheters from other
leading manufacturers in an animal study. The investigators concluded that the
use of the FACT catheter resulted in reduced arterial damage without reduction
in catheter performance as determined by catheter preparation, trackability,
pushability, inflation/deflation and angiographic visualization.

Certain of the Company's products which utilize Focus technology have
received FDA approval for PTCA and PTA indications. However, none of these
products has received FDA approval for use in stent delivery. An
investigator-controlled study is currently testing the Company's Focus
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") is evaluating the ability of stent delivery with Focus
technology compared with conventional delivery techniques to reduce acute
outcomes and restenosis rates. The study is being conducted using two patient
subgroups of approximately 100 patients each divided according to vessel size.
In the first group, stent delivery is being evaluated in vessels greater than
three

26
<PAGE> 29

millimeters in diameter; in the second group stent delivery is being evaluated
in vessels less than three millimeters in diameter. Each subgroup presents
different clinical issues related to stent delivery and the OSTI-2 Study
protocol is evaluating the efficacy of Focus technology in each subgroup. The
OSTI-2 Study began in February 1996 and is expected to be completed in 1997.

The Company also intends to sponsor additional studies from time to time to
assess the value of, and to expand clinical indications of, its existing and new
technologies. The Company is planning a clinical study to expand the clinical
uses of its Focus technology catheters to include balloon dilatation of
previously deployed stents in order to properly implant the stent in the
arterial wall. The Company is finalizing the clinical protocol for this study
and expects to begin this study prior to the end of 1996. This study will
include approximately 100 patients and is expected to be completed in 1997.

STRATEGIC RELATIONSHIPS

The Company evaluates on an ongoing basis potential strategic relationships
with corporate and other partners where such relationships may complement and
expand CVD's research, development, sales and marketing capabilities. The
Company is currently a party to four such agreements, described below.

Advanced CardioVascular Systems, Inc. In January 1995, the Company entered
into a license agreement with ACS. The parties subsequently confirmed their
understanding with respect to certain matters in a second agreement dated March
4, 1996 (collectively, the "ACS Agreements"). Under the ACS Agreements, the
Company acquired certain rights to ACS' SmartNeedle technology, subject to the
payment of certain royalties. ACS was granted the option to acquire the
exclusive worldwide rights to certain CVD perfusion technology, which ACS
exercised on February 14, 1996. As a result, ACS has an exclusive worldwide
right to develop, manufacture and market the Company's MAC I product line. In
exchange for this technology, ACS is obligated to make milestone and minimum
annual royalty payments to CVD, and also has certain obligations to develop and
market the technology. In addition, in the event that CVD develops a product
which combines coronary balloon angioplasty, perfusion and drug delivery
technology on the same catheter, ACS will have certain rights to license such
product. The ACS Agreements may be terminated upon 60 days notice in the event
of a breach by the other party, subject to the breaching party's right to cure,
or by ACS upon 30 days notice without cause.

SCIMED Life Systems, Inc. The Company has entered into a Stock Purchase
and Technology License Agreement, dated September 10, 1994, with SCIMED (the
"SCIMED Agreement"). Pursuant to the SCIMED Agreement, SCIMED purchased a 19%
equity position in the Company. SCIMED was also granted an exclusive worldwide
license to certain combined site-specific drug delivery and coronary angioplasty
technology, including the Company's Transport products, for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses. In the event that CVD's
SCIMED-funded research and development efforts result in improvements to the
licensed technology, SCIMED will have an exclusive worldwide license to the
technology in the cardiovascular field and a non-exclusive license outside the
cardiovascular field, both of which are subject to the payment of royalties. The
SCIMED Agreement may be terminated in the event of breach on 90 days notice by
the non-breaching party (or on 30 days notice in certain limited circumstances)
or by SCIMED upon 180 days notice.

Fukuda Denshi Co., Ltd. The Company has entered into a Distribution
Agreement, dated May 28, 1993, with Fukuda Denshi Co., Ltd. (the "Fukuda
Agreement"), whereby Fukuda serves as CVD's exclusive distributor for certain of
the Company's products in Japan. In exchange for this exclusive distributorship,
Fukuda paid a fee to CVD in addition to payments owing upon the purchase of the
products. Fukuda also agreed to undertake all necessary clinical trials to
obtain approval from Japanese regulatory authorities for the sale of the
products in Japan. Fukuda's purchases under the Fukuda Agreement are subject to
certain minimum requirements. The initial term of the Fukuda Agreement expires
on May 31, 1998, subject to a five-year extension. The Fukuda Agreement may also
be terminated in the event of breach upon 90 days notice by the non-breaching
party. In July 1995 and May 1996, the distribution agreement with Fukuda was
amended to

27
<PAGE> 30

grant Fukuda exclusive distribution rights to additional CVD products. Under
these amendments, the Company received $750,000 which converted into the right
to receive 62,500 shares of Common Stock upon the consummation of the Company's
initial public offering on June 19, 1996.

EndoSonics Corporation. The Company has entered into a license agreement
with EndoSonics, dated December 22, 1995 (the "EndoSonics Agreement"), pursuant
to which CVD granted EndoSonics the non-exclusive, royalty-free right to CVD's
Focus technology for the development and sale of a combined Focus/ Ultrasound
product. In exchange, CVD received the non-exclusive, royalty-free right to
submit PMA supplement applications utilizing an EndoSonics PMA as a reference
and to manufacture and distribute CVD products as a supplement to the EndoSonics
PMA. The EndoSonics Agreement may be terminated in the event of breach upon 60
days notice by the nonbreaching party, subject to the breaching party's right to
cure. In the event of termination, the Company would be prohibited from
submitting new PMA supplements referencing the EndoSonics PMA and would be
required to seek independent FDA approval for such products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, in March of 1996, EndoSonics recently
purchased 400,000 shares of CVD's Series B Preferred Stock for a purchase price
of $8,000,000, that converted into 800,000 shares of Common Stock upon the
consummation of the Company's initial public offering on June 19, 1996. See
"Certain Transactions -- Relationship with EndoSonics Corporation."

Medtronic, Inc. On July 15, 1996, the Company entered into co-distribution
agreements with Medtronic, providing for the co-distribution of the Company's
FACT, CAT and ARC balloon angioplasty catheters. Under the terms of these
agreements, Medtronic will purchase a minimum number of angioplasty catheters
manufactured by the Company for distribution worldwide for a period of up to
three years. If the Company is unable to meet its delivery obligations regarding
the purchased catheters, up to 60% of the Company's manufacturing capacity will
be devoted to manufacturing such catheters for Medtronic. Specific products to
be distributed by Medtronic will differ in individual country markets. The
initial term of the Medtronic agreements is for a period of three years from the
date of first delivery of a product. The agreements may be terminated in the
event of breach upon notice by the nonbreaching party, subject to the breaching
party's right to cure.

PATENTS AND PROPRIETARY INFORMATION

The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company has ten issued U.S. patents covering certain aspects of
its catheter technology and licenses, and additional patents relating to the
vascular access technology. No assurance can be given that any issued patents
will provide competitive advantages for the Company's products, or that they
will not be challenged or circumvented by competitors.

The interventional cardiovascular market in general and the balloon
angioplasty catheter market (including the type of catheters offered by CVD) in
particular have been characterized by substantial litigation regarding patent
and other intellectual property rights. There can be no assurance that the
Company's products do not infringe such patents or rights. The Company recently
received a notice of potential trademark infringement regarding the Company's
use of the term "focal" in connection with the Company's balloon angioplasty
catheter. CVD entered into an agreement which prohibits the Company from using
this term. The Company has since ceased any use thereof. In the event that any
such third-parties assert claims against the Company for patent infringement and
such patents are upheld as valid and enforceable, the Company could be prevented
from utilizing the subject matter claimed in such patents, or would be required
to obtain licenses from the owners of any such patents or redesign its products
or processes to avoid infringement. There can be no assurance that such licenses
would be available or, if available, would be so on terms acceptable to the
Company or that the Company would be successful in any attempt to redesign its
products or processes to avoid infringement. In addition, foreign intellectual
property laws may not provide protection commensurate with that provided by U.S.
intellectual property laws, and there can be no assurance that foreign
intellectual property laws will adequately protect the Company's intellectual
property rights abroad. The Company also relies on trade secrets and proprietary
technology and enters into confidentiality

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<PAGE> 31

and non-disclosure agreements with its employees, consultants and advisors.
There can be no assurance that the confidentiality of such trade secrets or
proprietary information will be maintained by employees, consultants, advisors
or others, or that the Company's trade secrets or proprietary technology will
not otherwise become known or be independently developed by competitors in such
a manner that the Company has no practical recourse. Litigation may be necessary
to defend against claims of infringement or invalidity, to enforce patents
issued to the Company or to protect trade secrets. There can be no assurance
that any such litigation would be successful. Any litigation could result in
substantial costs to, and diversion of resources by, the Company and its
officers, which would have a material adverse effect on its business, financial
condition and results of operations. See "Risk Factors -- Reliance on Patents
and Proprietary Technology; Risk of Patent Infringement."

COMPETITION

The Company believes that the primary competitive factors in the market for
interventional cardiology devices are: clinical effectiveness, product safety,
catheter size, flexibility and trackability, ease of use, reliability, price and
availability of third party reimbursement. In addition, a company's distribution
capability and the time in which products can be developed and receive
regulatory approval are important competitive factors. The Company believes it
competes favorably with respect to the foregoing factors. The Company also
believes that its competitive position is dependent upon its ability to continue
to develop innovative new catheter technologies and obtain rapid regulatory
approval.

Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. The interventional cardiology market is characterized by rapid
technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters and
other products under development compete or will compete with catheters marketed
by a number of manufacturers, including ACS, SCIMED, JJIS and Cordis
Corporation, subsidiaries of Johnson & Johnson, Medtronic, Inc., C.R. Bard, Inc.
and Schneider USA, a subsidiary of Pfizer, Inc. Such companies have
significantly greater financial, management and other resources, established
market positions, and significantly larger sales and marketing organizations
than does the Company. The Company also faces competition from manufacturers of
other catheter-based atherectomy devices, vascular stents and pharmaceutical
products intended to treat vascular disease. In addition, the Company believes
that many of the purchasers and potential purchasers of the Company's products
prefer to purchase catheter products from a single source. Accordingly, many of
the Company's competitors, because of their size and range of product offerings,
have a competitive advantage over the Company. There can be no assurance that
the Company's competitors will not succeed in developing or marketing
technologies and products that are more clinically effective or cost effective
than any that are being marketed or developed by the Company, or that such
competitors will not succeed in obtaining regulatory approval for introducing or
commercializing any such products prior to the Company. See "Risk
Factors -- Significant Competition."

THIRD-PARTY REIMBURSEMENT

In the United States, the Company's products are purchased primarily by
medical institutions, which then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the health care services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the U.S. HCFA. The fixed rate
of reimbursement is based on the procedure performed, and is unrelated to the
specific devices used in that procedure. If a procedure is not covered by a DRG,
payors may deny reimbursement. In addition, some payors may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication. Reimbursement of interventional procedures utilizing the Company's
products is currently covered under a DRG. There can be no assurance that
reimbursement for such procedures will continue to be available, or that future
reimbursement policies of payors will not adversely affect the Company's ability
to sell its products on a profitable basis. Failure by hospitals and other users
of the Company's products to obtain reimbursement from

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<PAGE> 32

third-party payors, or changes in government and private third-party payors'
policies toward reimbursement for procedures employing the Company's products,
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Limitations on
Third-Party Reimbursement."

GOVERNMENT REGULATION

The manufacturing and marketing of the Company's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. The Company believes that its success will be significantly dependent
upon commercial sales of improved versions of its catheter products. The Company
will not be able to market these new products in the United States unless and
until the Company obtains approval or clearance from the FDA. Foreign and
domestic regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed.

If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a PMA, the
manufacturer may seek clearance from the FDA to market the device by filing a
premarket notification with the FDA under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act. All of the 510(k) clearances received for the Company's
catheters were based on substantial equivalence to legally marketed devices.
There can be no assurance that 510(k) clearance for any future product or
significant modification of an existing product will be granted or that the
process will not be unduly lengthy. In addition, if the FDA has concerns about
the safety or effectiveness of any of the Company's products, it could act to
withdraw approval or clearances of those products or request that the Company
present additional data. Any such actions would have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company is also required to register as a medical device manufacturer
with the FDA and maintain a license with certain state agencies, such as the
CDHS. As such, the Company is inspected on a routine basis by both the FDA and
the CDHS for compliance with GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company has also undergone and expects to continue to undergo regular GMP
inspections in connection with the manufacture of its products at the Company's
facilities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting laws and regulations
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. In addition, the FDA prohibits an
approved device from being marketed for unapproved applications. CVD has
received FDA approval to market the FACT catheters, which utilize the FOCUS
technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by the
Company in the United States for such use.

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<PAGE> 33

PRODUCT LIABILITY

The Company faces the risk of financial exposure to product liability
claims. The Company's products are often used in situations in which 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. The Company is currently covered under a product
liability insurance policy with coverage limits of $2.0 million per occurrence
and $2.0 million per year in the aggregate. There can be no assurance that the
Company's product liability insurance is adequate or that such insurance
coverage will remain available at acceptable costs. There can be no assurance
that the Company will not incur significant product liability claims in the
future. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, adverse
product liability actions could negatively affect the reputation and sales of
the Company's products and the Company's ability to obtain and maintain
regulatory approval for its products and substantially divert the time and
effort of management away from the Company's operations.

EMPLOYEES

As of October 31, 1996, the Company had 156 employees, including 92 in
manufacturing, 23 in research, development and regulatory affairs, 25 in sales
and marketing, 9 in administration and 7 in quality assurance. The Company
believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel. The Company believes it has good
relations with its employees.

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<PAGE> 34

PROPERTIES

Currently, the Company leases facilities aggregating approximately 33,000
square feet in Irvine, California under lease agreements which expire beginning
in 1998. The Company believes that its facilities are adequate to meet its
requirements through 1997.

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MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The executive officers, directors and key employees of the Company, and
their ages as of September 30, 1996, are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Michael R. Henson............. 50 President, Chief Executive Officer and Chairman of the
Board of Directors
Dana P. Nickell............... 47 Vice President, Finance and Administration, Chief
Financial Officer and Secretary
Michael D. Crocker............ 39 Vice President, Engineering
Jeffrey F. O'Donnell.......... 36 Vice President, Sales and Marketing
Jeffrey H. Thiel.............. 41 Vice President, Operations
Bart R. Navarro............... 51 Director of Marketing
Claire K. Walker.............. 49 Director of Clinical Affairs
George F. Kick................ 51 Business Manager, Peripheral Products
Blair W. Breyne............... 37 Director of International Market Development
Robert J. Imdieke............. 43 Manager, Quality Assurance
Mitchell Dann(1).............. 36 Director
William G. Davis(1)........... 64 Director
Gerard von Hoffmann(2)........ 40 Director
Edward M. Leonard(2).......... 54 Director
</TABLE>

- - ---------------
(1) Member of Compensation Committee

(2) Member of Audit Committee

Michael R. Henson joined the Company as President and Chief Executive
Officer in February 1995. Prior to joining CVD, Mr. Henson served as the Chief
Executive Officer of EndoSonics from 1988 to February 1995. He was appointed
Chairman of the Board of Directors of EndoSonics in February 1993. Between April
1983 and February 1988, Mr. Henson served as President and Chief Executive
Officer of Trimedyne, Inc., a manufacturer of medical lasers and catheters.
Prior to joining Trimedyne in 1983, Mr. Henson held positions as Vice President
for G.D. Searle & Company, Director of Marketing for the Hospital Products
Division of Abbott Laboratories, and Marketing Manager for Bristol Myers and
Company.

Dana P. Nickell joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in December 1995 and was appointed
Secretary in May 1996. Prior to joining CVD he was Chief Financial Officer of
Innerspace Inc., a medical device manufacturer which filed for bankruptcy
protection in 1995, from May 1994 to April 1995. From August 1993 until April
1994, Mr. Nickell served as Chief Financial Officer of Masimo Corporation, a
developer of pulse oximeter technology. Between November 1988 and June 1993, Mr.
Nickell was Chief Financial Officer and Vice President, Finance, Administration
and Business Development of EndoSonics. He also served as Secretary of
EndoSonics from January 1990 to August 1992. Mr. Nickell is a Certified Public
Accountant.

Michael D. Crocker has served as Vice President, Engineering since the
incorporation of CVD in March 1992. From March 1991 to March 1992, Mr. Crocker
was involved with start-up activities related to CVD. From January 1989 to March
1991, Mr. Crocker provided product development consulting to the following
companies: Medtronic, Advanced Interventional Systems, Pilot CardioVascular and
Imagyn Medical. From November 1986 to January 1989, he served in product
development at Trimedyne, and from March 1983 to November 1986 in product
development and manufacturing at ACS.

Jeffrey F. O'Donnell has served as Vice President, Sales & Marketing at the
Company since November 1995. Prior to joining CVD, Mr. O'Donnell served as
President and Vice President of Marketing and Business Development of Kensey
Nash Corporation, a medical device manufacturer, from January 1994 to May 1995.

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<PAGE> 36

From 1988 to 1994 Mr. O'Donnell held various sales and regional management
positions at ACS. Prior to working at ACS, Mr. O'Donnell held senior sales and
marketing positions with Boston Scientific and Johnson & Johnson.

Jeffrey H. Thiel has served as Vice President, Operations since October
1996. Prior to joining CVD, Mr. Thiel served as Director of Operations of BEI
Medical Systems from May 1995 to October 1996. From July 1989 to November 1994,
Mr. Thiel held various Manufacturing and Operation Management positions with St.
Jude Medical.

Bart R. Navarro joined the Company in February 1995 as Director of
Manufacturing. From September 1989 to February 1995, Mr. Navarro served as
Director of Manufacturing for Eclipse Surgical Technologies, Inc. From March
1985 to September 1989, Mr. Navarro served as Manager of Manufacturing for MCM
Laboratories, Inc., a medical device manufacturer. From June 1981 to March 1985,
Mr. Navarro served as a Process Engineer for Manufacturing for ACS.

Claire K. Walker has served as Director of Clinical Affairs of the Company
since November 1994. From May 1992 to November 1994, Ms. Walker provided
clinical marketing consulting services to CVD. From September 1990 to November
1992, Ms. Walker served as a principal of CKW and Associates providing project
specific consulting services to InterVentional Technologies, Inc., a medical
device company. From July 1981 to August 1988, Ms. Walker was employed by ACS as
a clinical specialist and from 1984 through 1988 worked as a direct sales
representative. Ms. Walker also worked as a cardiovascular catheterization
laboratory nurse.

George F. Kick joined the Company in March 1995 and served as Director of
U.S. Marketing until December 1995 when he became the Business Manager,
Peripheral Products. From January 1992 to March 1995, Mr. Kick worked as a
consultant and project manager at NeuroNavigational, a medical device
manufacturer, developing minimally invasive vascular surgical systems for
arterial bypass in the leg. From February 1979 to December 1991, he served as
President of Dynamic Concepts, a cardiovascular distribution company,
representing Trimedyne, Telectronics, CryoLife and other high tech start-up
companies.

Blair W. Breyne joined the Company in January 1994 and has served as
Director of International Market Development for the Company since January 1995.
From January 1994 through December 1994, Ms. Breyne served as Manager of
International Market Development. Prior to joining the Company, Ms. Breyne was
employed by EndoSonics from May 1990 through December 1993 as Manager and
National Manager of Sales and Clinical Applications.

Robert J. Imdieke joined the Company as Manager of Quality Assurance in
January 1995. Prior to joining CVD, Mr. Imdieke served as Manager, Quality
Assurance at Imagyn Medical, Inc. from June 1991 to January 1995. From December
1989 until February 1991, he served as Quality Control Supervisor at Advanced
Interventional Systems. Mr. Imdieke also served as Quality Assurance Manager at
Trimedyne, Inc. from November 1984 through May 1989.

Mitchell Dann joined the Company as a director in April 1996. Since April
1991, Mr. Dann has been President of M. Dann & Co., Inc., a venture capital
advisory firm. From October 1982 to April 1991, he co-founded and held the
position of Managing Partner at IAI Venture Capital Group, the venture capital
division of Investment Advisors, Inc. Mr. Dann is Chairman of the Board of
Urologix, Inc.

William G. Davis joined the Company as a director in January 1995. Mr.
Davis is an independent business consultant. From 1957 to 1984, Mr. Davis was
associated with Eli Lilly and Company. He served as Executive Vice President,
Eli Lilly International Corporation, from 1972 to 1975, Executive Vice
President, Pharmaceutical Division, from 1975 to 1982, and President, Medical
Instrument Systems Division, from 1982 until his retirement in 1984. Mr. Davis
is also a director of ALZA Corporation, Collagen Corporation, EndoSonics and
Target Therapeutics, Inc.

Gerard von Hoffmann joined the Company as a director in April 1996. He has
been with the law firm of Knobbe, Martens, Olson & Bear since 1986 and has been
a partner since 1989.

34
<PAGE> 37

Edward M. Leonard was appointed as a director in April 1996. He has been a
partner in the law firm of Brobeck, Phleger & Harrison LLP since 1977. Mr.
Leonard is a member of Brobeck's Policy Committee and founded and served as
Managing Partner of Brobeck's Palo Alto office from January 1980 through January
1996. He also served as head of Brobeck's Corporate Practice Group from 1988
through 1992. Mr. Leonard is also a director of EndoSonics.

The Company currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his successor is
duly elected and qualified. The officers serve at the discretion of the Board of
Directors.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee establishes salaries, incentives and
other forms of compensation for directors, officers and other employees of CVD,
administers the various incentive compensation and benefit plans (including the
Company's stock plans) of CVD and recommends policies relating to such incentive
compensation and benefit plans. The Audit Committee reviews the need for
internal auditing procedures and the adequacy of internal controls and meets
periodically with management and the independent auditors. The Board of
Directors may establish additional committees from time to time.

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer whose salary and bonus for 1995 was in
excess of $100,000 (the "Named Officer") for services rendered in all capacities
to the Company for that fiscal year. No other executive officer was paid salary
and bonus in excess of $100,000 for the 1995 fiscal year. No executive officer
who would have otherwise been includable in such table on the basis of salary
and bonus earned for 1995 resigned or terminated employment during that year.
See "Certain Transactions -- Relationship with EndoSonics Corporation."

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND PRESENT PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
- - ---------------------------------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Michael R. Henson................................... 1995 $189,850 $70,000 250,000
President and Chief Executive Officer
</TABLE>

35
<PAGE> 38

OPTION GRANTS IN LAST FISCAL YEAR

The following table contains information concerning the stock option grants
made to the Named Officer in 1995. No stock appreciation rights were granted to
this individual during such year.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
------------------------------------------------------- STOCK
NUMBER OF % OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH)(3) DATE 5%($) 10%($)
- - -------------------------- ------------- -------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson(5)...... 200,000 20.90% $1.00 05/14/2005 $125,779 $318,748
50,000 5.22 1.50 12/18/2005 47,167 119,531
</TABLE>

- - ---------------
(1) Each of the options listed in the table was granted under the Company's 1995
Stock Option Plan. Each such option will be incorporated into the 1996 Stock
Option/Stock Issuance Plan.

(2) Based upon options granted for an aggregate of 957,000 shares to employees
in 1995, including the Named Officer.

(3) The exercise price may be paid in cash, in shares of the Company's 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. The
Company 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. The Compensation Committee of the
Board of Directors, as the Plan Administrator of the Company's 1996 Stock
Option/Stock Issuance Plan, has the discretionary authority to reprice the
options through the cancellation of those options and the grant of
replacement options with an exercise price based on the fair market value of
the option shares on the grant date.

(4) 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 the
Company's securities that the actual stock price appreciation over the
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.

(5) The options were granted on May 15, 1995 and December 19, 1995, and have a
maximum term of ten years measured from the grant date, subject to earlier
termination upon the optionee's termination of service with the Company.
Each option is immediately exercisable subject to a repurchase right in
favor of the Company which lapses in a series of annual and monthly
installments over the optionee's period of service with the Company. The
Company's repurchase right lapses as to 25% of the option shares upon the
optionee's completion of one year of service measured from November 21, 1994
and December 19, 1995, respectively, and as to the balance of the option
shares in a series of successive equal monthly installments upon the
optionee's completion of each additional month of service over the next 36
months thereafter.

36
<PAGE> 39

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information concerning option exercises and
option holdings for 1995 with respect to the Named Officer. 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 UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FY-END(1) AT FY-END(2)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Michael R. Henson...................... 54,167 195,833 $27,084 $72,916
</TABLE>

- - ---------------
(1) Options are immediately exercisable for all the option shares, but any
shares purchased under the options will be subject to repurchase by the
Company at the original exercise price per share upon the optionee's
cessation of service. Shares subject to repurchase are shown under the
"Unexercisable" column.

(2) Based on the fair market value of the Company's Common Stock at year-end,
$1.50 per share (as determined by the Company's Board of Directors), less
the exercise price payable for such shares.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Company's Board was formed in May 1996,
and the members of the Compensation Committee are Messrs. Davis and Dann.
Neither of these individuals was at any time during the fiscal year ended
December 31, 1995, or at any other time, an officer or employee of the Company.
No member of the Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

1996 STOCK OPTION/STOCK ISSUANCE PLAN

The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan")
serves as the successor equity incentive program to the Company's 1995 Stock
Option Plan (the "Predecessor Plan"). The 1996 Plan was adopted by the Board of
Directors and approved by the stockholders on May 1, 1996, (the "Effective
Date"). Under the 1996 Plan, 1,200,000 shares of Common Stock have been
authorized for issuance. This share reserve is comprised of the shares which
remained available for issuance under the Predecessor Plan as of the Effective
Date, including the shares subject to outstanding options thereunder. Those
outstanding options were incorporated into the 1996 Plan on the Effective Date,
and no further option grants were made under the Predecessor Plan. The
incorporated options will continue to be governed by their existing terms,
unless the Plan Administrator elects to extend one or more features of the 1996
Plan to those options. However, except as otherwise noted below, the outstanding
options under the Predecessor Plan contain substantially the same terms and
conditions specified below for the Discretionary Option Grant Program in effect
under the 1996 Plan. In no event may any one participant in the 1996 Plan
receive option grants or direct stock issuances for more than 800,000 shares in
the aggregate over the term of the Plan.

The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of their fair market value
on the grant date, (ii) the Stock Issuance Program under which such individuals
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly, through the purchase of such shares at a price not less than 85% of
their fair market value at the time of issuance or as a bonus tied to the
performance of services and (iii) 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 their fair market value on the grant date.

The Discretionary Option Grant Program and the Stock Issuance Program will
be administered by the Compensation Committee. The Compensation Committee as
Plan Administrator will have complete discretion to determine which eligible
individuals are to receive option grants or stock issuances, the time or times

37
<PAGE> 40

when such option grants or stock issuances are to be made, the number of shares
subject to each such grant or issuance, the status of any granted option as
either an incentive stock option or a non-statutory stock option under the
Federal tax laws, the vesting schedule to be in effect for the option grant or
stock issuance and the maximum term for which any granted option is to remain
outstanding.

Under the 1996 Plan, upon an acquisition of the Company by merger or asset
sale or a hostile take-over of the Company, each outstanding option and unvested
stock issuance will be subject to accelerated vesting under certain
circumstances. The options granted under the Predecessor Plan will be assumed or
replaced in a merger or asset sale but do not include any acceleration
provisions in connection with a merger or asset-sale or upon a hostile
take-over, although such options may be accelerated at the discretion of the
Plan Administrator.

Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. No stock appreciation rights exist with
respect to options currently outstanding under the Predecessor Plan.

The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.

Under the Automatic Option Grant Program, each non-employee Board member
serving on June 19, 1996, the date the Underwriting Agreement for the initial
public offering was executed, received an option grant on such date for 5,000
shares of Common Stock. Each individual who first becomes a non-employee Board
member thereafter will receive a 5,000-share option grant on the date such
individual joins the Board provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders Meeting, each
individual who is to continue to serve as a non-employee Board after the meeting
will receive an additional option grant to purchase 5,000 shares of Common Stock
whether or not such individual has been in the prior employ of the Company.

Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 5,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional annual
5,000-share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.

The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on April 30, 2006, unless sooner terminated by the Board.

NON-EMPLOYEE BOARD MEMBER REMUNERATION

The Company has adopted a policy under which each non-employee board member
receives a cash payment in the amount of $1,500 per quarter.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders on May 1,
1996. 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 a reserve of 200,000 shares of Common Stock has been established for
this purpose.

The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of twenty-four months. The initial
offering period began on June 19, 1996, the day the Underwriting

38
<PAGE> 41

Agreement for the initial public offering was executed, based on the initial
public offering price and will end on the last business day in July 1998. Each
offering period will be comprised of successive purchase intervals, each having
a duration of six months. However, the first purchase interval under the initial
offering period may have a duration in excess of six months. Shares of Common
Stock will be purchased for each participant at the end of each purchase
interval during the offering period. If the fair market value of the Common
Stock on any purchase date in the offering period is less than the fair market
value of the Common Stock at the start of the offering period, then that
offering period will terminate and a new offering period will automatically
commence on the next business day following that purchase date.

Payroll deductions may not exceed 10% of base salary for each purchase
interval. The purchase price per share will be 85% of the lower of (i) the fair
market value of the Common Stock on the participant's entry date into the
offering period or (ii) the fair market value on the semi-annual purchase date.
In no event may any participant purchase more than 950 shares of Common Stock on
any purchase date.

The Board may terminate the Purchase Plan at any time. The Purchase Plan
will terminate in all events on the last business day in July 2006.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a director of a corporation will not be personally liable for monetary
damages for breach of such individual's fiduciary duties as a director except
for liability (i) for any breach of such director's duty of loyalty to the
corporation, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.

The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of an indemnified
party and permits the Company to advance expenses incurred by an indemnified
party in connection with the defense of any action or proceeding arising out of
such party's status or service as a director, officer, employee or other agent
of the Company upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification.

The Company has entered into separate indemnification agreements with each
of its directors. These agreements require the Company, among other things, to
indemnify such director against expenses (including attorneys's fees),
judgments, fines and settlements (collectively, "Liabilities") paid by such
individual in connection with any action, suit or proceeding arising out of such
individual's status or service as a director of the Company (other than
Liabilities arising from willful misconduct or conduct that is knowingly
fraudulent or deliberately dishonest) and to advance expenses incurred by such
individual in connection with any proceeding against such individual with
respect to which such individual may be entitled to indemnification by the
Company.

The Company believes that its Certificate of Incorporation and Bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. At present the Company is not aware
of any pending litigation or proceeding involving any director, officer,
employee or agent of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.

EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS

The Company does not presently have any employment contracts in effect with
any of its executive officers.

The Compensation Committee as Plan Administrator of the 1996 Plan will have
the authority to provide for the accelerated vesting of the shares of Common
Stock subject to outstanding options held by the Chief Executive Officer and any
other executive officer or the shares of Common Stock subject to direct
issuances

39
<PAGE> 42

held by such individual, in connection with certain changes in control of the
Company or the subsequent termination of the officer's employment following the
change in control event.

CERTAIN TRANSACTIONS

RELATIONSHIP WITH ENDOSONICS CORPORATION

On June 15, 1992, EndoSonics acquired a 40% interest in CVD in exchange for
$568,000 in cash. Upon completion of this investment, EndoSonics' President and
Chief Executive Officer owned a 19% equity interest in CVD and served as
Chairman of the Board. Pursuant to an Agreement and Plan of Reorganization
between EndoSonics and CVD signed on June 9, 1993, EndoSonics acquired all of
the outstanding capital stock of CVD in exchange for $335,000 in cash and
250,000 shares of EndoSonics' Common Stock with an aggregate market value of
$1,563,000. Pursuant to the terms of the Agreement and Plan of Reorganization,
in June 1995, EndoSonics became obligated to issue 50,000 shares of its Common
Stock with an aggregate market value of $488,000, to the former shareholders of
CVD because the market price of EndoSonics' stock did not exceed a specified
price for a specified period during the two-year period following the
acquisition. On March 29, 1996, EndoSonics acquired 400,000 shares of Series B
Preferred Stock for a purchase price of $8,000,000, which converted into 800,000
shares of Common Stock upon the consummation of the initial public offering.

During 1994 and 1995, EndoSonics manufactured certain of the Company's
catheter products. Total purchases from EndoSonics during 1994 and 1995 amounted
to $0.8 million and $0.2 million, respectively. In addition, during 1994
EndoSonics performed certain billing and collection services for the Company in
return for a fee per invoice which amounted to $10,000. In addition, since
August 1993, certain of the Company's corporate expenses, including Mr. Henson's
salary, were paid by EndoSonics and accounting, cash management and other
administrative services were performed by EndoSonics. Pursuant to this
arrangement, the Company paid EndoSonics an aggregate of $290,000, $340,000,
$54,000 and $156,000 for 1993, 1994, 1995 and the nine months ended September
30, 1996, respectively. In addition, EndoSonics paid Mr. Henson's bonus for
1995. See "Management -- Executive Compensation."

The Company entered into a license agreement with EndoSonics, dated
December 22, 1995 (the "EndoSonics Agreement"), pursuant to which CVD granted
EndoSonics the non-exclusive, royalty-free right to CVD's Focus technology for
the development and sale of a combined Focus/Ultrasound product. In exchange,
CVD received the non-exclusive, royalty-free right to submit PMA supplement
applications utilizing an EndoSonics PMA as a reference and to manufacture and
distribute CVD products as a supplement to the EndoSonics PMA. The EndoSonics
Agreement may be terminated in the event of breach upon 60 days notice by the
non-breaching party, subject to the breaching party's right to cure.

CVD and EndoSonics have entered into certain agreements for the purpose of
defining the ongoing relationship between the two companies. EndoSonics owned
approximately 84% of the outstanding voting capital stock of CVD prior to the
initial public offering and currently owns approximately 45% of CVD's Common
Stock. Accordingly, these agreements are not the result of arm's-length
negotiations between independent parties.

CVD and EndoSonics have entered into a Tax Allocation Agreement that
provides, among other things, for (i) the allocation of tax liabilities and
adjustments thereto as between the business of the Company and other businesses
conducted by EndoSonics and its affiliates related to periods in which the
Company is includable in consolidated federal income tax returns filed by
EndoSonics, (ii) the allocation of responsibility for filing tax returns and
(iii) the conduct of and responsibility for taxes owed in connection with tax
audits and various related matters, as described below.

EndoSonics has agreed to indemnify CVD for any federal and state income tax
liability arising out of any audit with respect to periods ending prior to the
closing of the initial public offering and for which CVD was included in
EndoSonics' consolidated federal income tax return or a state unitary or
combined return. In addition, with respect to periods for which CVD is included
in EndoSonics' federal consolidated or state

40
<PAGE> 43

unitary tax return, EndoSonics shall control the filing of such returns and the
conduct of any audits thereof. With respect to periods following the closing of
the initial public offering, the Company will file its own federal income tax
return and will not be included in EndoSonics' federal return. The Company will
initially be included in certain unitary or combined returns for state tax
purposes. To the extent this occurs, this agreement generally treats the Company
as a separate taxpayer and charges the Company with its separate tax return
liability.

EndoSonics and CVD have entered into a Stockholder Agreement providing that
all transactions between the Company and EndoSonics or any affiliate of
EndoSonics must be approved by a special committee of CVD's Board of Directors
comprised of two directors who are not officers, directors, employees or
affiliates of EndoSonics. The members of this committee are Mitchell Dann and
Gerard von Hoffmann. No transactions between the Company and EndoSonics are
currently contemplated. During the effective term of the Agreement, EndoSonics
may not vote to eliminate from the Company's Certificate of Incorporation
provisions requiring cumulative voting for the election of directors. The
provisions of the Agreement became effective upon the consummation of the
initial public offering and terminate on the earlier of seven years from the
date of the Agreement or on the date EndoSonics beneficially owns less than 25%
of CVD's Common Stock.

OTHER TRANSACTIONS

On September 10, 1994, the Company entered into a Stock Purchase and
Technology License Agreement with SCIMED (the "SCIMED Agreement"). Pursuant to
the SCIMED Agreement, SCIMED purchased a 19% equity position in the Company for
a purchase price of $2,500,000. SCIMED was also granted an exclusive worldwide
license to certain site-specific drug delivery/PTCA technology for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses, respectively. In the event
that CVD's SCIMED-funded research and development efforts result in improvements
to the licensed technology, SCIMED will have an exclusive worldwide license to
the technology in the cardiovascular field and a non-exclusive license outside
the cardiovascular field, both of which are subject to the payment of royalties.
The SCIMED Agreement may be terminated in the event of breach on 90 days notice
by the non-breaching party (or on 30 days notice in certain limited
circumstances) or by SCIMED upon 180 days notice.

In connection with the adoption of the Predecessor Plan, the Company issued
a warrant to SCIMED in June 1995 to purchase 40,000 shares of Series A Preferred
Stock at an exercise price of $6.58 per share in exchange for a waiver of
SCIMED's anti-dilution rights under the SCIMED Agreement. The Company
subsequently issued a warrant for an additional 20,000 shares of Series A
Preferred at $6.58 per share in connection with an increase in the number of
shares reserved for issuance under the Predecessor Plan. Following the
consummation of the initial public offering, these warrants became exercisable
for 80,000 shares of Common Stock and 40,000 shares of Common Stock,
respectively, at an exercise price of $3.29 per share.

EndoSonics and SCIMED have entered into lock-up agreements with the Company
limiting sales of the Company's Common Stock during the 180-day period following
the date of the Company's initial public offering. See "Shares Eligible for
Future Sale."

On June 15, 1996, CVD extended a loan in the amount of $150,000, to Jeffrey
F. O'Donnell, the Company's Vice President of Sales and Marketing. The note was
secured by a second deed of trust on

41
<PAGE> 44

Mr. O'Donnell's home and has a five-year term with interest compounding
semi-annually at 6%. The principal and interest will be due five years from the
date of the note.

On September 16, 1996, the Company extended an interest free loan to
Michael Henson in the amount of $175,000. The principal amount of the loan will
be due in full on September 19, 1998. The Company secured the note by a deed of
trust on certain real property owned by Mr. Henson.

Edward M. Leonard and Gerard von Hoffmann, directors of the Company, are
members of the law firms of Brobeck, Phleger & Harrison LLP and Knobbe Martens,
Olson & Bear, respectively. Both of these firms render legal services to the
Company.

It is the Company's policy that all interested-party transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors.

42
<PAGE> 45

PRINCIPAL AND SELLING STOCKHOLDERS

The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock as of November 26, 1996, by (i) each
person who is known by the Company to own beneficially more than five percent of
the Company's Common Stock, (ii) each of the Company's directors, (iii) the
Named Officer, (iv) all current officers and directors as a group and (v) each
of the Selling Stockholders.

<TABLE>
<CAPTION>
NUMBER NUMBER
OF SHARES PERCENT OF OF SHARES
BENEFICIALLY OUTSTANDING REGISTERED FOR
NAME OF PRINCIPAL STOCKHOLDER OWNED(1)(2) SHARES SALE
- - ----------------------------------------------------------- ----------- ----------- --------------
<S> <C> <C> <C>
EndoSonics Corporation..................................... 4,040,000 45.18% --
6616 Owens Drive
Pleasanton, CA 94588
SCIMED Life Systems, Inc.(3)............................... 880,000 9.71 --
One SCIMED Place
Maple Grove, MN 55311
Michael R. Henson(4)....................................... 380,000 4.11 --
Mitchell Dann(5)........................................... 5,000 * --
William G. Davis(6)........................................ 13,000 * --
Gerard von Hoffmann(7)..................................... 5,300 * --
Edward M. Leonard(8)....................................... 5,000 * --
Michael D. Crocker(9)...................................... 100,000 1.11 --
Dana P. Nickell(10)........................................ 56,200 * --
Jeffrey F. O'Donnell(11)................................... 100,000 1.11 --
All directors and officers as a group (14 persons)(12)..... 818,500 8.45% --
--
---------- ------
Total Principal Stockholders..................... 5,738,500 58.55% --
NAME OF SELLING STOCKHOLDER
Dick Allen................................................. 589 * 589
Coin Operators
Stradling, Yocca, Carlson & Rauth........................ 3,685 * 3,685
California Central Trust Bank,
Trustee of Stradling, Yocca,
Carlson & Rauth Profit Sharing Plan...................... 2,211 * 2,211
Dima Ventures, Inc......................................... 5,160 * 5,160
Barry Katzen, M.D.......................................... 5,160 * 5,160
Edward A. McDonald......................................... 26,540 * 26,540
Micro Therapeutics, Inc.................................... 17,692 * 17,692
Stevens Blair & Company.................................... 1,474 * 1,474
Stradling, Yocca, Carlson & Rauth
Investment Partnership of 1982........................... 3,685 * 3,685
Ultrasonic Sensing and Monitoring Systems.................. 17,692 * 17,692
Paul Brown................................................. 2,211 * 2,211
George Wallace............................................. 5,897 * 5,897
Tom Winston, M.D........................................... 1,326 * 1,326
Fukuda Denshi Co., Ltd..................................... 62,500 * 62,500
--
----------
Total Selling Stockholders.......................... 155,822 1.74% 155,822
--
---------- ------
Total Principal and Selling Stockholders......... 5,894,322 60.13% 155,822
========== ====== ==
</TABLE>

- - ---------------
* Represents beneficial ownership of less than 1%.

43
<PAGE> 46

(1) The number of shares of Common Stock beneficially owned includes any shares
issuable pursuant to stock options that may be exercised within 60 days
after November 26, 1996. All options are immediately exercisable subject to
a repurchase right in favor of the Company. Shares issuable pursuant to
such options are deemed outstanding for computing the percentage of the
person holding such options but are not deemed to be outstanding for
computing the percentage of any other person.

(2) The number of shares of Common Stock outstanding includes the 93,322 shares
of Common Stock being issued by the Company in this offering and the
issuance of 62,500 shares of Common Stock to Fukuda pursuant to the terms
of the Amendment to Japanese Distribution Agreements dated May 13, 1996 by
and between CVD and Fukuda.

(3) Includes warrants to purchase 120,000 shares of the Company's Common Stock.

(4) Includes options to purchase 314,000 shares of the Company's Common Stock.

(5) Includes options to purchase 5,000 shares of Common Stock.

(6) Includes options to purchase 11,000 shares of the Company's Common Stock.

(7) Includes options to purchase 5,000 shares of Common Stock.

(8) Includes options to purchase 5,000 shares of Common Stock.

(9) Includes options to purchase 100,000 shares of the Company's Common Stock.

(10) Includes options to purchase 56,000 shares of the Company's Common Stock.

(11) Includes options to purchase 100,000 shares of the Company's Common Stock.

(12) Includes options to purchase 740,000 shares of the Company's Common Stock.

44
<PAGE> 47

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.

COMMON STOCK

As of the November 26, 1996, there were 8,941,822 shares of Common Stock
outstanding that were held of record by 6 stockholders. The holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore. See "Dividend Policy." In
the event of the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable, and the shares of Common Stock
to be issued are fully paid and nonassessable.

PREFERRED STOCK

The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.

ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW

Certificate of Incorporation and Bylaws

The Certificate of Incorporation provides that all stockholder actions must
be effected at a duly called meeting and not by a consent in writing. The Bylaws
provide that the Company's stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 50% of the
Company's capital stock. These provisions of the Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Effect of Certain Charter Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law."

Delaware Takeover Statute

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business

45
<PAGE> 48

combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock is ChaseMellon. Its
address is Encino Terrace Center, 15821 Ventura Boulevard, Suite 670, Encino, CA
91436, and its telephone number is (818) 971-4753.

46
<PAGE> 49

SHARES ELIGIBLE FOR FUTURE SALE

Sales of Common Stock in the public market during and after this offering
could adversely affect the market price of the Common Stock. As of November 26,
1996, the Company had 8,941,822 shares outstanding. Including the shares
registered for sale hereby, 4,065,822 of these shares are freely tradable
without restriction. Beginning December 17, 1996, approximately 4,076,000
additional shares will be eligible for sale, including 3,240,000 shares held by
EndoSonics and 760,000 shares held by SCIMED. Sales of any such shares in the
public market could adversely affect the market price of the Common Stock. The
Company has also registered 1,200,000 shares of Common Stock reserved for
issuance under the Company's 1996 Stock Option/Stock Issuance Plan and 200,000
shares under the Company's Employee Stock Purchase Plan. As of November 26,
1996, there were outstanding options under the Company's stock option plan to
acquire 1,162,000 shares, all of which are subject to lock-up agreements which
expire on December 16, 1996. After the expiration of the lock-up period, SCIMED
will be entitled to certain demand and piggyback registration rights with
respect to its shares. If SCIMED, by exercising its demand registration rights,
causes a large number of shares to be registered and sold in the public market,
such sales could have an adverse effect on the market price for the Common
Stock. If the Company were required to include in a Company-initiated
registration shares held by SCIMED pursuant to the exercise of its piggyback
registration rights, such sales may have an adverse effect on the Company's
ability to raise needed capital.

In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the consummation of the initial public offering, a
person (or persons whose shares are aggregated) who has beneficially owned
"restricted" shares for at least two years, including a person who may be deemed
an Affiliate of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock of the Company and the average weekly
trading volume of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. Sales under Rule 144 of the Securities Act
are subject to certain restrictions relating to manner of sale, notice and the
availability of current public information about the Company. A person who is
not an Affiliate of the Company at any time during the ninety days preceding a
sale, and who has beneficially owned shares for at least three years, would be
entitled to sell such shares immediately following the initial public offering
without regard to the volume limitations, manner of sale provisions or notice or
other requirements of Rule 144 of the Securities Act. However, the transfer
agent may require an opinion of counsel that a proposed sale of shares comes
within the terms of Rule 144 of the Securities Act prior to effecting a transfer
of such shares.

OPTIONS

As of November 26, 1996, options to purchase a total of 1,162,000 shares of
Common Stock pursuant to the 1996 Stock Option Plan were outstanding and
exercisable. All of the shares subject to options are subject to Lock-up
Agreements. See "-- Lock-up Agreements." An additional 112,000 shares of Common
Stock were available for future option grants or direct issuances under the 1996
Stock Option/Stock Issuance Plan. See "Management -- 1996 Stock Option/Stock
Issuance Plan," and Notes 11 and 13 of Notes to Financial Statements.

Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the consummation of the initial public
offering, subject to the manner of sale provisions of Rule 144, and by
Affiliates, beginning 90 days after the date of this Prospectus, subject to all
provisions of Rule 144 except its two-year minimum holding period. On July 11,
1996, the Company filed a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issued or issuable pursuant to the Company's 1996
Stock Option/Stock Issuance Plan and Common Stock issuable pursuant to the
Company's Employee Stock Purchase Plan. Shares covered by this registration
statement are eligible for sale in the public markets, subject to the Lock-up
Agreements, if applicable.

47
<PAGE> 50

LOCK-UP AGREEMENTS

In connection with the Company's initial public offering, each of the
Company's directors and officers and each stockholder of the Company agreed that
they will not, without the prior written consent of the Representatives of the
Underwriters, offer, sell, contract to sell or otherwise dispose of any shares
of Common Stock beneficially owned by them or any shares issuable upon exercise
of stock options until December 19, 1996, a period of 180 days from the
effective date of the public offering.

REGISTRATION RIGHTS

SCIMED, the holder of 760,000 shares of Common Stock will be entitled upon
expiration of a lock-up agreement with the Underwriters to certain rights with
respect to the registration of such shares under the Securities Act. Under the
terms of the agreement between the Company and SCIMED, if the Company proposes
to register any of its securities under the Securities Act, either for its own
account or for the account of other security holders exercising registration
rights, SCIMED is entitled to notice of such registration and is entitled to
include shares of such Common Stock therein. SCIMED may also require the Company
to file a registration statement under the Securities Act at the Company's
expense with respect to its shares of Common Stock, and the Company is required
to use its diligent reasonable efforts to effect such registration. Further,
SCIMED may require the Company to file additional registration statements on
Form S-3 at the Company's expense. These rights are subject to certain
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in such registration in certain
circumstances.

48
<PAGE> 51

PLAN OF DISTRIBUTION

The Company will receive no proceeds from this offering. The Shares offered
hereby may be sold by the Selling Stockholders from time to time in transactions
in the over-the-counter market, in negotiated transactions, or a combination of
such methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, at prices related to prevailing market prices or
at negotiated prices. The Selling Stockholders may effect such transactions by
selling the Shares to or through broker-dealers, and such broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
the Selling Stockholders and/or the purchasers of the Shares for whom such
broker-dealers may act as agents or to whom they sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).

The Selling Stockholders and any broker-dealers or agents that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be "underwriters" within the meaning of the Securities Act, and any commissions
received by them and any profit on the resale of the Shares purchased by them
may be deemed to be underwriting commissions or discounts under the Securities
Act.

The Shares were originally issued to former shareholders of IDI in
connection with the statutory merger of a wholly-owned subsidiary of the Company
with and into IDI pursuant to an exemption from the registration requirements of
the Securities Act provided by Section 4(2) thereof. The Company agreed to
register the Shares under the Securities Act and to indemnify and hold the
Selling Stockholders harmless against certain liabilities under the Securities
Act that could arise in connection with the sale by the Selling Stockholders of
the Shares. The Company has agreed to pay all reasonable fees and expenses
incident to the filing of this Registration Statement.

LEGAL MATTERS

The legality of the securities being offered hereby will be passed upon for
the Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California.

EXPERTS

The financial statements of CardioVascular Dynamics, Inc. at December 31,
1994 and 1995, and for each of the two years in the period ended December 31,
1995, and the period from June 10, 1993 to December 31, 1993 and of the
predecessor company for the period from January 1, 1993 through June 9, 1993,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.

49
<PAGE> 52

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Operations.............................................................. F-4
Statements of Stockholders' Equity (Net Capital Deficiency)........................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>

F-1
<PAGE> 53

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
CardioVascular Dynamics, Inc.

We have audited the accompanying balance sheets of CardioVascular Dynamics,
Inc. (a subsidiary of EndoSonics Corporation) as of December 31, 1994 and 1995,
and the related statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the period from June 10, 1993 to December 31,
1993 and the years ended December 31, 1994 and 1995, and the statements of
operations, stockholders' equity and cash flows of the predecessor company for
the period from January 1, 1993 through June 9, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit 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 audit provides 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 CardioVascular Dynamics,
Inc. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the period from June 10, 1993 to December 31, 1993 and the years
ended December 31, 1994 and 1995 and the results of operations and cash flows of
the predecessor company for the period from January 1, 1993 through June 9,
1993, in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Palo Alto, California
March 15, 1996, except for Note 11,
as to which the date is

July 17, 1996

F-2
<PAGE> 54

CARDIOVASCULAR DYNAMICS, INC.

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- 1996
1994 1995 -------------
------- ------- (UNAUDITED)
(NOTE 11)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash..................................................... $ 3,379 $ 1,568 $47,377
Accounts receivable, net of allowance for doubtful
accounts of $85, $180 and $270, respectively.......... 727 1,117 2,083
Accounts receivable from related parties................. 125 -- --
Inventories.............................................. 50 754 1,996
Other current assets..................................... 4 58 194
------- ------- -------
Total current assets............................. 4,285 3,497 51,650
Furniture and equipment.................................... 87 357 822
Leasehold improvements..................................... 1 174 275
------- ------- -------
88 531 1,097
Less accumulated depreciation and amortization............. (33) (107) (242)
------- ------- -------
Furniture, fixtures and equipment, net..................... 55 424 855
Other assets............................................... -- 81 486
------- ------- -------
Total assets..................................... $ 4,340 $ 4,002 $52,991
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses.................... $ 315 $ 1,684 $ 4,160
Payable to Parent........................................ 2,554 2,537 --
Deferred distributorship fee revenue, current portion.... 50 50 50
------- ------- -------
Total current liabilities........................ 2,919 4,271 4,210
Deferred distributorship fee revenue....................... 133 79 42
Convertible obligation..................................... -- 750 750
Commitments
Stockholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value; no shares
issued and outstanding at December 31, 1994; aggregate
liquidated preference of $13,160,000 as of December
31, 1995; 7,560,000 shares authorized, 2,000,000 and
no shares issued and outstanding as of December 31,
1995 and September 30, 1996, respectively............. -- 2 --
Common Stock, $.001 par value; 30,000,000 shares
authorized, 4,000,000 shares issued and outstanding at
December 31, 1994; no shares and 8,786,000 shares
issued or outstanding at December 31, 1995 and
September 30, 1996, respectively...................... 4 -- 9
Additional paid-in capital............................... 4,835 5,670 56,657
Deferred compensation.................................... -- (345) (407)
Accumulated deficit...................................... (3,551) (6,425) (8,270)
------- ------- -------
Total stockholders' equity (net capital
deficiency).................................... 1,288 (1,098) 47,989
------- ------- -------
Total liabilities and stockholders' equity (net
capital deficiency)............................ $ 4,340 $ 4,002 $52,991
======= ======= =======
</TABLE>

See accompanying notes.

F-3
<PAGE> 55

CARDIOVASCULAR DYNAMICS, INC.

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PREDECESSOR ENTITY
------------------ JUNE 10, 1993 YEAR ENDED NINE-MONTH PERIOD
JANUARY 1, 1993 THROUGH DECEMBER 31, ENDED SEPTEMBER 30,
THROUGH DECEMBER 31, ----------------- -------------------
JUNE 9, 1993 1993 1994 1995 1995 1996
------------------ ------------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Sales (including $43 from a
related party in
1994)................... $ -- $ 126 $ 1,169 $ 3,462 $ 2,156 $ 5,836
License fee and other from
related party........... -- -- 1,220 641 230 200
Contract................... -- -- -- -- 412 150
----- ------- ------- ------- ------- -------
Total revenue...... -- 126 2,389 4,103 2,798 6,186
Operating costs and expenses:
Cost of sales.............. -- 79 848 2,051 1,143 3,136
Charge for acquired
in-process research and
development............. -- 2,001 -- 488 488 --
Research and development
(including $99 for the
period from June 10,
1993 through December
31, 1993 and $73 in 1994
paid to EndoSonics)..... 245 489 1,228 1,683 1,420 2,610
Marketing and sales........ -- 94 748 1,526 1,120 2,094
General and administrative
(including $62 for the
period from June 10,
1993 through December
31, 1993, and $227,
$340, $54 and $156 for
the years ended December
31, 1994 and 1995 and
the nine-month periods
ended September 30, 1995
and 1996, respectively,
paid to EndoSonics)..... 34 62 587 1,331 981 922
----- ------- ------- ------- ------- -------
Total operating
costs and
expenses......... 279 2,725 3,411 7,079 5,152 8,762
----- ------- ------- ------- ------- -------
Loss from operations......... (279) (2,599) (1,022) (2,976) (2,354) (2,576)
Other income:
Interest income............ 6 6 -- 42 29 694
Distributorship fees and
other income............ 4 13 51 60 48 37
----- ------- ------- ------- ------- -------
Total other
income........... 10 19 51 102 77 731
----- ------- ------- ------- ------- -------
Net loss..................... $ (269) $(2,580) $ (971) $(2,874) $(2,277) $(1,845)
===== ======= ======= ======= ======= =======
Pro forma net loss per
share...................... $ (.25) $ (.65) $ (.51) $ (.29)
======= ======= ======= =======
Shares used in computing pro
forma net loss per share... 3,876 4,441 4,433 6,462
======= ======= ======= =======
</TABLE>

See accompanying notes.

F-4
<PAGE> 56

CARDIOVASCULAR DYNAMICS, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL EQUITY
------------------- ------------------- PAID-IN DEFERRED ACCUMULATED (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIENCY)
---------- ------ ---------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992
(Predecessor Entity)..... 902,500 $ 893 1,000,000 $ 1 $ 26 $ -- $ (313) $ 607
Net loss through June 9,
1993 (Predecessor
Entity)................ -- -- -- -- -- -- (269) (269)
--
-------- ----- -------- ------- ----- ------- -------
Balance at June 9, 1993
(Predecessor Entity)..... 902,500 893 1,000,000 1 26 -- (582) 338
Effects of merger with
EndoSonics Acquisition
Corp................... (902,500) (893 ) 2,240,000 2 2,310 -- 582 2,001
Net loss from June 10,
1993 to December 31,
1993................... -- -- -- -- -- -- (2,580) (2,580)
--
-------- ----- -------- ------- ----- ------- -------
Balance at December 31,
1993..................... -- -- 3,240,000 3 2,336 -- (2,580) (241)
Sale of Common Stock to
corporate investor..... -- -- 760,000 1 2,499 -- -- 2,500
Net loss................. -- -- -- -- -- -- (971) (971)
--
-------- ----- -------- ------- ----- ------- -------
Balance at December 31,
1994..................... -- -- 4,000,000 4 4,835 -- (3,551) 1,288
Additional effects of
merger with EndoSonics
Acquisition Corp....... -- -- -- -- 488 -- -- 488
Issuance of Preferred
Stock in exchange for
Common Stock........... 2,000,000 2 (4,000,000) (4) 2 -- -- --
Deferred compensation
resulting from grant of
options................ -- -- -- -- 345 (345) -- --
Net loss................. -- -- -- -- -- -- (2,874) (2,874)
--
-------- ----- -------- ------- ----- ------- -------
Balance at December 31,
1995..................... 2,000,000 2 -- -- 5,670 (345) (6,425) (1,098)
Sale of Preferred Stock
to EndoSonics
(unaudited)............ 400,000 -- -- -- 8,000 -- -- 8,000
Conversion of Preferred
Stock (unaudited)...... (2,400,000) (2 ) 2,400,000 2 -- -- -- --
Exercise of Common Stock
Options (unaudited).... -- -- 38,000 -- 76 -- -- 76
Common Stock Split
2-for-1 (unaudited).... -- -- 2,438,000 3 (3) -- -- --
Initial Public Offering
of Common Stock
(unaudited)............ -- -- 3,910,000 4 42,764 -- -- 42,768
Deferred compensation
resulting from grant of
options (unaudited).... -- -- -- -- 150 (150) -- --
Amortization of deferred
compensation
(unaudited)............ -- -- -- -- -- 88 -- 88
Net loss (unaudited)..... -- -- -- -- -- -- (1,845) (1,845)
--
-------- ----- -------- ------- ----- ------- -------
Balance at September 30,
1996 (unaudited)......... -- $ -- 8,786,000 $ 9 $ 56,657 $ (407) $(8,270) $47,989
======== ===== ======== == ======= ===== ======= =======
</TABLE>

See accompanying notes.

F-5
<PAGE> 57

CARDIOVASCULAR DYNAMICS, INC.

STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
PREDECESSOR ENTITY JUNE 10, NINE-MONTH
------------------ 1993 YEAR ENDED PERIOD ENDED
JANUARY 1, 1993 THROUGH DECEMBER 31, SEPTEMBER 30,
THROUGH DECEMBER 31, ----------------- -----------------
JUNE 9, 1993 1993 1994 1995 1995 1996
------------------ ------------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss.................................. $ (269) $ (2,580) $ (971) $(2,874) $(2,277) $(1,845)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 7 6 18 74 49 135
Amortization of deferred compensation... -- -- -- -- 88
Charge for acquired in-process research
and development....................... -- 2,001 -- 488 488 --
Net changes in:
Trade accounts receivable, net........ -- (65) (662) (390) (350) (966)
Receivable from related parties....... -- -- (125) 125 125 --
Inventories........................... -- (36) (14) (704) (357) (1,242)
Other assets.......................... -- -- -- (54) 4 (136)
Accounts payable and accrued
expenses............................ 12 (41) 273 1,369 996 2,476
Deferred distributor fee revenue...... 246 (13) (50) (54) (41) (37)
----- ------- ------- ------- ------- -------
Net cash used in operating activities..... (4) (728) (1,531) (2,020) (1,363) (1,527)
Investing activities
Capital expenditures for furniture,
fixtures and equipment.................. (17) (10) (35) (443) (419) (566)
Change in other assets.................... -- -- -- (81) (39) (405)
----- ------- ------- ------- ------- -------
Net cash used in investing activities..... (17) (10) (35) (524) (458) (971)
Financing activities
Proceeds from issuance of convertible
obligation.............................. -- -- -- 750 750 --
Proceeds from sale of Common Stock........ -- -- 2,500 -- -- 42,844
Proceeds from sale of Preferred Stock to
Parent.................................. -- -- -- -- -- 8,000
Payable to Parent, net.................... -- 656 1,898 (17) (235) (2,537)
----- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities.............................. -- 656 4,398 733 515 48,307
----- ------- ------- ------- ------- -------
Net increase (decrease) in cash........... (21) (82) 2,832 (1,811) (1,306) 45,809
Cash, beginning of period................. 650 629 547 3,379 3,379 1,568
----- ------- ------- ------- ------- -------
Cash, end of period....................... $ 629 $ 547 $ 3,379 $ 1,568 $ 2,073 $47,377
===== ======= ======= ======= ======= =======
</TABLE>

See accompanying notes.

F-6
<PAGE> 58

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT SEPTEMBER 30, 1996 AND FOR THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1995 AND 1996 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES

Business and Basis of Presentation

CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March
16, 1992 in the State of California. The Predecessor, and its successor
corporation discussed below, develops, manufactures and markets proprietary
therapeutic catheters used to treat certain vascular diseases.

In June 1992, EndoSonics Corporation ("EndoSonics") acquired a 40%
preferred interest in the Predecessor. EndoSonics, a Delaware corporation,
develops, manufactures, and markets intravascular ultrasound imaging systems and
diagnostic, therapeutic and imaging catheters for the treatment of coronary and
peripheral vascular disease.

In June 1993, EndoSonics acquired all of the remaining Preferred and Common
Stock of the Predecessor. The acquisition was accomplished through a merger
between the Predecessor and EndoSonics Acquisition Corp., a wholly owned
subsidiary of EndoSonics (which then changed its name to CardioVascular
Dynamics, Inc.). The merger was treated as a tax-free reorganization for income
tax purposes. The accompanying financial statements present the results of
operations, cash flows and changes in stockholders' equity for the Predecessor
through June 9, 1993, and of CardioVascular Dynamics, Inc. (hereinafter referred
to as "CVD" or the "Company") thereafter. For practical purposes the actual
cut-off date was June 30, 1993; however, the activity between June 10, 1993 and
June 30, 1993 was not material.

The acquisition by EndoSonics resulted in a new basis for the CVD assets
and liabilities. Accordingly, the purchase price paid by EndoSonics has been
allocated to the identifiable assets and liabilities, including in-process
research and development, which was immediately expensed as no CVD products had
received regulatory approval and the technology did not have identifiable
alternative uses. The amount by which the purchase price exceeded the
Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements. Pursuant to the terms of the original merger
agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its
Common Stock to the former shareholders of the Predecessor. The fair market
value of such shares of $488 has been reflected in the accompanying financial
statements as an additional charge for acquired in-process technology.

Subsequent to the acquisition, EndoSonics began performing certain services
for CVD (see Note 3), including general management, accounting, cash management,
and other administrative and engineering services. The amounts charged to CVD
for such services have been determined based on proportional cost allocations
and have been agreed to by the management of CVD and EndoSonics. In the opinion
of CVD's management, the allocation methods used are reasonable. Such
allocations, however, are not necessarily indicative of costs that would have
been incurred had CVD continued to operate independent of EndoSonics. No formal
agreement currently exists which specifies the nature of services to be provided
by EndoSonics to CVD, or the charges for such services. Therefore, the 1995
amounts are not necessarily indicative of the future charges to be incurred by
CVD.

In 1994, the Board of Directors of CVD approved a 16,200-for-1 Common Stock
split which has been reflected retroactively for all periods subsequent to the
merger in the accompanying financial statements (See Note 11).

Interim Results

The accompanying balance sheet as of September 30, 1996 and the statements
of operations, stockholders' equity and cash flows for the nine months ended
September 30, 1995 and 1996 are unaudited. In the

F-7
<PAGE> 59

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

opinion of management, the statements have been prepared on the same basis as
the audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair statement of the results of
interim periods. The data disclosed in these notes to the financial statements
for these periods are unaudited.

Use of Estimates

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 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.

Inventories

Inventories are comprised of raw materials, work-in-process and finished
goods and are stated at the lower of cost, determined on an average cost basis,
or market value.

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to five years.

Concentrations of Credit Risk and Significant Customers

The Company maintains its cash and cash equivalents in deposit accounts and
in pooled investment accounts administered by a major financial institution.

The Company sells its products primarily to medical institutions and
distributors worldwide. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral from
customers. Management believes that an adequate allowance for doubtful accounts
has been provided.

During 1994 and 1995, product sales to Fukuda Denshi Co., Ltd., ("Fukuda"),
the Company's Japanese distributor (see Note 4), comprised 61% and 18% of total
revenue. Accounts receivable from Fukuda represented 78% and 15% of net accounts
receivable at December 31, 1994 and 1995, respectively.

During the period from June 10, 1993 to December 31, 1993, product sales to
another of the Company's international distributors comprised 57% of total
revenue. One customer comprised 12% of revenues for the year ended December 31,
1995 and 14% of accounts receivable at December 31, 1995.

Export Sales

The Company had export sales by region as follows:

<TABLE>
<CAPTION>
NINE-MONTH
PERIOD FROM YEAR ENDED PERIOD ENDED
JUNE 10, 1993 TO DECEMBER 31, SEPTEMBER
DECEMBER 31, --------------- 30,
1993 1994 1995 1996
---------------- ---- ------ ------------
<S> <C> <C> <C> <C>
Europe................................. $101 $255 $1,179 $ 999
Japan.................................. -- 715 744 1,227
Latin America.......................... -- -- 131 127
Other.................................. -- -- -- 228
---- ---- ------ ------
$101 $970 $2,054 $2,581
==== ==== ====== ======
</TABLE>

F-8
<PAGE> 60

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Revenue Recognition and Warranty

The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment.

Accounting for Stock-Based Compensation

In October 1995, the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") was issued and is
effective for the Company's 1996 year end. The Company intends to continue to
account for employee stock options in accordance with APB Opinion No. 25 and
will make the pro forma disclosures required by SFAS 123 beginning in 1996.

Income Taxes

Since June 1993, the Company's results of operations have been included in
consolidated tax returns filed by EndoSonics. There was no income tax provision
for the consolidated tax group during the periods covered by these financial
statements. All net operating loss and credit carryforwards and deferred tax
assets and liabilities have been disclosed herein on a separate company basis
for CVD.

Pro Forma Net Loss Per Share

Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock, convertible Preferred Stock (using the
as-if-converted method) and Common Stock issuable upon conversion of the
Convertible Obligation, outstanding. Common equivalent shares from stock options
and warrants are not included as the effect is anti-dilutive, except that in
accordance with Securities and Exchange Commission Staff Accounting Bulletins,
common equivalents shares issued by the Company at prices substantially below
the anticipated initial public offering price during the period beginning one
year prior to the proposed public offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price).

Net loss per share information calculated in accordance with APB Opinion
No. 15 for the periods from January 1, 1993 to June 9, 1993 (predecessor entity)
and from June 10, 1993 to December 31, 1993 has not been presented as such
information is not meaningful as a result of the changes in the Company's
capital structure during those periods.

2. SCIMED LIFE SYSTEMS, INC.

In September 1994, CVD and EndoSonics entered into a Stock Purchase and
Technology License Agreement with SCIMED Life Systems, Inc. ("SCIMED"). SCIMED
acquired a 19% interest in CVD in exchange for $2,500 in cash. If the Company
has not completed an initial public offering, or in certain other circumstances,
at the three year anniversary of the agreement, SCIMED may exchange its shares
of CVD Series A Preferred Stock for shares of EndoSonics Common Stock at a
guaranteed conversion rate such that the value of the EndoSonics shares issued
will not be less than $2,500. The Company also granted SCIMED the right, through
the earlier of December 31, 1997 or the effective date of an initial
registration, and offering of CVD shares to the public, to maintain its 19%
ownership interest ("anti-dilution right").

CVD also granted SCIMED an exclusive license to certain patents in the
cardiovascular field of use, which allows SCIMED to manufacture the Transport
PTCA infusion catheter (the "Transport") developed by CVD in exchange for a
$1,000 license fee that was paid in 1994. SCIMED will pay royalties to CVD on
sales of the Transport and other products which use this patented technology.
CVD retains rights to this technology and the associated patents for use outside
of the cardiovascular field.

F-9
<PAGE> 61

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

During June 1995, the Company issued a warrant to SCIMED to purchase up to
40,000 shares of Series A Preferred Stock at an exercise price of $6.58 per
share in exchange for a waiver of SCIMED's anti-dilution right. The warrant
expires in September 1997.

SCIMED also paid CVD $220 and $641 in 1994 and 1995, respectively, on a
cost reimbursement basis to fund continuing development of the technology and
for other support. Additionally, the Company recorded $43 in product sales to
SCIMED during 1994 (none in 1995) and had accounts receivable from SCIMED
totaling $125 as of December 31, 1994, none at December 31, 1995 and September
30, 1996.

3. RELATED PARTY TRANSACTIONS

The following is a summary of significant transactions between CVD and
EndoSonics:

- During 1994 and a portion of 1995, EndoSonics manufactured certain of the
Company's catheter products at cost plus a mark-up of 30%. Total
purchases from EndoSonics during 1994 and 1995 amounted to $843 and $172,
respectively. In addition, during 1994 EndoSonics performed certain
billing and collection services for CVD in return for a fee per invoice
which aggregated to $10.

- Beginning in August 1993, certain EndoSonics corporate expenses,
primarily related to executive management time, accounting, cash
management, and other administrative and engineering services, have been
allocated to the Company. Total expenses allocated were $161 for the
period from June 10, 1993 to December 31, 1993, and $290, $340, $54 and
$156 for the years ended December 31, 1994 and 1995 and for the
nine-month periods ended September 30, 1995 and 1996, respectively.

No interest expense has been charged on the net payable due to EndoSonics.
The following is an analysis of the payable to EndoSonics:

<TABLE>
<CAPTION>
NINE-MONTH
PERIOD FROM YEAR ENDED PERIOD ENDED
JUNE 10, 1993 TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, --------------- ---------------
1993 1994 1995 1995 1996
---------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Beginning balance............................... $ -- $ 656 $2,554 $2,554 $2,537
Inventory purchases............................. 105 843 172 172 --
Corporate cost allocations...................... 161 300 340 162 156
Cash disbursements made by EndoSonics
on behalf of CVD.............................. 430 1,730 312 131 --
Cash collections made by EndoSonics on
behalf of CVD................................. (39) (318) (700) (700) --
Cash payments to EndoSonics..................... -- (549) -- -- (2,693)
Cash disbursements made by CVD on behalf of
EndoSonics and other.......................... (1) (108) (141) -- --
---- ------ ------ ------ ------
Ending balance.................................. $656 $2,554 $2,537 $2,319 $ --
==== ====== ====== ====== ======
Average balance during period................... $280 $1,750 $2,551 $2,272 $2,631
==== ====== ====== ====== ======
</TABLE>

(See Notes 5 and 11)

4. AGREEMENTS WITH FUKUDA

The Company has executed a distribution agreement with Fukuda. The
agreement provides Fukuda with exclusive distribution rights relative to certain
of the Company's products in Japan for periods extending through May 1999, which
may be extended at the option of the parties. Distribution fee revenue received
from Fukuda are deferred and are being recognized as revenue over the initial
periods covered by the respective agreements.

F-10
<PAGE> 62

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

In July 1995 and May 1996, the distribution agreement with Fukuda was
amended. In exchange for the exclusive distribution rights to additional CVD
products, the Company received $750,000 which converted into the right to
receive 62,500 shares of Common Stock upon the consummation of the initial
public offering. The Company has accounted for this as a convertible obligation
payable as of December 31, 1995.

5. LICENSE AGREEMENTS

In January 1995 the Company entered into a license agreement with Advanced
CardioVascular Systems, Inc. ("ACS") under which the Company acquired the
exclusive worldwide rights to ACS' SmartNeedle technology. ACS currently
manufactures the product for the Company. The Company is obligated to assume
responsibility for manufacturing the product in 1996, subject to the payment of
royalties. ACS was granted an option, which was exercised in February 1996, to
obtain exclusive worldwide rights to certain CVD perfusion technology. In
exchange for the perfusion technology, ACS is obligated to make milestone and
minimum royalty payments to CVD, and also has certain obligations to develop and
market the perfusion technology. An initial milestone of $150 was earned in the
nine-months ended September 30, 1996.

The Company has entered into a license agreement with EndoSonics pursuant
to which CVD granted EndoSonics the non-exclusive, royalty-free right to certain
technology for use in the development and sale of certain products. In exchange,
CVD received the non-exclusive, royalty-free right to utilize certain of
EndoSonics' product regulatory filings to obtain regulatory approval of CVD
products.

6. INVENTORIES

Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1994 1995 1996
---- ---- -------------
<S> <C> <C> <C>
Raw materials............................................ $-- $162 $ 731
Work in process.......................................... -- 330 578
Finished goods........................................... 50 262 687
--- ---- ------
$50 $754 $ 1,996
=== ==== ======
</TABLE>

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1994 1995 1996
---- ------ -------------
<S> <C> <C> <C>
Accounts payable...................................... $122 $ 962 $ 2,401
Accrued payroll and related expenses.................. 86 352 726
Accrued warranty...................................... 20 113 --
Customer Deposits..................................... 754
Other accrued expenses................................ 87 257 279
---- ------ ------
$315 $1,684 $ 4,160
==== ====== ======
</TABLE>

F-11
<PAGE> 63

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

8. COMMITMENTS

Operating Leases

The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancelable lease agreements
that have been accounted for as operating leases. Certain of these leases
include scheduled rent increases and renewal options as prescribed by the
agreements.

Future minimum payments by year under long-term, noncancellable operating
leases were as follows as of December 31:

Rental expense charged to operations for all operating leases during the
periods from January 1, 1993 to June 9, 1993, June 10, 1993 to December 31, 1993
and the years ended December 31, 1994 and 1995, was approximately $10, $10, $60,
and $171, respectively.

9. SHAREHOLDERS EQUITY

Preferred Stock

In February 1995, every two shares of the Company's outstanding Common
Stock was exchanged for one share of Series A Preferred Stock with a liquidation
preference of $6.58 per share. In March 1996, the Company issued 400,000 shares
of Series B Preferred Stock to EndoSonics at $20.00 per share for aggregate
proceeds of $8,000.

Authorized and outstanding Preferred Stock and its principal terms are as
follows at March 31, 1996:

<TABLE>
<CAPTION>
PER SHARE
------------------------
LIQUIDATION
SERIES AUTHORIZED OUTSTANDING DIVIDEND PREFERENCE
- - ----------------------------------------------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
A.............................................. 2,060,000 2,000,000 $ 0.50 $ 6.58
B.............................................. 500,000 400,000 $ 1.50 $ 20.00
Undesignated................................... 5,000,000 -- -- --
--------- ---------
7,560,000 2,400,000
========= =========
</TABLE>

The holders of Preferred Stock are entitled to receive dividends when and
if declared by the Board of Directors. These dividends are in preference to any
declaration or payment of any dividends or distributions with respect to the
Company's Common Stock. As of December 31, 1995, no dividends have been
declared.

Preferred stockholders have voting rights equivalent to the number of
shares of Common Stock into which their shares are convertible. Subject to
certain antidilution provisions and other adjustments, each share of Series A
and Series B Preferred Stock is convertible, at the holder's option, into two
shares of Common Stock. All shares of Preferred Stock convert automatically to
Common Stock upon the earlier of a public offering of the Company's Common Stock
with an aggregate offering price of $7,500 or upon the date which the Company
obtains the consent of the holders of a majority of the then-outstanding shares
of Preferred Stock.

F-12
<PAGE> 64

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Stock Option Plan

Under the terms of the Company's 1995 Stock Option Plan (the "1995 Plan")
eligible key employees, directors, and consultants can receive options to
purchase shares of the Company's Common Stock at a price not less than 100% for
incentive stock options and 85% for nonqualified stock options of the fair value
on the date of grant, as determined by the Board of Directors. The Company has
authorized 977,000 shares of Common Stock for issuance under the 1995 Plan. The
options granted under the 1995 Plan are exercisable over a maximum term of ten
years from the date of grant and generally vest over a four year period. Shares
underlying the exercise of unvested options are subject to various restrictions
as to resale and right of repurchase by the Company which lapses over the
vesting period.

Through December 31, 1995 the Company had granted options to purchase
957,000 shares of Common Stock with exercise prices ranging from $1.00 to $1.50.
An additional 233,000 options were granted during the nine-month period ended
September 30, 1996 at exercise prices ranging from $2.50 to $13.25 per share. No
options had been exercised and 125,000 options were exercisable at December 31,
1995. As of September 30, 1996, 272,333 options were exercisable, and 76,000
options had been exercised.

During 1995, the Company recorded deferred compensation of approximately
$345 for financial reporting purposes to reflect the difference between the
exercise price of certain options and the deemed fair value, for financial
statement presentation purposes, of the Company's shares of Common Stock. An
additional $150 of deferred compensation was recorded during the nine-month
period ended September 30, 1996. Deferred compensation is being amortized over
the vesting period of the related options.

10. INCOME TAXES

Significant components of the Company's deferred tax assets and liabilities
are as follows at December 31:

<TABLE>
<CAPTION>
1994 1995
--------------- ---------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net operating loss carryforward................. $ 641 $ 55 $ 1,322 $ 60
Research and development credits................ -- -- 97 25
Inventory write-downs........................... -- -- 73 13
Capitalized research and development............ -- -- -- 150
Deferred revenue................................ 64 11 45 8
Bad debt reserve................................ 30 5 63 11
Other........................................... 16 3 20 3
------ ---- ------- -----
Gross deferred tax assets....................... 751 74 1,620 270
Valuation allowance............................. (745) (73) (1,620) (270)
------ ---- ------- -----
Total deferred tax assets....................... 6 1 -- --
Other........................................... (6) (1) -- --
------ ---- ------- -----
Gross deferred tax liabilities.................. (6) (1) -- --
------ ---- ------- -----
Net deferred tax assets......................... $ -- $ -- $ -- $ --
====== ==== ======= =====
</TABLE>

The Company believes that, based on a number of factors including the lack
of an earnings history, there is uncertainty regarding the realizability of the
deferred tax assets such that a full valuation allowance has been recorded. The
valuation allowance increased by $317, $391 and $1,072 in 1993, 1994 and 1995,
respectively.

F-13
<PAGE> 65

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

At December 31, 1995, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $3,800, which expire in the years
2006 through 2010 and net operating loss carryforwards for state tax purposes of
approximately $1,000 which expire in the years 1997 through 2000.

Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss carryforwards may be
subject to an annual limitation against taxable income in future periods. As a
result of the annual limitation, a portion of these carryforwards may expire
before ultimately becoming available to reduce future income tax liabilities.

11. SUBSEQUENT EVENTS

On June 19, 1996, the Company closed its initial public offering (the
"Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per
share. On July 17, 1996, the Company's underwriters exercised their
overallotment option to purchase an additional 510,000 shares of Common Stock at
$12.00 per share. CVD received net offering proceeds from the sale of Common
Stock of approximately $42,700,000 after deducting underwriting discounts and
commissions and other expenses of the Offering.

In May 1996, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission
authorizing the issuance of 3,400,000 shares of Common Stock to the public. Each
share of convertible Preferred Stock outstanding converted into two shares of
Common Stock and the Convertible Obligation converted into 62,500 shares of
Common Stock (assuming an initial public offering price of $12.00 per share).
Unaudited pro forma stockholders' equity, as adjusted for the assumed conversion
of the convertible Preferred Stock and Convertible Obligation described above,
is set forth on the accompanying balance sheet.

In anticipation of the Offering, the Company effected a 2-for-1 stock split
of all outstanding shares of Common Stock and options and changed the conversion
ratio of Preferred Stock to two shares of Common Stock for each Preferred share.
All Common share and per share amounts included in the accompanying financial
statements have been retroactively adjusted to reflect the stock split as well
as the change in the Preferred Stock conversion ratio.

In May 1996 the Company adopted the 1996 Stock Option/Stock Issuance Plan
(the "1996 Plan") which is the successor to the Company's existing 1995 Plan
(see Note 9). A total of 1,200,000 shares of Common Stock have been reserved for
future issuance under the 1996 Plan including those shares previously reserved
under the 1995 Plan. The 1996 Plan provides for the grant of stock options or
issuances of stock to employees, consultants and directors of the Company.

In May 1996, the Company also adopted the 1996 Employee Stock Purchase Plan
(the "Purchase Plan"). A total of 200,000 shares of Common Stock are reserved
for issuance under the Purchase Plan. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions at a price equal
to the lower of 85% of the fair market value of the Company's Common Stock at
the beginning or end of the applicable offering period.

During May 1996, the Company agreed to issue an additional warrant to
SCIMED to purchase up to 20,000 shares of Series A Preferred Stock at an
exercise price of $6.58 per share in exchange for a waiver of SCIMED's
anti-dilution right related to the shares to be issued under the 1996 Plan. (See
Note 2).

In connection with the offering, CVD and EndoSonics have entered into a Tax
Allocation Agreement that will provide, among other things, for (i) the
allocation of tax liabilities and adjustments thereto as between the business of
the Company and other businesses conducted by EndoSonics and its affiliates
related to periods in which the Company is includable in consolidated federal
income tax returns filed by EndoSonics, (ii) the allocation of responsibility
for filing tax returns and (iii) the conduct of and responsibility for taxes
owed in connection with tax audits and various related matters.

F-14
<PAGE> 66

CARDIOVASCULAR DYNAMICS, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

F-15
<PAGE> 67

- - ------------------------------------------------------
- - ------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 5
The Company........................... 12
Use of Proceeds....................... 12
Price Range of Common Stock........... 13
Dividend Policy....................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 15
Business.............................. 19
Management............................ 33
Certain Transactions.................. 40
Principal Stockholders................ 43
Description of Capital Stock.......... 45
Shares Eligible for Future Sale....... 47
Plan of Distribution.................. 49
Legal Matters......................... 49
Experts............................... 49
Index to Financial Statements......... F-1
</TABLE>

- - ------------------------------------------------------
- - ------------------------------------------------------
- - ------------------------------------------------------
- - ------------------------------------------------------

155,822 SHARES

CARDIOVASCULAR
DYNAMICS, INC.
COMMON STOCK
------------------------
PROSPECTUS
------------------------

November 29, 1996

- - ------------------------------------------------------
- - ------------------------------------------------------
<PAGE> 68

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee.

<TABLE>
<S> <C>
SEC Registration fee....................................................... $ 575
Printing and engraving..................................................... 30,000
Legal fees and expenses.................................................... 26,000
Accounting fees and expenses............................................... 15,000
Blue sky fees and expenses................................................. 5,000
Miscellaneous.............................................................. 5,000
-------
Total............................................................ $81,575
=======
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VIII of the Registrant's Bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its directors, a form of which is attached as
Exhibit 10.1 hereto and incorporated herein by reference. The Indemnification
Agreements provide the Registrant's directors with further indemnification to
the maximum extent permitted by the Delaware General Corporation Law. Reference
is also made to the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since June 1993, the Registrant has issued and sold the following
securities:

1. On September 10, 1994, the Company issued and sold an aggregate of
380,000 shares of Common Stock (subsequently recapitalized into Series A
Preferred Stock) to SCIMED for an aggregate purchase price of $2,500,000.

2. On July 17, 1995, the Company issued a $750,000 convertible
obligation to Fukuda, which converted into 62,500 shares of Common Stock at
the consummation of the initial public offering.

3. On June 30, 1995 and May 2, 1996, the Company issued warrants to
SCIMED to purchase 40,000 shares of Series A Preferred Stock and 20,000
shares of Series A Preferred Stock, respectively, each at an exercise price
of $6.58 per share. The warrants were issued in connection with the waiver
of

II-1
<PAGE> 69

certain rights by SCIMED under the Stock Purchase and Technology License
Agreement dated September 10, 1994, as amended on September 29, 1995.

4. On March 29, 1996, the Company issued and sold an aggregate of
400,000 shares of Series B Preferred Stock to EndoSonics Corporation for an
aggregate purchase price of $8,000,000.

5. On October 16, 1996 and November 26, 1996, the Company issued an
aggregate of 93,322 shares of Common Stock to the shareholders of
Intraluminal Devices, Inc. ("IDI") in connection of the merger of IDI with
and into a wholly owned subsidiary of the Company.

The issuances of the securities described above were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of such
Act as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(A) EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ---------- ---------------------------------------------------------------------------------
<C> <S>
1.1(1) Form of Underwriting Agreement.
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among EndoSonics
Corporation ("EndoSonics"), EndoSonics Acquisition Corporation and CardioVascular
Dynamics, Inc. ("CVD").
</TABLE>

<TABLE>
<C> <S>
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and CVD.
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular Dynamics, Inc.,
IDI Acquisition Corporation and Intraluminal Devices, Inc. ("IDI") dated as of
October 2, 1996.
3.1(3) Certificate of Incorporation.
3.2(3) Amended Bylaws.
4.1(1) Specimen Certificate of Common Stock.
5.1(5) Opinion of Brobeck, Phleger & Harrison LLP.
10.1(3) Form of Indemnification Agreement to be entered into between the Registrant and
its directors and officers.
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements thereunder.
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement thereunder.
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and between
the Company and CVD.
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between EndoSonics and
CVD.
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on October 27,
1994 and July 17, 1995, (the "Japanese Distribution Agreements") by and between
CVD and Fukuda Denshi Co., Ltd. ("Fukuda")
10.7(3)* Stock Purchase and Technology License Agreement dated September 10, 1994, as
amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED Life
Systems, Inc. ("SCIMED").
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD and
Endosonics.
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and Advanced
CardioVascular Systems, Inc. ("ACS").
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS.
</TABLE>

II-2
<PAGE> 70

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - ---------- ---------------------------------------------------------------------------------
<C> <S>
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD and
EndoSonics.
10.12(3) License Agreement dated December 22, 1995 by and between CVD and EndoSonics.
10.13(1) Form of Stockholder Agreement with EndoSonics.
10.14(1) Form of Tax Allocation Agreement with EndoSonics.
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine Company and
CVD.
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD and
Endosonics.
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and between
CVD and Fukuda.
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
11.1(1) Computation of Earnings Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2(5) Consent of Brobeck, Phleger & Harrison LLP (Reference is made to Exhibit 5.1).
24.1(5) Power of Attorney.
27.1(5) Financial Data Schedule.
</TABLE>

- - ---------------
* Confidential treatment requested.

(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.

(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.

(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.

(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.

(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.

(B) FINANCIAL STATEMENT SCHEDULES

Schedule II -- Valuation and Qualifying Accounts

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, Indemnification Agreements
entered into between the Registrant and its directors, the Underwriting
Agreement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being

II-3
<PAGE> 71

registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 72

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Irvine, State of California, on this 27th day of November, 1996.

CARDIOVASCULAR DYNAMICS, INC.

By: /s/ DANA P. NICKELL

------------------------------------

Dana P. Nickell

Vice President, Finance and
Administration, Chief Financial
Officer and Secretary (Principal
Financial and Accounting Officer

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - ------------------------------------------ ------------------------------ ------------------
<C> <S> <C>
* President, Chief Executive November 27, 1996
- - ------------------------------------------ Officer (Principal Executive
(Michael R. Henson) Officer) and Chairman
* Vice President, Finance and November 27, 1996
- - ------------------------------------------ Administration, Chief
Dana P. Nickell Financial Officer and
Secretary (Principal Financial
and Accounting Officer)
* Director November 27, 1996
- - ------------------------------------------
(William G. Davis)
* Director November 27, 1996
- - ------------------------------------------
(Mitchell Dann)
* Director November 27, 1996
- - ------------------------------------------
(Gerard von Hoffman)
* Director and Assistant November 27, 1996
- - ------------------------------------------ Secretary
(Edward M. Leonard)
*By /s/ DANA P. NICKELL
- - ------------------------------------------
Dana P. Nickell
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 73

CARDIOVASCULAR DYNAMICS, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)

<TABLE>
<CAPTION>
COLUMN C
----------------------
COLUMN B ADDITIONS COLUMN E
---------- ---------------------- ----------
COLUMN A BALANCE AT CHARGES TO CHARGED COLUMN D BALANCE AT
- - ------------------------------------------ BEGINNING COST AND TO OTHER ---------- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- - ------------------------------------------ ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Allowance for doubtful accounts......... $ 85 $ 95 $ -- $ -- $180
Accrued warranty expenses............... $ 20 $ 93 $ -- $ -- $113
Year ended December 31, 1994
Allowance for doubtful accounts......... $ -- $ 85 $ -- $ -- $ 85
Accrued warranty expenses............... $ -- $ 20 $ -- $ -- $ 20
Year ended December 31, 1993
Allowance for doubtful accounts......... $ -- $ -- $ -- $ -- $ --
Accrued warranty expenses............... $ -- $ -- $ -- $ -- $ --
</TABLE>

S-1
<PAGE> 74

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- - ---------- -----------------------------------------------------------------------------------------
<C> <S> <C>
1.1(1) Form of Underwriting Agreement.
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among
EndoSonics Corporation ("EndoSonics"), EndoSonics Acquisition Corporation
and CardioVascular Dynamics, Inc. ("CVD").
</TABLE>

<TABLE>
<C> <S> <C>
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and CVD.
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular Dynamics,
Inc., IDI Acquisition Corporation and Intraluminal Devices, Inc. ("IDI")
dated as of October 2, 1996.
3.1(3) Certificate of Incorporation.
3.2(3) Amended Bylaws.
4.1(1) Specimen Certificate of Common Stock.
5.1(5) Opinion of Brobeck, Phleger & Harrison LLP.
10.1(3) Form of Indemnification Agreement to be entered into between the Registrant
and its directors and officers.
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements thereunder.
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement
thereunder.
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and
between the Company and CVD.
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between
EndoSonics and CVD.
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on October
27, 1994 and July 17, 1995, (the "Japanese Distribution Agreements") by and
between CVD and Fukuda Denshi Co., Ltd. ("Fukuda")
10.7(3)* Stock Purchase and Technology License Agreement dated September 10, 1994, as
amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED Life
Systems, Inc. ("SCIMED").
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD
and Endosonics.
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and Advanced
CardioVascular Systems, Inc. ("ACS").
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS.
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD
and EndoSonics.
10.12(3) License Agreement dated December 22, 1995 by and between CVD and EndoSonics.
10.13(1) Form of Stockholder Agreement with EndoSonics.
10.14(1) Form of Tax Allocation Agreement with EndoSonics.
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine Company
and CVD.
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD and
Endosonics.
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and
between CVD and Fukuda.
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
</TABLE>

<PAGE> 75

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- - ---------- -----------------------------------------------------------------------------------------

<S> <C> <C>
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
11.1(1) Computation of Earnings Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2(5) Consent of Brobeck, Phleger & Harrison LLP (Reference is made to Exhibit
5.1).
24.1(5) Power of Attorney.
27.1(5) Financial Data Schedule.
</TABLE>

- - ---------------

* Confidential treatment requested.

(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.

(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.

(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.

(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.

(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.

<PAGE> 1
EXHIBIT 23.1

Consent of Ernst & Young LLP, Independent Auditors

We consent to the reference to our firm under the caption "Selected Financial
Data" and "Experts" and to the use of our report dated March 15, 1996, except
for Note 11, as to which the date is July 17, 1996 in the Registration Statement
(Form S-1 No. 333-15901) and the related Prospectus of CardioVascular Dynamics,
Inc. for the registration of 155,822 shares of its Common Stock.

Our audits also included the financial statement schedule of CardioVascular
Dynamics, Inc. listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Orange County, California
November 27, 1996