<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                    FORM 10-K
       FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

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

     For the fiscal year ended December 31, 1998

                                       OR

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

    For the transition period from                to
                                  ----------------   -------------------

                         Commission file number: 0-28440


                         RADIANCE MEDICAL SYSTEMS, INC.
             (Exact name of Registrant as specified in its charter)


           Delaware                                      68-0328265
   (State of Incorporation)                 (I.R.S. Employer Identification No.)

            13700 Alton Parkway, Suite 160, Irvine, California 92618
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (949) 457-9546

Securities registered pursuant to Section 12(b) of the Act:

                                                     Name of each exchange 
      Title of each class                            on which registered
      -------------------                            --------------------
             None                                           None

Securities to be registered pursuant to Section 12(g) of the Act: Common Stock,
$.001 par value.

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 15, 1999, was approximately $33,788,000 (based upon the
closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

On March 15, 1999, approximately 10,597,000 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of
Stockholders to be held on June 9, 1999 are incorporated by reference into Part
III.


<PAGE>   2

FORWARD-LOOKING STATEMENTS

        Radiance cautions stockholders that, in addition to the historical
financial information included herein, this Annual Report on Form 10-K includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are
based on management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this offering memorandum, including without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and statements
located elsewhere herein regarding Radiance's financial position and business
strategy, may constitute forward-looking statements. In addition,
forward-looking statements generally can be identified by the use of
forward-looking terminology such as "believes," "may," "will," "expects,"
"intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the
negative thereof or variations thereon or similar terminology. Such
forward-looking statements involve known and unknown risks, including, but not
limited to, economic and market conditions, the regulatory environment in which
Radiance operates, competitive activities or other business conditions. There
can be no assurance that Radiance's actual results, performance or achievements
will not differ materially from any future results, performance or achievements
expressed or implied from such forward-looking statements. Important factors
that could cause actual results to differ materially from Radiance's
expectations ("Cautionary Statements") are disclosed in this Annual Report on
Form 10-K, including, but not limited to, those discussed in "Item 7--Risk
Factors." All subsequent written and oral forward-looking statements
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these Cautionary Statements.


                                     PART I


ITEM 1.  BUSINESS

INTRODUCTION

        Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops, 
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance's primary product under development is the RDX
Catheter, a balloon catheter-based delivery system designed to deliver
radioactive materials to the area of an artery that has been treated with
conventional interventional therapy such as Percutaneous Transluminal Coronary
Angioplasty ("PTCA"), atherectomy and/or stent deployment. See "Item
1--Products."

        The Company is the result of an acquisition effected by the merger of
the (former) Radiance Medical Systems, Inc. ("RMS") with and into CardioVascular
Dynamics, Inc. (now named Radiance Medical Systems, Inc.). RMS originally was
formed by the Company as a separate entity to focus on the development of
radiation therapy technology for the treatment of cardiovascular disease, and to
obtain financing for such development from sources other than the Company. As a
result of the merger, the Company reacquired all of the shares of RMS which it
did not own. The Company was incorporated on March 16, 1992.

INDUSTRY BACKGROUND

        CORONARY ARTERY DISEASE

        Coronary artery disease is the leading cause of death in the United
States. More than 13 million people in the United States currently have been
diagnosed with coronary artery disease, which is generally characterized by the
progressive accumulation of plaque as a result of the deposit of cholesterol and
other fatty materials on the walls of arteries. The accumulation of plaque leads
to a narrowing of the interior passage, or lumen, of the arteries, reducing
blood flow to the heart. When blood flow to the heart becomes insufficient, the
oxygen supply is restricted, resulting in heart attack and/or death. Each year
more than 900,000 revascularization procedures are performed in the United
States, and approximately 1.5 million such procedures are performed worldwide,
to treat coronary artery disease and increase blood flow to the heart.

                                      -2-


<PAGE>   3

        TYPES OF TREATMENT

        The two most common forms or treatment for coronary artery disease are:
(i) the coronary artery bypass graft ("CABG"); and (ii) PTCA and other
catheter-based technologies. CABG is a highly invasive, open surgical procedure
in which blood vessel grafts are used to bypass the site of a blocked artery,
thereby restoring blood flow. CABG, still considered the most effective and
long-lasting treatment for coronary artery disease, is generally the primary
treatment for severe coronary artery disease involving multiple vessels. In
addition, CABG is often a treatment of last resort for patients who have
undergone other less invasive procedures but require reintervention. CABG,
however, has significant limitations, including medical complications, such as
stroke, multiple organ dysfunction, inflammatory response, respiratory failure
and post-operative bleeding, each of which may result in death. In addition,
CABG is a very expensive procedure and requires a long recovery period. In the
United States, the cost of undergoing CABG is approximately $32,000 to $36,000
and the average post-operative recovery period following CABG is approximately
six to eight weeks. Approximately 400,000 CABG procedures are performed annually
in the United States. Currently, several minimally invasive surgical techniques
are being developed to lessen the cost and trauma of CABG procedures.

        PTCA is the principal, less invasive alternative to CABG. PTCA is a
procedure performed in a cath lab by an interventional cardiologist. During
PTCA, a guidewire is inserted into a blood vessel through a puncture in the leg
(or arm in some cases) and guided through the vasculature to a diseased site in
the coronary artery. A balloon-tipped catheter is then guided over the wire to
the deposit of plaque ("lesion") occluding the artery. Once the balloon is
positioned across the lesion inside the vessel, the balloon is inflated and
deflated several times. Frequently, successively larger balloons are inflated at
the lesion site, requiring the use of multiple balloon catheters. The inflation
of the balloon cracks or reshapes the plaque and the arterial wall, thereby
expanding the arterial lumen. Though injury to the arterial wall often occurs
under balloon pressure, PTCA typically results in increased blood flow without
the actual removal of any plaque. In 1997, more than 600,000 PTCA procedures
were performed in the United States. The average cost of each PTCA procedure is
approximately $15,000, or less than one half of the average cost of CABG, and
the length of stay and recuperation period are substantially less than required
for CABG.

        The principal limitation of PTCA is the high rate of restenosis, a
re-narrowing of a treated artery, which generally requires reintervention. Due
to the effects of restenosis, the long-term cost-effectiveness of PTCA has not
proven greater than that of CABG. Studies have indicated that within six months
after PTCA, between 25% and 45% of PTCA patients experience restenosis. In
addition, 60% of patients with multi-vessel coronary artery disease who received
PTCA have been shown to require reintervention within three years of treatment.
Although the average cost of PTCA initially is less than one-half of the cost of
CABG, a recent study indicated that three years after the procedure, PTCA has no
cost advantage over CABG due to the need for subsequent interventional
treatment.

        A variety of other catheter-based, minimally invasive, interventional
devices for coronary artery disease have been developed in an attempt to reduce
the frequency of restenosis following PTCA. These devices include atherectomy
devices (catheter devices that cut and remove plaque from the arterial wall),
rotational ablation devices (catheter devices which use a rotating burr to
remove plaque), and laser catheter devices (devices that use laser energy to
reduce plaque in arteries). Although these new approaches to coronary artery
disease have been found to be effective in certain lesion types and in certain
locations in the coronary arteries, they still exhibit high rates of restenosis.

        RESTENOSIS

        Clinical restenosis is typically defined as a renarrowing of a coronary
artery within six months of a revascularization treatment to less than 50% of
its original size. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure, which stretches coronary
arteries or otherwise damages


                                      -3-


<PAGE>   4

the treated segment of the artery. Due to multiple mechanisms controlling
vascular repair, restenosis may occur within a short period after a
revascularization procedure or may develop over the course of months or years.
Restenosis that occurs shortly after a revascularization procedure is usually
attributed to elastic recoil (acute loss of lumen diameter) of the artery.

        Restenosis occurring a longer period of time after a revascularization
procedure may result from excessive proliferation of cells at the treatment site
("hyperplasia") or from a generalized geometric remodeling of the arterial
segment, the causes of which are not well understood. Hyperplasia is a
physiological response to injury, similar to scarring which occurs in wound
healing. In response to an arterial injury from revascularization, the body
initiates a biochemical response to repair the injury site and protect it from
further harm. This response will include a signal to adjacent cells of the
arterial wall to multiply. Often this cell proliferation goes unchecked,
resulting in a much thicker and inelastic arterial wall and in reduced blood
flow. CVD and Radiance believe that hyperplasia and vascular remodeling may be
responsible for a large portion of the overall effect of restenosis.

        CORONARY STENTING

        Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased lumen diameter by
mechanically supporting the diseased site in a coronary artery. Of all the
non-surgical treatments which have sought to improve upon PTCA, stents have
demonstrated the best results in reducing the rate of restenosis. In a typical
stent procedure, the artery is pre-dilated at the lesion site with a balloon
catheter and the stent is delivered to the site of the lesion and deployed with
the use of a second balloon catheter, which expands the stent and firmly
positions it in place. This positioning is often followed by a third dilatation
using a high pressure balloon to fully expand and secure the stent. Once placed,
stents exert radial force against the walls of the coronary artery to enable the
artery to remain open and functional.

        Recent studies have concluded that the rate of restenosis in patients
who receive coronary stents following PTCA is approximately 30% lower than in
patients treated only by PTCA. Additional clinical studies with stents which
incorporate a specialized coating may show a greater reduction in the rate of
restenosis. Stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, but may increase, rather than decrease, hyperplasia.

        The use of stents has grown rapidly since commercial introduction in the
United States in 1994. Approximately 300,000 of the approximately 600,000 PTCA
procedures performed in the United States in 1997 utilized stents. Despite their
rapid adoption, stents have certain disadvantages. Not only are they permanent
implants which may result in unforeseen long-term adverse effects, but they
cannot be used in cases where the coronary arteries are too tortuous or too
narrow. In addition, the use of stents approximately doubles the cost of a PTCA
procedure and restenosis still may occur, often requiring reintervention.

        RADIOTHERAPY

        For more than 50 years, radiotherapy has been used routinely to treat
proliferative cellular disorders in humans. While externally applied radiation
has shown little beneficial effect on treated arteries, the application of Beta
and Gamma radiation at the site of arterial injury has proven more useful in
treating restenosis.

        Gamma radiation has been demonstrated in a number of models to inhibit
the cellular proliferation associated with the restenosis mechanism. Gamma is
compatible with vessels of all sizes but is more complicated to use in the cath
lab because of its activity.

        Beta radiation has been demonstrated to inhibit intimal hyperplasia.
Since Beta radiation travels only a short distance (2-4 mm) before loosing its
therapeutic value, it is imperative that the source be placed as close as
possible to the arterial wall. This relatively short distance of travel makes
its compatible with current cath lab practices. Dosage is calculated by knowing
the energy level of the source and the distance from the treatment target.
Uniform dosage to the intended area is dependent upon maintaining a consistent
energy field.

                                      -4-


<PAGE>   5

        The placement of guidewire based systems of radiation transport in the
curved coronary anatomy has been shown to produce inconsistent dosages to actual
tissue because of the different distances the guidewire lays from the vessel
wall over the length of the active wire. When guidewire centering balloons are
used, the beneficial effect of the radiation is lost over the distance from the
wire to the arterial wall. As the vessel diameter increases, the therapeutic
effect also diminishes. The Company believes that if any benefit is to be
realized with guidewire based techniques it would be limited to small diameter,
straight arteries. The extended inflation times of the centering balloon
required to insure adequate dosage also may result in ischemia and unacceptable
discomfort or hazard to the patient.

        A stent activated to emit Beta radiation would overcome the proximity
issues inherent in a guidewire delivery system by placing the Beta source
directly opposed to the vessel. This approach also assumes a one dose for all
patients, removing control of dose from the clinician. This approach also
assumes a vessel of fixed size and that the energy level of the implanted stent
will be adequate to deliver the required radiation dosage after implant. Vessel
diameter is often difficult to quantify. As a stent expands, the space between
its active elements increases. Since the radioactive stent cannot be removed
after placement, the patient continues to receive the ionizing effects until the
radiation dissipated over five half lives of the isotope used. In the case of
Beta p32, this is approximately 70 days.

PRODUCTS

        In addition to research and development of radiotherapy products,
Radiance also manufactures and markets catheters and coronary stent systems used
in conjunction with angioplasty and vascular stenting. The Company's proprietary
Focus catheter technology enables physicians to deliver therapeutic radial force
and stents accurately and effectively to the treatment site. The Company's
proprietary stent designs offer characteristics enabling physicians to access
varying coronary anatomy. RMS believes that these products enable physicians to
perform challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. RMS owns the rights to 21 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter and SEAL stent technologies.

        RADIATION PRODUCTS TECHNOLOGY

        Radiance believes that its radiation source technology, combined with
its existing catheter and stent delivery systems, can deliver radioactive
materials to the localized site safely and effectively. The Company's radiation
technology enables solid form radioactive material of virtually any isotope to
be integrated into the wall of the balloon material itself, which creates a
balloon/source angioplasty catheter. The Radiance approach combines the
demonstrated benefits of Beta radiation with the utility of direct vessel wall
apposition associated with balloon dilatation.

        Radiance currently is focusing on the development of the RDX catheter, a
radiation delivery balloon catheter system. The RDX Catheter consists of an
expandable dual balloon system which enables the radiation dosage to be
delivered precisely to the vessel wall. Because the balloon is in contact with
the wall, this method of delivering Radiotherapy is appropriate for vessels of
any diameter with proper balloon size selection.

        This dual balloon concept also enables the RDX Catheter to be used to
perform both PTCA and/or stent deployment and deliver Radiotherapy on a single
catheter. Radiance is unaware of any competing technology that provides this
combination of benefits, versatility and multifunctionality.

        Because the Beta source is positioned relatively close to the vessel
wall and the exact radiation strength is known prior to delivery, accurate dose
calculations can be made to customize patient treatment. This device may also
incorporate a perfusion system to maintain blood flow distal to the inflated
balloon to permit longer inflation times, if required, to optimize radiation
dosage delivery effectively.


                                      -5-



<PAGE>   6

        Radiance believes that the RDX Catheter has several technical and
clinical advantages for the treatment of restenosis.

        o      The RDX Catheter provides complete apposition to the arterial
               wall, reducing the problems of distance determination and closing
               with current vascular radiotherapy devices.

        o      The RDX Catheter can deliver equal or higher radioisotope
               activity with less total radiation dose than other technologies.

        o      The fully-deployable radiation source is independent of vessel
               size. Coronary arteries range from 1.5 - 6.0 millimeters. With
               other devices, a different dose of radiation has to be calculated
               and/or delivered for each vessel size. With the RDX Catheter, the
               dose is the same regardless of the vessel dimensions. This also
               makes the RDX Catheter system useful in other vascular
               applications such as coronary, peripheral vascular leg arteries,
               renal, carotid and kidney dialysis grafts. This potentially
               broadens the clinical utility and market potential for the RDX
               system.

        o      The RDX Catheter is simple and easy-to-use. Use of the RDX
               Catheter is consistent with the use of other types of catheters
               by interventional cardiologists.

        o      The solid film substrate is totally protected by the double
               balloon construction. The use of the Beta isotope within the
               system increases the safety of the RDX Catheter as a vascular
               radiotherapy delivery device.

        The Company currently is focusing on developing products for the
treatment of restenosis following the interventional treatment of
atherosclerosis. The Company believes, however, that its Radiotherapy technology
may eventually be utilized to prevent and treat restenosis in all vascular
segments of the body, including coronary, peripheral vascular, carotid,
neurovascular and renal arteries. However, there is no assurance that Radiance
will develop and market the RDX Catheter technology or any other radiation
therapy technology successfully, that such products or radiation therapy in
general will receive market acceptance or that such products, whether under
development or commercialized, will not be rendered obsolete as a result of
other technology.

        EXISTING CATHETER PRODUCTS TECHNOLOGY

        Radiance has utilized its Focus technology to develop catheter products
that address the principal challenges physicians experience in treating vascular
diseases: restenosis of a treated vessel, chronic total occlusions and acute
reclosure of a vessel during or soon after a procedure. 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. Therefore, existing uniform diameter catheters require
cardiologists to use multiple balloons to treat vessels of varying diameters,
resulting in unnecessary costs. 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. The center compliant section of the Focus
catheter enlarges predictably at a rate of 0.1 mm 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. These
characteristics allow a single balloon to expand to multiple diameters, enabling
the physician to deliver stents and perform interventional procedures in vessels
of varying diameters and anatomical locations.

        Radiance believes the Focus catheters 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. The
technology also is available in various combinations on a multiple-purpose
catheter, thereby enabling physicians to treat vascular disease
cost-effectively. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, as well as flexible and trackable, enabling cardiologists to advance
and control them accurately within the vasculature.

                                      -6-



<PAGE>   7

        The following table lists the Company's catheter products which
currently are marketed:


<TABLE>
<CAPTION>
                                                                                      FIRST
                                                                                   COMMERCIAL
PRODUCTS                INTENDED APPLICATIONS         U.S. REGULATORY STATUS          SALE
- --------                ---------------------         ----------------------       ----------
<S>                  <C>                          <C>                              <C>
FOCUS CATHETERS
Guardian             PTCA  (i.e., balloon         PMA Supplement Approved            Q2 1998
Over-the-wire        angioplasty in coronary
design               arteries)

Lynx F/X             PTCA or Stent Delivery(2)    N/A(1)                             Q1 1997
Rail Design

ARC                  PTCA                         PMA Supplement Approved            Q3 1996
Over-the-wire
design

FACT Catheter        PTCA                         PMA Supplement Approved            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 Radiance to
        obtain a PMA supplement approval. Radiance is not currently seeking such
        approval.

        EXISTING STENT PRODUCTS TECHNOLOGY

        Radiance's line of coronary integrated stent delivery systems provide
physicians with unique products of varying measures of strength and flexibility
to allow optimal placement and stenting characteristics to aid in the
minimization of restenosis.

        The following table lists Radiance's currently marketed stent products
which are not available in the United States due to Radiance's decision not to
apply for regulatory approval.


<TABLE>
<CAPTION>
                                                                       FIRST
        PRODUCTS                      INTENDED APPLICATIONS       COMMERCIAL SALE
        --------                      ---------------------       ---------------
<S>                                   <C>                         <C>   
        Synthesis Stent               Coronary Stenting               Q1 1998
        Synthesis Star System (1)     Coronary Stenting               Q1 1998
        Enforcer Stent                Coronary Stenting               Q3 1997
        Enforcer Stent System         Coronary Stenting               Q4 1997
</TABLE>


- ---------------
(1)     Pre-mounted stent on a Star balloon catheter delivery system.

        In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive
marketing rights in the United States. In exchange for those rights Radiance has
received, and will receive, certain milestone payments based upon the transfer
of the technological knowledge to Guidant, and royalty payments based upon the
sale of products by Guidant using Focus technology. However, there is no
assurance that Guidant will successfully manufacture and distribute products
based on the technology, or that Radiance will realize any such royalty
payments.


                                      -7-



<PAGE>   8

        SEAL TECHNOLOGY

        In addition to its development of Radiotherapy technology, the Company
is developing its SEAL stent technology, which it believes may prove to be state
of the art technology for the treatment of restenosis. The SEAL stent is a
unique and new concept in vascular stenting which is designed to isolate the
diseased segment of the vessel wall from blood flow. The SEAL is self-expanding
metallic stent with a microporous surface for use as either a stent or a stent
graft. By developing metal foil of the proper thickness and strength, Radiance
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. Two patents have been issued to date for this technology.

        Radiance believes that covering a high percentage of the diseased vessel
wall with a proprietary metal liner will result in a lower restenosis rate in
diseased vessels. The SEAL technology presently is being tested in animal
studies to determine its efficacy in large diameter coronary vessels and
saphenous vein grafts. If the animal studies are successful, Radiance
anticipates commencing human clinical trials in Europe prior to the end of 1999.
Radiance, depending on the outcome of clinical trials, intends to promote the
SEAL stent as an effective primary stent for the treatment and prevention of
restenosis in selected patient indications. Radiance has developed a proprietary
delivery system to place the SEAL stent accurately at the location of the
diseased segment of the vessel wall. However, there can be no assurance that the
SEAL stent will perform in animal studies or clinical trials, that Radiance will
complete the development of a new product successfully, that Radiance will be
able to obtain FDA approval, or that the SEAL stent ever will gain market
acceptance.

        Radiance will be required to seek FDA approval for any new product and
expects that some of these products will be subject to the PMA process. The
Company also will be subject to federal, state and/or local laws and regulations
governing the use and handling of radioactive materials. See "Item 1--Government
Regulation." There can be no assurance that Radiance will complete the
development of any products successfully or that any such products will receive
any required regulatory approvals. The failure of Radiance to develop new
products successfully or to obtain regulatory approvals could have a material
adverse effect on the business and results of operations of the Company.

        VASCULAR ACCESS PRODUCTS

        Radiance's vascular access products utilized patented technology to
provide rapid, accurate access to the body's vascular system for guidewire and
catheter entry. In January 1999, Radiance sold the assets and operations of its
vascular access business unit to Escalon Medical Corp. The Company believes that
the sale of its vascular access business unit, combined with the CVD/RMS merger,
focuses the Company's business on developing its proprietary technologies for
the interventional cardiology market.

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 Radiance has licensed to
third parties, all of Radiance's products are produced in its facilities in
Irvine, California. Radiance fabricates certain proprietary components, then
assembles, inspects, tests and packages all components into finished products.
By designing and assembling its catheter products, Radiance believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and better manage manufacturing process enhancements and
new product introductions. In addition, Radiance 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
currently are performed by single vendors. While Radiance 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
Radiance's ability to manufacture its products until a new source of supply were
qualified and, as a result, could have a material adverse effect on Radiance's
business, financial condition and results of operations.


                                      -8-



<PAGE>   9

        Radiance has obtained the right to affix the CE (Conformite Europeene)
marking to all of its products sold in all countries of the European Economic
Area and Switzerland. CE marking is a European symbol of conformance to strict
product manufacturing and quality system standards. As part of the CE marking
process, Radiance also received ISO 9001/EN46001 certification with respect to
the manufacturing of all of its currently marketed products.

        Radiance's success will depend in part upon its ability to manufacture
its products in compliance with ISO 9001, the FDA's quality system regulations
("QSR") requirements, and 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. Radiance began manufacturing certain of its products at its facilities in
July 1995. Accordingly, Radiance has limited experience in manufacturing its
products. Radiance has undergone and expects to continue to undergo regular
"QSR" inspections in connection with the manufacture of its products at
Radiance's facilities. Radiance's success will depend upon, among other things,
its ability to manage the simultaneous manufacture of different products
efficiently and to integrate the manufacture of new products with existing
products. There can be no assurance that Radiance 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. Radiance's failure to commence the
manufacturing of these new products successfully, or to increase production
volumes of new and existing products in a timely manner, would materially and
adversely affect Radiance'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, QSR requirements, CDHS or other
regulatory requirements could have a material adverse effect on Radiance's
business, financial condition and results of operations.

MARKETING AND SALES

        Radiance does not have any products based on radiation therapy currently
available for commercial marketing and sale to the public. Radiance's existing
catheter and coronary stent system products are sold in the United States and
international markets, principally Europe and Japan. However, certain of
Radiance's products are not available in each market due to regulatory and
intellectual property restrictions. Radiance currently sells its products
through a combination of strategic partners, medical device distributors and
direct sales personnel. Radiance also has distribution agreements with companies
covering countries outside the United States and Japan. Radiance previously
distributed certain products in Japan through an exclusive distribution
agreement with Fukuda, which the Company terminated in April 1997. Radiance
subsequently entered into an exclusive distribution agreement in Japan with
Cathex in May 1997 which terminates in January 2001. Sales of Radiance's
products to Fukuda accounted for 15% and 7% of Radiance's total product sales in
1996 and 1997, respectively. Sales to Cathex accounted for 13% and 22% of
Radiance's total product sales in 1997 and 1998, respectively. In addition,
sales to Medtronic accounted for 22%, 13% and 0% of total product sales in 1996,
1997 and 1998, respectively. See "Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview." Radiance intends to
expand its sales and marketing capability and to distribute selected new
products through strategic partnerships.

        In 1996, 1997 and 1998, total export sales were $3,514,000, $6,579,000
and $5,887,000, respectively, or approximately 42%, 58% and 63% respectively, of
total product sales. In 1996, 1997 and 1998, sales to Europe accounted for
$1,614,000, $3,020,000 and $2,476,000, respectively; sales to Japan represented
$1,240,000, $2,350,000 and $2,622,000, respectively; and sales to other
regions represented $660,000, $1,209,000 and $789,000, respectively. Radiance
expects to continue to derive significant revenue from international sales and
therefore a significant portion of Radiance'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 Radiance's ability to deliver products on a
competitive and timely basis. However, all of the Company's foreign sales are
denominated in dollars, except for sales in Germany by Radiance Germany, which
totaled $1.4 million, or 15% of total product sales in 1998. Future imposition
of, or significant increases in the level of, customs duties, export quotas or
other trade restrictions, could have an adverse effect on Radiance's business,
financial condition and results of operation. In foreign countries,


                                      -9-



<PAGE>   10

Radiance'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 Radiance. See "Item 1--Government
Regulation," and "Note 1 of Notes to Consolidated Financial Statements."

POST-MARKETING CLINICAL STUDIES

        Radiance has completed the clinical trials required for FDA approval of
those products which are marketed in the United States.

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

        The Focus Lesion Expansion Optimizes Results Study ("FLEXOR Study")
compared Focus PTCA catheter with conventional PTCA catheters. The FLEXOR Study
evaluated the efficacy of Focus technology in improving clinical results
following angioplasty procedures. Success was evaluated based on the ability of
Focus technology to improve the minimal lumen diameter ("MLD") of the arterial
opening, and to reduce the number of catheters necessary for PTCA procedures.
MLD is a commonly-used measurement of the ability of a therapeutic tool to open
a blocked artery and reestablish required blood flow. The FLEXOR Study commenced
in the fourth quarter of 1996 and was completed in the first quarter of 1997.
Results of the study were presented at the 1997 Transcatheter Therapeutics
symposium in Washington D.C. Data from this study of 80 patients demonstrated a
trend toward fewer balloons used per procedure with Focus technology, especially
when stent implantation was required, without any increase in complications.
Additionally, the Focus technology group of patients had a lower residual
stenosis than the conventional angioplasty group.

        Certain of Radiance's products which utilize Focus technology have
received FDA approval for PTCA and percutaneous transluminal angioplasty ("PTA")
indications. However, none of these products has received FDA approval for use
in stent delivery. An investigator-controlled study is currently testing
Radiance'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 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 completed enrollment of
patients in the first quarter of 1998. Follow-up to this study is in progress.
Preliminary results of the study were reported at the American Heart Association
Scientific Sessions in November 1997 and additional results were reported at the
American College of Cardiology meeting in March 1998 and at American Heart
Association Scientific Sessions in November 1998. Early results demonstrate that
Focus technology facilitates achieving a larger in stent MLD following
conventional stent expansion techniques and also following optimal PTCA. These
increased MLDs were achieved without increased complication rates. In June 1998,
Radiance signed a technology license agreement with Guidant Corporation, an
international interventional cardiology products company, granting Guidant
rights to manufacture and distribute products using Radiance's Focus technology
for delivery of stents. See the discussion below in this section "Strategic
Relationships."

        Radiance recently completed a clinical study in Europe of its
proprietary Synthesis (TM) coronary stent. The multicenter study enrolled 85
patients at four centers in Germany. Procedural and 30 day follow-up results
demonstrate a high technical success rate with low complication and low major
adverse event rates. Six month clinical and angiographic follow-up is ongoing.


                                      -10-



<PAGE>   11

STRATEGIC RELATIONSHIPS

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

        Guidant Corporation. In June 1998, Radiance entered into a Technology
License Agreement with Guidant Corporation, an international interventional
cardiology products company, to grant them a license to manufacture and
distribute products using Radiance's Focus Technology. Under the Agreement,
Radiance has received, and will receive, certain milestone payments based upon
the transfer of the technological knowledge to Guidant, and royalty payments
based upon the sale of products using Focus technology by Guidant. However,
there is no assurance that Guidant will successfully manufacture and distribute
products based on the technology, or that Radiance will realize any such royalty
payments. 

        SCIMED Life Systems, Inc. Radiance entered into a Stock Purchase and
Technology License Agreement, dated September 10, 1994, with SCIMED, now a unit
of Boston Scientific Corporation (the "SCIMED Agreement"). Pursuant to the
SCIMED Agreement, SCIMED purchased a 19% equity position in Radiance, which is
now diluted to 5%. SCIMED also was granted an exclusive worldwide license to
certain combined site-specific solution delivery and coronary angioplasty
technology in exchange for license and royalty fees. The SCIMED Agreement may be
terminated (i) in the event of breach on 90 days notice by the non-breaching
party; or (ii) on 30 days notice in certain limited circumstances or (iii) by
SCIMED upon 180 days notice.

        Cathex Co., Ltd. Radiance entered into a Distribution Agreement dated
May 1, 1997 with Cathex Co., Ltd. ("Cathex"), whereby Cathex serves as
Radiance's exclusive distributor for certain of Radiance's products in Japan. In
exchange for this exclusive distributorship, certain Cathex shareholders agreed
to purchase $200,000 of Radiance Common Stock (approximately 25,000 shares) and
Cathex agreed to purchase predetermined minimum quantities of Radiance's
products. The initial term of the agreement expires on January 1, 2001 and is
subject to a five-year extension. The agreement may be terminated in the event
of breach upon 90 days notice by the non-breaching party, subject to cure within
the notice period.

        Endosonics Corporation. Radiance has entered into a license agreement
with Endosonics Corporation ("EndoSonics"), dated December 22, 1995 (the
"EndoSonics Agreement"), in which Radiance granted EndoSonics the non-exclusive,
royalty-free right to Radiance's Focus technology for the development and sale
of a device with a Radiance Focus techology balloon when it is combined only on
the same catheter with an Endosonics' ultrasound product. In exchange, Radiance
received the non-exclusive, royalty-free right to submit PMA supplement
applications utilizing an EndoSonics PMA as a reference and to manufacture and
distribute Radiance products as a supplement to the EndoSonics PMA. In February
1998, the FDA approved Radiance's PMA application and, as a result, Radiance can
obtain independent FDA supplemental approvals on its products. 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 addition,
in March of 1996, EndoSonics purchased 400,000 shares of Radiance's 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 Radiance's initial public
offering on June 19, 1996. In February 1998, Radiance repurchased 300,000 shares
of its own common stock from Endosonics for an aggregate price of $1,275,000.

PATENTS AND PROPRIETARY INFORMATION

        Radiance'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. Radiance owns or has the rights to 21 issued U.S. patents, one issued
European patent and two Japanese patents covering certain aspects of its
catheter, vascular access and SEAL stent technologies. No assurance can be given
that any issued patents will provide competitive advantages for Radiance's
products, or that they will not be challenged or circumvented by competitors.

        The interventional cardiovascular market in general and the stent and
balloon angioplasty catheter market (including the type of catheters offered by
Radiance) in particular have been characterized by substantial litigation
regarding patent and other intellectual property rights. There can be no
assurance that Radiance's products do not


                                      -11-


<PAGE>   12

infringe such patents or rights. During 1997, Radiance was sued for trademark
infringement regarding Radiance's use of the product name "Lynx" in connection
with one of Radiance's balloon angioplasty catheter product lines. Radiance paid
no monetary damages but agreed to a consent judgment which prohibits Radiance
from using this name in the United States. In the event that any such
third-parties assert claims against Radiance for patent infringement and such
patents are upheld as valid and enforceable, Radiance 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 Radiance
or that Radiance 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 protect Radiance's foreign intellectual property rights adequately.
Radiance 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 Radiance's trade secrets or proprietary technology
will not otherwise become known or be independently developed by competitors in
such a manner that Radiance has no practical recourse. Litigation may be
necessary to defend against claims of infringement or invalidity, to enforce
patents issued to Radiance 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, Radiance and its
officers, which would have a material adverse effect on its business, financial
condition and results of operations.

COMPETITION

        There are more than ten competing development programs in the area of
vascular radiotherapy. The major competitors include Novoste Corporation,
Johnson & Johnson, Guidant Corporation and the U.S. Surgical division of Tyco
International Ltd. The radiation sources being developed by our competition vary
between gamma, beta and x-ray.

        One alternative competitive approach is represented by the radioactive
guidewire. Three companies are in the pivotal clinical trial stage in the United
States. Johnson & Johnson has completed patient enrollment into its trial, the
Gamma One trial, which purpose is to assess the use of Best Medical
International's manually advanced gamma wire in treating "in-stent" restenosis.
The U.S. Surgical division of Tyco International Ltd. is investigating its gamma
wire/afterloader system in an "in-stent" restenosis trial called the ARTISTIC
Trial. Finally, Guidant currently is evaluating its beta wire/afterloader system
in the INHIBIT Trial, also for "in-stent" restenosis. Boston Scientific, through
its Schneider AG subsidiary, is also developing a beta wire/afterloader system
which is under investigation in Europe and in a pilot study in the United
States.

        Most of the radioactive guidewires are used in conjunction with an
afterloader, a specialized piece of equipment that is typically computer
controlled. It is used to automatically calculate treatment times, control
movement of the guidewire, and to store and shield the guidewire when not in
use. This equipment is large, complex, and expensive. Guidewires with
gamma-emitting radioactive tips have been used for some time in cancer therapy.
Gamma radiation is significantly more penetrating and therefore more hazardous
to use than beta radiation. For example, health care workers must leave the cath
lab during administration of gamma radiation to ensure their safety by limiting
their ongoing exposure to gamma radiation. In addition, gamma radiation impacts
patient tissue beyond the treatment site.

        In addition to the guidewire approach, radioactive fluid filled balloon
catheters have been investigated in small pilot clinical studies, and very
little clinical data is currently available. Mallinckrodt, Inc., Tyco
International Ltd., and Guidant are developing radioactive fluid filled balloon
catheters. This approach would involve injecting a short half-life radioactive
liquid down a catheter to inflate a balloon. The disadvantages of this approach
include the risks of fluid leaks inside the cath lab, balloon rupture, the need
to fractionate dosing to prevent ischemia, and the disposal of the catheter
which has been contaminated with radioactive material.


                                      -12-



<PAGE>   13

        Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense and characterized by
extensive research and development and rapidly advancing technology. The
interventional cardiology market is characterized by rapid technological
innovation and change, and Radiance's products could be rendered obsolete as a
result of future innovations. Radiance's catheters, stents and other products
under development compete or will compete with catheters and stents marketed by
a number of manufacturers, including Guidant Corporation, Boston Scientific
Corporation, Johnson & Johnson, Medtronic, Inc., and Arterial Vascular
Engineering (which was acquired by Medtronic, Inc.). Such companies have
significantly greater financial, management and other resources, established
market positions, and significantly larger sales and marketing organizations
than does Radiance. Radiance also faces competition from manufacturers of other
catheter-based atherectomy devices, vascular stents and pharmaceutical products
intended to treat vascular disease. In addition, Radiance believes that many of
the purchasers and potential purchasers of Radiance's products prefer to
purchase catheter and stent products from a single source. Accordingly, many of
Radiance's competitors, because of their size and range of product offerings,
have a competitive advantage over Radiance.

        We believe 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. Although we believe we
compete favorably with respect to the foregoing factors, most of our competitors
and potential competitors have substantially greater capital resources than we
do and also have greater resources and expertise in the areas of research and
development, obtaining regulatory approvals, manufacturing and marketing.

        We believe that our competitive position is dependent upon our ability
to continue to develop innovative new catheter technologies, including the RDX
Catheter, and to obtain rapid regulatory approval. However, we cannot assure you
that competitors and potential competitors will not succeed in developing,
marketing and distributing technologies and products that are more effective
than those we will develop and market or that would render our technology and
products obsolete or noncompetitive. We may be unable to compete effectively
against such competitors and other potential competitors in terms of
manufacturing, marketing and sales. There can be no assurance that our
competitors will not succeed in developing or marketing technologies and
products that are more clinically or cost effective than any that are being
marketed or developed by us, or that such competitors will not succeed in
obtaining regulatory approval for introducing or commercializing any such
products before we can.

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. Healthcare Finance
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 Radiance'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 Radiance's ability to sell its
products on a profitable basis. Failure by hospitals and other users of
Radiance's products to obtain reimbursement from third-party payors, or changes
in government and private third-party payors' policies toward reimbursement for
procedures employing Radiance's products, would have a material adverse effect
on Radiance's business, financial condition and results of operations.


                                      -13-



<PAGE>   14

GOVERNMENT REGULATION

        The manufacturing and marketing of Radiance's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. All new products will require regulatory approval by appropriate
governmental agencies prior to commercialization and will be subject to rigorous
pre-clinical and human clinical testing and patient follow-up. Federal
regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. Radiance
believes its success also will depend upon commercial sales of improved versions
of its catheter products. Radiance will not be able to market these new products
in the United States unless and until Radiance 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 application ("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 Radiance'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
Radiance's products, it could act to withdraw approval or clearances of those
products or request Radiance present additional data. Any such actions would
have a material adverse effect on Radiance's business, financial condition and
results of operations.

        If substantial equivalence cannot be established, or if the FDA
determines the device or the particular application for the device requires a
more rigorous review to assure safety and effectiveness, the FDA will require
the manufacturer to submit a PMA which 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. The PMA
process may require as many as 1,000 patients depending on indications with at
least one year follow-up. Radiance expects that the RDX Catheter and certain
other products under development will be subject to this PMA process. In
addition to the FDA, the Company expects to file an application with the
Ministry of Health and Welfare in Japan. This procedure requires completion of
60-100 patients in two to three Japanese clinical investigation sites. The
Company expects the Japanese approval process to take approximately 18-24
months.

        Because the RDX Catheter is expected to utilize radiation sources, its
manufacture, distribution, transportation import/export, use and disposal also
will be subject to federal, state and/or local laws and regulations relating to
the use and handling of radioactive materials. Specifically, after PMA approval
is obtained, approval by the U.S. Nuclear Regulatory Commission ("NRC"), or an
equivalent state agency, of Radiance's radiation sources for certain medical
uses will be required to distribute the radiation sources commercially to
licensed recipients in the U.S. In addition, Radiance and/or its supplier of
radiation sources must obtain a specific license from the NRC to distribute such
radiation sources commercially as well as comply with all applicable
regulations. Radiance and/or its supplier of radiation sources also must comply
with NRC and U.S. Department of Transportation regulations on the labeling and
packaging requirements for shipment of radiation sources to hospitals or other
users of the RDX Catheter. In addition, hospitals may be required to obtain or
expand their licenses to use and handle beta radiation prior to receiving
radiation sources for use in the RDX Catheter. The Company expects to comply
with comparable radiation regulatory requirements and/or approvals in markets
outside the U.S.

        Radiance is 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, Radiance is inspected on a routine basis by both the FDA and the CDHS for
compliance with QSR regulations. These regulations require that Radiance
manufacture its products and maintain related documentation in a prescribed
manner with respect to manufacturing, testing and control activities. Radiance
has undergone and expects to continue to undergo regular QSR inspections in
connection with the manufacture of its products at Radiance's facilities.
Further, Radiance is required to comply with various FDA requirements for
labeling. The Medical Device Reporting laws and regulations require Radiance to
provide


                                      -14-


<PAGE>   15

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. Radiance has received FDA approval to
market the FACT and ARC 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 Radiance 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 Radiance'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 Radiance's
business, financial condition and results of operations.

        Radiance also is 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 predicted
accurately. Failure to comply with regulatory requirements could have a material
adverse effect on Radiance's business, financial condition and results of
operations.

        International sales of Radiance's products are subject to the regulatory
requirements in many countries. The regulatory review process varies from
country to country and may in some cases require the submission of clinical
data. Radiance 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 which require a
PMA but are not yet approved domestically.

        In order to sell its products within the European Economic Area and
Switzerland, Radiance must achieve compliance with the requirements of the
Medical Devices Directive ("MDD") and affix CE marking on its products to attest
to such compliance. To achieve compliance, Radiance's products must meet the
"Essential Requirements" of the MDD relating to safety and performance and
Radiance must successfully undergo verification of its regulatory compliance
("conformity assessment") by a Notified Body selected by Radiance. Radiance has
selected TUV Product Service of Munich, Germany as its Notified Body. The level
of scrutiny of such assessment depends on the regulatory class of the product,
and many of Radiance's coronary products are currently in Class III, the highest
risk class, and therefore subject to the most rigorous controls.

        In December 1996, Radiance received ISO 9001/EN46001 certification from
its Notified Body with respect to the manufacturing of all of its products in
its Irvine facilities. Radiance's contracted manufacturing facility in The
Netherlands received such certification in 1993. This certification demonstrates
that Radiance manufactures its products in accordance with certain international
quality requirements. A manufacturer must receive ISO 9001/EN46001 certification
prior to applying for CE marking of specific products. In January 1998, Radiance
obtained the right to affix CE marking to all of its products currently sold in
all countries of the European Economic Area and Switzerland. Radiance is subject
to continued supervision by its Notified Body and will be required to report any
serious adverse incidents to the appropriate authorities. Radiance also must
comply with additional requirements of individual nations. Failure to maintain
compliance required for CE marking could have a material adverse effect upon
Radiance's business, financial condition and results of operations. There can be
no assurance Radiance will be able to achieve or maintain such compliance on all
or any of its products or that it will be able to produce its products timely
and profitably while complying with the MDD and other regulatory requirements.


                                      -15-



<PAGE>   16

PRODUCT LIABILITY

        Radiance faces the risk of financial exposure to product liability
claims. Radiance'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. Radiance is currently covered under a product
liability insurance policy with coverage limits of $10.0 million per occurrence
and $10.0 million per year in the aggregate. There can be no assurance that
Radiance's product liability insurance is adequate or that such insurance
coverage will remain available at acceptable costs. There can be no assurance
that Radiance will not incur significant product liability claims in the future.
A successful claim brought against Radiance in excess of its insurance coverage
could have a material adverse effect on Radiance's business, financial condition
and results of operations. Additionally, adverse product liability actions could
negatively affect the reputation and sales of Radiance's products and Radiance's
ability to obtain and maintain regulatory approval for its products, as well as
substantially divert the time and effort of management away from Radiance's
operations.

EMPLOYEES

        As of December 31, 1998, Radiance had 98 employees, including 49 in
manufacturing, 19 in research, development, and regulatory and clinical affairs,
19 in sales and marketing and 11 in administration. Radiance believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. Radiance believes it has good relations with its
employees.

RESEARCH AND DEVELOPMENT

        Expenditures for research and development amounted to $7,957,000 in
fiscal year 1998, $7,041,000 in fiscal 1997 and $3,582,000 in fiscal 1996.


I
TEM 2. PROPERTIES

        Currently, Radiance leases facilities aggregating approximately 28,000
square feet in Irvine, California under various lease agreements, most of which
expire in May 2001. Radiance also leases approximately 2,700 square feet in
Koln, Germany expiring in April 2003. Radiance believes that its facilities are
adequate to meet its requirements through fiscal 1999.


ITEM 3. LEGAL PROCEEDINGS

        Radiance is a party to ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on Radiance's consolidated financial
position.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.



                                      -16-


<PAGE>   17

EXECUTIVE OFFICERS OF THE REGISTRANT

        The executive officers and key employees of the Company, and their ages
as of March 1, 1999, are as follows:


<TABLE>
<CAPTION>

NAME                           AGE    POSITION
- ----                           ---    --------
<S>                            <C>    <C>
Michael R. Henson...........   53     President, Chief Executive Officer and Chairman of the
                                      Board of Directors
Stephen R. Kroll............   52     Vice President, Finance and Administration, Chief
                                      Financial Officer and Corporate Secretary
Jeffrey H. Thiel............   43     Executive Vice President
Claire K. Walker............   52     Vice President, Clinical Affairs
Duane Dickens...............   53     Vice President, Research and Development Engineering
William Rigas...............   56     Vice President, Worldwide Sales
</TABLE>


BACKGROUND

        The principal occupations of each executive officer and key employee of
the Company for at least the last five years are as follows:

        Michael R. Henson joined the Company in February 1992 as President,
Chief Executive Officer and Chairman of the Board of Directors, positions in
which he currently serves the Company. From June 1997 until March 1999, Mr.
Henson served Chairman of the Board, Chief Executive Officer and President of
the (former) Radiance Medical Systems, Inc., and as Chairman of the Board of the
Company. Prior to joining the Company, Mr. Henson served as the Chief Executive
Officer of Endosonics Corporation from 1988 to February 1995, and as Chairman of
the Board from February 1993 to November 1996. 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. Mr. Henson also serves as a
director of two private companies, Endologix, Inc.
and Micrus Corporation.

        Jeffrey H. Thiel was appointed Executive Vice President of the Company
in February 1999, and served as Vice President, Operations since October 1996.
Prior to joining Radiance, 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 Operations Management positions with
St. Jude Medical.

        Stephen R. Kroll joined the Company in April 1998 as Vice President of
Finance and Administration, Chief Financial Officer and Corporate Secretary.
From May 1989 until May 1991, Mr. Kroll served as Vice President of Finance and
Corporate Secretary, and from May 1991 until March 1997 as Vice President of
Administration and Corporate Secretary, for Viking Office Products.

        Claire K. Walker has served as Vice President of Clinical Affairs since
April 1997. She joined the Company in November 1994 as Director of Clinical
Affairs. From May 1992 to November 1994, Ms. Walker provided clinical marketing
consulting services to the Company. 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.

        Duane Dickens joined the Company in August of 1998 as Vice President of
Research and Development. Prior to joining Radiance, Mr. Dickens founded and
served as Vice President of New Product Development at Cardima, Inc. from 1993
to 1998. From 1992 to 1993, Mr. Dickens founded and served as President and CEO
of Rhythmetrix Inc., a company that develops catheter ablation systems. Prior to
1992, Mr. Dickens held various senior management positions for Medtronic
Interventional Vascular, Inc., Advanced Cardiovascular Systems and American
Bentley, Inc.

        William Rigas was hired as Vice President of Worldwide Sales in August
of 1998. Mr. Rigas previously served as Vice President of Worldwide Sales at
Neuro Navigational Corporation from 1993 to 1997. Prior to 1993, Mr. Rigas held
various senior management positions at Intertherapy Corporation, GE Medical
Systems and Honeywell's Biosound.


                                      -17-


<PAGE>   18


                                     PART II


ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

        The Company's Common Stock commenced trading on the Nasdaq National
Market on June 20, 1996 and is traded under the symbol "RADX". 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 1997
First Quarter                                $13 1/4          $7 1/2
Second Quarter                                10 1/4           6 5/8
Third Quarter                                  9 3/8           6 5/8
Fourth Quarter                                     8           4 3/4

FISCAL 1998
First Quarter                                $ 6 3/8          $4 3/16
Second Quarter                                 7 3/4           4 5/8
Third Quarter                                  6 1/4           2 1/2
Fourth Quarter                                     5           2 1/4

FISCAL 1999
First Quarter (through 3/25/99)              $ 4 3/4          $3 3/8
</TABLE>



        On March 25, 1999 the closing sale price on the Nasdaq National Market
was $3.94 per share and there were approximately 281 record holders of Radiance
Common Stock.

SALES OF UNREGISTERED SECURITIES

        None.

USE OF PROCEEDS

        The Company has used approximately $2.7 million of the net proceeds from
the initial public offering ("IPO") for repayment of certain outstanding
indebtedness to Endosonics, Inc., a holder of in excess of ten percent of the
Common Stock of the Company. From the date of the IPO until December 31, 1998,
in the normal course of business, the Company has paid salaries and bonuses in
excess of $0.1 million each to eight officers of the Company and used $7.0
million for working capital. The Company also has used approximately $1.7
million of the net proceeds for machinery and equipment and leasehold
improvement purchases. From August 1997 to December 1998, the Company used
approximately $3.7 million to repurchase 686,000 shares of the Company's Common
Stock on the open market. In September 1998, the Company exercised a warrant to
acquire 1,500,000 Series B Preferred Stock of RMS for $1.5 million. At December
31, 1998, approximately $23.4 million was held in temporary investments, of
which approximately $6.0 million was invested in U.S. Treasury and other
agencies debt securities, and $14.4 million was invested in corporate debt
securities and $3.0 million was invested in foreign government obligations.

DIVIDEND POLICY

        The Company has never paid any dividends. 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.



                                      -18-


<PAGE>   19


ITEM 6. SELECTED FINANCIAL DATA.


<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                             -------------------------------------------------
                                               1994       1995      1996      1997        1998
                                               ----       ----      ----      ----        ----
                                                              (In thousands)
<S>                                          <C>        <C>       <C>        <C>        <C>    
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
  Sales..................................   $  1,169   $  3,462  $  8,384   $ 11,332   $  9,415
  License fee and other (1)..............      1,000         --       150         --      2,760
  Contract...............................        220        641       200         --         --
                                            --------   --------  --------   --------    -------
Total revenue............................      2,389      4,103     8,734     11,332     12,175
Operating costs and expenses:
  Cost of sales..........................        848      2,051     4,111      6,418      6,152
  Research and development...............      1,228      1,683     3,582      7,041      7,957
  Marketing and sales....................        748      1,526     3,358      6,691      5,371
  General and administrative.............        587      1,331     1,548      2,179      2,937
  Charge for acquired in-process research
    and development(2)...................         --        488     2,133         --        234
  Minority interest......................         --         --        --         --      (992)
                                            --------   --------  --------   --------    -------
Total operating costs and expenses.......      3,411      7,079    14,732     22,329     21,659
                                            --------   --------  --------   --------    -------
Loss from operations.....................     (1,022)    (2,976)   (5,998)   (10,997)    (9,484)
Other income.............................         51        102     1,374      2,225      1,498
                                            --------   --------  --------   --------    -------
Net loss.................................    $ (971)    $(2,874)  $(4,624)   $(8,772)   $(7,986)
                                            =======    ========  ========   ========    =======
Basic and diluted net loss per share (pro 
forma through June 1996).................    $(0.28)    $(0.71)   $(0.69)    $(0.96)    $(0.90)
                                            =======    ========  ========   ========    =======
Shares used in computing basic and  
diluted net loss per share (pro forma
through June 1996).......................     3,487       4,052     6,755      9,118      8,862
                                            =======    ========  ========   ========    =======
</TABLE>




<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                             -------------------------------------------------
                                               1994       1995      1996      1997        1998
                                               ----       ----      ----      ----        ----
                                                              (In thousands)
<S>                                          <C>        <C>       <C>        <C>        <C>    
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 3,379    $ 1,568   $17,192    $ 6,141    $ 1,437
Marketable securities available-for-sale....      --         --    25,733     24,773     23,375
Working capital (deficit)...................   1,366      (774)    46,142     33,828     24,905
Total assets................................   4,340      4,002    50,084     41,361     33,781
Convertible obligation......................      --        750        --         --         --
Accumulated deficit.........................  (3,551)    (6,425)  (11,049)   (19,821)   (27,807)
Total stockholders' equity (net capital 
  deficiency)............................... $ 1,288    $(1,098)  $47,623    $37,873    $29,245
</TABLE>


(1)     The revenue for 1994 was received from a related party, SCIMED. See Note
        3 of Notes to Consolidated 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
        for the year ended December 31, 1995 and the excess of the purchase
        price over the net assets acquired for Intraluminal Devices, Inc. and
        (the former) Radiance Medical Systems, Inc., and the associated
        acquisition expenses for the years ended December 31, 1996 and 1998,
        respectively. See Notes 1 and 2 of Notes to Consolidated Financial
        Statements.


                                      -19-


<PAGE>   20



ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS.

OVERVIEW

        Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops, 
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance's primary product under development in its main
focus area is the RDX Catheter, a balloon catheter-based delivery system
designed to deliver radioactive materials to the area of an artery that has been
treated with conventional interventional therapy such as Percutaneous
Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or stent deployment.
See "Item 1--Products."

        The Company is the result of an acquisition effected by the merger of
the (former) Radiance Medical Systems, Inc. ("RMS") with and into CardioVascular
Dynamics, Inc. (now named Radiance Medical Systems, Inc.). RMS originally was
formed by the Company as a separate entity to focus on the development of
radiation therapy technology for the treatment of cardiovascular disease, and to
obtain financing for such development from sources other than the Company. As a
result of the merger, the Company reacquired all of the shares of RMS which it
did not own. The Company was incorporated on March 16, 1992.

        From inception (March 16, 1992) through the first quarter of 1994, the
Company's 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 the Company in exchange for $0.5 million in cash. Pursuant to
an Agreement and Plan of Reorganization between EndoSonics and the Company dated
on June 9, 1993, EndoSonics acquired all of the outstanding capital stock of the
Company 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 the Company's assets and liabilities.
Accordingly, the purchase price paid by EndoSonics has been allocated to the
Company's identifiable assets and liabilities, including $2.0 million to
acquired in-process research and development which was immediately expensed, as
none of the Company's 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 Radiance 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 the Company'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 Company's initial public offering.

        In September 1994, Radiance and SCIMED, now a unit of Boston Scientific
Corporation, entered into a Stock Purchase and Technology License Agreement to
develop and license Radiance's patented combination balloon
angioplasty/site-specific drug delivery technology (the Transport product line)
for use in the coronary vessels. Through December 31, 1996, Radiance had
received in the aggregate approximately $2.2 million in license fees, research
and development funding and technical assistance from SCIMED under this
agreement. Radiance received no revenues from SCIMED January 1, 1997 through
December 31, 1998. In 1994, SCIMED purchased a 19% equity position in Radiance
for a purchase price of $2.5 million. In August 1997, SCIMED exercised warrants
to purchase 120,000 shares of Radiance's Common Stock at a price of $3.29 per
share. See "BUSINESS OF Radiance - Strategic Relationships."

        In January 1995, Radiance and ACS, subsequently purchased by Guidant
Corporation, entered into an agreement pursuant to which Radiance 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 Radiance perfusion


                                      -20-


<PAGE>   21

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 Radiance, and also has certain obligations to develop and
market the perfusion technology. Through December 31, 1996, Radiance had
received approximately $0.35 million in milestone payments under the ACS
Agreements. Radiance received no payments during 1997 or 1998. In February 1998,
ACS exercised its right to terminate the perfusion technology Agreement. See
"Item 1 - Strategic Relationships."

        Radiance currently sells its products primarily through medical device
distributors and a limited number of direct sales personnel. Radiance is a party
to three agreements for the U.S. distribution of products incorporating its
Focus technology. Radiance distributed certain products in Japan through an
exclusive distribution agreement with Fukuda which was terminated and replaced
by Radiance in May 1997 with a similar agreement with Cathex. Radiance also has
distribution agreements with 30 companies covering 35 countries outside the
United States and Japan. See "BUSINESS OF Radiance -- Strategic Relationships."

        On July 15, 1996, Radiance entered into co-distribution agreements with
Medtronic, providing for the co-distribution of Radiance's FACT, CAT and ARC
balloon angioplasty catheters. Under the terms of these agreements, Medtronic
purchased a minimum number of angioplasty catheters manufactured by Radiance for
distribution worldwide for a period of up to three years. Specific products to
be distributed by Medtronic differ in individual country markets. The initial
term of the Medtronic agreements was for a period of three years from the date
of first delivery of a product. In May 1997, Medtronic advised Radiance of its
election to not make minimum purchases of product for the second year of the
agreement. In June 1997, Medtronic informed Radiance that it would not fulfill
its commitment for the first year of the agreement and that it did not believe
it was required to fulfill such commitment. This dispute adversely affected
Radiance's financial results for the second half of 1997 and first half of 1998.

        In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive rights
in the United States. In exchange for those rights Radiance has received, and
will receive, certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products by Guidant using Focus technology. However, there is no assurance that
Guidant will successfully manufacture and distribute products based on the
technology, or that Radiance will realize any such royalty payments.
 
        In January 1999, the Company sold substantially all of the properties
and assets used exclusively in its Vascular Access Business Unit to Escalon
Medical Corporation. The Company received an initial payment of $1.1 million for
actual inventory transferred, will receive an additional $1.0 million upon the
completion of the transfer of the assets and technology, and also is entitled to
receive royalty payments upon the sale of products for a five-year period. The
Company will continue to manufacture certain vascular access products for up to
180 days following the completion of the sale.

        In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance
Medical Systems, Inc.) ("Radiance," or the "Company") acquired through a merger
all of capital stock which it did not own of the (former) Radiance Medical
Systems, Inc. ("RMS"). Pursuant to the Merger, the Company paid the former
stockholders of RMS $3.00 for each share of RMS preferred stock and $2.00 for
each share of RMS common stock, for a total consideration of approximately $7.0
million, excluding the value of RMS common stock options to be provided to RMS
optionholders in exchange for their RMS common stock options. The consideration
was paid by delivery of an aggregate of 1,900,157 shares of Company Common
Stock, and $0.7 million in cash to certain RMS stockholders who elected cash.
Options for 546,250 shares of RMS common stock accelerated and vested
immediately prior to the completion of the Merger. Of these, 1,250 were
exercised, and holders received the same consideration for their shares of RMS
Common Stock as other holders of RMS Common Stock. The options not exercised
prior to the completion of the Merger were assumed by the Company and converted
into options at the same exercise price to purchase an aggregate of 317,775
share of the Company Common Stock.




                                      -21-


<PAGE>   22

        In addition, the former RMS stockholders and optionholders may receive
product development milestone payments of $2.00 for each share of RMS preferred
stock and $3.00 for each share of RMS common stock. The milestone payments may
be increased up to 30%, or reduced or eliminated if the milestones are reached
earlier or later, respectively, than the milestone target dates. The milestones
represent important steps in the United States Food and Drug Administration and
European approval process which the Company has determined are critical to
bringing the Company's technology to the marketplace.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998

        SALES REVENUE. Sales Revenue in 1998 decreased 17% to $9.4 million
compared to $11.3 million for the same period of 1997. The decrease resulted
primarily from sales to one large former international distributor of
approximately $1.5 million made in 1997.

        During 1998, the Company licensed its focus technology and reduced its
domestic direct sales force. In January 1999, it sold its Vascular Access
Business Unit and acquired RMS as the Company sought to maximize the value of
existing technology, while acquiring a technology which management believes will
have greater potential for future product sales. In 1999, the Company intends to
devote relatively more of its resources to research and development and less to
sales and marketing.

        Because 1998 sales of Vascular Access Products totaled approximately
$2.7 million, or 22% of total revenues, and the Company licensed its focus
technology in 1998, management anticipates significantly lower product sales and
associated revenue in 1999 compared with 1998.

        LICENSE FEE AND OTHER REVENUE. In 1998, the Company signed a technology
license agreement with Guidant Corporation resulting in $2.8 million in license
fees.

        COST OF SALES. The cost of sales decreased to $6.2 million in 1998
compared with $6.4 million in 1997. The cost of sales for 1998 decreased to 51%
compared to 57% for 1997. This decrease was primarily attributable to $2.8
million from licensing fees received in 1998 that had no associated cost of
sales.

        The Company agreed to produce Vascular Access products for six months
following the sale of the Vascular Access Division in January 1999 on a "cost
plus" reimbursement basis for the acquiring company. Thus, the margin that the
Company earned on sales of such products will be substantially lower in 1999
compared with 1998.

        CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Due to the
acquisition of a controlling interest in RMS, the Company recognized a charge of
$0.2 million for acquired in-process research and development in 1998. See Note
1 - Intangible Assets.

        RESEARCH AND DEVELOPMENT. Research, development and clinical expenses
increased by 13% to $8.0 million for 1998 from $7.0 million in 1997. The primary
reason for this increase was additional spending on development of the Company's
new Radiation catheter and SEAL technology and increased spending on clinical
trials for these products. The Company anticipates that the research,
development and clinical expenses could be substantially higher in 1999 compared
with 1998, primarily due to higher costs for the development of radiotherapy
technology.

        MARKETING AND SALES. Marketing and sales expenses declined 20% to $5.4
million in 1998, from $6.7 million in 1997. This decrease primarily reflects
reductions in the Company's domestic sales force and related expenses.


                                      -22-


<PAGE>   23

        GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased by 35% to $2.9 million for 1998 from $2.2 million for 1997. The
increase was due primarily to additions to the allowance for uncollectible
accounts receivable and the salary expense of an additional executive officer.

        OTHER INCOME. Interest income declined to $1.5 million in 1998 compared
with $2.2 million in 1997. The decrease was due to a reduction of $6.1 million
in cash, cash equivalents and marketable securities during 1998, due to the use
of funds for operations, the purchase of treasury stock and capital
expenditures.

YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1997

        SALES REVENUE. Sales revenue increased to $11.3 million in 1997 from
$8.4 million in 1996, representing an increase of 35%. The increase resulted
primarily from increased sales of the Company's Focus catheters, and, to a
lesser extent, the introduction of new coronary stent products. Sales of
products through Medtronic under the Company's co-exclusive distribution
agreement and sales of products in Japan through the Company's exclusive
distribution relationships with Fukuda and Cathex accounted for 7 % and 13 %,
respectively, of total product sales in 1997. The Agreements with Medtronic and
Fukuda were terminated in 1997. See "Item 1. Business--Strategic Relationships."

        LICENSE FEE AND OTHER REVENUE. There were no license fees or other
revenues from ACS in 1997, compared with $0.2 million in 1996. In February of
1998, ACS elected to terminate the technology license agreement with the
Company. See "Item 1. Business--Strategic Relationships."

        CONTRACT REVENUE. There were no contract revenues from SCIMED in 1997,
compared with $0.2 million in 1996. See "Item 1. Business--Strategic
Relationships."

        COST OF SALES. Cost of sales increased to $6.4 million in 1997 from $4.1
million in 1996. This increase resulted primarily from increased manufacturing
volumes related to increased product sales and reserves and allowances of
approximately $1.0 million for excess product inventories. The increase in the
allowance for excess inventories resulted from increased product manufactured
for sales forecasts, which were subsequently lowered, and unfulfilled purchase
commitments. The Company considered remaining shelf life and anticipated sales
volume in determining the amount of allowance needed.

        CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. The Company
incurred a charge of $2.1 million in 1996 in connection with the acquisition of
Intraluminal Devices, Inc. ("IDI"). The excess of the purchase price of IDI 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 IDI was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition. There were no similar charges in 1997.

        RESEARCH AND DEVELOPMENT. Research and development increased to $7.0
million in 1997 compared to $3.6 million in 1996, representing an increase of
97%. This increase resulted primarily from expenditures on the development of
Focus technology, vascular stents and vascular access products.

        MARKETING AND SALES. Marketing and sales expenses increased to $6.7
million in 1997 from $3.4 million in 1996, representing an increase of 99%. 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
coronary stent products in foreign markets.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $2.2 million in 1997 from $1.5 million in 1996, representing an
increase of 41%. The added costs were primarily due to additions in
administrative staff and the added costs of operating as a public company for an
entire year. The Company began trading as a public company on June 20, 1996.


                                      -23-


<PAGE>   24

        OTHER INCOME. Other income, principally interest income, increased to
$2.2 million in 1997 from $1.4 million in 1996. The 62% increase primarily
resulted from the investment of the net proceeds of the Company's initial public
offering for the entire year of 1997.

        Radiance has experienced an operating loss for each of the last three
years and expects to continue to incur operating losses through at least 2000.
Radiance's results of operations have varied significantly from quarter to
quarter. Quarterly operating results 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 fluctuation 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 an aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital from Endosonics, which was repaid to
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
proceeds of $42.8 million after deducting underwriting discounts and commissions
and other expenses of the offering. For the years ended December 31, 1998, 1997
and 1996, the Company's net cash used in operating activities was $5.0, $9.8 and
$6.2 million, respectively. The decrease in 1998 was primarily the result of a
lower net loss and a decrease in net working capital. The increases in 1997 and
1996 were primarily due to funding of operating losses and the charges for
acquired in-process research and development.

        At December 31, 1998, Radiance had cash, cash equivalents and marketable
securities available for sale of $24.8 million. The Company expects to incur
substantial costs related to, among other things, clinical testing, product
development, marketing and sales expenses, and to utilize increased levels of
working capital to finance its accounts receivable and inventories prior to
achieving positive cash flow from operations. The Company anticipates that its
existing capital resources will be sufficient to fund its operations through
June 30, 2000. Radiance'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.

RISK FACTORS

        OPERATING LOSSES, ANTICIPATED FUTURE LOSSES AND FUTURE CAPITAL
REQUIREMENTS. From our formation in 1992 to the date of this prospectus, we have
had substantial annual operating losses and expect to have them at least through
2000, if not longer, due to our continued research and development activities,
and expenditures related to clinical testing and product development. We had an
accumulated deficit of approximately $27,807,000 as of December 31, 1998.




                                      -24-


<PAGE>   25

        Our activities are highly capital intensive. Although we believe that
our present capital and anticipated revenues from operations will be sufficient
to meet our presently planned capital needs at least through the second quarter
of 2000, there can be no assurance that we will not require additional capital
during that time or thereafter. Our cash requirements in the future may be
significantly different from our current estimates and depend on many factors,
including:

        o   Research and development programs;

        o   Scope and results of clinical trials;

        o   Time and costs involved in obtaining regulatory approvals;

        o   Costs involved in obtaining and enforcing patents or any litigation
            by third parties regarding intellectual property;

        o   Status of competitive products;

        o   Establishment and scale-up of manufacturing capacity;

        o   Establishment of sales and marketing capabilities; and

        o   Establishment of collaborative relationships with other parties and
            costs related to the acquisition of new technologies and product
            development.

        We may require additional funds to finance these activities and for
working capital requirements, and may seek such funds through additional rounds
of financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. In addition, we may be
required to undertake significant capital expenditures to achieve and maintain
any technological and competitive position in our industry. There can be no
assurance that funds will be raised on favorable terms, if at all. If adequate
funds are not available, we may be required to delay, scale back or eliminate
one or more of our development programs or obtain funds through arrangements
with collaborative partners or others that may require us to relinquish rights
to certain technologies, product candidates or products that we would not
otherwise relinquish. If we are successful in raising additional funds, we may
issue additional equity securities which may dilute our earnings and net
tangible book value per share.

        DEPENDENCE ON NEW AND UNPROVEN RADIATION TECHNOLOGY. The RDX Catheter is
designed to reduce the frequency of restenosis following the interventional
treatment of atherosclerosis by locally applying Beta radiation to the diseased
blood vessel. This and other radiation technologies and products which we intend
to develop are in the early stages of development and require significant
research, development and testing. Our development of these products is subject
to the risks of failure commonly experienced in the development of new products
based on innovative or novel technologies. While early clinical results by our
competitors indicate that radiation will reduce local restenosis, there are no
extensive clinical trials of the technology showing positive and lasting
clinical results. The possibility also exists that any or all of these proposed
technologies and products will be found to be ineffective or unsafe, will fail
to meet applicable regulatory standards or will fail to obtain required
regulatory approvals. In addition, even if radiation technology and products are
developed successfully and are effective, they may be uneconomical to market, or
other companies hold the proprietary rights which preclude us from marketing
such technologies and products.

        To achieve profitable operations, we must develop and obtain regulatory
approval for products based on radiation technology, and introduce and market
these products successfully. Most of the preclinical and clinical development
work for the products based on the Radiance technologies remains to be
completed. We have not



                                      -25-


<PAGE>   26

generated, nor do we expect to generate in the near future, any operating
revenues based on new products. We cannot assure you that we will develop,
obtain regulatory approval for or introduce and market these products
successfully, and any failure on our part could have a material adverse effect
on our business and results of operations.

        DEPENDENCE UPON NEW PRODUCTS AND TECHNOLOGY; RAPID TECHNOLOGICAL CHANGE;
RISK OF OBSOLESCENCE. We are in the rapidly changing, competitive and heavily
regulated medical device industry, which makes it difficult for us to predict
our risks and expenses with any amount of certainty. We cannot say with any
certainty that our research and development activities will enable us to produce
any products able to withstand competition. Our development of each product is
subject to the risks of failure commonly experienced in the development of
products based upon innovative technologies and the expense and difficulty of
obtaining approvals from regulatory agencies. All of our potential products
currently under development will require significant additional funding and
development and pre-clinical and clinical testing before we are able to submit
them to any of the regulatory agencies for approval for commercial use. We
cannot assure you that we will be able to license any technologies or proposed
products or to complete successfully any of our research and development
activities. Even if we do complete them, there is no assurance that we will be
able to market successfully any of the products, or that we will be able to
obtain the necessary regulatory approval, or that customers will like our
products. We also face the risk that any or all of our products will not work as
intended or that they will be toxic, or that, even if they do work and are safe,
that our products will be difficult to manufacture or market on a large scale.
We also face the risk that the proprietary rights of other persons or entities
will prevent us from marketing any of our products or that other persons or
entities might market their products as well as we market our products or even
better.
        Even if we overcome all of the above obstacles successfully, our
products are subject to rapid technological change and obsolescence. In
addition, our competitors may introduce new products or new technology which
could render our products obsolete or unmarketable. We therefore may be required
to make significant capital expenditures to maintain any technological and
competitive position in our industry. Most of the preclinical and clinical
development work for the products based on the Radiance technologies remains to
be completed. We have not generated, nor do we expect to generate in the near
future, any operating revenues based on new products. We cannot assure you that
we will develop, obtain regulatory approval for or introduce and market these
products successfully, and any failure on our part could have a material adverse
effect on our business and results of operations.

        LIMITED SALES OF PRODUCTS TO DATE; UNCERTAINTY OF MARKET ACCEPTANCE. Our
catheters and stents are used in conjunction with angioplasty and other
intravascular procedures such as vascular stenting and solution delivery.
Although we have received regulatory clearance for a total of 97 product models,
only certain of these product models have been marketed, and then only in
limited quantities, or in certain markets, or in certain countries. Although
interventional catheters are used widely by physicians, because our catheter
designs are relatively new, our product's commercial success will depend upon
their acceptance by the medical community as useful, cost-effective components
of interventional vascular procedures and localized solution delivery. Continued
good relations with certain prominent doctors and researchers in the medical
community are essential for us to promote the uses and acceptance of our
approved products.

        No products utilizing the Radiance radiotherapy technology are currently
commercially available. The use of stents during percutaneous transluminal
coronary angioplasty ("PTCA") in an attempt to reduce the frequency of
restenosis has grown rapidly since commercial introduction in the U.S. in 1994.
We cannot predict the clinical acceptance by physicians of the Radiance
technology -- integrating Beta radiation with traditional minimally invasive
techniques - as compared to more conventional treatment modalities. Other
companies may have superior resources to market similar products or technologies
or have superior technologies and products to market.

        SIGNIFICANT COMPETITION. We believe 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.
Although we believe we compete favorably with respect to the foregoing factors,
we also believe that our competitive position depends upon our ability to
continue to develop innovative new catheter technologies, to obtain rapid
regulatory approval and to manufacture and distribute such products efficiently.




                                      -26-


<PAGE>   27

        Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. There is rapid technological innovation and change in the
interventional cardiology device market and our products could be rendered
obsolete as a result of future innovations. The catheters, stents and other
products we are developing compete or will compete with catheters and stents
marketed by a number of manufacturers, including Guidant Corporation, Boston
Scientific Corporation, Johnson & Johnson, Medtronic, Inc., and Arterial
Vascular Engineering (which has recently entered into an agreement to be
acquired by Medtronic, Inc.). Such companies have significantly greater
financial, management and other resources, established market positions, and
significantly larger sales and marketing organizations than we do. We also face
competition from manufacturers of other catheter-based atherectomy devices,
vascular stents and pharmaceutical products intended to treat vascular disease.
In addition, we believe that many of the purchasers and potential purchasers of
our competitors prefer to purchase catheter and stent products from a single
source. Accordingly, many of our competitors, because of their size and range of
product offerings, have a competitive advantage over Radiance. It is also
possible that our competitors may succeed in developing products that are safer
or more effective than those that we are developing and may obtain FDA approvals
for their products faster than we can.

        Several companies are developing devices to improve the outcome of
coronary revascularization procedures, such as PTCA, including several companies
that have various radiation therapy products under investigation to reduce the
frequency of restenosis. The radiation therapy devices being developed by our
competitors include intravessel radiation delivered through a variety of means
and a variety of radiation sources, including Gamma, Beta and X-ray. We are not
certain that our research and development activities into the Radiance
technology will enable us to produce any products able to withstand competition.
There are more than ten competing development programs in the area of vascular
radiotherapy and our major competitors include the Novoste Corporation, Johnson
& Johnson, Guidant Corporation and United States Surgical Corporation. Each of
these competitors have significantly greater financial, marketing, personnel and
other resources compared to us and there is no assurance that we can develop the
products able to compete with these larger competitors.

        RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY; RISK OF PATENT
INFRINGEMENT. Our success will depend, in part, on our ability to get patent
protection for our products and processes in the United States and elsewhere. We
have filed and intend to continue to file patent applications as we need them.
We cannot say with any certainty, however, that any additional patents will
issue from any of these applications or, if patents do issue, that the claims
allowed will be sufficiently broad to protect our technology or that the issued
patents will provide competitive advantages for our products. If we are unable
to obtain sufficient protection of our proprietary rights in our products or
processes prior to or after obtaining regulatory clearances, our competitors may
be able to obtain regulatory clearance and market competing products by
demonstrating the equivalency of their products to our products. If they are
successful at demonstrating the equivalency between the products, our
competitors would not have to conduct the same lengthy clinical tests that we
have conducted.

        The interventional cardiovascular and peripheral vascular device market,
and more specifically, the market for balloon angioplasty catheters and coronary
stents (including those products we offer) has been subject to substantial
litigation regarding patent and other intellectual property rights. There can be
no assurance that our products do not infringe such patents or rights, and we
cannot say with any certainty that any patents issued to us or licensed by us
can withstand challenges made by others or that we will be able to protect our
rights. We are aware of patent applications and issued patents belonging to our
competitors, and we are uncertain whether any of these, or of any patent
applications which we do not know about, will require us to alter or cease our
potential products or processes. We cannot say with any certainty that we will
be able to obtain any licenses to technology that we will require or, if
obtainable, that the cost will be reasonable. Our failure to obtain any
necessary licenses to any technology could hurt our business substantially if we
could not redesign our products or processes to avoid infringement. Expensive
and drawn-out litigation also may be necessary for us to assert any of our
rights or to determine the scope and validity of rights claimed by other
parties. Litigation could be too expensive for us to pursue with no certainty as
to the outcome. Our failure to pursue litigation could result in the loss of our
rights which could hurt our business substantially. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent as do the laws of the United States, if at all.




                                      -27-


<PAGE>   28

        We also own trade secrets and confidential information that we try to
protect by entering into confidentiality agreements with other parties. We
cannot be certain that any of the confidentiality agreements will be honored,
or, if breached, that we would have enough remedies to protect our confidential
information. Further, our competitors may independently learn our trade secrets
or develop similar or superior technologies. To the extent that our consultants,
key employees or others apply technological information independently developed
by them or by others to our projects, disputes may arise regarding the
proprietary rights to such information and there is no guarantee that such
disputes will be resolved in our favor.

        LIMITED MANUFACTURING EXPERIENCE. The Company's manufacturing experience
is limited; we only began manufacturing certain products at our facilities in
July 1995, introducing a number of new products in 1996 and 1997. We must
manufacture our products in compliance with a variety of licensing and other
regulatory requirements, including the ISO 9001, the FDA's QSR requirements, the
U.S. Nuclear Regulatory Commission ("NRC") requirements, and the requirements of
the California Department of Health Services ("CDHS") in order to succeed. In
addition, building and operating production facilities which can handle the
radiation sources required for the manufacture of the RDX Catheter will require
substantial additional funds and other resources. We also need to manage the
simultaneous manufacture of different products efficiently and to integrate the
manufacture of new products with existing product lines. During this process, we
may 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.

        In addition, we purchase many standard and custom built components from
independent suppliers and we subcontract certain manufacturing processes from
independent vendors. Most of these components and processes are available from
more than one vendor; however, we may not be able to enter into any arrangements
with outside manufacturers on terms favorable to us, if at all. Moreover,
certain manufacturing processes are currently performed by single vendors. An
interruption of performance by any of these vendors could cripple our ability to
manufacture our products until a new source of supply was qualified.

        NO ASSURANCE OF FDA APPROVAL; GOVERNMENT REGULATION. The FDA and other
similar agencies in foreign countries have substantial requirements for
therapeutic and diagnostic pharmaceutical and biological products. Such
requirements involve lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
It often takes companies several years to satisfy these requirements, depending
on the complexity and novelty of the product. The review process also is
extensive, which may delay the approval process even more. These regulatory
requirements could substantially hurt our ability to clinically test and
manufacture our potential products. Government regulation also could delay our
marketing of new products for a considerable period of time, impose costly
procedures upon our activities and give our competitors an advantage. Moreover,
the FDA and other regulatory agencies may not grant us approval for any of our
products on a timely basis, if at all. Any delay in obtaining, or failure to
obtain, such approvals could substantially hurt our marketing of any proposed
products and our ability to earn product revenue. Further, regulation is subject
to change and any additional regulation could limit or restrict our ability to
use any of our technologies, which could have a material adverse effect on our
business and results of operations.

        Because the RDX Catheter uses radiation sources, its manufacture,
distribution, transportation, import/export, use and disposal will also be
subject to federal, state and/or local laws and regulations relating to the use
and handling of radioactive materials. We must obtain a license from the NRC to
commercially distribute such radiation sources and comply with all applicable
regulations, as does our supplier of radiation sources. We and our supplier of
radiation sources also must comply with NRC and U.S. Department of
Transportation regulations on the labeling and packaging requirements for
shipment of radiation sources to hospitals or to the other users of the RDX
Catheter. In addition, hospitals may be required to obtain or expand their
licenses to use and handle Beta radiation prior to receiving radiation sources
for use in the RDX Catheter. Comparable radiation regulatory requirements and/or
approvals are anticipated in markets outside the U.S.




                                      -28-


<PAGE>   29

        Finally, we are subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may be required to incur significant costs
to comply with such laws and regulations now or in the future. In the future, we
could also be subject to other federal, state or local regulations which could
affect our research and development programs. We are unable to predict whether
any agency will adopt any rule which could substantially hurt our business and
our results of operations.

        UNCERTAINTY RELATED TO HEALTH CARE REIMBURSEMENT AND REFORM MEASURES.
Health care providers such as hospitals and physicians that purchase or lease
medical devices in the United States generally rely on third-party payors,
principally Medicare, Medicaid and private health insurance plans, including
health maintenance organizations, to reimburse all or part of the cost of the
treatment for which the medical device is being used. Third party payors
increasingly have challenged the cost of medical products and services, which
have and could continue to have a significant effect on the ratification of such
products and services by many health care providers. Several proposals have been
made by federal and state government officials that may lead to health care
reforms, including a government directed national health care system and health
care cost-containment measures. The effect of changes in the health care system
or method of reimbursement for any medical device which we may market in the
United States cannot be determined.

        Moreover, our success in developing products based on novel or
innovative technology, such as the RDX Catheter, may depend, in part, on whether
we will be reimbursed by government health administrative authorities, private
health insurers and other organizations. There is significant uncertainty if
costs associated with newly approved health care products will be reimbursed.
There is no assurance that sufficient insurance coverage will be available for
us to establish and maintain price levels sufficient to realize an appropriate
return on developing our new products. Government and other third party payors
are attempting to contain health care costs more every day by limiting both
coverage and the level of reimbursement of new therapeutic and diagnostic
products approved for marketing by the FDA and by refusing, in some cases, to
provide any coverage of uses of approved products for disease indications for
which the FDA has not granted market approval. If adequate coverage and
reimbursement levels are not provided by government and third party payors for
use of our new products, it will be very difficult for us to market our products
to doctors and hospitals because their patients might not be able to pay for the
products without any insurance coverage or reimbursement.

        We cannot predict what additional legislation or regulations, if any,
may be enacted or adopted in the future relating to our business or the health
care industry, including third party coverage and reimbursement, or what effect
any such legislation or regulations may have on us. Furthermore, significant
uncertainty exists as to the reimbursement status of newly approved healthcare
products, and there can be no assurance that adequate third-party coverage will
be available with respect to any of our products in the future. Failure by
physicians, hospitals, nursing homes and other users of our products to obtain
sufficient reimbursement for treatments using our products would have a material
adverse effect on our business and results of operations.

        FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. We have experienced
operating losses for each of the last five years. Considering the anticipated
operating losses of Radiance, we expect to continue to incur consolidated
operating losses through at least 2000, and there can be no assurance that we
will ever be able to achieve or sustain profitability in the future. Our results
of operations have varied significantly from quarter to quarter. Quarterly
operating results will depend upon several factors, including timing and amount
of expenses associated with expanding our 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 payor's reimbursement policies and healthcare reform. We do not
operate with a significant backlog of customer orders, and therefore revenues in
any one quarter are mainly dependent on orders received within that quarter. In
addition, we cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. Our expenses are relatively fixed and difficult to
adjust in response to fluctuating revenues. As a result of these and other
factors, we expect to continue to experience significant fluctuations in
quarterly operating results and we may not be able to achieve or maintain
profitability in the future.


                                      -29-


<PAGE>   30

        LIMITED MARKETING AND SALES RESOURCES; DEPENDENCE UPON STRATEGIC
PARTNERS. We depend on medical device distributors, our direct sales
organization and certain strategic relationships, some of which are with our
competitors, to distribute our products. Recently, 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, like us, to distribute products effectively
without a relationship with one or more of the major suppliers. We currently
market certain of our products in the U.S. through a licensing agreement with
Guidant Corporation. Revenue generated from these distributor relationships will
directly depend upon their efforts to market our products.

        PRODUCT LIABILITY AND INSURANCE. Clinical testing, manufacturing and
marketing of our products may expose us to product liability claims. Although we
never have been subject to a product liability claim, we cannot assure you that
there will not be any claims brought against us in the future. Even then, the
coverage limits of our insurance policies may not be adequate and one or more
successful claims brought against us may have a material adverse effect upon our
business, financial condition and results of operations. Additionally, adverse
product liability actions could negatively affect the reputation and sales of
our products and our ability to obtain and maintain regulatory approval for our
products.

        DEPENDENCE UPON INTERNATIONAL SALES. We derive significant revenue from
international sales, and therefore a significant portion of our revenues will
continue to be subject to the risks associated with international sales. These
risks include 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 our ability to deliver products
on a competitive and timely basis. In foreign countries, our products are
subject to governmental review and certification. The regulation of medical
devices in foreign countries, particularly in the European Union, continues to
expand and we cannot be certain that new laws or regulations will not have an
adverse effect on our business.

        LIMITED PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Our Common Stock has
been traded on the Nasdaq National Market since June 1996 and the price of our
Common Stock has fluctuated significantly. We are in the medical device industry
and the market price of securities of small life sciences companies in general
has been very unpredictable. Announcements by us or our competitors concerning
technological innovations, new products, proposed governmental regulations or
actions, developments or disputes relating to patents or proprietary rights,
public concern over the safety of therapeutic products and other factors that
affect the market generally could significantly impact our business and the
market price of our securities.

        EFFECT OF CERTAIN CHARTER PROVISIONS. Certain provisions of our Amended
& Restated Certificate of Incorporation could make it more difficult for a third
party to acquire control of our business, even if such change in control would
be beneficial to our stockholders. Our Amended & Restated Certificate of
Incorporation allows our Board of Directors to issue up to 7,560,000 shares of
preferred stock without stockholder approval. Any such issuance could make it
more difficult for a third party to acquire our business and may adversely
affect the rights of our stockholders. In addition, our Board of Directors is
divided into three classes for staggered terms of three years. Although this
measure is designed to protect stockholder interests in the event of a hostile
takeover attempt against the Company, this provision can have the effect of
delaying, deterring or preventing a change in control of the Company, adversely
effecting the market price of our Common Stock.

        IMPACT OF YEAR 2000. We have completed an assessment of our hardware and
software and are in the process of upgrading them so that our computer systems
will function properly on and after the Year 2000. Of the total cost of $15,000
estimated for the Year 2000 upgrade, approximately $15,000 has been spent.
Future expenditures for upgrades and other project costs are not expected to
exceed this estimate by a material amount. Our Year 2000 upgrade was completed
in the first quarter of 1999.

        We will contact our vendors and customers to assess the impact the Year
2000 issue will have on our supply and service relationships we have with our
vendors and customers. Based upon our assessment of our systems and software, we
believe that the planned system enhancements and upgrades should prevent related
problems that could affect our ability to supply or service our customers. We
anticipate completing our assessment


                                      -30-


<PAGE>   31

of significant vendor and customer Year 2000 issues by the end of the second
quarter of 1999 and will formulate a contingency plan based upon the apparent
"worst-case" scenarios. However, depending upon the response level by customers
and vendors and the information received from them, this assessment may not be
completed as anticipated or may be inadequate to assess or address the related
risks. We cannot be certain that all of our systems and software will be Year
2000 ready nor have any assurance that our vendors' or customers' systems and
software will be Year 2000 ready. To prepare for any vendor problems, we will
try to identify alternative supply sources, but there is no guaranty that these
alternative sources will be Year 2000 ready or to be able to provide the same
level of service and supply as our current vendors. If our customers' systems
and software are not Year 2000 ready, any operational problems which may result
could cause slowed or lower demand of our products. Even if our goal is to be
Year 2000 ready, there can be no assurance that our plans will be sufficient to
address any third party failures, and any unresolved or undetected internal or
external Year 2000 issues could affect our business, financial condition or
results of operations.

        DIVIDENDS. Since our formation in 1992, we have not paid cash dividends
on our Common Stock, nor do we anticipate paying any dividends on our Common
Stock in the future.


I
TEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

        The Company does not believe that it has material exposure to interest
rate, foreign currency exchange rate or other relevant market risks. 

        Interest Rate Risk.  The Company's exposure to market risk for changes 
in interest rates relates primarily to the Company's investment profile. The 
Company does not use derivative financial instruments in its investment 
portfolio. The Company places its investments with high credit quality issuers 
and, by policy, limits the amount of credit exposure to any one issuer. The 
Company is adverse to principal loss and tries to ensure the safety and 
preservation of its invested funds by limiting default risk, market risk, and 
reinvestment risk. The Company attempts to mitigate default risk by investing 
in only the safest and highest credit quality securities and by constantly 
positioning its portfolio to respond appropriately to a significant reduction 
in a credit rating of any investment issuer or guarantor. At December 31, 1998, 
the portfolio includes only high grade corporate bonds and commercial paper and 
government bonds all with remaining maturities of less than two years.

        The table below provides information about our available-for-sale 
investment portfolio. For investment securities, the table presents principal
cash flows and related weighted average fixed interest rates by expected
maturity dates.

        Principal amounts by expected maturity at December 31, 1998:


<TABLE>
<CAPTION>
                                                                                  Fair Value
                                                   1999       2000      Total        1998
                                                 -------    -------    -------    ----------
                                                    (in thousands, except interest rates)
<S>                                              <C>        <C>        <C>        <C>
        Cash and cash equivalents............       693        --         693          693
        Weighted average rate................      4.85%                 4.85%
        Investments..........................    20,000      3,500     23,500       23,375
        Weighted average rate................      5.38%      5.55%      5.40%
        Total portfolio......................    20,693      3,500     24,193       24,068
        Weighted average rate................      5.36%      5.55%      5.39%
</TABLE>


        Foreign Currency Risk.  The Company transacts business in various 
foreign currencies, primarily in certain European countries. The company does 
not have hedging or similar foreign currency contracts. Although international 
revenues approximated 48% of the Company's total revenues for the year ended 
December 31, 1998, only approximately 12% of the revenues are denominated in 
foreign currencies. Significant currency fluctuations could adversely impact 
foreign revenues, however the Company does not foresee or expect any 
significant changes in foreign currency exposure in the near future.


                                      -31-


<PAGE>   32


ITEM 8.  FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                          Page
                                                                                          ----
<S>                                                                                       <C>
        Report of Ernst & Young LLP, Independent Auditors................................  F-1

        Financial Statements
               Consolidated Balance Sheets...............................................  F-2
               Consolidated Statements of Operations.....................................  F-3
               Consolidated Statement of Stockholders' Equity (Net Capital Deficiency)...  F-4
               Consolidated Statements of Cash Flows.....................................  F-5
               Notes to Consolidated Financial Statements................................  F-6

</TABLE>


        The financial statement schedule listed under Part IV, Item 14, is filed
as part of this Form 10-K.





                                      -32-


<PAGE>   33


ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

        Not applicable.


                                    PART III


ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.

        The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to stockholders for the Annual
Meeting to be held on or about June 9, 1999. The information concerning the
Company's executive officers required by this item is incorporated by reference
to the section of Part I hereof entitled "Executive Officers of the Registrant."


ITEM 11. EXECUTIVE COMPENSATION.

        The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to stockholders for the Annual
Meeting to be held on or about June 9, 1999.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

        The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to stockholders for the Annual
Meeting to be held on or about June 9, 1999.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

        The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to stockholders for the Annual
Meeting to be held on or about June 9, 1999.





                                      -33-


<PAGE>   34


                                     PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

         (a)      The following documents are filed as a part of this Annual
                  Report on Form 10-K:

                  1. Financial Statements.


                     Report of Ernst & Young LLP, Independent Auditors
                     Consolidated Balance Sheets - December 31, 1997 and 1998
                     Consolidated Statements of Operations
                       for the years ended December 31, 1996, 1997 and 1998
                     Consolidated Statements of Stockholders' Equity
                       for the years ended December 31, 1996, 1997 and 1998
                     Consolidated Statements of Cash Flows
                       for the years ended December 31, 1996, 1997 and 1998
                     Notes to Consolidated Financial Statements
                       for the years ended December 31, 1996, 1997 and 1998

                  2. Financial Statement Schedule.

                     II - Valuation and Qualifying Accounts

                     Schedules not listed above have been omitted because
                     they are not applicable or are not required to be set
                     forth herein as such information is included in the
                     Consolidated Financial Statements or the notes
                     thereto.

                  3. Exhibits. Reference is made to Item 14(c) of this
                     Annual Report on Form 10-K.

        (b)       REPORTS ON FORM 8-K. The Company filed a Report on Form 8-K as
                  of November 12, 1998 reporting the signing of a merger
                  agreement between CardioVascular Dynamics, Inc. and Radiance
                  Medical Systems, Inc.

        (c)       EXHIBITS.

        2.1(3)    Agreement and Plan of Reorganization dated as of June 9, 1993
                  among Endosonics Corporation ("Endosonics"), Endosonics
                  Acquisition Corporation and the Company.

        2.2(3)    First Amendment dated as of June 30, 1993 to the Agreement and
                  Plan of Reorganization among Endosonics, Endosonics
                  Acquisition Corporation and the Company.

        2.4(12)   Agreement and Plan of Merger dated November 3, 1998 by and
                  between CardioVascular Dynamics, Inc. and Radiance Medical
                  Systems, Inc.

        2.5(13)   Assets Sale and Purchase Agreement dated January 21, 1999 by
                  and between the Company and Escalon Medical Corp.

        3.1(10)   Amended and Restated Certificate of Incorporation, and
                  Certificates of Amendment thereof dated January 14, 1999 and
                  November 12, 1998.


        3.2(11)   Amended and Restated Bylaws of the Company.


                                      -34-


<PAGE>   35

        4.1(1)    Specimen Certificate of Common Stock.

        10.1(3)   Form of Indemnification Agreement 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 Radiance.

        10.5(3)   Stock Purchase Option Agreement dated June 5, 1992, by and
                  between Endosonics and the Company.

        10.7(3)*  Stock Purchase and Technology License Agreement dated
                  September 10, 1994, as amended on September 29, 1995, by and
                  among Endosonics, the Company and SCIMED Life Systems, Inc.
                  ("SCIMED").

        10.8(3)   Waiver and Grant of Warrant dated June 30, 1995 by and between
                  SCIMED, the Company and Endosonics.

        10.9(3)*  License Agreement dated January 15, 1995 by and between the
                  Company and Advanced Cardiovascular Systems, Inc. ("ACS").

        10.10(3)* License Agreement dated March 4, 1996 by and between the
                  Company and ACS.

        10.11(3)  Series B Stock Purchase Agreement dated March 29, 1996 by and
                  between the Company and Endosonics.

        10.15(3)  Industrial Lease dated February 23, 1995 by and between the
                  Irvine Company and the Company.

        10.16(1)  Waiver and Grant of Warrant dated May 2, 1996 by and between
                  SCIMED, the Company and Endosonics.

        10.18(4)* Supply Agreement dated July 15, 1996 by and between the
                  Company and Medtronic, Inc.

        10.19(4)* OEM Agreement dated July 15, 1996 by and between the Company
                  and Medtronic, Inc.

        10.20(6)  License Agreement dated May 16, 1997, by and between the
                  Company and Endosonics.


                                      -35-

<PAGE>   36

        10.21(6)  Registration Rights Agreement dated as of January 26, 1997 by
                  and between the Company and Endosonics.

        10.22(7)**Supplemental Stock Option Plan

        10.23(8)  Stock Repurchase Agreement dated as of February 10, 1998 by
                  and between Endosonics and the Company.

        10.24(9)* License Agreement by and between the Company and Guidant
                  Corporation dated June 19, 1998.

        10.25(14)** 1996 Stock Option/Stock Issuance Plan (as Amended and
                  Restated as of April 8, 1997, March 12, 1998 and November 3,
                  1998).

        10.26(15)** 1997 Stock Option Plan (As Amended as of June 15, 1998)
                  assumed by Registrant pursuant to its acquisition of Radiance
                  Medical Systems, Inc. on January 14, 1999.

        10.27**   + Amendment to Employment Agreement dated as of February 1,
                  1999 between the Company and Michael R. Henson and form of
                  Employment Agreement entered into on January 14, 1999 between
                  the Company and Michael R. Henson.

        10.28**   + Employment Agreement entered into as of February 1, 1999 by
                  and between the Company and Stephen R. Kroll.

        10.29**   + Form of Employment Agreement by and between the Company and
                  Jeffrey Thiel.

        10.30**   + Form of Employment Agreement by and between the Company and
                  Claire Walker.

        21.1+     List of Subsidiaries.

        23.1      Consent of Ernst & Young LLP, Independent Auditors.

        24.1      Power of Attorney. (Reference is made to page 39 of this
                  Annual Report on Form 10-K.)

        27.1      Financial Data Schedule.

- --------------------
        *      Confidential treatment requested.
        **     Indicates compensatory plan or arrangement.
        +      Filed herewith.

        (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.

        (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.


                                      -36-

<PAGE>   37

        (6)    Previously filed as an exhibit to the Company's Registration
               Statement on Form S-1 filed with the Securities and Exchange
               Commission on June 19, 1997.

        (7)    Previously filed as an exhibit to the Company's Registration
               Statement on Form S-8 filed with the Securities and Exchange
               Commission on December 12, 1997.

        (8)    Previously filed as Exhibit 10 to the Company's Report on Form
               10-Q filed with the Securities and Exchange Commission as of May
               14, 1998.

        (9)    Previously filed as Exhibit 10.24 to the Company's Report on Form
               10-Q filed with the Securities and Exchange Commission as of
               August 11, 1998.

        (10)   Previously filed as Exhibit 3.5 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               January 22, 1999.

        (11)   Previously filed as Exhibit 3.4 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               January 22, 1999.

        (12)   Previously filed as Exhibit 2.4 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               November 12, 1998.
        (13)   Previously filed as Exhibit 2 to the Company's Report on Form 8-K
               filed with the Securities and Exchange Commission as of February
               5, 1999.

        (14)   Previously filed as Annex III to the Company's Proxy Statement on
               Schedule 14A filed with the Securities and Exchange Commission on
               December 18, 1998.

        (15)   Previously filed as Exhibit 99.2 to the Company's Registration
               Statement on Form S-8 filed with the Securities and Exchange
               Commission on February 17, 1999.


                                      -37-

<PAGE>   38


 
                                  SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                            RADIANCE MEDICAL SYSTEMS, INC.



        Date: March 29, 1999                 By: /s/ Michael R. Henson
                                                 -------------------------------
                                                 Michael R. Henson
                                                 Chief Executive Officer
                                                 (Principal Executive Officer)
                                                 and Chairman



        Date: March 29, 1999                 By: /s/ Stephen R. Kroll
                                                 -------------------------------
                                                 Stephen R. Kroll
                                                 Vice President, Finance and
                                                 Administration,
                                                 Chief Financial Officer and
                                                 Secretary (Principal Financial
                                                 and Accounting Officer)


                                      -38-

<PAGE>   39

                                POWER OF ATTORNEY

        KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Michael R. Henson
and Stephen R. Kroll, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>

          SIGNATURE                            TITLE                    DATE
          ---------                            -----                    ----
<S>                                   <C>                             <C>
/s/ Michael R. Henson                 Chief Executive Officer         March 29, 1999
- ------------------------------        (Principal Executive Officer)
     (Michael R. Henson)              and Chairman

/s/ Stephen R. Kroll                  Vice President, Finance and     March 29, 1999
- -----------------------------         Administration, Chief
      (Stephen R. Kroll)              Financial Officer and
                                      Secretary (Principal
                                      Financial and Accounting
                                      Officer)

/s/ Franklin D. Brown                 Director                        March 29, 1999
- -----------------------------
      (Franklin D. Brown)


/s/ William G. Davis                  Director                        March 29, 1999
- -----------------------------
      (William G. Davis)


/s/ Gerard von Hoffmann               Director                        March 29, 1999
- -----------------------------
     (Gerard von Hoffmann)

/s/ Edward M. Leonard
- ------------------------------        Director and Assistant          March 29, 1999
      (Edward M. Leonard)             Secretary


/s/ Jeffrey F. O'Donnell              Director                        March 29, 1999
- -----------------------------
    (Jeffrey F. O'Donnell)


/s/ Maurice Buchbinder                Director                        March 29, 1999
- -----------------------------
  (Maurice Buchbinder, M.D.)
</TABLE>



                                      -39-


<PAGE>   40


                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Radiance Medical Systems, Inc.

        We have audited the accompanying consolidated balance sheets of Radiance
Medical Systems, Inc. as of December 31, 1997 and 1998, and the related
consolidated statements of operations, stockholders' equity (net capital
deficiency) and cash flows for each of the three years in the period ended
December 31, 1998. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Radiance Medical Systems, Inc. at December 31, 1997 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.




                                          /s/ ERNST & YOUNG LLP


Orange County, California
February 18, 1999



                                      F-1



<PAGE>   41

                         RADIANCE MEDICAL SYSTEMS, INC.

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


<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                                -----------------------
                                                                  1997           1998
                                                                --------       --------
<S>                                                             <C>            <C>     
                                     ASSETS
Current Assets:
  Cash and cash equivalents ..............................      $  6,141       $  1,437
  Marketable securities available-for-sale, including
    unrealized gains of $176 and $209, respectively ......        24,773         23,375
Accounts receivable, net of allowance for doubtful
  accounts of $500 and $583, respectively ................         2,752          2,413
  Other accounts receivable ..............................           282            375
  Inventories ............................................         3,205          1,623
  Other current assets ...................................           163            218
                                                                --------       --------
    Total current assets .................................        37,316         29,441

Property and Equipment:
  Furniture and equipment ................................         1,871          2,326
  Leasehold improvements .................................           322            326
                                                                --------       --------
                                                                   2,193          2,652
  Less accumulated depreciation and amortization .........          (643)        (1,120)
                                                                --------       --------
    Net property and equipment ...........................         1,550          1,532
  Intangibles, net of amortization of $84 and $188 .......         1,978          2,133
  Notes receivable from officers .........................           273            116

  Deferred charges and other assets ......................           244            559
                                                                --------       --------
    Total assets .........................................      $ 41,361       $ 33,781
                                                                ========       ========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable and accrued expenses ..................      $  3,488       $  4,286
  Deferred license revenue ...............................            --            250
                                                                --------       --------
      Total current liabilities ..........................         3,488          4,536

Commitments (Note 10)

Stockholders' equity
  Convertible preferred Stock, $.001 par value;
    7,560,000 shares authorized, no shares issued
    and outstanding ......................................            --             --
  Common Stock, $.001 par value; 30,000,000 shares
    authorized, 9,389,000 and 9,578,000 shares issued
    and outstanding at December 31, 1997 and
    1998, respectively ...................................             9             10
  Additional paid-in capital .............................        60,371         60,664
  Deferred compensation ..................................          (634)          (409)
  Accumulated deficit ....................................       (19,821)       (27,807)
  Treasury stock, at cost; 345,000 and 686,000 common
    shares at December 31, 1997 and 1998, respectively ...        (2,205)        (3,675)
  Accumulated other comprehensive income .................           153            462
                                                                --------       --------
    Total stockholders' equity ...........................        37,873         29,245
                                                                --------       --------
    Total liabilities and stockholders' equity ...........      $ 41,361       $ 33,781
                                                                ========       ========
</TABLE>


                             See accompanying notes.

                                      F-2



<PAGE>   42

                         RADIANCE MEDICAL SYSTEMS, INC.

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


<TABLE>
<CAPTION>
                                                                 YEAR END DECEMBER 31,
                                                         --------------------------------------
                                                           1996           1997          1998
                                                         --------       --------       --------
<S>                                                      <C>           <C>           <C>      
Revenue:
  Sales ...........................................      $  8,384       $ 11,332       $  9,415
  License fee and other ...........................           150             --          2,760
  Contract ........................................           200             --             --
                                                         --------       --------       --------
    Total revenue .................................         8,734         11,332         12,175
Operating costs and expenses:
  Cost of sales ...................................         4,111          6,418          6,152
  Research and development ........................         3,582          7,041          7,957
  Marketing and sales .............................         3,358          6,691          5,371
  General and administrative (including $156
    for the year ended December 31, 1996 paid
    to Endosonics) ................................         1,548          2,179          2,937
  Charge for acquired in-process research and
    development ...................................         2,133             --            234
  Minority interest in losses of RMS ..............            --             --           (992)
                                                         --------       --------       --------
    Total operating costs and expenses ............        14,732         22,329         21,659
                                                         --------       --------       --------
  Loss from operations ............................        (5,998)       (10,997)        (9,484)
Other income (expense):
  Interest income .................................         1,324          2,201          1,567
  Distributorship fees and other income (expense) .            50             24            (69)
                                                         --------       --------       --------
    Total other income ............................         1,374          2,225          1,498
                                                         --------       --------       --------
  Net loss ........................................      $ (4,624)      $ (8,772)      $ (7,986)
                                                         ========       ========       ========
  Basic and diluted net loss per share (pro forma
  through June 1996) ..............................      $  (0.69)      $  (0.96)      $  (0.90)
                                                         ========       ========       ========
  Shares used in computing basic and diluted
    net loss per share (pro forma through
    June 1996) ....................................         6,755          9,188          8,862
                                                         ========       ========       ========
</TABLE>


                             See accompanying notes

                                       F-3


<PAGE>   43

                         RADIANCE MEDICAL SYSTEMS, INC.

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



<TABLE>
<CAPTION>
                                     Preferred Stock          Common Stock        Additional                              
                                   --------------------    -------------------     Paid-In        Deferred      Accumulated   
                                     Shares      Amount     Shares      Amount     Capital      Compensation      Deficit     
                                   ----------    ------    ---------    ------    ----------    ------------    -----------   
<S>                                <C>             <C>     <C>            <C>      <C>             <C>           <C>          
Balance at December 31, 1995 ....   2,000,000      $ 2            --      $--      $  5,670        $(345)        $ (6,425)    
Sale of preferred stock to                                                                                                    
  Endosonics ....................     400,000       --            --       --         8,000           --               --     
Conversion of preferred stock ...  (2,400,000)      (2)    4,800,000        5            (3)          --               --     
Exercise of common stock options           --       --       139,000       --           138           --               --     
Initial public offering of                                                                                                    
 Common Stock ...................          --       --     3,910,000        4        42,764           --               --     
Deferred compensation resulting                                                                                               
 from grant of options ..........          --       --            --       --           150         (150)              --     
Amortization of deferred                                                                                                      
 compensation ...................          --       --            --       --            --          119               --     
Acquisition of Intraluminal                                                                                                   
 Devices, Inc. ..................          --       --        93,000       --         1,400           --               --     
Conversion of $750,000 debt by                                                                                                
 Fukuda Denshi ..................          --       --        62,000       --           750           --               --     
Net loss ........................          --       --            --       --            --           --           (4,624)    
Unrealized gain on investments ..          --       --            --       --            --           --               --     
                                   ----------      ---     ---------      ---      --------        -----         --------     
Balance of December 31, 1996 ....          --       --     9,004,000        9        58,869         (376)         (11,049)    
Exercise of common stock options           --       --       208,000       --           238           --               --     
Employee stock purchase plan ....          --       --        33,000       --           266           --               --     
SCIMED warrant exercise .........          --       --       120,000       --           377           --               --     
Sale of common stock to Cathex ..          --       --        25,000       --           200           --               --     
Expense repayment by Intraluminal                                                                                             
 Devices, Inc. by transfer and                                                                                                
 cancellation of common stock ...          --       --        (1,000)      --           (16)          --               --     
Deferred compensation resulting                                                                                               
 from grant of options ..........          --       --            --       --           437         (437)              --     
Amortization of deferred                                                                                                      
 compensation ...................          --       --            --       --            --          179               --     
Treasury common stock ...........          --       --            --       --            --           --               --     
Net loss ........................          --       --            --       --            --           --           (8,772)    
Unrealized gain on investments ..          --       --            --       --            --           --               --     
Unrealized exchange rate loss ...          --       --            --       --            --           --               --     
                                   ----------      ---     ---------      ---      --------        -----         --------     
Balance at December 31, 1997 ....          --       --     9,389,000        9        60,371         (634)         (19,821)    
Exercise of common stock options           --       --       139,000        1           162           --               --     
Employee stock purchase plan ....          --       --        50,000       --           180           --               --     
Deferred compensation resulting                                                                                               
 from grant of options ..........          --       --            --       --           159         (159)              --     
Deferred compensation adjustment                                                                                              
 due to grant revaluation .......          --       --            --       --          (208)         208               --     
Amortization of deferred                                                                                                      
 compensation ...................          --       --            --       --            --          176               --     
Treasury shares purchased .......          --       --            --       --            --           --               --     
Net loss ........................          --       --            --       --            --           --           (7,986)    
Unrealized gain on investments ..          --       --            --       --            --           --               --     
Unrealized exchange rate gain ...          --       --            --       --            --           --               --     
                                   ----------      ---     ---------      ---      --------        -----         --------     
Balance at December 31, 1998 ....          --      $--     9,578,000      $10      $ 60,664        $(409)        $(27,807)    
                                   ==========      ===     =========      ===      ========        =====         ========     
</TABLE>



<TABLE>
<CAPTION>
                                                                             Total      
                                                         Accumulated     Stockholders'  
                                      Treasury              Other           Equity      
                                   -----------------    Comprehensive    (Net Capital     Comprehensive
                                   Shares     Amount       Income         Deficiency)        Income
                                   ------    -------    -------------    -------------    -------------
<S>                                  <C>     <C>        <C>              <C>              <C>
Balance at December 31, 1995 ....     --     $    --        $ --            $(1,098)    
Sale of preferred stock to                                                              
  Endosonics ....................     --          --          --              8,000     
Conversion of preferred stock ...     --          --          --                 --     
Exercise of common stock options      --          --          --                138     
Initial public offering of                                                              
 common stock ...................     --          --          --             42,768     
Deferred compensation resulting                                                         
 from grant of options ..........     --          --          --                 --     
Amortization of deferred                                                                
 compensation ...................     --          --          --                119     
Acquisition of Intraluminal                                                             
 Devices, Inc. ..................     --          --          --              1,400     
Conversion of $750,000 debt by                                                          
 Fukuda Denshi ..................     --          --          --                750           
Net loss ........................     --          --          --             (4,624)          $(4,624)
Unrealized gain on investments ..     --          --         170                170               170
                                     ---     -------        ----            -------           -------
Balance of December 31, 1996 ....     --          --         170             47,623           $(4,454)
Exercise of common stock options      --          --          --                238           =======
Employee stock purchase plan ....     --          --          --                266     
SCIMED warrant exercise .........     --          --          --                377     
Sale of common stock to Cathex ..     --          --          --                200     
Expense repayment by Intraluminal                                                       
 Devices, Inc. by transfer and                                                          
 cancellation of common stock ...     --          --          --               (16)     
Deferred compensation resulting                                                         
 from grant of options ..........     --          --          --                --      
Amortization of deferred                                                                
 compensation ...................     --          --          --                179     
Treasury common stock ...........    345      (2,205)         --             (2,205)    
Net loss ........................     --          --          --             (8,772)          $(8,772)
Unrealized gain on investments ..     --          --           6                  6                 6
Unrealized exchange rate loss ...     --          --         (23)               (23)              (23)
                                     ---     -------        ----            -------           -------
Balance at December 31, 1997 ....    345      (2,205)       $153             37,873           $(8,789)
Exercise of common stock options      --          --          --                163           =======
Employee stock purchase plan ....     --          --          --                180     
Deferred compensation resulting                                                         
 from grant of options ..........     --          --          --                 --     
Deferred compensation adjustment                                                        
 due to grant revaluation .......     --          --          --                 --     
Amortization of deferred                                                                
 compensation ...................     --          --          --                176     
Treasury shares purchased .......    341      (1,470)         --             (1,470)     
Net loss ........................     --          --          --             (7,986)          $(7,986)
Unrealized gain on investments ..     --          --          33                 33                33
Unrealized exchange rate gain ...     --          --         276                276               276
                                     ---     -------        ----            -------           -------
Balance at December 31, 1998 ....    686     $(3,675)       $462            $29,245           $(7,677)
                                     ===     =======        ====            =======           =======
</TABLE>



                                      F-4

<PAGE>   44

                         RADIANCE MEDICAL SYSTEMS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31, 
                                                               ---------------------------------------
                                                                  1996           1997           1998
                                                               --------       --------       --------
<S>                                                            <C>            <C>            <C>      
Operating activities:
  Net loss ..............................................      $ (4,624)      $ (8,772)      $ (7,986)
Adjustments to reconcile net loss to net cash
     used in operating activities:
   Depreciation and amortization ........................           182            432            576
   Amortization of deferred compensation ................           119            179            176
   Bad debt expense .....................................           221            318            295
   Charge for acquired in-process research and
      development .......................................         1,400             --            234
   Minority interest in losses of Radiance ..............            --             --           (992)
  Changes (net of effects of acquisition of controlling
   interest in RMS):
   Trade accounts receivable, net .......................        (1,372)        (2,767)            44
   Inventories ..........................................        (2,145)            10          1,582
   Other assets .........................................          (671)            37           (125)
   Accounts payable and accrued expenses ................           698            836            928
   Deferred revenue .....................................           (50)           (79)           250
                                                               --------       --------       --------
Net cash used in operating activities ...................        (6,242)        (9,806)        (5,018)
Investing activities:
   Purchase of available-for-sale securities ............       (25,563)       (43,208)       (37,841)
   Sales of available-for-sale securities ...............            --         44,174         39,272
   Capital expenditures for property and equipment ......          (940)          (699)          (431)
   Net of cash acquired, purchase of controlling 
     interest in Radiance................................            --             --            587
   Net of cash acquired, purchase of Clinitec ...........            --            (30)            --
   Change in other assets ...............................            --           (358)          (625)
                                                               --------       --------       --------
Net cash (used in) provided by investing activities .....       (26,503)          (121)           962
Financing activities:
  Proceeds from sale of common stock ....................        42,768            466            180
  Proceeds from exercise of stock warrants ..............            --            377             --
  Proceeds from exercise of stock options ...............           138            238            163
  Proceeds from sale of preferred stock to EndoSonics ...         8,000             --             --
  Proceeds from repayment of affiliate debt .............            --             --            479
  Purchase of treasury common stock .....................            --         (2,205)        (1,470)
  Payable to Endosonics, net ............................        (2,537)            --             --
                                                               --------       --------       --------
Net cash provided by (used in) financing activities .....        48,369         (1,124)          (648)
                                                               --------       --------       --------
Net increase (decrease) in cash .........................        15,624        (11,051)        (4,704)
Cash and cash equivalents, beginning of period ..........         1,568         17,192          6,141
                                                               --------       --------       --------
Cash and cash equivalents, end of period ................      $ 17,192       $  6,141       $  1,437
                                                               ========       ========       ========

Supplemental disclosure of non-cash financing activities:
  The Company exercised preferred stock warrants bringing
     its ownership of Radiance to approximately 50%. 
     In conjunction with the assumption of control of
     Radiance, the following liabilities were assumed:
       Fair value of assets acquired ....................      $     --       $     --       $  1,535
       Cash paid to exercise preferred stock warrants ...            --             --         (1,463)
                                                               --------       --------       --------
       Liabilities assumed ..............................      $     --       $     --       $     72
                                                               ========       ========       ========
The Company purchased all of the capital stock of
  Clinitec for $30. In conjunction with the acquisition,
  the Company forgave $1,630 in debt and assumed
  the following liabilities:
    Fair value of assets acquired .......................      $     --       $    401       $     --
    Cash paid for the capital stock .....................            --            (30)            --
                                                               --------       --------       --------
    Liabilities assumed .................................      $     --       $    371       $     --
                                                               ========       ========       ========
Common stock issued upon the acquisition of Intraluminal
   Devices, Inc., Note 1 ................................      $  1,400       $     --       $     --
Conversion of Debentures to Common Stock, Note 5 ........           750             --             --
</TABLE>


                             See accompanying notes

                                      F-5


<PAGE>   45

                         RADIANCE MEDICAL SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

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

BUSINESS AND BASIS OF PRESENTATION

Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc and herein
after referred to the "Company" or "Radiance") was incorporated in March 1992 in
the State of California. The Company and its subsidiaries design, develop,
manufacture and market proprietary therapeutic catheters and stents used to
treat certain vascular diseases. Accordingly, the Company operates in a single
business segment.

The consolidated financial statements for December 31, 1996, 1997 and 1998
include the accounts of the Company and its subsidiaries. Intercompany
transactions have been eliminated. To conform with the 1998 financial statement
presentation, certain reclassifications have been made to the 1997 and 1996
financial statements.

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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash on hand, demand deposits, and short-term
investments with original maturities of three months or less.

MARKETABLE SECURITIES AVAILABLE-FOR-SALE

The Company accounts for its investments pursuant to Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities ("SFAS No. 115").

The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in stockholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.

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 seven years.


                                      F-6


<PAGE>   46

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR OBTAINED FOR
INTERNAL USE

In March 1998, the AICPA issued SOP 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED FOR OR OBTAINED FOR INTERNAL USE ("SOP"). The Company intends
to adopt the provisions of the SOP on January 1, 1999. The SOP requires the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal use. The Company
currently expenses such costs, and it anticipates that the impact of the SOP
will not be material on its results of operations or financial position for the
foreseeable future as amounts expended to develop or obtain software have not
been and are not expected to be material.

INTANGIBLE ASSETS

The excess of the purchase price over the net assets of the business acquired
("goodwill") and any other identifiable acquired intangible assets are amortized
on the straight-line method over the estimated recovery period. The goodwill and
other intangible assets stemming from the acquisition of Clinitec and purchase
of a controlling interest in the (former) Radiance Medical Systems, Inc.
("RMS"), $1.9 million and $0.5 million, respectively, is being amortized over
ten and three to seven years, respectively. Based upon an independent appraisal
of intangible assets acquired in the purchase of a controlling interest in RMS,
$0.3 million was classified as developed technology and covenants not to compete
and capitalized, and $0.2 million as acquired in-process research and
development and expensed.

LONG-LIVED ASSETS

Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Long-lived assets
expected to be disposed of are stated at the estimated fair value less the cost
to sell.

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 on going 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 1997 and 1998, product sales to Cathex, the Company's Japanese
distributor, comprised 13% and 22%, respectively, of total revenues. Accounts
receivable from Cathex represented 44% and 49% of net accounts receivable at
December 31, 1997 and 1998, respectively. During 1996 product sales to Fukuda
Denshi Co., Ltd., ("Fukuda"), the Company's former Japanese distributor (see
Note 5), comprised 14% of total revenue.

Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% and 13% of
total revenues during 1996 and 1997, respectively.

In June of 1998, the Company signed a technology license agreement with Guidant
Corporation ("Guidant"), an international interventional cardiology products
company, to grant them the ability to manufacture and distribute


                                      F-7


<PAGE>   47

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


products using the Company's focus technology. During 1998, Radiance recognized
license fees from Guidant of $2.8 million, which represented 23% of total
revenues. (See Note 6.)

EXPORT SALES

The Company had export sales by region as follows:


<TABLE>
<CAPTION>
                                               YEAR ENDED
                                              DECEMBER 31,
                                        -------------------------
                                         1996     1997     1998
                                         ----     ----     ----
<S>                                     <C>      <C>      <C>   
         Europe.........................$1,614   $3,020   $2,476
         Japan...........................1,240    2,350    2,622
         Other...........................  660    1,209      789
                                         -----   ------   ------
                                        $3,514   $6,579   $5,887
                                        ======   ======   ======
</TABLE>


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. License revenues are recognized
on a contract with SCIMED Life Systems, Inc. ("SCIMED") when distribution rights
to certain markets are made available to SCIMED for the sale of products based
upon certain limited catheter technology. License revenues are recognized on a
contract with Guidant Corporation based upon the achievement of milestones
involving the transfer of technology to Guidant and royalties based upon the
sale of products using the Focus technology (See Note 6). Contract revenues are
recognized on contracts with SCIMED and Advanced CardioVascular Systems, Inc.
("ACS") for transferring certain limited catheter technology based upon the
Company's completion of (1) technical assistance to aid ACS and SCIMED in
manufacturing the related products, and (2) research and development to develop
the related products for SCIMED (See Note 3).

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related Interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting

Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"),
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under the provisions of APB 25, the Company has
not recognized compensation expense because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant. Pro forma information regarding net income and earnings per share
is required by SFAS No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's


                                      F-8



<PAGE>   48

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

In calculating pro forma information regarding net income and net income per
share the fair value was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for the
options on the Company's Common Stock: risk-free interest rate of 6.0%, 5.5% and
5.7%; a dividend yield of 0%, 0% and 0%; volatility of the expected market price
of the Company's common stock of 0.475, 0.692 and 0.696; and a weighted-average
expected life of the options of 3.5, 5.0 and 5.0 years for 1996, 1997 and 1998,
respectively.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the years ended December 31, 1996, 1997 and 1998 follows:


<TABLE>
<CAPTION>
                                                    1996        1997       1998
                                                    ----        ----       ----
<S>                                               <C>         <C>        <C>     
        Pro forma net loss......................  $(5,170)    $(9,320)   $(9,135)
        Pro forma basic and diluted net loss
           per share............................  $ (0.77)    $ (1.02)   $ (1.03)
</TABLE>



Because SFAS No. 123 is applicable only to options granted subsequent to
December 31, 1994, its total pro forma effect was not fully reflected until
1997.

REPORTING COMPREHENSIVE INCOME

In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and displaying comprehensive income and its components
with the same prominence as other financial statement information.

DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

For the year beginning January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business enterprises report selected
information about operating segments in annual and interim financial statements.
Because the Company operates in one business segment and has no significant 
foreign operations, no additional reporting is required under SFAS No. 131.

INCOME TAXES

From June 1993 until June 1996, the Company's results of operations were
included in consolidated tax returns filed by EndoSonics, its former parent.
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 Radiance.

NET LOSS PER SHARE

Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's common stock granted under the Company's


                                      F-9



<PAGE>   49

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

stock option plan have been excluded from the calculation of diluted earnings
per share as they are anti-dilutive. The following table sets forth the
computation of basic and diluted net loss per share:


<TABLE>
<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                   -----------------------------------
                                                     1996         1997          1998
                                                   -------       -------       -------
                                                             (In thousands)
<S>                                                <C>           <C>           <C>
NUMERATOR:
Net loss ....................................      $(4,624)      $(8,772)      $(7,986)
                                                   -------       -------       -------
Net loss used for basic and diluted loss per
  share--
  Loss attributable to common stockholders ..      $(4,624)      $(8,772)      $(7,986)
                                                   =======       =======       =======
DENOMINATOR:
Denominator for basic and diluted loss per
  share--
  Weighted average common shares outstanding         4,715         9,118         8,862
Assumed conversion of Preferred Stock
  from the date of issuance (Series A
  and B) ....................................        2,040            --            --
                                                   -------       -------       -------
                                                     6,755         9,118         8,862
                                                   =======       =======       =======
Basic and diluted net loss per share ........      $ (0.69)      $ (0.96)      $ (0.90)
                                                   =======       =======       =======
</TABLE>


2.  ACQUISITIONS

On October 16, 1996, the Company acquired all of the outstanding shares of
Intraluminal Devices, Inc. ("IDI") in exchange for approximately 93,000 shares
of Radiance common stock valued at $1,400. The acquisition was accounted
for using the purchase method of accounting. As the assets of IDI were patents
for products still in their development stage, the purchase price and the
associated costs of acquisition, $700, were expensed as acquired
in-process research and development.

On July 29, 1997, the Company acquired all of the common stock of its
independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec").
The aggregate purchase price of the acquisition was $1,630 million and consisted
of cash of $30 and the forgiveness of debt of $1,600. The transaction was
accounted for by the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and the liabilities assumed
based on their fair market values at the date of acquisition. In connection with
the acquisition, the Company acquired assets and assumed liabilities with fair
market values of $401 and $652, respectively. The excess of the purchase price
over the fair value of the net assets acquired of $1,900 has been allocated to
goodwill. The results of operations of Clinitec are included in the consolidated
statement of operations subsequent to the date of acquisition.

RMS was incorporated by the Company in August 1997 to develop radiation products
to treat restenosis based on RMS's patented focus delivery systems technology.
In consideration for the granting by RMS of a license to this technology, RMS
issued to the Company 750,000 shares of Series B Preferred Stock, a warrant to
purchase 1,500,000 shares of Series B Preferred Stock, rights of first offer
with respect to the commercialization of RMS's products, and a promise to
receive royalties on sales of products based upon the licensed technology.
Following the organization of RMS and its sale of common stock to investors in a
private offering, Radiance did not control RMS and accounted for its investment
at zero -- the book value of the assets transferred to RMS by Radiance. In
September 1998, the Company exercised warrants to purchase an additional
1,500,000 Preferred Series B shares in RMS for $0.975 per share or a total of
$1,500, bringing the Company's ownership of the outstanding equity of RMS to
approximately 50%. 


                                      F-10



<PAGE>   50

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

In November 1998, the Company signed a definitive merger agreement with RMS and
in January 1999, the Company acquired RMS pursuant to that Agreement. Under the
terms of the Agreement, the Company paid the shareholders of RMS $3.00 for each
share of Preferred Stock and $2.00 for each share of Common Stock for a total
consideration of approximately $7,000, excluding the value of Radiance common
stock options to be provided to RMS optionholders in exchange for their RMS
common stock options. Such consideration was paid by delivery of an aggregate of
1,900,157 shares of Common Stock, and $700 million in cash to certain RMS
stockholders who elected to receive cash pursuant to the definitive merger
agreement. Options for 546,250 shares of RMS common stock accelerated and vested
immediately prior to the completion of the Merger. Of these, 1,250 were
exercised, and the holder received the same consideration for their shares of
RMS Common Stock as other holders of RMS Common Stock. The options not exercised
prior to the completion of the Merger were assumed by the Company and converted
into options at the same exercise price to purchase an aggregate of 317,775
share of the Company's Common Stock.

In addition, RMS share and option holders may receive product development
milestone payments of $2.00 for each share of RMS Preferred Stock and $3.00 for
each share of RMS Common Stock. The development milestone payments may be
increased up to 30%, or reduced or eliminated if the milestones are reached
earlier or later, respectively, than the milestone target dates. The milestones
represent important steps in the United States Food and Drug Administration and
European approval process, which the Company has determined are critical to
bringing the RMS technology to the marketplace.

The following table reflects unaudited pro forma combined results of operations
of the Company, IDI, Clinitec and RMS on the basis that the acquisitions, or
purchase of a controlling interest in the case of Radiance, had taken place and
the related charge for IDI, noted above, was recorded at the beginning of 1996
for IDI and Clinitec, as IDI operations were not material to the Company's
operations prior to 1996, and at the inception of RMS in August 1997.


<TABLE>
<CAPTION>
                                       1996        1997        1998
                                    -------     -------     -------
<S>                                 <C>         <C>         <C>    
Revenues.........................   $ 8,822     $11,633     $12,175
Net Loss.........................    (5,060)     (9,589)     (8,511)
Net Loss per common share........     (0.75)      (1.05)      (0.96)
Shares used in computation.......     6,755       9,118       8,862
</TABLE>


In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of 1996, 1997 or 1998,
respectively, or of future operations of the combined companies under the
ownership and management of the Company.

3.  SCIMED LIFE SYSTEMS, INC.

In September 1994, the Company and EndoSonics entered into a Stock Purchase and
Technology License Agreement with SCIMED Life Systems, Inc. ("SCIMED"). SCIMED
acquired a 19% interest in Radiance in exchange for $2,500 in cash. Radiance
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 Radiance in exchange for a
$1,000 license fee that was paid in 1994. SCIMED will pay royalties to Radiance
on


                                      F-11



<PAGE>   51

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

sales of the Transport and other products which use this patented technology.
Radiance retains rights to this technology and the associated patents for use
outside of the cardiovascular field.

During June 1995, the Company issued a warrant to SCIMED to purchase up to
80,000 shares of Series A Preferred Stock at an exercise price of $3.29 per
share in exchange for a waiver of SCIMED's anti-dilution right.

During May 1996, the Company agreed to issue an additional warrant to SCIMED to
purchase up to 40,000 shares of Series A Preferred Stock at an exercise price of
$3.29 per share in exchange for a waiver of SCIMED's anti-dilution right related
to the shares to be issued under the 1996 Plan. In August 1997, SCIMED exercised
all 120,000 warrants, mentioned above.

SCIMED also paid Radiance $200 in 1996, on a cost reimbursement basis to fund
continuing development of the technology and for other support.

4.  RELATED PARTY TRANSACTIONS

Prior to the Company's initial public offering in June 1996, certain corporate
expenses, primarily related to executive management time, accounting, cash
management, and other administrative and engineering services, have been
allocated to the Company by its former parent, EndoSonics. Total expenses
allocated were $156 for the year ended December 31, 1996.

5.  AGREEMENTS WITH FUKUDA AND CATHEX

The Company entered into a distribution agreement, dated May 1, 1997, with
Cathex, Ltd. (The "Cathex Agreement"), whereby Cathex was appointed to serve as
Radiance's exclusive distributor for certain of the Company's products in Japan.
In exchange for this exclusive distributorship, Cathex shareholders agreed to
purchase $200 in Radiance common stock or approximately 25,000 shares. Cathex
also agreed to undertake all necessary clinical trails to obtain approval from
Japanese regulator authorities for the sale of the products in Japan. Cathex's
purchases under the Cathex Agreement are subject to certain minimum
requirements. The initial term of the Cathex Agreement expires on January 1,
2001, subject to a five-year extension. The Cathex Agreement may also be
terminated in the event of breach upon 90 days notice by the non-breaching
party, subject to cure within the notice period.

The Company previously had a distribution agreement with Fukuda. The agreement
provided Fukuda with exclusive distribution rights relative to certain of the
Company's products in Japan for periods extending through May 1999. Distribution
fee revenues received from Fukuda were deferred and were being recognized as
revenue over the initial periods covered by the respective agreement.
In July 1995 and May 1996, the distribution agreement with Fukuda was amended.
In exchange for the exclusive distribution rights to additional Company
products, the Company received $750 which converted into the right to receive
62,500 shares of Common Stock upon the consummation of the initial public
offering. In November, 1996, Fukuda exercised the conversion feature of said
obligation. In May 1997, the Company terminated the existing distribution
agreement.


                                      F-12


<PAGE>   52

                         RADIANCE MEDICAL SYSTEMS, INC.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

6.  LICENSE AGREEMENTS

ADVANCED CARDIOVASCULAR SYSTEMS, INC.

In January 1995 the Company entered into a license agreement with Advanced
CardioVascular Systems, Inc. ("ACS"), a subsidiary of Guidant Corporation, under
which ACS was obligated to make milestone and minimum royalty payments to
Radiance. An initial milestone of $150 was earned in the year ended December 31,
1996. In February 1997, ACS elected to terminate the agreement.

ENDOSONICS CORPORATION

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

GUIDANT CORPORATION

In June of 1998, the Company signed a technology license agreement with Guidant
Corporation ("Guidant") to grant Guidant the ability to manufacture and
distribute stent delivery products using the Company's focus technology. Under
the Agreement, the Company is entitled to receive certain milestone payments
based upon the transfer of the technology to Guidant, and royalty payments based
upon the sale of products using the focus technology. An initial license payment
of $2,000 was received by the Company upon the signing of the Agreement.
In October of 1998, the Company received another $1,000 license milestone
payment upon the completion of the technology transfer to Guidant. Based upon
the completion of certain initial technology transfer milestones, the Company
recognized $1,200 and $1,600 in license revenue in the third quarter
and first nine months of 1998, respectively, and will recognize the remaining
$250 of deferred license revenue as remaining milestones are met.

7.  MARKETABLE SECURITIES AVAILABLE-FOR-SALE

The Company's investments in debt securities are diversified among high credit
quality securities in accordance with the Company's investment policy. The
Company's investment portfolio is managed by a major financial institution. The
following is a summary of investments in debt securities at December 31, 1997
and 1998.


<TABLE>
<CAPTION>
                                              DECEMBER 31, 1997                DECEMBER 31, 1998
                                        ------------------------------   ------------------------------
                                                   Gross
                                                  Unrealized                         Gross
                                                   Holding                         Unrealized
                                                    Gains       Fair                Holding     Fair
                                         Cost     (Losses)     Value      Cost       Gains      Value
                                       --------   --------    --------   --------   --------   --------
<S>                                    <C>        <C>         <C>        <C>        <C>        <C>     
U.S. Treasury and other agencies
  debt securities ..................   $  4,976   $     30    $  5,006   $  5,928   $     33   $  5,961
securities
Corporate debt securities ..........     17,605        150      17,755     14,239        169     14,408
Foreign government debt securities .      2,016         (4)      2,012      2,999          7      3,006
                                       --------   --------    --------   --------   --------   --------
                                       $ 24,597   $    176    $ 24,773   $ 23,166   $    209   $ 23,375
                                       ========   ========    ========   ========   ========   ========
</TABLE>


        All debt securities mature within one year with the exception of debt
securities with a cost and fair value totaling $2.0 million and $3.5 million at
December 31, 1997 and 1998, respectively, which mature within two years.

                                      F-13


<PAGE>   53

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

8.  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,
                                                     -----------------
                                                       1997      1998
                                                     -------   -------
<S>                                                  <C>       <C>    
                    Raw materials................    $ 1,285   $   630
                    Work in process..............        165        87
                    Finished goods...............      1,755       906
                                                     -------   -------
                                                     $ 3,205   $ 1,623
                                                     =======   =======
</TABLE>


9. INTANGIBLES

Intangibles consisted of the following:


<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                               ---------------
                                                1997     1998
                                               ------   ------
<S>                                            <C>      <C>   
Goodwill ...................................   $1,809   $1,746
Developed research and development and other
intangible assets ..........................       --      243
Product license ............................      169      144
                                               ------   ------
                                               $1,978   $2,133
                                               ======   ======
</TABLE>


10. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of the following:


<TABLE>
<CAPTION>

                                     DECEMBER 31,
                                  ------------------
                                   1997        1998
                                  ------      ------
<S>                               <C>         <C>   
Accounts payable ...........      $1,374      $1,281
Accrued payroll and related
   expenses ................       1,317       1,287
Accrued clinical studies ...         548         979
Accrued office closing costs          --         225
Other accrued expenses .....         249         514
                                  ------      ------
                                  $3,488      $4,286
                                  ======      ======
</TABLE>


11. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases its administrative, research and manufacturing facilities and
certain equipment under long-term, noncancellable 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, 1998:


                                      F-14


<PAGE>   54

                         RADIANCE MEDICAL SYSTEMS, INC.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

<S>                                                <C>
                  1999.........................    $  468
                  2000.........................       442
                  2001.........................       150
                  2002.........................        47
                  2003.........................        15
                                                   ------
                                                   $1,122
                                                   ======
</TABLE>


Rental expense charged to operations for all operating leases during the years
ended December 31, 1996, 1997 and 1998, was approximately $365, $574 and $639,
respectively.

12. SHAREHOLDERS EQUITY

PREFERRED STOCK

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.

The preferred stockholders converted their shares to common shares upon the
consummation of the Company's initial public offering.

STOCK SPLIT

In 1996, the Board of Directors of the Company approved a 2-for-1 Common Stock
split which has been reflected retroactively for all periods in the accompanying
financial statements.

SALE OF COMMON STOCK

On June 25, 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. The Company received net offering proceeds from the sale of
Common Stock of approximately $42.8 million after deducting underwriting
discounts and commissions and other expenses of the Offering.

STOCK OPTION PLAN

In May 1996, the Company adopted the 1996 Stock Option/Stock Issuance Plan (the
"1996 Plan") which is the successor to the Company's 1995 Stock Option Plan. In
September 1997, the Company adopted the 1997 Supplemental Stock Option Plan (the
"1997 Plan"). Under the terms of the 1996 and 1997 Plans, 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, a determined by the Board of Directors. At December 31, 1998 the Company
had authorized 2,100,000 and 90,000 shares of Common Stock for issuance under
the 1996 and 1997 Plan, respectively. In January 1999, the Company authorized an
additional 750,000 shares of Common Stock for issuance under the 1996 Plan. At
December 31, 1998, the Company had 152,000 shares and 39,000 shares of Common
Stock available for grant under the 1996 and 1997 Plan, respectively. The
options granted under the Plans 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. The activity under both plans is summarized below:

                                      F-15


<PAGE>   55

                         RADIANCE MEDICAL SYSTEMS, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)


<TABLE>
<CAPTION>

                                      OPTION PRICE         NUMBER
                                       PER SHARE         OF SHARES
                                   -----------------     ----------
<S>                                <C>                   <C>    
Balance at December 31, 1995..     $ 1.00  to $ 1.50        956,000
Granted.......................     $ 2.50  to $13.25        346,000
Exercised.....................     $ 1.00  to $ 1.50       (138,600)
Forfeited.....................     $ 1.00  to $13.25        (18,875)
Cancelled.....................                    --             --
                                   -----------------     ----------
Balance at December 31, 1996..     $ 1.00  to $13.25      1,144,525
Granted.......................     $ 5.00  to $ 9.50      1,000,000
Exercised.....................     $ 1.00  to $ 2.50       (208,259)
Forfeited.....................     $ 1.00  to $13.25       (204,229)
Cancelled.....................                $ 6.87       (130,000)
                                   -----------------     -----------
Balance at December 31, 1997..     $ 1.00  to $13.25      1,602,037
Granted.......................     $ 3.25  to $ 6.44        665,100
Exercised.....................     $ 1.00  to $ 2.50       (138,965)
Forfeited.....................     $ 1.00  to $ 9.50       (614,794)
Cancelled.....................                    --             --
                                   -----------------     ----------
Balance at December 31, 1998..     $ 1.00  to $12.00      1,513,378
                                   =================     ==========
</TABLE>


        The Board of Directors approved repricing of the following options:


<TABLE>
<CAPTION>
                                                     Original    New
            Date Repricing                            Grant     Grant
               Approved         Option Grant Date     Price     Price
               --------         -----------------     -----     -----
<S>                             <C>                   <C>       <C>  
            April 21, 1997      August 5, 1996        $13.25    $6.88
                                November 4, 1996       12.50     6.88
            April 7, 1998       January 13, 1997        9.50     4.94
                                September 19, 1997      7.31     4.94
            December 14, 1998   April 21, 1997          6.88     3.63
                                May 20, 1998            6.00     3.63
                                May 26, 1998            5.88     3.63
                                June 10, 1998           6.44     3.63
</TABLE>


As a result of the repricing, the vesting period on the aforementioned options
started anew.

The following table summarizes information regarding stock options outstanding
at December 31, 1998:


<TABLE>
<CAPTION>
                                    WEIGHTED-
                                     AVERAGE         WEIGHTED                       WEIGHTED-
                     OPTIONS        REMAINING        AVERAGE          OPTIONS        AVERAGE
   RANGE OF        OUTSTANDING     CONTRACTUAL       EXERCISE       EXERCISABLE      EXERCISE
EXERCISE PRICES    AT 12/31/98        LIFE            PRICE         AT 12/31/98       PRICE
- ---------------    -----------     -----------       --------      -----------      ---------
<S>                <C>             <C>               <C>            <C>              <C>  
$1.00 -$ 1.50         358,216          6.6            $1.28            282,049        $1.23
 2.50 -  5.63         983,662          9.0             4.05             65,074         4.10
 7.31 - 12.00         171,500          8.6             7.91             19,844         9.41
                    ---------                                          -------
 1.00 - 12.00       1,513,378          8.4             3.84            366,967         2.18
                    =========                                          =======
</TABLE>


The weighted-average grant-date fair value of options granted during 1996, 1997
and 1998, for options where the exercise price on the date of grant was equal to
the stock price on that date, was $5.12, $4.50 and $2.99,

                                      F-16


<PAGE>   56

                         RADIANCE MEDICAL SYSTEMS, INC.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

respectively. The weighted-average grant-date fair value of options granted
during 1996, 1997 and 1998, for options where the exercise price on the date of
grant was less than the stock price on that date, was $3.16, $0, and $0,
respectively.

During 1996, the Company recorded deferred compensation of approximately $150
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
$437 and $159 of deferred compensation was recorded to recognize compensation
for non-employee option grants during the years ended December 31, 1997 and
1998, respectively. Deferred compensation is being amortized over the vesting
period of the related options. $119, $179 and $176 of deferred compensation was
amortized in the years ended December 31, 1996, 1997 and 1998, respectively.

STOCK PURCHASE PLAN

Under the terms of the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), eligible employees can 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. A total of 200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan. During 1998, a total of approximately 50,000 shares, of
Common Stock was purchased at an average price of $3.61 per share.



                                      F-17


<PAGE>   57

                         RADIANCE MEDICAL SYSTEMS, INC.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

13. INCOME TAXES

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


<TABLE>
<CAPTION>
                                            1997          1998 
                                          -------       -------
<S>                                       <C>           <C>    
Net operating loss carryforward ....      $ 3,959       $ 5,473
Accrued expenses ...................          405           572
Tax credits ........................          812           953
Bad debt reserve ...................          205           236
Depreciation .......................          (56)          (85)
Amortization .......................           --            58
Inventory write-downs ..............          451           749
Capitalized research and development          642           963
Deferred revenue ...................           --           100
Deferred Compensation amortization .           --           215
Other ..............................          191           249
                                          -------       -------
Gross deferred tax assets ..........        6,609         9,483
Valuation allowance ................       (6,609)       (9,483)
                                          -------       -------
Net deferred tax assets ............      $    --       $    --
                                          =======       =======
</TABLE>


The valuation allowance increased by $2,874 and $3,150 in 1998 and 1997,
respectively.

The Company's effective tax rate differs from the statutory rate of 35% due to
federal and state losses which were recorded without tax benefit.

At December 31, 1998, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $15,700 and $406,
respectively, which expire in the years 2000 through 2018. In addition, the
Company has research and development tax credits for federal and state income
tax purposes of approximately $522, and $431, respectively, which expire in the
years 2011 through 2013.

Because of the "change of ownership" provision of the Tax Reform Act of 1986,
utilization of the Company's net operating loss and research credit
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.

The results of operations includes the net loss of the Company's wholly-owned 
German subsidiary of $1,029.

14. EMPLOYEE BENEFIT PLAN

The Company provides a 401(k) Plan for all employees 21 years of age or older
with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 1997 and 1998.

15. SUBSEQUENT AND SIGNIFICANT EVENTS

In October 1998, the Company signed a letter of intent to sell substantially all
of the properties and assets used exclusively in its Vascular Access Business
Unit to Escalon Medical Corporation and in January 1999 the sale was completed
under a definitive Sale and Purchase Agreement ("Agreement"). Under the terms of
the Agreement, the Company received an initial payment of $1,100. This
payment represented a $1,000 consideration payment increased by the excess
of the actual inventory transferred of $700 over the contractual estimate of
$600

                                      F-18

<PAGE>   58

                         RADIANCE MEDICAL SYSTEMS, INC.

              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

The Company may also receive up to an additional $1,000 upon the completion of
the transfer of the assets and technology, and royalty payments upon the sale of
products for a five-year period. The Company will recognize such additional
payments as income when it is probable they will be received. In addition, the
Company will continue to manufacture certain products for up to 180 days
following the Agreement date.

The following table sets forth the Vascular Access operating profits for the
periods indicated:


<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                           -------------------------------
                                            1996        1997        1998
                                           -------     -------     -------
<S>                                        <C>         <C>         <C>
Revenues.................................  $ 1,810     $ 2,419     $ 2,664
Operating costs and expenses:
   Costs of sales........................    1,201         937       1,342
   Research and development..............       44         392         480
   Marketing and sales...................      248         506         556
   General and administrative............      109         465         671
                                           -------     -------     -------
Total operating costs and expenses.......    1,602       2,300       3,049
                                           -------     -------     -------
                                           $   208     $   119     $  (385)
                                           =======     =======     =======
</TABLE>




                                      F-19


<PAGE>   59

                         RADIANCE MEDICAL SYSTEMS, INC.

 
                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                  YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
             COLUMN A                   COLUMN B           COLUMN C             COLUMN D    COLUMN E
             --------                  ----------   ----------------------     ----------   ----------
                                                          ADDITIONS
                                                    ----------------------
                                       BALANCE AT   CHARGES TO    CHARGED                   BALANCE AT
                                       BEGINNING     COSTS AND    TO OTHER                    END OF
           DESCRIPTION                 OF PERIOD     EXPENSES     ACCOUNTS     DEDUCTIONS     PERIOD
           -----------                 ---------     --------     --------     ----------     ------
<S>                                     <C>          <C>          <C>           <C>           <C>
Year ended December 31, 1998
  Allowance for doubtful accounts       $   500      $   295      $    --       $  (212)      $   583
  Reserve for excess and obsolete
   inventories ...................      $ 1,100      $ 1,274      $    --       $  (518)      $ 1,856

Year ended December 31, 1997
   Allowance for doubtful accounts      $   377      $   318      $    --       $  (195)      $   500
   Accrued warranty expenses .....      $    29      $    --      $    --       $   (29)      $    --
   Reserve for excess and obsolete
    inventories ..................      $   145      $   955      $    --       $    --       $ 1,100

Year ended December 31, 1996
   Allowance for doubtful accounts      $   180      $   221      $    --       $   (24)      $   377
   Accrued warranty expenses .....      $   113      $    --      $    --       $   (84)      $    29
   Reserve for excess and obsolete
    inventories ..................      $   209      $    --      $    --       $   (64)      $   145
</TABLE>



                                      II-1


<PAGE>   60


                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

       EXHIBIT                                                                   SEQUENTIALLY
       NUMBER                             DESCRIPTION                            NUMBERED PAGE
       -------                            -----------                            -------------
<S>               <C>                                                            <C>
        2.1(3)    Agreement and Plan of Reorganization dated as of June 9, 1993
                  among Endosonics Corporation ("Endosonics"), Endosonics
                  Acquisition Corporation and the Company.

        2.2(3)    First Amendment dated as of June 30, 1993 to the Agreement and
                  Plan of Reorganization among Endosonics, Endosonics
                  Acquisition Corporation and
                  the Company.

        2.4(12)   Agreement and Plan of Merger dated November 3, 1998 by and
                  between CardioVascular Dynamics, Inc. and Radiance Medical
                  Systems, Inc.

        2.5(13)   Assets Sale and Purchase Agreement dated January 21, 1999 by
                  and between the Company and Escalon Medical Corp.

        3.1(10)   Amended and Restated Certificate of Incorporation, and
                  Certificates of Amendment thereof dated January 14, 1999 and
                  November 12, 1998.

        3.2(11)   Amended and Restated Bylaws of the Company.

        4.1(1)    Specimen Certificate of Common Stock.

        10.1(3)   Form of Indemnification Agreement 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 Radiance.

        10.5(3)   Stock Purchase Option Agreement dated June 5, 1992, by and
                  between Endosonics and the Company.

        10.7(3)*  Stock Purchase and Technology License Agreement dated
                  September 10, 1994, as amended on September 29, 1995, by and
                  among Endosonics, the Company and SCIMED Life Systems, Inc.
                  ("SCIMED").

        10.8(3)   Waiver and Grant of Warrant dated June 30, 1995 by and between
                  SCIMED, the Company and Endosonics.

        10.9(3)*  License Agreement dated January 15, 1995 by and between the
                  Company and Advanced Cardiovascular Systems, Inc. ("ACS").

        10.10(3)* License Agreement dated March 4, 1996 by and between the
                  Company and ACS.

        10.11(3)  Series B Stock Purchase Agreement dated March 29, 1996 by and
                  between the Company and Endosonics.
</TABLE>



<PAGE>   61
                           EXHIBIT INDEX (Continued)

<TABLE>
<CAPTION>

       EXHIBIT                                                                   SEQUENTIALLY
       NUMBER                             DESCRIPTION                            NUMBERED PAGE
       -------                            -----------                            -------------
<S>               <C>                                                            <C>
        10.15(3)  Industrial Lease dated February 23, 1995 by and between the
                  Irvine Company and the Company.

        10.16(1)  Waiver and Grant of Warrant dated May 2, 1996 by and between
                  SCIMED, the Company and Endosonics.

        10.18(4)* Supply Agreement dated July 15, 1996 by and between the
                  Company and Medtronic, Inc.

        10.19(4)* OEM Agreement dated July 15, 1996 by and between the Company
                  and Medtronic, Inc.

        10.20(6)  License Agreement dated May 16, 1997, by and between the
                  Company and Endosonics.

        10.21(6)  Registration Rights Agreement dated as of January 26, 1997 by
                  and between the Company and Endosonics.

        10.22(7)**Supplemental Stock Option Plan

        10.23(8)  Stock Repurchase Agreement dated as of February 10, 1998 by
                  and between Endosonics and the Company.

        10.24(9)* License Agreement by and between the Company and Guidant
                  Corporation dated June 19, 1998.

        10.25(14)** 1996 Stock Option/Stock Issuance Plan (as Amended and
                  Restated as of April 8, 1997, March 12, 1998 and November 3,
                  1998).

        10.26(15)** 1997 Stock Option Plan (As Amended as of June 15, 1998)
                  assumed by Registrant pursuant to its acquisition of Radiance
                  Medical Systems, Inc. on January 14, 1999.

        10.27**   + Amendment to Employment Agreement dated as of February 1,
                  1999 between the Company and Michael R. Henson and form of
                  Employment Agreement entered into on January 14, 1999 between
                  the Company and Michael R. Henson.

        10.28**   + Employment Agreement entered into as of February 1, 1999 by
                  and between the Company and Stephen R. Kroll.

        10.29**   + Form of Employment Agreement by and between the Company and
                  Jeffrey Thiel.
</TABLE>




<PAGE>   62



<TABLE>
<CAPTION>

       EXHIBIT                                                                   SEQUENTIALLY
       NUMBER                             DESCRIPTION                            NUMBERED PAGE
       -------                            -----------                            -------------
<S>               <C>                                                            <C>

        10.30**   + Form of Employment Agreement by and between the Company and
                  Claire Walker.

        21.1      + List of Subsidiaries.

        23.1      Consent of Ernst & Young LLP, Independent Auditors.

        24.1      Power of Attorney. (Reference is made to page 39 of this
                  Annual Report on Form 10-K.)

        27.1      Financial Data Schedule.
</TABLE>


- --------------------
        *      Confidential treatment requested.
        **     Indicates compensatory plan or arrangement.
        +      Filed herewith.

        (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.

        (6)    Previously filed as an exhibit to the Company's Registration
               Statement on Form S-1 filed with the Securities and Exchange
               Commission on June 19, 1997.

        (7)    Previously filed as an exhibit to the Company's Registration
               Statement on Form S-8 filed with the Securities and Exchange
               Commission on December 12, 1997.

        (8)    Previously filed as Exhibit 10 to the Company's Report on Form
               10-Q filed with the Securities and Exchange Commission as of May
               14, 1998.

        (9)    Previously filed as Exhibit 10.24 to the Company's Report on Form
               10-Q filed with the Securities and Exchange Commission as of
               August 11, 1998.

        (10)   Previously filed as Exhibit 3.5 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               January 22, 1999.

        (11)   Previously filed as Exhibit 3.4 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               January 22, 1999.

        (12)   Previously filed as Exhibit 2.4 to the Company's Report on Form
               8-K filed with the Securities and Exchange Commission as of
               November 12, 1998.


<PAGE>   63

        (13)   Previously filed as Exhibit 2 to the Company's Report on Form 8-K
               filed with the Securities and Exchange Commission as of February
               5, 1999.

        (14)   Previously filed as Annex III to the Company's Proxy Statement on
               Schedule 14A filed with the Securities and Exchange Commission on
               December 18, 1998.

        (15)   Previously filed as Exhibit 99.2 to the Company's Registration
               Statement on Form S-8 filed with the Securities and Exchange
               Commission on February 17, 1999.







<PAGE>   1
                                                                   EXHIBIT 10.27


                              EMPLOYMENT AGREEMENT


        THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of _______________, ______ by and between CARDIOVASCULAR DYNAMICS, INC., a
Delaware corporation (the "Company"), and Michael R. Henson, an individual (the
"Executive").

                                  R E C I T A L

        The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.

                                A G R E E M E N T

        NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:

        1. Employment. The Company hereby agrees to employ the Executive as the
Chairman of the Board of Directors of the Company, effective as of ____________,
1999, and as the President and Chief Executive Officer of the Company effective
____________, 1999, and the Executive accepts such employment and agrees to
devote substantially all his business time and efforts and skills on such
reasonable duties as shall be assigned to him by the Company commensurate with
such position.

        2. Term. The initial term of the Executive's employment hereunder shall
commence _______________, ______, ("Effective Date")
 and shall be for a period
of two (2) years, and shall automatically extend for successive one year periods
following the initial term unless either party delivers written notice to the
other no later than sixty (60) days prior to the end of the second anniversary
of the Effective Date or any successive anniversary of the Effective Date, as
the case may be, of intent not to renew. Executive's employment is subject to
earlier termination as hereafter specified.

        3. Position and Duties.

            3.1 Service with the Company. During the term of this Agreement, the
Executive agrees to perform such reasonable duties and on such basis as shall be
assigned to him from time to time by the Board of Directors (the "Board of
Directors"); such duties, however, to be commensurate with the Executive's
position as Chairman, President and Chief Executive Officer of the Company. In
particular, and without limitation, such duties shall include:

                (a) developing strategic policies for the Company,

                (b) coordinating the Board of Directors activities and the
various committees of the Board of Directors, including but not limited to the
Audit Committee and the Compensation Committee,

                (c) participating as the Chairman and member of the Coronary
Radiation Management Committee, and

                (d) managing projects as requested by the Company's Board of
Directors.


<PAGE>   2

            3.2 No Conflicting Duties. Except as provided in Exhibit A hereto,
during the term hereof, the Executive shall not serve as an officer, director,
employee, consultant or advisor to any other business; provided, however, that
the Executive may serve as a director of another corporation so long as (i) such
corporation does not compete, directly or indirectly, with the Company or any of
its Affiliates for such products as defined as "Competitive Products" in Exhibit
B attached to this Agreement, and (ii) such services do not adversely affect
Executive's ability to perform his duties under this Agreement, unless such
other service is approved by the Board of Directors of the Company. For purposes
of this Agreement, the term "Affiliate" means any corporation, association or
other business entity of which more than 50% of the total voting power of shares
of stock entitled to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled by the Company. Notwithstanding the
foregoing, nothing contained herein shall prevent Executive from making and
expending any time of passive personal investments and/or expending reasonable
amounts of time for educational and charitable activities. Except as provided in
Exhibit A hereto, the Executive confirms that he is under no contractual
commitment inconsistent with his obligations set forth in this Agreement.

        4. Compensation.

            4.1 Base Salary. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $264,000 ("Base Salary"), which shall be paid on a regular basis
in accordance with the Company's normal payroll procedures and policies. The
amount of the Base Salary shall be reviewed by the Compensation Committee of the
Board of Directors, which may annually increase Executive's Base Salary in
amounts consistent with industry practices as determined in its sole discretion.
Executive's performance, the performance of the Company and such other factors
as the Board of Directors deem appropriate shall also be considered.

            4.2 Incentive Compensation Plans. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to earn up to thirty-five percent (35%) of his Base Salary as incentive
compensation. All amounts to which the Executive may be entitled under any
incentive compensation plans shall be subject to the provisions, rules and
regulations of any such plan which apply to other management employees.

            4.3 Participation in Benefit Plans. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit C.



<PAGE>   3

            4.4 Expenses. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.

        5.  Termination.

            5.1 Termination by the Company for Cause. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":

               (a) Willful misconduct by Executive causing material harm to the
Company but only if Executive shall not have discontinued such misconduct within
30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.

               (b) Any material act or omission by the Executive involving gross
negligence in the performance of the Executive's duties to, or material
deviation from any of the policies or directives of, the Company, other than a
deviation taken in good faith by the Executive for the benefit of the Company;

               (c) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.

               Termination by the Company for cause shall be accomplished by
written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct his conduct.

            5.2 Termination for Death or Disability. In addition to termination
for cause pursuant to Section 5.1 hereof, the Executive's employment pursuant to
this Agreement shall be immediately terminated without notice by the Company (i)
upon the death of the Executive or (ii) upon the Executive becoming totally
disabled. For purposes of this Agreement, the term "totally disabled" means an
inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of one
hundred eighty (180) or more consecutive days, as determined by a competent
physician selected by the Company's Board of Directors and reasonably agreed to
by the Executive, following such one hundred eighty (180) day period.

            5.3 Termination for Good Reason. Executive's employment pursuant to
this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates his employment as a result of any of the
following:

               (a) Without the Executive's prior written consent, a reduction in
his then current Base Salary;





<PAGE>   4

               (b) Without Executive's prior written consent, a relocation of
the Executive's place of employment outside of Orange County, California;

               (c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;

               (d) A reduction in duties and responsibilities which results in
the Executive no longer having duties customary for a Chairman, President and
Chief Executive Officer; or

               (e) The Company materially breaches any provision of this
Agreement.

            5.4 Termination Without Cause. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.

            5.5 Payments Upon Removal or Termination. If during the term of this
Agreement, the Executive resigns for one of the reasons stated in Section 5.3,
or the Company terminates the Executive's service, except as provided in
Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the following
compensation: (i) the portion of his then current Base Salary which has accrued
through his date of termination, (ii) any payments for unused vacation and
reimbursement expenses, which are due, accrued or payable at the date of
Executive's termination, (iii) severance payment in an amount (the "Severance
Amount") equal to Executive's then-current Base Salary, payable for the
remainder of the Term; and (iv) all of Executive's options to purchase shares of
the Company's common stock and restricted stock shall accelerate and
automatically vest by one additional year, and such options shall otherwise be
exercisable in accordance with their terms.

            All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the Executive shall be entitled to only the compensation set forth in
items (i) and (ii) or the first paragraph of this Section 5.5.

            6. Assignment. This Agreement shall not be assignable, in whole or
in part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.



<PAGE>   5

            7. Successors. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.

            8. Miscellaneous.

               8.1 Governing Law. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.

               8.2 Prior Agreements. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
all prior agreements and understanding with respect to such subject matter, and
the parties hereto have made no agreements, representations or warranties
relating to the subject matter of this Agreement which are not set forth herein.

               8.3 Arbitration. In the event of any controversy, claim or
dispute between the parties hereto arising out of or relating to this Agreement,
the matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.

               8.4 Withholding Taxes. The Company may withhold from any salary
and benefits payable under this Agreement all federal, state, city or other
taxes or amounts as shall be required to be withheld pursuant to any law or
governmental regulation or ruling.

               8.5 Amendments. No amendment or modification of this Agreement
shall be deemed effective unless made in writing signed by the parties hereto.

               8.6 No Waiver. No term or condition of this Agreement shall be
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.

               8.7 Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.



<PAGE>   6

               8.8 Counterpart Execution. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.

               8.9 Attorneys Fees. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or his reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.

               8.10 Notices. Any notice required or permitted to be given
hereunder shall be in writing and may be personally served or sent by United
States Mail, and shall be deemed to have been given when personally served or
two days after having been deposited in the United States Mail, registered mail,
return receipt requested, with first class postage prepaid and properly
addressed as follows:

               If to Executive:             Michael Henson
                                            Two Via Presea
                                            Coto de Caza, CA 92679

               If to the Company:           Cardiovascular Dynamics, Inc.
                                            13700 Alton Parkway, Suite 160
                                            Irvine, CA 92618
                                            Attn: Chief Executive Officer


               8.11 Proprietary Information and Inventions Agreement. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.

        IN WITNESS WHEREOF, the parties have executed this Agreement as
of the day and year set forth above.

                                             "COMPANY"
                                             CARDIOVASCULAR DYNAMICS, INC.,
                                             a Delaware corporation


                                             By: _______________________________
                                             Its: ______________________________


                                             "EXECUTIVE"

                                             ___________________________________
                                             Michael R. Henson



<PAGE>   7

                                    EXHIBIT A


        M. Henson Board of Director Memberships

               --Endologix, Inc.

               --Micrus Corporation






<PAGE>   8

                                    Exhibit B


        "Competitive Products"

               1.     PTCA Catheters

               2.     Conventional Coronary Stents - Without Drug Delivery

               3.     Conventional Coronary Stents - with Radiation

               4.     Coronary and Peripheral Vascular Radiation Catheters






<PAGE>   9

                                    Exhibit C


        M. Henson Benefits

               --Health Insurance

               --Dental Insurance

               --Prescription Drug Insurance

               --401K Program Participation

               --Employee Stock Purchase Program Participation

               --Paid Company Holidays

               --Paid vacation per company policy

               --Monthly automobile allowance of $850.00 per month

               --Administrative assistant support services




<PAGE>   10

                        AMENDMENT TO EMPLOYMENT AGREEMENT


        THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is made and
entered into as of February 1, 1999 by and between RADIANCE MEDICAL SYSTEMS,
INC., a Delaware corporation (the "Company"), and Michael R. Henson, an
individual (the "Executive").

                                  R E C I T A L

        The Company and Executive are parties to an Employment Agreement dated
January 14, 1999, and the parties thereto desire to amend such Employment
Agreement as set forth herein.

                                A G R E E M E N T

        NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:

               1. Article 4 of the Employment Agreement is amended to add a new
Section 4.5 to read as follows:

               "4.5 ACCELERATION OF OPTIONS. Notwithstanding any provisions of
        the Company's option or stock incentive plan, or of the Executive's
        stock option or restricted stock agreements, in the event of a
        "Corporate Transaction" or "Change of Control," as defined below, during
        the period of the Executive's employment hereunder; all of the
        Executive's stock options shall vest in full and all rights of the
        company to repurchase restricted stock of the Executive shall terminate.
        For purposes hereof, "Change in Control" shall mean a change in
        ownership or control of the Company effected through either of the
        following transactions:

                      (i) the acquisition, directly or indirectly, by any person
        or related group of persons (other than the Company or a person that
        directly or indirectly controls, is controlled by, or is under common
        control with, the Company), of beneficial ownership (within the meaning
        of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
        percent (50%) of the total combined voting power of the Company's
        outstanding securities pursuant to a tender or exchange offer made
        directly to the Company's stockholders which the Board does not
        recommend such stockholders to accept, or

                      (ii) a change in the composition of the Board over a
        period of thirty-six (36) consecutive months or less such that a
        majority of the Board members ceases, by reason of one or more contested
        elections for Board membership, to be comprised of individuals who
        either (A) have been Board members continuously since the beginning of
        such period or (B) have been elected or nominated for election as Board
        members during such period by at least a majority of the Board members
        described in clause (A) who were still in office at the time the Board
        approved such election or nomination.



<PAGE>   11

               "Corporate Transaction" shall mean either of the following
stockholder-approved transactions to which the Company is a party:

                      (i) a merger or consolidation in which securities
        possessing more than fifty percent (50%) of the total combined voting
        power of the Company's outstanding securities are transferred to a
        person or persons different from the persons holding those securities
        immediately prior to such transaction; or

                      (ii) the sale, transfer or other disposition of all or
        substantially all of the Company's assets in complete liquidation or
        dissolution of the Company."

        2. Section 5.5 is amended to add the following at the end of such 
section:

               "To the extent that any or all of the payments and benefits
        provided for in this Agreement constitute "parachute payments" within
        the meaning of Section 280G of the Internal Revenue Code (the "Code")
        and, but for this paragraph, would be subject to the excise tax imposed
        by Section 4999 of the Code, then at the Executive's election:

                      (A) the Executive shall receive all such payments and
               benefits the Executive is entitled to receive hereunder, and any
               liability for taxes pursuant to the above shall be the liability
               solely of the Executive; or

                      (B) the aggregate amount of such payments and benefits
               shall be reduced such that the present value thereof (as
               determined under the Code and applicable regulations) is equal to
               2.99 times the Executive's "base amount" (as defined in the
               Code).

               The determination of any reduction or increase of any payment or
        benefits under this paragraph 5 pursuant to the foregoing provision
        shall be made by a nationally recognized public accounting firm chosen
        by the Company in good faith, and such determination shall be conclusive
        and binding on the Company and the Executive."

        3. All other terms and provisions of the Employment Agreement shall
remain in full force and effect.




<PAGE>   12

        IN WITNESS WHEREOF, the parties have executed this Amendment as of the
day and year set forth above.


                                           "COMPANY"
                                           RADIANCE MEDICAL  SYSTEMS, INC.,
                                           a Delaware corporation


                                           By: ________________________________
                                           Its: _______________________________


                                           "EXECUTIVE"


                                           ____________________________________
                                           Michael R. Henson





<PAGE>   1
                                                                   EXHIBIT 10.28


                              EMPLOYMENT AGREEMENT


        THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of February 1, 1999 by and between RADIANCE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), and Stephen R. Kroll, an individual (the
"Executive").

                                  R E C I T A L

        The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.

                                A G R E E M E N T

        NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:

        1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the
Vice President and Chief Financial Officer of the Company, reporting to the
Chief Executive Officer ("CEO") of the Company, and the Executive accepts such
employment and agrees to devote substantially all his business time and efforts
and skills on such reasonable duties as shall be assigned to him by the Company
commensurate with such position.

        2. TERM. The initial term of the Executive's employment hereunder shall
commence February 1, 1999 ("Effective Date")
 and shall be for a period of two
(2) years, and shall automatically extend for successive one year periods
following the initial term unless either party delivers written notice to the
other no later than sixty (60) days prior to the end of the second anniversary
of the Effective Date or any successive anniversary of the Effective Date, as
the case may be, of intent not to renew. Executive's employment is subject to
earlier termination as hereafter specified.

        3. POSITION AND DUTIES.

           3.1 SERVICE WITH THE COMPANY. During the term of this Agreement, the
Executive agrees to perform such reasonable duties and on such basis as shall be
assigned to him from time to time by the CEO; such duties, however, to be
commensurate with the Executive's position as Vice President and Chief Financial
Officer of the Company. In particular, and without limitation, such duties shall
include, within the guidelines set by the CEO, setting up long-range strategic
plans, guidance of day-to-day operations of the Company, preparing operating
budgets for presentation to the CEO, implementation of operating plans as
approved by the CEO and communicating the Company's goals and objects to the
financial community.

           3.2 NO CONFLICTING DUTIES. Except as provided in Exhibit A hereto,
during the term hereof, the Executive shall not serve as an officer, director,
employee, consultant or advisor to any other business; provided, however, that
the Executive may serve as a director of another corporation so long as (i) such
corporation does not compete, directly or indirectly, with the



<PAGE>   2

Company or any of its Affiliates for such products as defined as "Competitive
Products" in Exhibit B attached to this Agreement, and (ii) such services do not
adversely affect Executive's ability to perform his duties under this Agreement,
unless such other service is approved by the CEO or Board of Directors of the
Company. For purposes of this Agreement, the term "Affiliate" means any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of stock entitled to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled by
the Company. Notwithstanding the foregoing, nothing contained herein shall
prevent Executive from making and expending any time of passive personal
investments and/or expending reasonable amounts of time for educational and
charitable activities. Except as provided in Exhibit A hereto, the Executive
confirms that he is under no contractual commitment inconsistent with his
obligations set forth in this Agreement.

        4. COMPENSATION.

           4.1 BASE SALARY. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $175,000 ("Base Salary"), which shall be paid on a regular basis
in accordance with the Company's normal payroll procedures and policies. The
amount of the Base Salary shall be reviewed by the Compensation Committee of the
Board of Directors, which may annually increase Executive's Base Salary in
amounts consistent with industry practices as determined in its sole discretion.
Executive's performance, the performance of the Company and such other factors
as the Compensation Committee of the Board of Directors deem appropriate shall
also be considered.

           4.2 INCENTIVE COMPENSATION PLANS. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to earn up to thirty percent (30%) of his Base Salary as incentive
compensation. All amounts to which the Executive may be entitled under any
incentive compensation plans shall be subject to the provisions, rules and
regulations of any such plan which apply to other management employees.

           4.3 PARTICIPATION IN BENEFIT PLANS. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit C.

           4.4 EXPENSES. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.



<PAGE>   3

           4.5 ACCELERATION OF OPTIONS. Notwithstanding any provisions of the
Company's option or stock incentive plan, or of the Executive's stock option or
restricted stock agreements, in the event of a "Corporate Transaction" or
"Change of Control," as defined below, during the period of the Executive's
employment hereunder; all of the Executive's stock options shall vest in full
and all rights of the company to repurchase restricted stock of the Executive
shall terminate. For purposes hereof, "Change in Control" shall mean a change in
ownership or control of the Company effected through either of the following
transactions:

                      (i) the acquisition, directly or indirectly, by any person
        or related group of persons (other than the Company or a person that
        directly or indirectly controls, is controlled by, or is under common
        control with, the Company), of beneficial ownership (within the meaning
        of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
        percent (50%) of the total combined voting power of the Company's
        outstanding securities pursuant to a tender or exchange offer made
        directly to the Company's stockholders which the Board does not
        recommend such stockholders to accept, or

                      (ii) a change in the composition of the Board over a
        period of thirty-six (36) consecutive months or less such that a
        majority of the Board members ceases, by reason of one or more contested
        elections for Board membership, to be comprised of individuals who
        either (A) have been Board members continuously since the beginning of
        such period or (B) have been elected or nominated for election as Board
        members during such period by at least a majority of the Board members
        described in clause (A) who were still in office at the time the Board
        approved such election or nomination.

           "Corporate Transaction" shall mean either of the following
stockholder-approved transactions to which the Company is a party:

                      (i) a merger or consolidation in which securities
        possessing more than fifty percent (50%) of the total combined voting
        power of the Company's outstanding securities are transferred to a
        person or persons different from the persons holding those securities
        immediately prior to such transaction; or

                      (ii) the sale, transfer or other disposition of all or
        substantially all of the Company's assets in complete liquidation or
        dissolution of the Company.

        5. TERMINATION.

           5.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":

               (a) Willful misconduct by Executive causing material harm to the
Company but only if Executive shall not have discontinued such misconduct within
30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.

               (b) Any material act or omission by the Executive involving gross
negligence in the performance of the Executive's duties to, or material
deviation from any of the policies or directives of, the Company, other than a
deviation taken in good faith by the Executive for the benefit of the Company;



<PAGE>   4

               (c) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.

               Termination by the Company for cause shall be accomplished by
written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct his conduct.

           5.2 TERMINATION FOR DEATH OR DISABILITY. In addition to termination
for cause pursuant to Section 5.1 hereof, the Executive's employment pursuant to
this Agreement shall be immediately terminated without notice by the Company (i)
upon the death of the Executive or (ii) upon the Executive becoming totally
disabled. For purposes of this Agreement, the term "totally disabled" means an
inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of one
hundred eighty (180) or more consecutive days, as determined by a competent
physician selected by the Company's Board of Directors and reasonably agreed to
by the Executive, following such one hundred eighty (180) day period.

           5.3 TERMINATION FOR GOOD REASON. Executive's employment pursuant to
this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates his employment as a result of any of the
following:

               (a) Without the Executive's prior written consent, a reduction in
his then current Base Salary;

               (b) Without Executive's prior written consent, a relocation of
the Executive's place of employment outside of Orange County, California;

               (c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;

               (d) A reduction in duties and responsibilities which results in
the Executive no longer having duties customary for a Vice President and Chief
Financial Officer; or

               (e) The Company materially breaches any provision of this
Agreement.

           5.4 TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.

           5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of this
Agreement, the Executive resigns for one of the reasons stated in Section 5.3,
or the Company terminates the Executive's service, except as provided in
Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the following
compensation: (i) the portion of his then current Base Salary which


<PAGE>   5

has accrued through his date of termination, (ii) any payments for unused
vacation and reimbursement expenses, which are due, accrued or payable at the
date of Executive's termination, (iii) severance payment in an amount (the
"Severance Amount") equal to Executive's then-current Base Salary, payable for
the remainder of the Term; and (iv) all of Executive's options to purchase
shares of the Company's common stock and restricted stock shall accelerate and
automatically vest by one additional year, and such options shall otherwise be
exercisable in accordance with their terms.

           All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the Executive shall be entitled to only the compensation set forth in
items (i) and (ii) or the first paragraph of this Section 5.5.

           To the extent that any or all of the payments and benefits provided
for in this Agreement constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code (the "Code") and, but for this
paragraph, would be subject to the excise tax imposed by Section 4999 of the
Code, then at the Executive's election:

                      (A) the Executive shall receive all such payments and
        benefits the Executive is entitled to receive hereunder, and any
        liability for taxes pursuant to the above shall be the liability solely
        of the Executive; or

                      (B) the aggregate amount of such payments and benefits
        shall be reduced such that the present value thereof (as determined
        under the Code and applicable regulations) is equal to 2.99 times the
        Executive's "base amount" (as defined in the Code).

           The determination of any reduction or increase of any payment or
benefits under this paragraph 5 pursuant to the foregoing provision shall be
made by a nationally recognized public accounting firm chosen by the Company in
good faith, and such determination shall be conclusive and binding on the
Company and the Executive.

        6. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.





<PAGE>   6

        7. SUCCESSORS. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.

        8. MISCELLANEOUS.

           8.1 GOVERNING LAW. This Agreement is made under and shall be governed
by and construed in accordance with the laws of the State of California.

           8.2 PRIOR AGREEMENTS. This Agreement contains the entire agreement of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this Agreement which are not set forth herein.

           8.3 ARBITRATION. In the event of any controversy, claim or dispute
between the parties hereto arising out of or relating to this Agreement, the
matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.

           8.4 WITHHOLDING TAXES. The Company may withhold from any salary and
benefits payable under this Agreement all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.

           8.5 AMENDMENTS. No amendment or modification of this Agreement shall
be deemed effective unless made in writing signed by the parties hereto.

           8.6 NO WAIVER. No term or condition of this Agreement shall be deemed
to have been waived nor shall there be any estoppel to enforce any provisions of
this Agreement, except by a statement in writing signed by the party against
whom enforcement of the waiver or estoppel is sought. Any written waiver shall
not be deemed a continuing waiver unless specifically stated, shall operate only
as to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.

           8.7 SEVERABILITY. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.

           8.8 COUNTERPART EXECUTION. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.


<PAGE>   7

           8.9 ATTORNEYS FEES. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or his reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.

           8.10 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally served or sent by United States Mail,
and shall be deemed to have been given when personally served or two days after
having been deposited in the United States Mail, registered mail, return receipt
requested, with first class postage prepaid and properly addressed as follows:

           If to Executive:             Stephen R. Kroll
                                        3591 Courtside Circle
                                        Huntington Beach, CA 92649

           If to the Company:           Radiance Medical  Systems, Inc.
                                        13700 Alton Parkway, Suite 160
                                        Irvine, CA 92618
                                        Attn: Chief Executive Officer

           9.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.




<PAGE>   8

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.


                                         "COMPANY"
                                         RADIANCE MEDICAL  SYSTEMS, INC.,
                                         a Delaware corporation


                                         By: _____________________________
                                         Its: ____________________________


                                         "EXECUTIVE"


                                         _________________________________
                                         Stephen R. Kroll





<PAGE>   9

                                    Exhibit A

                 Stephen R. Kroll Board of Director Memberships


        None.




<PAGE>   10

                                    Exhibit B


        "Competitive Products"

               1.     PTCA Catheters

               2.     Conventional Coronary Stents - Without Drug Delivery

               3.     Conventional Coronary Stents - with Radiation

               4.     Coronary and Peripheral Vascular Radiation Catheters



<PAGE>   11

                                    Exhibit C

        S. Kroll Benefits

               --Health Insurance

               --Dental Insurance

               --Long Term Disability Insurance

               --Prescription Drug Insurance

               --401K Program Participation

               --Employee Stock Purchase Program Participation

               --Paid Company Holidays

               --Paid vacation per company policy




<PAGE>   1
                                                                   EXHIBIT 10.29

                              EMPLOYMENT AGREEMENT


        THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of ___________, 1999 by and between RADIANCE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), and Jeffrey Thiel, an individual (the "Executive").

                                  R E C I T A L

        The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.

                                A G R E E M E N T

        NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:

        1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the
Executive Vice President, Operations of the Company, reporting to the Chief
Executive Officer ("CEO") of the Company, and the Executive accepts such
employment and agrees to devote substantially all his business time and efforts
and skills on such reasonable duties as shall be assigned to him by the Company
commensurate with such position.

        2. TERM. The initial term of the Executive's employment hereunder shall
commence ___________, 1999 ("Effective Date") and shall be for a period of two

(2) years, and shall automatically extend for successive one year periods
following the initial term unless either party delivers written notice to the
other no later than sixty (60) days prior to the end of the second anniversary
of the Effective Date or any successive anniversary of the Effective Date, as
the case may be, of intent not to renew. Executive's employment is subject to
earlier termination as hereafter specified.

        3. POSITION AND DUTIES.

           3.1 SERVICE WITH THE COMPANY. During the term of this Agreement, the
Executive agrees to perform such reasonable duties and on such basis as shall be
assigned to him from time to time by the CEO; such duties, however, to be
commensurate with the Executive's position as Executive Vice President,
Operations of the Company. In particular, and without limitation, such duties
shall include, within the guidelines set by the CEO, setting up long-range
strategic plans, guidance of day-to-day operations of the Company, preparing
operating budgets for presentation to the CEO, and implementation of operating
plans as approved by the CEO.

           3.2 NO CONFLICTING DUTIES. Except as provided in Exhibit A hereto,
during the term hereof, the Executive shall not serve as an officer, director,
employee, consultant or advisor to any other business; provided, however, that
the Executive may serve as a director of another corporation so long as (i) such
corporation does not compete, directly or indirectly, with the Company or any of
its Affiliates for such products as defined as "Competitive Products" in Exhibit
B



<PAGE>   2

attached to this Agreement, and (ii) such services do not adversely affect
Executive's ability to perform his duties under this Agreement, unless such
other service is approved by the CEO or Board of Directors of the Company. For
purposes of this Agreement, the term "Affiliate" means any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of stock entitled to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled by the Company.
Notwithstanding the foregoing, nothing contained herein shall prevent Executive
from making and expending any time of passive personal investments and/or
expending reasonable amounts of time for educational and charitable activities.
Except as provided in Exhibit A hereto, the Executive confirms that he is under
no contractual commitment inconsistent with his obligations set forth in this
Agreement.

        4. COMPENSATION.

           4.1 BASE SALARY. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $153,846 ("Base Salary"), which shall be paid on a regular basis
in accordance with the Company's normal payroll procedures and policies. The
amount of the Base Salary shall be reviewed by the Compensation Committee of the
Board of Directors, which may annually increase Executive's Base Salary in
amounts consistent with industry practices as determined in its sole discretion.
Executive's performance, the performance of the Company and such other factors
as the Compensation Committee of the Board of Directors deem appropriate shall
also be considered.

           4.2 INCENTIVE COMPENSATION PLANS. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to earn up to twenty percent (20%) of his Base Salary as incentive
compensation. All amounts to which the Executive may be entitled under any
incentive compensation plans shall be subject to the provisions, rules and
regulations of any such plan which apply to other management employees.

           4.3 PARTICIPATION IN BENEFIT PLANS. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit C.

           4.4 EXPENSES. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.

           4.5 ACCELERATION OF OPTIONS. Notwithstanding any provisions of the
Company's option or stock incentive plan, or of the Executive's stock option or
restricted stock agreements, in



<PAGE>   3

the event of a "Corporate Transaction" or "Change of Control," as defined below,
during the period of the Executive's employment hereunder; all of the
Executive's stock options shall vest in full and all rights of the company to
repurchase restricted stock of the Executive shall terminate. For purposes
hereof, "Change in Control" shall mean a change in ownership or control of the
Company effected through either of the following transactions:

                      (i) the acquisition, directly or indirectly, by any person
        or related group of persons (other than the Company or a person that
        directly or indirectly controls, is controlled by, or is under common
        control with, the Company), of beneficial ownership (within the meaning
        of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
        percent (50%) of the total combined voting power of the Company's
        outstanding securities pursuant to a tender or exchange offer made
        directly to the Company's stockholders which the Board does not
        recommend such stockholders to accept, or

                      (ii) a change in the composition of the Board over a
        period of thirty-six (36) consecutive months or less such that a
        majority of the Board members ceases, by reason of one or more contested
        elections for Board membership, to be comprised of individuals who
        either (A) have been Board members continuously since the beginning of
        such period or (B) have been elected or nominated for election as Board
        members during such period by at least a majority of the Board members
        described in clause (A) who were still in office at the time the Board
        approved such election or nomination.

           "Corporate Transaction" shall mean either of the following
stockholder-approved transactions to which the Company is a party:

                      (i) a merger or consolidation in which securities
        possessing more than fifty percent (50%) of the total combined voting
        power of the Company's outstanding securities are transferred to a
        person or persons different from the persons holding those securities
        immediately prior to such transaction; or

                      (ii) the sale, transfer or other disposition of all or
        substantially all of the Company's assets in complete liquidation or
        dissolution of the Company.

        5. TERMINATION.

           5.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":

               (a) Willful misconduct by Executive causing material harm to the
Company but only if Executive shall not have discontinued such misconduct within
30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.

               (b) Any material act or omission by the Executive involving gross
negligence in the performance of the Executive's duties to, or material
deviation from any of the policies or directives of, the Company, other than a
deviation taken in good faith by the Executive for the benefit of the Company;



<PAGE>   4

               (c) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.

               Termination by the Company for cause shall be accomplished by
written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct his conduct.

           5.2 TERMINATION FOR DEATH OR DISABILITY. In addition to termination
for cause pursuant to Section 5.1 hereof, the Executive's employment pursuant to
this Agreement shall be immediately terminated without notice by the Company (i)
upon the death of the Executive or (ii) upon the Executive becoming totally
disabled. For purposes of this Agreement, the term "totally disabled" means an
inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of one
hundred eighty (180) or more consecutive days, as determined by a competent
physician selected by the Company's Board of Directors and reasonably agreed to
by the Executive, following such one hundred eighty (180) day period.

           5.3 TERMINATION FOR GOOD REASON. Executive's employment pursuant to
this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates his employment as a result of any of the
following:

               (a) Without the Executive's prior written consent, a reduction in
his then current Base Salary;

               (b) Without Executive's prior written consent, a relocation of
the Executive's place of employment outside of Orange County, California;

               (c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;

               (d) A reduction in duties and responsibilities which results in
the Executive no longer having duties customary for an Executive Vice President,
Operations; or

               (e) The Company materially breaches any provision of this
Agreement.

           5.4 TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.

           5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of this
Agreement, the Executive resigns for one of the reasons stated in Section 5.3,
or the Company terminates the Executive's service, except as provided in
Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the following
compensation: (i) the portion of his then current Base Salary which has accrued
through his date of termination, (ii) any payments for unused vacation and
reimbursement expenses, which are due, accrued or payable at the date of
Executive's termination, (iii) severance payment in an amount (the "Severance
Amount") equal to Executive's then-current Base Salary, payable for the
remainder of the Term; and (iv) all of Executive's options to purchase shares of
the Company's common stock and restricted stock shall accelerate and
automatically vest by one additional year, and such options shall otherwise be
exercisable in accordance with their terms.



<PAGE>   5

           All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the Executive shall be entitled to only the compensation set forth in
items (i) and (ii) or the first paragraph of this Section 5.5.

           To the extent that any or all of the payments and benefits provided
for in this Agreement constitute "parachute payments" within the meaning of
Section 280G of the Internal Revenue Code (the "Code") and, but for this
paragraph, would be subject to the excise tax imposed by Section 4999 of the
Code, then at the Executive's election:

                      (A) the Executive shall receive all such payments and
        benefits the Executive is entitled to receive hereunder, and any
        liability for taxes pursuant to the above shall be the liability solely
        of the Executive; or

                      (B) the aggregate amount of such payments and benefits
        shall be reduced such that the present value thereof (as determined
        under the Code and applicable regulations) is equal to 2.99 times the
        Executive's "base amount" (as defined in the Code).

           The determination of any reduction or increase of any payment or
benefits under this paragraph 5 pursuant to the foregoing provision shall be
made by a nationally recognized public accounting firm chosen by the Company in
good faith, and such determination shall be conclusive and binding on the
Company and the Executive.

        6. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.

        7. SUCCESSORS. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.



<PAGE>   6

        8. MISCELLANEOUS.

           8.1 GOVERNING LAW. This Agreement is made under and shall be governed
by and construed in accordance with the laws of the State of California.

           8.2 PRIOR AGREEMENTS. This Agreement contains the entire agreement of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this Agreement which are not set forth herein.

           8.3 ARBITRATION. In the event of any controversy, claim or dispute
between the parties hereto arising out of or relating to this Agreement, the
matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.

           8.4 WITHHOLDING TAXES. The Company may withhold from any salary and
benefits payable under this Agreement all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.

           8.5 AMENDMENTS. No amendment or modification of this Agreement shall
be deemed effective unless made in writing signed by the parties hereto.

           8.6 NO WAIVER. No term or condition of this Agreement shall be deemed
to have been waived nor shall there be any estoppel to enforce any provisions of
this Agreement, except by a statement in writing signed by the party against
whom enforcement of the waiver or estoppel is sought. Any written waiver shall
not be deemed a continuing waiver unless specifically stated, shall operate only
as to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.

           8.7 SEVERABILITY. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.

           8.8 COUNTERPART EXECUTION. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.


<PAGE>   7

           8.9 ATTORNEYS FEES. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or his reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.

           8.10 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally served or sent by United States Mail,
and shall be deemed to have been given when personally served or two days after
having been deposited in the United States Mail, registered mail, return receipt
requested, with first class postage prepaid and properly addressed as follows:

                If to Executive:             Jeffrey Thiel
                                             8 Thornapple
                                             Laguna Niguel, CA 92677

                If to the Company:           Radiance Medical  Systems, Inc.
                                             13700 Alton Parkway, Suite 160
                                             Irvine, CA 92618
                                             Attn:  Chief Executive Officer

           9.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.


<PAGE>   8



        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.

                                                "COMPANY"
                                                RADIANCE MEDICAL  SYSTEMS, INC.,
                                                a Delaware corporation


                                                By: ____________________________
                                                Its: ___________________________


                                                "EXECUTIVE"


                                                ________________________________
                                                Jeffrey Thiel



<PAGE>   9

                                    Exhibit A

                   Jeffrey Thiel Board of Director Memberships


           None.




<PAGE>   10

                                    Exhibit B


        "Competitive Products"

               1.     PTCA Catheters

               2.     Conventional Coronary Stents - Without Drug Delivery

               3.     Conventional Coronary Stents - with Radiation

               4.     Coronary and Peripheral Vascular Radiation Catheters




<PAGE>   11

                                    Exhibit C

        J. Thiel Benefits

               --Health Insurance

               --Dental Insurance

               --Long Term Disability Insurance

               --Prescription Drug Insurance

               --401K Program Participation

               --Employee Stock Purchase Program Participation

               --Paid Company Holidays

               --Paid vacation per company policy




<PAGE>   1
                                                                   EXHIBIT 10.30


                              EMPLOYMENT AGREEMENT

        THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of ____________, 1999 by and between RADIANCE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), and Claire Walker, an individual (the "Executive").

                                  R E C I T A L

        The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.

                                A G R E E M E N T

        NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:

        1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the
Vice President, Clinical Affairs of the Company, reporting to the Chief
Executive Officer ("CEO") of the Company, and the Executive accepts such
employment and agrees to devote substantially all her business time and efforts
and skills on such reasonable duties as shall be assigned to her by the Company
commensurate with such position.

        2. TERM. The initial term of the Executive's employment hereunder shall
commence __________, 1999 ("Effective Date") and shall be for a period of two
(2) years,
 and shall automatically extend for successive one year periods
following the initial term unless either party delivers written notice to the
other no later than sixty (60) days prior to the end of the second anniversary
of the Effective Date or any successive anniversary of the Effective Date, as
the case may be, of intent not to renew. Executive's employment is subject to
earlier termination as hereafter specified.

        3. POSITION AND DUTIES.

           3.1 SERVICE WITH THE COMPANY. During the term of this Agreement, the
Executive agrees to perform such reasonable duties and on such basis as shall be
assigned to her from time to time by the CEO; such duties, however, to be
commensurate with the Executive's position as Executive Vice President, Clinical
Affairs of the Company. In particular, and without limitation, such duties shall
include, within the guidelines set by the CEO, designing, implementing and
monitoring clinical studies on the Company's products, _____________, _________,
___________.

           3.2 NO CONFLICTING DUTIES. Except as provided in Exhibit A hereto,
during the term hereof, the Executive shall not serve as an officer, director,
employee, consultant or advisor to any other business; provided, however, that
the Executive may serve as a director of another corporation so long as (i) such
corporation does not compete, directly or indirectly, with the Company or any of
its Affiliates for such products as defined as "Competitive Products" in Exhibit
B attached to this Agreement, and (ii) such services do not adversely affect
Executive's ability to



<PAGE>   2

perform her duties under this Agreement, unless such other service is approved
by the CEO or Board of Directors of the Company. For purposes of this Agreement,
the term "Affiliate" means any corporation, association or other business entity
of which more than 50% of the total voting power of shares of stock entitled to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled by the Company. Notwithstanding the foregoing, nothing
contained herein shall prevent Executive from making and expending any time of
passive personal investments and/or expending reasonable amounts of time for
educational and charitable activities. Except as provided in Exhibit A hereto,
the Executive confirms that she is under no contractual commitment inconsistent
with her obligations set forth in this Agreement.

        4. COMPENSATION.

           4.1 BASE SALARY. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $138,180 ("Base Salary"), which shall be paid on a regular basis
in accordance with the Company's normal payroll procedures and policies. The
amount of the Base Salary shall be reviewed by the Compensation Committee of the
Board of Directors, which may annually increase Executive's Base Salary in
amounts consistent with industry practices as determined in its sole discretion.
Executive's performance, the performance of the Company and such other factors
as the Compensation Committee of the Board of Directors deem appropriate shall
also be considered.

           4.2 INCENTIVE COMPENSATION PLANS. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to earn up to twenty percent (20%) of her Base Salary as incentive
compensation. All amounts to which the Executive may be entitled under any
incentive compensation plans shall be subject to the provisions, rules and
regulations of any such plan which apply to other management employees.

           4.3 PARTICIPATION IN BENEFIT PLANS. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit C.

           4.4 EXPENSES. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by her in the
performance of her duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.

           4.5 ACCELERATION OF OPTIONS. Notwithstanding any provisions of the
Company's option or stock incentive plan, or of the Executive's stock option or
restricted stock agreements, in the event of a "Corporate Transaction" or
"Change of Control," as defined below, during the period




<PAGE>   3

of the Executive's employment hereunder; all of the Executive's stock options
shall vest in full and all rights of the company to repurchase restricted stock
of the Executive shall terminate. For purposes hereof, "Change in Control" shall
mean a change in ownership or control of the Company effected through either of
the following transactions:

                      (i) the acquisition, directly or indirectly, by any person
        or related group of persons (other than the Company or a person that
        directly or indirectly controls, is controlled by, or is under common
        control with, the Company), of beneficial ownership (within the meaning
        of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
        percent (50%) of the total combined voting power of the Company's
        outstanding securities pursuant to a tender or exchange offer made
        directly to the Company's stockholders which the Board does not
        recommend such stockholders to accept, or

                      (ii) a change in the composition of the Board over a
        period of thirty-six (36) consecutive months or less such that a
        majority of the Board members ceases, by reason of one or more contested
        elections for Board membership, to be comprised of individuals who
        either (A) have been Board members continuously since the beginning of
        such period or (B) have been elected or nominated for election as Board
        members during such period by at least a majority of the Board members
        described in clause (A) who were still in office at the time the Board
        approved such election or nomination.

           "Corporate Transaction" shall mean either of the following
stockholder-approved transactions to which the Company is a party:

                      (i) a merger or consolidation in which securities
        possessing more than fifty percent (50%) of the total combined voting
        power of the Company's outstanding securities are transferred to a
        person or persons different from the persons holding those securities
        immediately prior to such transaction; or

                      (ii) the sale, transfer or other disposition of all or
        substantially all of the Company's assets in complete liquidation or
        dissolution of the Company.

        5. TERMINATION.

           5.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":

               (a) Willful misconduct by Executive causing material harm to the
Company but only if Executive shall not have discontinued such misconduct within
30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.

               (b) Any material act or omission by the Executive involving gross
negligence in the performance of the Executive's duties to, or material
deviation from any of the policies or directives of, the Company, other than a
deviation taken in good faith by the Executive for the benefit of the Company;



<PAGE>   4

               (c) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.

               Termination by the Company for cause shall be accomplished by
written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct her conduct.

           5.2 TERMINATION FOR DEATH OR DISABILITY. In addition to termination
for cause pursuant to Section 5.1 hereof, the Executive's employment pursuant to
this Agreement shall be immediately terminated without notice by the Company (i)
upon the death of the Executive or (ii) upon the Executive becoming totally
disabled. For purposes of this Agreement, the term "totally disabled" means an
inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of her duties for a period of one
hundred eighty (180) or more consecutive days, as determined by a competent
physician selected by the Company's Board of Directors and reasonably agreed to
by the Executive, following such one hundred eighty (180) day period.

           5.3 TERMINATION FOR GOOD REASON. Executive's employment pursuant to
this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates her employment as a result of any of the
following:

               (a) Without the Executive's prior written consent, a reduction in
her then current Base Salary;

               (b) Without Executive's prior written consent, a relocation of
the Executive's place of employment outside of Orange County, California;

               (c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;

               (d) A reduction in duties and responsibilities which results in
the Executive no longer having duties customary for a Vice President, Clinical
Affairs; or

               (e) The Company materially breaches any provision of this
Agreement.

           5.4 TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.

           5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of this
Agreement, the Executive resigns for one of the reasons stated in Section 5.3,
or the Company terminates the Executive's service, except as provided in
Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the following
compensation: (i) the portion of her then current Base Salary which has accrued
through her date of termination, (ii) any payments for unused vacation and
reimbursement expenses, which are due, accrued or payable at the date of
Executive's termination, (iii) severance payment in an amount (the "Severance
Amount") equal to Executive's then-current




<PAGE>   5

Base Salary, payable for the remainder of the Term; and (iv) all of Executive's
options to purchase shares of the Company's common stock and restricted stock
shall accelerate and automatically vest by one additional year, and such options
shall otherwise be exercisable in accordance with their terms.

               All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the Executive shall be entitled to only the compensation set forth in
items (i) and (ii) or the first paragraph of this Section 5.5.

               To the extent that any or all of the payments and benefits
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this paragraph, would be subject to the excise tax imposed by Section 4999 of
the Code, then at the Executive's election:

                      (A) the Executive shall receive all such payments and
        benefits the Executive is entitled to receive hereunder, and any
        liability for taxes pursuant to the above shall be the liability solely
        of the Executive; or

                      (B) the aggregate amount of such payments and benefits
        shall be reduced such that the present value thereof (as determined
        under the Code and applicable regulations) is equal to 2.99 times the
        Executive's "base amount" (as defined in the Code).

               The determination of any reduction or increase of any payment or
benefits under this paragraph 5 pursuant to the foregoing provision shall be
made by a nationally recognized public accounting firm chosen by the Company in
good faith, and such determination shall be conclusive and binding on the
Company and the Executive.

        6. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.

        7. SUCCESSORS. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to her hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.



<PAGE>   6

        8. MISCELLANEOUS.

           8.1 GOVERNING LAW. This Agreement is made under and shall be governed
by and construed in accordance with the laws of the State of California.

           8.2 PRIOR AGREEMENTS. This Agreement contains the entire agreement of
the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this Agreement which are not set forth herein.

           8.3 ARBITRATION. In the event of any controversy, claim or dispute
between the parties hereto arising out of or relating to this Agreement, the
matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.

           8.4 WITHHOLDING TAXES. The Company may withhold from any salary and
benefits payable under this Agreement all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.

           8.5 AMENDMENTS. No amendment or modification of this Agreement shall
be deemed effective unless made in writing signed by the parties hereto.

           8.6 NO WAIVER. No term or condition of this Agreement shall be deemed
to have been waived nor shall there be any estoppel to enforce any provisions of
this Agreement, except by a statement in writing signed by the party against
whom enforcement of the waiver or estoppel is sought. Any written waiver shall
not be deemed a continuing waiver unless specifically stated, shall operate only
as to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.

           8.7 SEVERABILITY. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted herefrom and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.

           8.8 COUNTERPART EXECUTION. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.



<PAGE>   7

           8.9 ATTORNEYS FEES. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or her reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.

           8.10 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally served or sent by United States Mail,
and shall be deemed to have been given when personally served or two days after
having been deposited in the United States Mail, registered mail, return receipt
requested, with first class postage prepaid and properly addressed as follows:

                If to Executive:             Claire Walker
                                             787 Balboa Avenue
                                             Laguna Beach, CA 92651

                If to the Company:           Radiance Medical  Systems, Inc.
                                             13700 Alton Parkway, Suite 160
                                             Irvine, CA 92618
                                             Attn:  Chief Executive Officer

           9.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.




<PAGE>   8

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.

                                            "COMPANY"
                                            RADIANCE MEDICAL  SYSTEMS, INC.,
                                            a Delaware corporation


                                            By: _______________________________
                                            Its: ______________________________


                                            "EXECUTIVE"


                                            ___________________________________
                                            Claire Walker



<PAGE>   9

                                    Exhibit A

                   Claire Walker Board of Director Memberships


           None.




<PAGE>   10

                                    Exhibit B


        "Competitive Products"

               1.     PTCA Catheters

               2.     Conventional Coronary Stents - Without Drug Delivery

               3.     Conventional Coronary Stents - with Radiation

               4.     Coronary and Peripheral Vascular Radiation Catheters






<PAGE>   11

                                    Exhibit C

        C. Walker Benefits

               --Health Insurance

               --Dental Insurance

               --Long Term Disability Insurance

               --Prescription Drug Insurance

               --401K Program Participation

               --Employee Stock Purchase Program Participation

               --Paid Company Holidays

               --Paid vacation per company policy




<PAGE>   1

                                                                    EXHIBIT 21.1


                              List of Subsidiaries

1.   CVD/RMS Acquisition Corp., a Delaware corporation.

2.   CVD GmbH, a German corporation.

3.   IDI Acquisition Corporation, a Delaware corporation.




                                       18





<PAGE>   1

                                                                    EXHIBIT 23.1


               CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


        We consent to the incorporation by reference in the Registration
Statements on Form S-8 No. 333-07959, No. 333-42161 and No. 333-72531 and the
Registration Statements on Form S-3 No. 333-35343, No. 333-33997, No. 333-71053,
and No. 333-59305 of our report dated February 18, 1999, with respect to the
consolidated financial statements and schedule of Radiance Medical Systems, Inc.
and subsidiaries included in this Annual Report (Form 10-K) for the year ended
December 31, 1998.


/s/ ERNST & YOUNG LLP


Orange County, California
March XX  , 1999






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