GUIDANT CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.

FORM 10-K

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

For the fiscal year ended December 31, 1997

Commission File Number 1-13388
- -------------------------------------------------------------------------------

GUIDANT CORPORATION
(Exact name of registrant as specified in its charter)

INDIANA 35-1931722
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

111 MONUMENT CIRCLE, 29TH FLOOR
INDIANAPOLIS, INDIANA 46204
--------------------- -----
(Address of principal (Zip Code)
executive offices)

Registrant's telephone number, including area code: 317-971-2000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ----------------------
Common Stock New York Stock Exchange
Pacific Exchange, Inc.

Preferred Stock Purchase Rights New York Stock Exchange
Pacific Exchange, Inc.

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None.

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, and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
----- ----

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

The aggregate market value of voting stock of the registrant held by
non-affiliates as of March 2, 1998 (Common Stock) was approximately
$10.7 billion.

The number of shares of Common Stock outstanding as of March 2, 1998:

CLASS NUMBER OF SHARES OUTSTANDING
Common 150,835,789

Portions of the following documents have been incorporated by reference into
this report:

DOCUMENT PARTS INTO WHICH INCORPORATED

Registrant's Annual Report to Shareholders Parts I, II and IV
for fiscal year ended December 31, 1997

Registrant's Proxy Statement for the Annual Part III
Meeting of Shareholders to be held May 18, 1998

Part I

Item 1. BUSINESS
Overview

Guidant Corporation (the "Company")* was incorporated in Indiana
on September 9, 1994 to be the parent of five of the nine businesses
in the Medical Devices and Diagnostics ("MDD") Division of Eli Lilly
and Company, an Indiana corporation ("Lilly"). Prior to the
consummation of the initial public offering of the Company's common
stock on December 20, 1994 (the "Offering"), the Company was a wholly-
owned subsidiary of Lilly. Pursuant to the Offering, approximately
19.8 percent of the Company's common stock was issued to the public.
Lilly continued to own approximately 80.2 percent of the Company's
common stock after the Offering. On September 25, 1995, Lilly
disposed of its remaining ownership interest in the Company by means
of a split-off, an exchange offer pursuant to which Lilly
shareholders were given the opportunity to exchange some, all or none
of their Lilly common stock for the Company's common stock owned by
Lilly (the "Exchange Offer"). The consummation of the Exchange Offer
resulted in Lilly distributing all of its Company common stock to
Lilly shareholders. As a result, Lilly no longer owns any Company
common stock.

The Company is a multinational company that designs, develops,
manufactures and markets a broad range of products for use in cardiac
rhythm management ("CRM"), vascular intervention ("VI"), and cardiac
and vascular surgery ("CVS"). In CRM, the Company is a worldwide
leader in automatic implantable cardioverter defibrillator ("AICD")
systems used in the detection and treatment of abnormally fast heart
rhythms. The Company also designs, manufactures and markets a full
line of implantable pacemaker systems used in the treatment of slow
or irregular arrhythmias. In VI, the Company is a worldwide leader
in minimally invasive procedures used for opening blocked coronary
arteries. During the fourth quarter of 1997, the Company's Minimally
Invasive Systems Group was renamed the Cardiac & Vascular Surgery
Group to reflect management's strategic redirection of this business.
The Company's net sales for the year ended December 31, 1997 were
$1,328.2 million.

The Company's business strategy is to design, develop, manufacture
and market innovative, high quality therapeutic products principally for
use in treating cardiovascular disease, resulting in improved quality of
patient care and reduced treatment costs. Cardiovascular disease is the
leading cause of death in the United States. In implementing this
strategy, the Company focuses on the following three areas, which the
Company believes are critical to its future success: (1) global product
innovation, (2) economic partnership with customers worldwide, and
(3) organizational excellence.

The Company continues to pursue a strategy that includes the
potential acquisition of businesses in the medical device industry.
The Company plans to acquire technologies that are complementary to
its existing technology base, products that serve the Company's
existing customer base and businesses that expand its geographical
presence. However, there can be no assurance that any acquisition
will be consummated or, if consummated, as to the timing and terms of
any transaction.

- --------------
*The terms, "Company," "Guidant," and "Registrant" are used
interchangeably herein to refer to Guidant Corporation or to
Guidant Corporation and its consolidated subsidiaries, as the
context requires.

2

Cardiac Rhythm Management

In the CRM market, implantable device systems are used to detect
and treat abnormally fast, abnormally slow or irregular heart rhythms
or arrhythmias. The Company's CRM product line is organized into two
major product categories. The tachycardia ("Tachy") product category
includes AICDs, endocardial defibrillation leads, programmers and
accessories used primarily in the treatment of abnormally fast
arrhythmias. The bradycardia ("Brady") product category includes
pacemaker pulse generators, endocardial pacing leads, programmers and
accessories used primarily in the treatment of slow or irregular
arrhythmias. Customers for Brady products include
electrophysiologists, implanting cardiologists and cardiovascular
surgeons. Customers for Tachy products are primarily
electrophysiologists. Sales of the Company's CRM products, as a
percentage of the Company's total consolidated net sales for the
years ended December 31, 1997, 1996 and 1995, were 50%, 55% and 49%,
respectively.

Tachycardia ("Tachy")

AICD systems, or Tachy products, are used to detect and treat
potentially fatal, abnormally fast heart rhythms by delivering
electrical energy to the heart and, in so doing, restoring the
heart's normal rhythm. Tachyarrhythmias often result from the
presence of abnormal cardiac tissue. This tissue interferes with the
normal electrical activity of the heart.

The Company's tachy products offer multiple therapeutic options
(tiered- therapy). Tiered-therapy devices use a staged process for
treating multiple arrhythmias by first providing lower intensity
pacing pulses, or antitachycardia pacing, to the patient in an
attempt to correct the abnormal rhythm. If antitachycardia pacing is
unsuccessful or if the arrhythmia requires more aggressive therapy,
then the device can progress to low or high energy shocks.

Bradycardia ("Brady")

Cardiac pacemaker systems, or Brady products, are generally used
to manage a slow or irregular heartbeat caused by disorders that
disrupt the heart's normal electrical conduction system. This often
results in a heart rate insufficient to provide adequate blood flow
through the body, creating symptoms including fatigue, dizziness and
fainting. Brady products range from conventional single chamber
devices to more sophisticated adaptive-rate dual chamber devices.

Brady products are used to treat patients whose natural
pacemaker, the sinus node, is malfunctioning, or patients suffering
from a disruption in the electrical conduction system. Normally, the
sinus node, located in the upper atrial portion of the heart, sends
electrical signals through the atrium to the atrioventricular ("AV")
node, which in turn sends signals down to the lower (ventricular)
chambers of the heart. The patient population needing pacemakers can
be divided roughly in half: those with malfunctioning sinus nodes,
or Sick Sinus Syndrome, and those suffering from malfunctioning AV
nodes, or AV Block.

Vascular Intervention

The Company offers its customers a wide range of VI products,
including stent systems, coronary dilatation catheters, guide wires,
atherectomy catheters, guiding catheters and related accessories.
Customers for VI products are primarily interventional cardiologists.
Sales of VI products, as a percentage of the Company's total
consolidated net sales for the years ended December 31, 1997, 1996
and 1995 were 45%, 40% and 48%, respectively.

More than six million Americans have been diagnosed with
coronary artery disease ("CAD"), which is the formation of blood
flow restrictions (atherosclerotic lesions) within the coronary
arteries. If untreated, CAD can

3

lead to a heart attack, or cause chest pain that may interfere with
normal activities. Worldwide, over one million patients annually
undergo a minimally invasive CAD intervention (angioplasty, stenting,
atherectomy or mechanical or laser ablation), which are less invasive
and less expensive alternatives to coronary artery bypass graft surgery.

In a percutaneous transluminal coronary angioplasty ("PTCA")
procedure, a local anesthetic is administered and a small incision is
made in the patient's groin area to gain access to the femoral
artery. The physician inserts a guiding catheter through the femoral
artery into the entrance of the coronary blood vessel and then
advances a small guide wire through the inside of the guiding
catheter, into the blood vessel and across the site of the blockage.
Then a dilatation catheter is delivered over the guide wire through
the inside of the guiding catheter into the blood vessel and across
the site of the blockage. The dilatation catheter is then inflated
to compress the atherosclerotic plaque against the artery wall,
thereby enlarging the opening of the vessel and increasing blood flow
to the heart. At the end of the PTCA procedure, all of the devices
are withdrawn.

The major clinical challenge to PTCA is clinical restenosis, the
renarrowing of the blood vessel at the site of the initial treatment
generally requiring another intervention within six months of the
initial procedure. A number of other technologies have evolved to
reduce the occurrence of this condition, often in combination with
a coronary dilatation catheter, including stenting, atherectomy and
ablation. Like coronary dilatation catheters, coronary stents,
atherectomy catheters and ablation catheters are delivered through a
guiding catheter and over a guide wire.

Coronary stents are metal tubes or coils that are mounted on
coronary dilatation catheters. Coronary stents are permanently
deployed at the blockage by inflating the coronary dilatation
catheter to expand the stent in the artery. When the coronary
dilatation catheter is removed from the artery, the stent stays in
place, which provides a "mechanical" way of keeping the artery open.
In October 1997, the Company received approval to market the ACS RX
MULTI-LINK Coronary Stent System in the United States.

Atherectomy is the excision and removal of blockages by
catheters with miniature cutting systems. Ablation is the mechanical
or laser reduction of blockages without the removal of the tissue.

In May 1997, the Company acquired the assets of Neocardia, LLC.
("Neocardia"), a privately held development-stage company for an
initial price of $57.4 million. Under the acquisition agreement, the
Company could pay a total amount of as much as $77.0 million in cash,
plus subsequent additional bonus and royalty payments contingent upon
achieving certain product development and sales goals. Neocardia,
which currently does not have any products available for commercial
sale, has pioneered the use of radiation therapy to reduce the
occurrence of restenosis. The Company has recently commenced
clinical studies in this area. However, no assurance can be given
that the Company will obtain the regulatory approvals necessary for
commercial marketing.

Cardiac and Vascular Surgery

The Company is involved in the development and marketing of
innovative surgical devices and systems which alter the surgeon's
approach to surgical procedures and may provide improved clinical
benefit, reduced procedure time and better patient outcomes. In May
1996, the Company announced that the strategic focus for its
minimally invasive surgery business would be on cardiovascular
applications and, in December 1997, the business group was renamed
the Cardiac & Vascular Surgery Group. The primary customers for the
Company's CVS products are cardiac and vascular surgeons. Sales of
the Company's CVS products, as a percentage of the Company's total
consolidated net sales for the years ended December 31, 1997, 1996
and 1995, were 5%, 5% and 3%, respectively. These

4

percentages include other minimally invasive surgery products sold by
the Company with a focus on laparoscopic market opportunities in the field
of general surgery. Certain of these devices were developed for and
manufactured under original equipment manufacturer (OEM) distribution
arrangements.

In December 1997, the Company completed its acquisition of
EndoVascular Technologies, Inc. ("EVT"). EVT designs, develops and
manufactures minimally invasive systems to repair diseased or damaged
vascular structures. EVT is currently developing a product, the
ANCURE system, to provide a catheter-based delivery and implantation
of a specialized vascular prosthesis to repair abdominal aortic
aneurysms which would represent a less invasive alternative to the
open surgical procedure performed today. The ANCURE system is
approved for marketing in Europe and Australia and is currently in
Phase II clinical trials in the United States. However, no assurance
can be given that the Company will obtain the regulatory approvals
necessary for commercial marketing in the United States.

The Company believes that CVS product systems may significantly
decrease the patient's postoperative pain, hospital stay and
recovery period by reducing the resulting trauma caused by more
invasive techniques.

5

Products

Tachy Products

The Company offers a broad array of Tachy products, including
complex devices and systems offering multiple therapeutic options as
set forth in the following chart:

Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
Inter-
U.S. national
Release Release
-------- ----------
Tiered- AICDs that provide VENTAK AV II DR (1) Sept. 1997
Therapy low and high energy VENTAK MINI III Jan. 1998 Oct. 1997
shock therapy, Brady VENTAK AV II DDD Dec. 1997 Sept. 1997
pacing and VENTAK AV DDD July 1997 Nov. 1996
antitachycardia VENTAK MINI II+ July 1996 June 1996
pacing. VENTAK MINI II July 1996 June 1996
VENTAK MINI+HC May 1996 Dec. 1995
VENTAK MINI HC May 1996 Dec. 1995
VENTAK MINI + Jan. 1996 Dec. 1995
VENTAK MINI Jan. 1996 Dec. 1995

Endocardial Insulated wires, ENDOTAK DSP Jan. 1996 Oct. 1994
Defibril- inserted through ENDOTAK 70 Series Aug. 1994 Nov. 1992
lation a vein into the
Leads heart, which allow
energy to be trans-
mitted to and from
the implanted AICD,
allowing arrhythmias
to be detected and
treated.

- --------------
(1) This product is not currently available in the United States.
There can be no assurance that the Company will obtain the
regulatory approval necessary for commercial marketing of this
product in the United States.

6

Brady Products

The Company offers a broad array of Brady products ranging from
conventional single chamber devices to more sophisticated adaptive-
rate, dual chamber devices as set forth in the following chart:

Category Description Product Name Date of Commercial Release
- -------- ----------- ------------ --------------------------
First
Inter-
U.S. national
Release Release
--------- -----------
Single Pacemakers that pace VIGOR SSI March 1995 May 1993
Chamber (SSI) one chamber of the VISTA VVI Apr. 1988 Dec. 1987
heart, typically the
ventricle, at a
programmed rate.

Single Pacemakers that pace VIGOR SR June 1995 May 1993
Chamber one chamber of the
Adaptive-Rate heart, and incorporate
(SSIR) a sensor that modifies
the pacing rate in
response to physical
activity.

Dual Chamber Pacemakers that pace VIGOR DDD Oct. 1994 May 1993
(DDD) both chambers of the VISTA DDD June 1990 Oct. 1989
heart, thereby
improving heart
synchronization and
cardiac output.

Dual Chamber Pacemakers that VIGOR DR June 1995 May 1993
Adaptive-Rate pace both chambers
(DDDR) of the heart, and
incorporate a sensor
that modifies the
pacing rate in
response to physical
activity.

Endocardial Insulated wires, SELUTE May 1996 Dec. 1994
Pacemaker inserted through a SELUTE Atrial (1) June 1996
Leads vein into the heart, SWEET TIP RX (1) June 1996
which allow energy
to be transmitted to
and from the
implanted pacemaker.

- ---------------------
(1) This product is not currently available in the United States.
There can be no assurance that the Company will obtain the
regulatory approval necessary for commercial marketing of this
product in the United States.

7

Vascular Intervention Products

The Company offers its customers a wide range of VI products,
including coronary dilatation catheters, stents, atherectomy
catheters, guide wires and accessories as set forth in the following
chart:

Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------ -----------
Stents Stents are ACS MULTI-LINK RX DUET (1)
implantable metal ACS RX MULTI-LINK Oct. 1997
devices that are ACS RX MULTI-LINK HP Feb. 1998
permanently
deployed to provide
a "mechanical" way
to keep an artery
open.

Rapid Exchange RX coronary ACS RX ROCKET Nov. 1997
("RX") dilatation catheters ACS RX COMET VP Feb. 1997
Coronary allow for easy exchange ACS RX COMET Nov. 1996
Dilatation of the catheter RX ELIPSE Oct. 1993
Catheter without removing the
original guide wire.

Perfusion Perfusion coronary ACS OTW LIFESTREAM Dec. 1995
Coronary dilatation catheters ACS RX LIFESTREAM Mar. 1995
Dilatation allow continuous ACS RX FLOWTRACK Mar. 1993
Catheter blood flow during ACS RX PERFUSION Dec. 1990
the PTCA procedure,
offering flexibility
in inflation times.
Perfusion catheters
are available in RX
and OTW configurations.

Over-the-Wire OTW coronary dilatation ACS Tx2000 VP April 1997
("OTW") catheters are ACS Tx2000 Nov. 1996
Coronary delivered over a
Dilatation separate guide wire to
Catheter position the balloon
across the lesion.

Fixed-Wire Fixed-wire catheters SLALOM PLUS Jan. 1991
Coronary permit access
Dilatation through tortuous and
Catheter very small vessels.

8

Vascular Intervention Products (continued)

Date of U.S.
Commercial
Category Description Product Name Release
- -------- ----------- ------------- ----------
Atherectomy Catheters which ATHEROCATH-BANTAM Dec. 1996
Products allow for the ATHEROCATH-GTO Sept. 1994
excision and removal ATHEROCATH SCA-EX Sept. 1992
of atherosclerotic
plaque.

Guide wires Individual ACS HI-TORQUE ALL STAR Sept. 1997
guide wires are ACS HI-TORQUE BALANCE
inserted through MIDDLEWEIGHT Aug. 1997
coronary and ACS HI-TORQUE IRON MAN Feb. 1997
peripheral vessels HI-TORQUE BALANCE Oct. 1994
before the dilatation ACS HI-TORQUE EXTRA S'PORT Sept. 1994
catheter, facilitating HI-TORQUE EXTRA SUPPORT Feb. 1992
the placement of the HI-TORQUE TRAVERSE Nov. 1991
dilatation catheter DOC Feb. 1988
or atherectomy HI-TORQUE FLOPPY II June 1986
catheter.

Accessories Accessories are INDEFLATOR 20/30 Sept. 1996
products that ACS ANCHOR Apr. 1996
facilitate the delivery TOURGUIDE Dec. 1995
or operation of a INDEFLATOR 20/20 March 1990
device.

Imaging Imaging systems that SONICATH (2) Dec. 1996
allow for an MICRORAIL (2) Dec. 1996
ultrasound scan MICROVIEW (2) Dec. 1996
of the coronary ULTRACROSS (2) Dec. 1996
arteries.

- ------------
(1) This product is released in select international markets and
is not currently available in the United States. There can
be no assurance that the Company will obtain the regulatory
approval necessary for commercial marketing of this product
in the United States.

(2) The products are offered by the Company through a
distribution agreement with Hewlett Packard Company. The
product names are trademarks of Boston Scientific
Corporation.

9

CVS Products

The Company currently markets the VASOVIEW balloon dissection
system, a broad product offering for minimally invasive access to,
and removal of, the saphenous vein. The saphenous vein is used in
coronary artery bypass graft surgery ("CABG"). The Company also
markets a cardiac stabilizer which enables immobilization of the
anastomotic site on a beating heart during CABG procedures. In
addition, as a result of the Company's acquisition of EVT, the
Company markets the ANCURE system in Europe and Australia. The
ANCURE system is a catheter-based product that delivers and implants
a specialized vascular prosthesis to repair abdominal aortic
aneurysms. The Company also markets a number of other minimally
invasive surgery products for access, retraction and fixation,
focusing on laparoscopic market opportunities in general surgery.
These products include the ORIGIN TACKER fixation device.

Sales and Marketing

The Company has a broad product line which requires a sales and
marketing strategy that is tailored to its customers in order to
deliver high quality, cost-effective products and services to all of
its customer segments worldwide. Because of the diverse needs of the
global market that the Company serves, the Company's distribution
system includes both direct sales forces and independent
distributors. The Company utilizes separate sales forces to sell its
CRM, VI and CVS products in order to take advantage of specific
clinical and technical expertise. In many cases, members of the
sales forces are present during procedures in order to provide
technical consultation to the physician in the use of the Company's
products. The Company is not dependent on any single customer and no
single customer accounted for more than 5% of the Company's net sales
in 1997.

Sales personnel work closely with the primary decision makers
who purchase the Company's products, whether physicians, material
managers, biomedical staff, hospital administrators or purchasing
managers. Additionally, the sales forces actively pursue approval of
the Company as a qualified supplier for hospital group purchasing
organizations that negotiate contracts with suppliers of medical
products. The Company already has contracts with a number of
national buying groups and is working with a growing number of
regional buying groups that are emerging in response to cost
containment pressures and health care reform. In addition, the
Company has contracted with a number of hospitals to provide products
under a predictable procedural cost program.

United States

In the United States, the Company sells substantially all of its
products through its direct sales forces. The different uses of the
Company's product lines and the different physicians performing the
corresponding procedures necessitate focused sales organizations that
can utilize their specific clinical and technical knowledge. In
1997, 68% of the Company's consolidated net sales were derived from
sales in the United States.

The Company's sales operations for its CRM and VI products are
divided into three geographic areas within the United States, under a
single management structure to which all sales operations report.
The Company believes this geographic organizational structure
provides the opportunity to leverage the Company's resources across
the individual business unit sales organizations by facilitating
rapid decision making and development of sales and marketing
strategies at the customer level, while retaining its clinical focus.

10

International

In 1997, 32% of the Company's net sales were derived from its
international operations through its direct sales forces and
independent distributors. The Company sells its products in over 70
countries. Major international markets for the Company's products
include: Japan, Germany, France, Spain, Italy, the United Kingdom,
Australia, Belgium, The Netherlands, and Canada. The sales and
marketing approach in international markets varies depending on
market size and stage of development. The Company believes that its
geographic-based sales organization gives the Company greater
flexibility in responding to each of these markets.

Manufacturing

The Company's manufacturing operations are carried out in
facilities in Menlo Park, Santa Clara and Temecula, California; St.
Paul, Minnesota; and Dorado, Puerto Rico.

In general, the Company's production activities occur in a
controlled environment setting or "cleanroom." Such a manufacturing
environment helps ensure that products meet all cleanliness standards
and requirements. In addition, manufacturing employees are trained
in the necessary production operations, the Quality System Regulation
requirements (regulations adopted by the United States Food and Drug
Administration ("FDA") in October, 1996 which replace the
requirements previously known as Good Manufacturing Practices) and
ISO 9001 and EN46001 international quality system standards
applicable to the production process. The Company uses various
production and quality performance measures to provide high
manufacturing quality and efficiency.

The Company vertically integrates its operations where it
believes such integration provides significant cost, supply or
quality benefits. In some areas, the Company is highly vertically
integrated. In other cases, the Company purchases components. In
all cases, the Company attempts to work closely with its suppliers to
ensure the cost-effective delivery of high quality materials and
components. The Company's major considerations used in the selection
and retention of suppliers are supplier technology, quality,
reliability, consistent on-time deliveries, value-added services and
cost. The Company tries to select and build long-term relationships
with suppliers who have demonstrated a commitment to these factors.
To date, the Company has been able to obtain all required components
and materials for all market released products and for all products
under development.

Raw Materials

The Company purchases certain of the materials and components
used in manufacturing its products, some of which are custom-made
for the Company. In addition, the Company purchases certain supplies
from single sources due to quality considerations, costs or
constraints resulting from regulatory requirements. In the past,
certain suppliers have announced that, in an effort to reduce
potential product liability exposure, they intend to limit or
terminate sales to the medical device industry. In addition,
agreements with certain suppliers can be terminated by either party
upon short notice. The Company has agreed to indemnify certain
suppliers against certain potential product liability exposure. The
establishment of additional or replacement suppliers for certain
components or materials cannot be accomplished quickly, largely due
to the FDA approval system and the complex nature of manufacturing
processes employed by many suppliers. The inability to develop
satisfactory alternatives, if required, or a reduction or
interruption in supply or a significant increase in the price of
materials or components could have a material adverse effect on the
Company.

11

Patents, Trademarks, Proprietary Rights and Licenses

The Company believes that patents and other proprietary rights
are important to its business. The Company also relies upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain its competitive position. The
Company reviews third-party patents and patent applications in an
effort to develop an effective patent strategy, identify licensing
opportunities and monitor the patent claims of others.

There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. From
time to time, the Company is subject to claims of, and legal actions
alleging, infringement by the Company of the patent rights of others.
The Company believes that it has been vigilant in reviewing the
patents of others with regard to the Company's products. However, an
adverse outcome with respect to any one or more of these claims or
actions could have a material adverse effect on the Company.

The Company owns numerous patents and has numerous patent
applications pending in the United States and in certain foreign
countries which relate to aspects of the technology used in many of
the Company's products. The Company's policy is generally to file
patent applications in the United States and foreign countries where
rights are available and the Company believes it is commercially
advantageous to do so. In addition, the Company is party to several
license agreements with unrelated third parties pursuant to which it
has obtained, for varying terms, the exclusive or non-exclusive
rights to certain patents held by such third parties in consideration
for cross-licensing rights or royalty payments. The Company has also
granted various rights in its own patents to others under license
agreements. There can be no assurance that pending patent
applications will result in issued patents, that patents issued to or
licensed by the Company will not be challenged or circumvented by
competitors, that such patents will not be found to be invalid or
that such patents will be found to be sufficiently broad to protect
the Company's technology or provide the Company with a competitive
advantage.

The Company actively monitors the products of its competitors
for possible infringement of the Company's owned and/or licensed
patents. Historically, litigation has been necessary to enforce
certain patent rights held by the Company and the Company plans to
continue to defend and prosecute its rights with respect to such
patents. There can be no assurance, however, that the Company's
efforts in this regard will be successful. In addition, patent
litigation could result in substantial cost to and diversion of
effort by the Company. The Company also relies upon trade secrets
for protection of its confidential and proprietary information.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information or techniques or
that third parties will not otherwise gain access to the Company's
trade secrets.

It is the Company's policy to require certain of its employees,
consultants and other parties to execute confidentiality and
invention assignment agreements upon the commencement of employment
or consulting relationships with the Company. There can be no
assurance, however, that these agreements will provide meaningful
protection against, or adequate remedies for, the unauthorized use or
disclosure of the Company's trade secrets.

The Company has the following registered trademarks that are
referred to herein: ACS, ACS EDGE, ACS RX COMET, ACS RX LIFESTREAM,
AICD, ATHEROCATH, ATHEROCATH-GTO, CPI, DOC, ENDOTAK, ENDOTAK DSP,
EXCEL, HI-TORQUE BALANCE, HI-TORQUE EXTRA SUPPORT, HI-TORQUE FLOPPY
II, HI-TORQUE TRAVERSE, INDEFLATOR, ORIGIN, PRx, RX ELIPSE, SELUTE,
SLALOM PLUS, VENTAK, VIGOR and VISTA. The following are trademarks
of the Company: ACS ANCHOR, ACS HI-TORQUE ALL STAR, ACS HI-TORQUE
BALANCE MIDDLEWEIGHT, ACS HI-TORQUE EXTRA S'PORT, ACS HI-TORQUE IRON
MAN, ACS MULTI-LINK RX DUET, ACS OTW LIFESTREAM, ACS OTW MULTI-LINK,
ACS RX MULTI-LINK, ACS RX MULTI-LINK HP, ACS RX FLOWTRACK, ACS RX
PERFUSION, ACS RX ROCKET, ACS Tx 2000, ACS Tx 2000 VP, ANCURE,
ATHEROCATH-BANTAM, INDEFLATOR PLUS 20, INDEFLATOR 20/30, ORIGIN
TACKER, SCA-EX, SWEET TIP RX, TOURGUIDE, VASOVIEW, VENTAK AV and
VENTAK MINI.

12

Competition

The medical devices market is highly competitive. The Company
competes with many companies, some of which may have access to
greater financial and other resources than the Company. Furthermore,
the medical devices market is characterized by rapid product
development and technological change. The present or future products
of the Company could be rendered obsolete or uneconomic by
technological advances by one or more of the Company's present or
future competitors or by other therapies such as drugs. The Company
must continue to develop and acquire new products and technologies to
remain competitive with other developers of medical devices and
therapies.

The Company faces substantial competition from a number of
companies in the markets for its products. The Company's primary
competitors in the Brady pacemaker market are Medtronic, Inc.,
Pacesetter, Inc. (St. Jude Medical, Inc.), and Sulzer Intermedics,
Inc. (Sulzer Brothers Ltd.). In the Tachy market, the Company
competes primarily with Medtronic, Inc. and Ventritex, a division of
Pacesetter, Inc. (St. Jude Medical, Inc.). The Company's primary
competitors in VI are SciMed Life Systems, Inc. and Heart
Technologies, Inc. (Boston Scientific), Cordis Corporation and
Johnson & Johnson Interventional Systems (Johnson & Johnson),
Schneider (Pfizer), USCI (C. R. Bard, Inc.), Arterial Vascular
Engineering, Inc. and Medtronic, Inc. With respect to CVS devices,
the principal competitors of the Company are the United States
Surgical Corporation, Ethicon Endo-Surgery, Inc. (Johnson & Johnson),
Medtronic, Inc. and Boston Scientific Corporation. The Company
believes that it competes primarily on the basis of product features,
product quality, customer support, field services and cost-
effectiveness.

Government Regulation

As a manufacturer of medical devices, the Company is subject to
extensive regulation by the FDA and, in some jurisdictions, by state
and foreign governmental authorities. These regulations govern the
introduction of new medical devices, the observance of certain
standards with respect to the design, manufacture, testing, labeling
and promotion of such devices, the maintenance of certain records,
the ability to track devices, the reporting of potential product
defects, the export of devices and other matters. The Company
believes that it is in substantial compliance with such governmental
regulations.

From time to time, the Company has received notifications from
the FDA or other authorities of alleged deficiencies in the Company's
compliance with applicable regulatory requirements. These include
FDA warning letters and adverse inspection reports. To date, the
Company has been able to address or correct such deficiencies to the
satisfaction of the FDA or other authorities and, to the extent
deficiencies arise in the future, the Company expects to be able to
so correct them, but there can be no assurance that this will be the
case. In addition, from time to time, the Company has recalled, or
issued safety alerts or advisory notices on, certain of its products.
To date, no such recall or safety alert has had a material adverse
effect on the Company, but there can be no assurance that a future
recall or safety alert would not have such an effect.

The Company's medical devices introduced in the United States
market are required by the FDA, as a condition of marketing, to
secure a premarket notification clearance pursuant to Section 510(k)
of the federal Food, Drug and Cosmetic Act, an approved pre-market
approval ("PMA") application or a supplemental PMA. Alternatively,
the Company may seek United States market clearance through a Product
Development Protocol approved by the FDA. Establishing and
completing a Product Development Protocol, or obtaining a PMA or
supplemental PMA, can take up to several years and can involve
preclinical studies and clinical testing. In order to perform
clinical testing in the United States on an unapproved product, the
Company is also required to obtain an investigational device
exemption from the FDA. In addition to requiring clearance for new
products, FDA rules may require a filing and FDA approval, usually
through a PMA supplement or a 510(k) pre-market notification
clearance, prior to marketing products that are modifications of
existing products.

13

While the FDA Modernization Act of 1997, when fully implemented,
is expected to inject more predictability into the product review
process, streamline post-market surveillance, and promote the global
harmonization of regulatory procedures, the process of obtaining such
clearances can be onerous and costly. There can be no assurance that
all the necessary approvals, including approval for product
improvements and new products, will be granted on a timely basis, if
at all. Delays in receipt of or failure to receive such approvals
could have a material adverse effect on the Company's business.
Moreover, after clearance is given, if the product is shown to be
hazardous or defective, the FDA and foreign regulatory agencies have
the power to withdraw such clearance or require the Company to change
the device, its manufacturing process or its labeling, to supply
additional proof of its safety and effectiveness or to recall,
repair, replace or refund the cost of the medical device. In
addition, federal, state and foreign regulations regarding the
manufacture and sale of medical devices are subject to future
changes. The Company cannot predict what impact, if any, such
changes might have on its business. However, such changes could have
a material impact on the Company's business.

The Company is also required to register with the FDA as a
device manufacturer. As such, the Company is subject to periodic
inspection by the FDA for compliance with the FDA's Quality System
Regulation and other regulations. These regulations require that the
Company manufacture its products and maintain its documents in a
prescribed manner with respect to design, manufacturing, testing and
control activities. Further, the Company is required to comply with
various FDA requirements for labeling and promotion. The Medical
Device Reporting regulation requires that the Company provide
information to the FDA whenever there is evidence to reasonably
suggest that one of its devices may have caused or contributed to a
death or serious injury or, if a malfunction were to recur, could
cause or contribute to a death or serious injury. In addition, the
FDA prohibits the Company from promoting a medical device before
marketing clearance has been received or promoting an approved device
for unapproved indications. If the FDA believes that a company is
not in compliance with applicable regulations, it can institute
proceedings to detain or seize products, issue a warning letter,
issue a recall order, impose operating restrictions, enjoin future
violations and assess civil penalties against the company, its
officers or its employees and can recommend criminal prosecution to
the Department of Justice. Other regulatory agencies may have
similar powers.

Medical device laws are also in effect in many of the countries
in which the Company does business outside the United States. These
laws range from comprehensive device approval requirements for some
or all of the Company's medical device products to simpler requests
for product data or certifications. The number and scope of these
requirements are increasing. In addition, the Company is required to
notify the FDA if it exports to certain countries medical devices
manufactured in the United States that have not been approved by the
FDA for distribution in the United States. The Company is also
required to maintain certain records relating to exports and make the
records available to the FDA for inspection, if required.

Health Care Cost Containment and Third-Party Reimbursement

During the past several years, the major third-party payers of
hospital services in the United States (Medicare, Medicaid, private
health care insurance and managed care plans) have substantially
revised their policies, methodologies and formulae in an attempt to
contain health care costs. The introduction of various Medicare cost
containment incentives, combined with closer scrutiny of health care
expenditures by both private health insurers and employers, has
resulted in increased contractual adjustments and discounts in
hospital charges for services performed and in the shifting of services
from inpatient to outpatient settings. If hospitals respond to such
pressures by substituting lower cost products or therapies for the
Company's products, the Company could be adversely affected. Moreover,
third-party payers may deny reimbursement if they determine that a
device was not used in accordance with cost-effective treatment

14

methods as determined by the payer, was experimental, or
for other reasons. Certain states have already made significant
changes to their Medicaid programs and have also adopted health care
reform. Similar initiatives to limit the growth of health care
costs, including price regulation, are also underway in several other
countries in which the Company does business. For example, the
Japanese Ministry of Health and Welfare recently announced its
intentions to cut reimbursement levels for medical devices effective
in April 1998. Implementation of health care reform may limit the
price of, or the level at which reimbursement is provided for, the
Company's products.

The ability of customers to obtain appropriate reimbursement for
their products and services from government and third-party payers is
critical to the success of all medical device companies around the
world. Several foreign governments have attempted to dramatically
reshape reimbursement policies affecting medical devices. Further
restrictions on reimbursement of the Company's customers will likely
have an impact on the products purchased by customers and the prices
they are willing to pay.

Product Liability and Insurance

The design, manufacture and marketing of medical devices of the
types produced by the Company entail an inherent risk of product
liability claims. The Company's products are often used in intensive
care settings with seriously ill patients. In addition, many of the
medical devices manufactured and sold by the Company are designed to
be implanted in the human body for long periods of time or
indefinitely. The occurrence of a problem with one of the Company's
products could result in product liability claims and/or a recall of,
or safety alert or advisory notice relating to, the product. While
the amount of product liability insurance maintained by the Company
has been adequate in relation to claims made against the Company in
the past, there can be no assurance that the amount of such insurance
will be adequate to satisfy claims made against the Company in the
future or that the Company will be able to obtain insurance in the
future at satisfactory rates or in adequate amounts. Product
liability claims or product recalls in the future, regardless of
their ultimate outcome, could have a material adverse effect on the
Company's business, financial condition and reputation, and on the
Company's ability to attract and retain customers for its products.

Environmental Compliance

The Company is subject to various federal, state and local laws
and regulations relating to the protection of the environment. In
the course of its business, the Company is involved in the handling,
storage and disposal of certain chemicals. While the Company
continues to make capital and operational expenditures for protection
of the environment, it does not anticipate that those expenditures
will have a material adverse effect on its business.

Research and Development

The Company is engaged in ongoing research and development to
introduce clinically advanced new products, to enhance the
effectiveness, ease of use, safety and reliability of its existing
products and to expand the applications for which the uses of its
products are appropriate. The Company is dedicated to developing
novel technologies that will furnish health care providers with a
more complete line of products to treat medical conditions through
minimally invasive procedures.

The Company's research and development activities are carried
out primarily in facilities located in Santa Clara, Menlo Park, and
Temecula, California; St. Paul, Minnesota; and Brussels, Belgium.
The Company's research and development staff is focused on product
design and development, quality, clinical research and

15

regulatory compliance. To pursue primary research efforts, the Company
has developed alliances with several leading research institutions and
universities. The Company also works with leading clinicians around
the world in conducting scientific studies on the Company's products.
These studies include clinical trials which provide data for use in
regulatory submissions and post market approval studies involving
applications of the Company's products.

The Company evaluates developing technologies in areas where it
may have technological or marketing expertise for possible investment
or acquisition. The Company has invested in several start-up
ventures. In return for funding and technology, the Company has
received equity interests in these ventures.

Quality Assurance Systems

The Company is committed to providing high quality products to
its customers. To meet this commitment, the Company has implemented
modern quality systems and concepts throughout the organization. The
Company's quality system starts with the initial product
specification and continues through the design of the product,
component specification process and the manufacturing, sales and
servicing of the product. The quality system is designed to build in
quality and to utilize continuous improvement concepts throughout the
product life.

Certain of the Company's operations are certified under ISO
9001, ISO 9002, EN46001 and EN46002 international quality system
standards. ISO 9001 and 9002 require, among other items, an
implemented quality system that applies to component quality,
supplier control and manufacturing operations. In addition, ISO 9001
and EN46001 require an implemented quality system that applies to
product design. Such certification can be obtained only after a
complete audit of a company's quality system by an independent
outside auditor. These certifications require that these facilities
undergo periodic reexamination.

16

Executive Officers of the Company

Name Position Age
- ---- -------- ---
James M. Cornelius Chairman of the Board of Directors 54
and Director

Ronald W. Dollens President, Chief Executive Officer 51
and Director

J.B. King Vice President, General Counsel, 68
Secretary and Director

James R. Baumgardt President, Western Hemisphere Sales 50

Keith E. Brauer Vice President, Finance and 49
Chief Financial Officer

A. Jay Graf President, Cardiac Rhythm Management 50
Group

Ginger L. Howard President, Vascular Intervention Group 42

Cynthia L. Lucchese Treasurer 37

Roger Marchetti Corporate Controller and 40
Chief Accounting Officer

Richard M. van Oostrom President of Operations, Europe, 53
Middle East and Africa

F. Thomas (Jay) Watkins, III President, Cardiac and Vascular 45
Surgery Group

Joseph A. Yahner Vice President, Human Resources 50
and Corporate Affairs

A brief summary of the recent business and professional experience
of each executive officer is set forth below.

JAMES M. CORNELIUS Mr. Cornelius is Chairman of the Board of
Directors and a Director of the Company. Previously, he was Vice
President, Finance and Chief Financial Officer of Lilly from 1983
until his retirement in October 1995 and was a Director for Lilly.
Mr. Cornelius has served as Treasurer of Lilly and as President of
IVAC Corporation, a former Lilly medical device subsidiary. He
joined Lilly in 1967. Mr. Cornelius is a director of American United
Life Insurance Company, Chubb Corporation, Lilly Industries, Inc.,
and the National Bank of Indianapolis. Mr. Cornelius also serves as
a trustee of the University of Indianapolis.

RONALD W. DOLLENS Mr. Dollens is President, Chief Executive
Officer and a Director of the Company. Previously, he served as
President of Lilly's MDD Division from 1991 until 1995. Mr. Dollens
served as Vice President of Lilly's MDD Division and Chairman of the
Company's subsidiary, Advanced Cardiovascular Systems, Inc. ("ACS"),
from 1990 to 1991. He also held the position of President and Chief
Executive Officer of ACS. Mr. Dollens joined Lilly in 1972. Mr.
Dollens currently serves on the boards of Physio-Control International
Corporation, the Health Industry Manufacturers Association, the
Eiteljorg Museum, and the Indiana State Symphony Society Board. He is
also the President of the Indiana Health Industry Forum.

17

J. B. KING Mr. King is Vice President, General Counsel,
Secretary and a Director of the Company. Mr. King also acts as
counsel to the law firm of Baker & Daniels, which provides legal
services to the Company. He previously was Vice President and
General Counsel for Lilly, a position he held from 1987 until he
retired in 1995. Before joining Lilly, Mr. King was a partner and
chairman of the management committee of Baker & Daniels. Mr. King is
a director of Bank One, Indianapolis, N.A., the Indiana Legal
Foundation, IWC Resources, Inc., and the James Whitcomb Riley
Memorial Association.

JAMES R. BAUMGARDT Mr. Baumgardt is a Vice President of the
Company and President, Western Hemisphere Sales. Previously he held
the position of Vice President, Corporate Resources from 1994 to
1995. Mr. Baumgardt has also served as Executive Director of Human
Resources and Business Development for the MDD Division of Lilly from
1992 to 1994. Mr. Baumgardt was Director of Personnel for Lilly from
1990 to 1992 and Director of Sales for Lilly's Select Product
Division from 1988 to 1990. He joined Lilly in 1970. Mr. Baumgardt
is a director of the Rose-Hulman Institute of Technology.

KEITH E. BRAUER Mr. Brauer is Vice President, Finance and Chief
Financial Officer for the Company. Previously, he served as
Executive Director of Finance and Chief Accounting Officer of Lilly
from 1992 to 1994. Mr. Brauer was Executive Director of
International Finance of Lilly from 1988 to 1992 and Director of
Corporate Affairs of Lilly from 1986 to 1988. Additionally, he held
the position of Vice President of Finance and Treasurer for Physio-
Control Corporation, a former Lilly subsidiary. Mr. Brauer joined
Lilly in 1974. Mr. Brauer also serves on the University of Michigan
Business School Corporate Advisory Board.

A. JAY GRAF Mr. Graf is a Vice President of the Company and
President of the Cardiac Rhythm Management Group. He has been
President and Chief Executive Officer of the Company's subsidiary,
Cardiac Pacemakers, Inc. ("CPI"), since 1992. He joined CPI as
Executive Vice President and Chief Operating Officer in 1990. Mr.
Graf has also held the position of Senior Vice President of
Operations at Physio-Control Corporation. Additionally, Mr. Graf
held the positions of Vice President of Sales and Technical Services,
and Vice President of Marketing and Communications at Physio-Control
Corporation. Mr. Graf joined Lilly in 1976. Mr. Graf is a director
of ATS Corporation.

GINGER L. HOWARD Ms. Howard is a Vice President of the Company and
President of the Vascular Intervention Group. She has been President of
ACS since 1993. She served as a Director of Pharmaceutical Sales for Lilly
in 1992 and was Director of Corporate Pharmaceutical Strategic Planning
from 1989 to 1991. Ms. Howard joined Lilly in 1979. Ms. Howard is a
director of Amylin Pharmaceuticals, Inc. and the California Healthcare
Institute. She is also a member of the Committee of 200.

CYNTHIA L. LUCCHESE Ms. Lucchese is Treasurer of the Company.
She served as Worldwide Treasury Planning Manager for Lilly from 1992
to 1994. She served as Audit Manager for Lilly from 1990 to 1992.
Ms. Lucchese joined Lilly in 1987. Prior to joining Lilly, she was
on the audit staff of Ernst & Young LLP from 1982 to 1986. Ms.
Lucchese is a Certified Public Accountant. She is also a director
for MEDMARC Mutual Insurance Company, Inc.

ROGER MARCHETTI Mr. Marchetti is Corporate Controller and Chief
Accounting Officer of the Company. He served as Manager of Finance
for Lilly's Indianapolis pharmaceutical manufacturing operations from
1992 to 1994, and Manufacturing Controller for ACS from 1990 to 1992.
Mr. Marchetti joined ACS in 1988 as General Accounting Manager.
Prior to joining ACS, Mr. Marchetti was on the audit staff of Touche
Ross & Co. (currently Deloitte & Touche LLP) from 1980 to 1986. Mr.
Marchetti is a Certified Public Accountant.

RICHARD M. VAN OOSTROM Mr. van Oostrom is a Vice President of
the Company and President of Operations, Europe, Middle East and
Africa. He served as Vice President of European Operations for
Lilly's MDD Division from 1984 to 1994.

18

Mr. van Oostrom was an Executive Director of Marketing for Lilly from
1981 to 1984 and President and General Manager of Eli Lilly Canada Inc.
from 1980 to 1981. He joined Lilly in 1971. Mr. van Oostrom is a board
member of Isotis B.V. and the European trade association for medical
prosthesis manufacturers.

F. THOMAS (JAY) WATKINS, III Mr. Watkins is a Vice President of
the Company and President of the Cardiac and Vascular Surgery Group.
He has also been President of the Company's subsidiary, Origin
Medsystems, Inc. ("Origin"), since 1995. Mr. Watkins joined Origin
in 1989. Previously, he has served in management positions in
several start-up companies, including Microgenics Corporation, and
was a consultant with the international consulting firm of McKinsey &
Company, Inc.

JOSEPH A. YAHNER Mr. Yahner is Vice President of Human
Resources and Corporate Affairs for the Company. Previously, he was
Vice President of Human Resources for CPI and U.S. Operations,
positions he held from 1992 and 1994, respectively, to 1995. He
served as Director of Operations at Lilly's Tippecanoe Laboratories
from 1988 to 1992. Mr. Yahner has also served in various positions
in Personnel, Research, Manufacturing, Quality Control and Technical
Services for Lilly. Mr. Yahner joined Lilly in 1971.

Employees

As of December 31, 1997, the Company had approximately 5100 full-
time employees, including approximately 560 employees outside the
United States. The Company maintains compensation, benefits, equity
participation and work environment policies intended to assist in
attracting and retaining qualified personnel. The Company believes
that the success of its business will depend, in significant part, on
its ability to attract and retain such personnel. In addition, the
Company contracts for services where appropriate. The contract labor
provides management with flexibility in dealing with fluctuations in
volume during periods of high sales growth and through new product
transfers to manufacturing.

None of the Company's employees are represented by a labor
union. The Company has never experienced an organized work stoppage
or strike and considers its relations with its employees to be
excellent.

Prior Relationship with Lilly

The Company was incorporated on September 9, 1994 as a wholly-
owned subsidiary of Lilly. In November 1994, Lilly transferred all
of its outstanding capital stock of ACS, CPI and Devices for Vascular
Intervention, Inc. to the Company in exchange for shares of the
Company's common stock. As part of this transfer, the Company agreed
to indemnify Lilly for any losses arising out of or otherwise related
to the ownership or operation at any time of the businesses conducted
by the Company. Also in November 1994, the Company purchased from
Lilly all of the capital stock of Heart Rhythm Technologies
Incorporated and Origin and certain assets used in the Company's
international businesses. In connection with these transactions, the
Company and Lilly also entered into a Tax Sharing Agreement which
provides, among other things, that should the Exchange Offer, which
was intended to qualify as a tax-free distribution pursuant to
Section 355 of the Internal Revenue Code of 1986, subsequently fail
to qualify under Section 355 as a result of any event wholly or
partially within the control of the Company and its subsidiaries (the
"Company Group") involving either the stock or assets (or any
combination thereof) of any member of the Company Group within three
years of the date of the Exchange Offer, then the Company is
obligated to indemnify and hold Lilly harmless from any tax liability
imposed on Lilly in connection with the Exchange Offer, which
liability would be material. The Exchange Offer was completed in
September 1995.

19

Financial Information Relating to Classes of Products

Financial information relating to classes of products, set forth in
the Company's 1997 Annual Report to Shareholders under "Management's
Discussion and Analysis of Results of Operations and Financial Condition,"
at page 19, is incorporated herein by reference.

Due to several factors, including the introduction of new
products by the Company and other manufacturers, the relative
contribution of any particular Company product to consolidated net
sales is not necessarily constant from year to year, and its
contribution to consolidated net income is not necessarily the same
as its contribution to consolidated net sales.

Financial Information Relating to Foreign and Domestic Operations

Financial information relating to foreign and domestic
operations, set forth in the Company's 1997 Annual Report to
Shareholders at page 36 under "Notes to Consolidated Financial
Statements--Geographic Information," is incorporated herein by
reference.

Local restrictions on the transfer of funds from branches and
subsidiaries located abroad (including the availability of dollar
exchange) have not to date been a significant deterrent in the
Company's overall operations abroad. The Company cannot predict what
effect these restrictions or the other risks inherent in foreign
operations, including possible nationalization, might have on its
future operations or what other restrictions may be imposed in the future.

Item 2. PROPERTIES

As of December 31, 1997, the Company owned or leased the
following principal facilities:
Approximate Leased or
Location Type of Facility Square Feet Owned
- -------- ---------------- ----------- -------
Basingstoke, UK Administration 24,000 Leased

Brussels, Belgium Administration and CRM research 17,000 Leased

Dorado, PR CRM manufacturing and 54,000 Owned
administration

Indianapolis, IN Administration 18,000 Leased

Menlo Park, CA CVS manufacturing, research and 122,000 Leased
development, administration,
sales and marketing and warehouse

Santa Clara, CA VI manufacturing, research and 370,000 Owned
development, administration,
and sales and marketing

St. Paul, MN CRM manufacturing, research and 360,000 Owned
development, administration and
sales and marketing

St. Paul, MN CRM lead development and 100,000 Leased
administration

St. Paul, MN CRM packaging, shipping and 25,000 Leased
warehouse

20

Temecula, CA VI manufacturing; CRM 500,000 Owned
research and development

Tokyo, Japan Administration 10,000 Leased

The Company currently maintains its executive offices at 111 Monument
Circle, 29th Floor, Indianapolis, Indiana. Subject to normal expansion,
the Company believes that its facilities are adequate to meet its present
and reasonably foreseeable needs.

The Company believes that none of its properties is subject to
any encumbrance, easement or other restriction that would detract
materially from its value or materially impair its use in the
operation of the business of the Company. The buildings owned by the
Company are of varying ages and are in good condition.

Item 3. LEGAL AND REGULATORY PROCEEDINGS

The Company is currently a party to various legal actions which
have occurred in the normal course of its business. The litigation
includes disputes over intellectual property, product liability,
employment litigation and general commercial matters.

The Company currently has a number of disputes with Boston Scientific
Corporation ("BSC") and its subsidiary, SciMed Life Systems, Inc. ("SciMed").
These include the following:

A. In a lawsuit originally filed on May 31, 1994, in the
Northern District of California, SciMed alleges that the
ACS RX ELIPSE coronary dilatation catheter infringes a
patent owned by SciMed. In the lawsuit, SciMed is seeking
injunctive relief and monetary damages.

B. On October 10, 1995, ACS filed suit against SciMed
alleging that the SciMed Express Plus and Express Plus II
coronary dilatation catheters infringe certain patents of
ACS. In addition, on March 12, 1996, ACS filed a separate
lawsuit alleging that these products infringe another
patent of ACS. These lawsuits were filed in the Northern
District of California and ACS is seeking injunctive relief
and monetary damages.

C. On December 15, 1995, BSC and SciMed filed suit
against ACS in the United States District Court of
Massachusetts alleging violation of federal and state
antitrust laws, as well as state unfair competition and
abuse of process laws. The lawsuit seeks injunctive
relief, unspecified monetary damages and a declaration that
certain patents are unenforceable. BSC and SciMed allege
that the violations are based on the misuse of the United
States patent laws as a result of agreements concerning
certain rapid exchange catheter patents. On October 27,
1997, the Court granted ACS' motion to dismiss the lawsuit.
BSC has appealed.

D. On March 12, 1996, ACS filed suit against SciMed in
the Northern District of California alleging that SciMed's
Trio/Bandit line of coronary dilatation catheters infringes
a patent of ACS. In the lawsuit, ACS is seeking injunctive
relief and monetary damages.

E. On June 10, 1997, SciMed filed suit against ACS in the
Northern District Court of California. The Complaint
alleges that the ACS RX COMET coronary dilatation catheter
infringes a patent owned by SciMed. The lawsuit seeks
monetary and injunctive relief. Previously, on

21

May 1, 1997, SciMed formally requested an arbitration as
to whether the ACS RX COMET coronary dilatation catheter is
covered under a Settlement Agreement entered into between
ACS and SciMed (the "Settlement Agreement"). ACS' motion
to dismiss the litigation without prejudice pending outcome
of the arbitration was granted. Arbitration is currently
scheduled to begin on May 11, 1998.

F. On July 31, 1997, SciMed notified ACS by letter that
it believes that ACS' rapid exchange stent delivery systems
infringe one of its German patents. Similarly, on October
21, 1997, SciMed notified ACS by letter that it believes
that the ACS RX ROCKET coronary dilatation catheter
infringes the same patent. ACS informed SciMed that ACS
believes that both of these products are covered by the
Settlement Agreement. As a result, SciMed instituted an
arbitration under the Settlement Agreement. Both of these
disputes have been consolidated for purposes of an
arbitration hearing, currently scheduled to begin on May
11, 1998.

G. On September 17, 1997, ACS filed suit against SciMed
and BSC in the Northern District of California alleging
that the SciMed Rebel rapid exchange coronary dilatation
catheter infringes certain patents of ACS. In the lawsuit,
ACS is seeking injunctive relief and monetary damages.

The Company currently has a number of disputes with Medtronic, Inc.
("Medtronic"), including the following:

A. On October 10, 1995, ACS filed suit against Medtronic
alleging that the Medtronic Falcon coronary dilatation
catheter infringes certain patents of ACS. On March 12,
1996, ACS filed another suit against Medtronic alleging
that the Medtronic Falcon coronary dilatation catheter
infringes another patent owned by ACS. Both of these
lawsuits were filed in the Northern District of California.
In the lawsuits, ACS is seeking injunctive relief and
monetary damages.

B. On November 6, 1997, Medtronic filed suit against ACS
in the United States District Court for Minnesota alleging
that the ACS MULTI-LINK coronary stent infringes a patent
owned by Medtronic. In the lawsuit, Medtronic is seeking
injunctive relief and monetary damages.

The Company currently has a number of disputes with Johnson & Johnson
("J&J") and its subsidiary, Cordis Corporation ("Cordis"), including the
following:

A. On August 26, 1997, J&J and Expandable Grafts
Partnership ("EGP") filed suit against the Company's
subsidiary Guidant Canada Corporation in the Federal Court
of Canada alleging that the sale of the ACS MULTI-LINK
coronary stent in Canada infringes a patent licensed to J&J
by EGP. In the lawsuit, J&J and EGP seek injunctive relief
and monetary damages.

B. On October 3, 1997, Cordis filed suit against the
Company and ACS, in the District Court for the District of
Delaware alleging that the sale of the ACS MULTI-LINK
coronary stent by ACS infringes certain patents licensed to
Cordis. In addition, on October 8, 1997, Cordis filed a
motion for a preliminary injunction in this lawsuit seeking
to prevent ACS from selling the ACS MULTI-LINK coronary
stent other than in certain limited circumstances and
subject to certain conditions. On October 22, 1997, the
complaint was amended to include BSC and Arterial Vascular
Engineering, Inc. ("AVE") as co-defendants. The complaint
was re-filed on February 6, 1998 to include EGP as a
plaintiff. A hearing on the motion for a preliminary
injunction was held in February 1998. No decision has been
made by the Court on this motion. In the lawsuit, Cordis
is seeking injunctive relief and monetary damages.

22

C. On December 2, 1997, Cordis filed suit against Guidant
and ACS in the United States District Court for the
District of Delaware alleging that the ACS RX ROCKET
coronary dilatation catheter infringes patents owned by
Cordis. Cordis has also filed a motion for a preliminary
injunction, which is currently scheduled for a hearing
beginning on April 9, 1998. In the lawsuit, Cordis is
seeking injunctive relief, monetary damages and attorney
fees. A separate lawsuit was also filed against the
Company in December 1997 in The Netherlands alleging
infringement of the European equivalents of these patents.

The Company currently has a number of disputes with General Surgical
Innovations, Inc. ("GSI"), including the following:

A. On May 28, 1996, Origin filed suit against GSI in the
Northern District of California alleging that GSI's
Spacemaker balloon products infringe a patent of Origin.
In the lawsuit, Origin is seeking injunctive relief and
monetary damages.

B. On June 4, 1996, GSI filed suit against Origin in the
Northern District of California alleging that Origin's
Preperitoneal Distention Balloon Systems infringe a patent
owned by GSI. GSI is seeking injunctive relief and
monetary damages.

C. On September 24, 1997, GSI filed suit against Origin
in the Northern District of California alleging that
Origin's VASOVIEW Balloon Dissection System infringes a
patent owned by GSI. GSI is seeking injunctive relief and
unspecified monetary damages.

The Company currently has a number of disputes with AVE, including the
following:

A. On December 24, 1997, ACS filed suit against AVE in
the United States District Court for the Northern District
of California alleging infringement of three patents of
ACS. In the lawsuit, ACS is seeking injunctive relief and
monetary damages.

B. On February 18, 1998, AVE filed suit against ACS in
the District Court of Delaware alleging that the sale of
the ACS MULTI-LINK Coronary Stent infringes certain patents
licensed to AVE. The lawsuit also alleges misappropriation
of trade secrets and breach of a confidentiality agreement
by ACS. In the lawsuit, AVE is seeking injunctive relief,
monetary damages, and to invalidate certain ACS stent
patents.

The Company currently has a number of disputes with St. Jude Medical,
Inc. ("St. Jude"), including the following:

A. On May 3, 1996, Pacesetter, Inc. ("Pacesetter"), a
subsidiary of St. Jude, filed a lawsuit against CPI which
is currently pending in the United States District Court
for Minnesota. The complaint, as subsequently amended,
alleges infringement of certain Pacesetter patents by
certain CPI pacemaker models and programmers for pacemakers
and defibrillators. The lawsuit seeks injunctive relief,
unspecified monetary damages, and an award of attorneys'
fees.

B. On November 26, 1996, the Company and its
subsidiaries, CPI and Guidant Sales Corporation ("GSC"),
and Lilly filed suit (the "State Court Case") against St.
Jude, Pacesetter, Ventritex, Inc. ("Ventritex") and certain
entities affiliated with Telectronics Holdings Ltd.
("Telectronics Parties") in the Marion Superior Court,
State of Indiana, alleging (among other things) that a
license agreement entered into in 1994 among CPI, Lilly and
the Telectronics Parties ("Telectronics Agreement") did not
transfer to Pacesetter when Pacesetter purchased certain
assets of the Telectronics Parties in

23

1996. The lawsuit seeks declaratory and injunctive relief
to prevent and invalidate the purported transfer of the
Telectronics Agreement to Pacesetter.

C. On November 26, 1996, CPI, GSC and Lilly filed suit
against St. Jude, Pacesetter and Ventritex in the United
States District Court for the Southern District of Indiana
alleging that upon consummation of the merger of Ventritex
and Pacesetter, the continued manufacture, use or sale of
certain Ventritex products would infringe certain patents
of CPI and Lilly. The lawsuit seeks declaratory and
injunctive relief and monetary damages.

D. On December 24, 1996, the Telectronics Parties and
Pacesetter filed suit against the Company, CPI, GSC and
Lilly in the United States District Court for the District
of Minnesota alleging that the claims made in the State
Court Case are subject to an arbitration provision in the
Telectronics Agreement. In the lawsuit, the Telectronics
Parties and Pacesetter are seeking declaratory and
injunctive relief and an award of costs. In February 1997,
the District Court ruled against the Telectronics Parties
and Pacesetter and held that the dispute was not subject to
the arbitration provision. The Telectronics Parties and
Pacesetter have appealed the Court's ruling to the United
States Court of Appeals for the Eighth Circuit.

On May 15, 1995, Intermedics, Inc., a division of Sulzermedica
USA, Inc. ("Intermedics"), filed a lawsuit against CPI which is
currently pending in the United States District Court for Minnesota.
The complaint alleges infringement of certain Intermedics patents by
CPI's VENTAK MINI and PRx defibrillator models and certain VIGOR and
EXCEL pacemaker models. (The EXCEL models are not currently
manufactured or sold by CPI). Intermedics is seeking injunctive
relief and monetary damages. CPI has filed counterclaims alleging
that certain of its patents are infringed by the Intermedics Res-Q
defibrillator products and certain Intermedics pacemaker products.

On May 3, 1996, Angeion Corporation filed a lawsuit against CPI
which is currently pending in the United States District Court for
Minnesota. The complaint, as subsequently amended, alleges
infringement of certain Angeion defibrillator patents by CPI's VENTAK
and PRx defibrillator models. The lawsuit seeks injunctive relief,
unspecified monetary damages, and an award of attorneys' fees.

On June 6, 1997, C.R. Bard, Inc. filed suit against the Company
and ACS in the U. S. District Court, District of Delaware. The
Complaint alleges that certain unspecified ACS dilatation catheters
infringe two patents owned by Bard. Bard is seeking monetary and
injunctive relief.

In March 1995, Sam F. Liprie filed suit against Omnitron
International, Inc. ("Omnitron") and Neocardia LLC. in the 215th
District Court of Harris County, Texas. In the Complaint, Mr.
Liprie, a former employee of Omnitron, alleges that he has exclusive
rights to certain unspecified developments made at Omnitron relating
to the treatment of restenosis with radiation. In March 1997, U.S.
Surgical Corporation was joined in the lawsuit and has also claimed
it has exclusive rights to this technology through Mr. Liprie. The
Company acquired certain assets from Omnitron/Neocardia on May 7,
1997. The exclusive right to use certain of these assets is the
subject of this litigation. On July 3, 1997, the Company and its
subsidiary, ACS Delaware Corporation, were joined in the litigation.
The trial is currently scheduled to begin in August 1998. The
lawsuit seeks monetary damages and injunctive relief.

In addition, the Company is currently involved in a number of
other patent related actions, including patent interferences,
European patent oppositions and patent reexamination proceedings.

24

While it is not possible to predict or determine the outcome of
the legal actions brought against it, or to provide an estimate of
the losses, if any, that may arise, the Company believes the costs
associated with all of these actions will not have a material adverse
effect on the Company's consolidated financial position or liquidity,
but could possibly be material to the consolidated results of
operations. However, an adverse outcome in certain of these cases
could have a material adverse effect on the Company.

Item 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of 1997, no matters were submitted to
a vote of security holders.

Part II

Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the New York Stock
Exchange ("NYSE") and the Pacific Exchange, Inc. ("PCX").
Information relating to the high and low sales prices per share of
the Company's common stock, as reported in the consolidated
transactions reporting system on the NYSE set forth in the Company's
1997 Annual Report to Shareholders under "Notes to Consolidated
Financial Statements--Selected Quarterly Information (Unaudited)," at
page 38 is incorporated herein by reference.

During each quarter of 1997 and 1996, the Company paid a
quarterly cash dividend of $0.0125 per share of the Company's common
stock, as adjusted for the Company's two-for-one stock split which
occurred in September 1997. The declaration and payment of future
dividends to holders of the Company's common stock will be at the
discretion of the Board and will depend upon many factors, including
the Company's competitive position, financial condition, earnings and
capital requirements. Accordingly, there is no requirement or
assurance that dividends will be declared or paid.

As of March 2, 1998, the approximate number of record holders of
the Company's common stock was 4,071.

Item 6. SELECTED FINANCIAL DATA

Selected financial data for each of the Company's five most
recent fiscal years, set forth in the Company's 1997 Annual Report to
Shareholders under "Selected Consolidated Financial Data," at page
18, are incorporated herein by reference.

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

Management's Discussion and Analysis of Results of Operations
and Financial Condition, set forth in the Company's 1997 Annual
Report to Shareholders under "Operating Results" (pages 19-23),
"Liquidity and Financial Condition" (pages 23-24), and "Regulatory
and Other Matters" (pages 24-25), is incorporated herein by
reference.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information related to quantitative and qualitative disclosures
about market risk, set forth in the Company's 1997 Annual Report to
Shareholders under "Management's Discussion and Analysis of Results
of Operations and Financial

25

Condition -- Liquidity and Financial Condition" (pages 23-24), is
incorporated herein by reference.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and its
subsidiaries, listed in Item 14(a)1 and included in the Company's
1997 Annual Report to Shareholders at pages 26-29 (Consolidated
Statements of Income, Consolidated Balance Sheets, Consolidated
Statements of Shareholders' Equity and Consolidated Statements of
Cash Flows), and pages 30-38 (Notes to Consolidated Financial
Statements) and the Report of Independent Auditors set forth in the
Company's 1997 Annual Report to Shareholders at page 39, are
incorporated herein by reference.

Information on quarterly results of operations, set forth in the
Company's 1997 Annual Report to Shareholders under "Notes to
Consolidated Financial Statements--Selected Quarterly Information
(Unaudited)," at page 38, is incorporated herein by reference.

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

None.

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to the Company's directors, set forth in
the Company's Proxy Statement for the Annual Meeting of Shareholders
to be held on May 18, 1998, under "Election of Directors--Nominees
for Election," is incorporated herein by reference. Information
relating to the Company's executive officers is set forth at pages 17-
19 of this Form 10-K under "Executive Officers of the Company."

Item 11. EXECUTIVE COMPENSATION

Information relating to executive compensation, set forth in the
Company's Proxy Statement for the Annual Meeting of Shareholders to
be held May 18, 1998, under "Election of Directors--Executive
Compensation," is incorporated herein by reference, except that the
Compensation Committee Report and Performance Graph are not so
incorporated.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information relating to ownership of the Company's common stock
by persons known by the Company to be the beneficial owners of more
than 5% of the outstanding shares of common stock and by management,
set forth in the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 18, 1998, under "Election of Directors--
Ownership of Company Common Stock by Directors and Executive
Officers," and "Election of Directors--Principal Holders of Company
Common Stock," is incorporated herein by reference.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information relating to a transaction with an executive officer
of the Company, set forth in the Company's Proxy Statement for the
Annual Meeting of Shareholders to be held on May 18, 1998, under
"Election of Directors -- Transaction with Executive Officer," is
incorporated herein by reference.

26

PART IV

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

(a) 1. Financial Statements

The following consolidated financial statements of the Company
and its subsidiaries, included in the Company's 1997 Annual Report to
Shareholders at the pages indicated in parentheses, are incorporated
by reference in Item 8:

Consolidated Statements of Income--Years Ended
December 31, 1997, 1996 and 1995 (page 26)

Consolidated Balance Sheets--December 31, 1997 and
1996 (page 27)

Consolidated Statements of Shareholders' Equity--
Years Ended December 31, 1997, 1996 and 1995 (page
28)

Consolidated Statements of Cash Flows--Years Ended
December 31, 1997, 1996 and 1995 (page 29)

Notes to Consolidated Financial Statements (pages
30-38)

(a)2. Financial Statement Schedules

The following consolidated financial statement schedule of the
Company and its subsidiaries is included in this Form 10-K:

Schedule II Valuation and Qualifying Accounts (page F-1)

All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions, are
inapplicable or are adequately explained in the financial statements
and, therefore, have been omitted.

Financial statements of interests of 50% or less, which are
accounted for by the equity method, have been omitted because they do
not, considered in the aggregate as a single subsidiary, constitute a
significant subsidiary.

The report of the Company's independent auditors with respect to
the schedule listed above is contained herein as part of Exhibit
23.1, Consent of Independent Auditors.

27

(a)3. Exhibits

3.1 Amended and Restated Articles of Incorporation of the
Registrant. (1)
3.2 By-Laws of the Registrant. (1)
4.1 Specimen of Certificate for Common Stock. (1)
10.1 Rights Agreement dated as of October 17, 1994 between the
Company and Bank One, Indianapolis, N.A. (1)
10.2 Form of International Services Agreement between international
subsidiary of Eli Lilly and Company and international
subsidiary of the Company. (1)
10.3 United States Services Agreement dated as of October 31, 1994
between Eli Lilly and Company and the Company. (1)
10.4 Transfer Agreement dated as of November 30, 1994 between Eli
Lilly and Company and the Company. (1)
10.5 Tax Sharing Agreement dated as of November 30, 1994 between
Eli Lilly and Company and the Company. (1)
10.6 Form of International Asset Purchase Agreement between
international subsidiary of Eli Lilly and Company and
international subsidiary of the Company. (1)
10.7 Sublicense Agreement dated as of October 18, 1994 between Eli
Lilly and Company and Cardiac Pacemakers, Inc. (1)
10.8 Purchase and Sale Agreement and Escrow Instructions dated as
of October 18, 1994 between Eli Lilly and Company and Advanced
Cardiovascular Systems, Inc. (1)
10.9 Assignment of Leases dated as of October 25, 1985 between
Seaport Centre Venture Phase II and Metropolitan Life
Insurance Company. (1)
10.10 Settlement Agreement dated as of December 1, 1991 among
Advanced Cardiovascular Systems, Inc., Eli Lilly and Company
and SciMed Life Systems, Inc. (1)
10.11 Distribution Agreement dated as of December 31, 1992 among
Advanced Cardiovascular Systems, Inc., Peripheral Systems
Group and Mallinckrodt Medical, Inc. (1)
10.12 Settlement Agreement dated as of January 13, 1992 between
Advanced Cardiovascular Systems, Inc. and C. R. Bard, Inc. (1)
10.13 Settlement and License Agreement dated as of December 17, 1991
among Schneider (Europe) A.G., Schneider (USA) Inc. and
Advanced Cardiovascular Systems, Inc. (1)
10.14 Amendment to Settlement and License Agreement dated as of
April 9, 1992 among Schneider (Europe) A.G., Schneider (USA)
Inc. and Advanced Cardiovascular Systems, Inc. (1)
10.15 Amended License Agreement dated as of September 26, 1988
between Paul Yock, M.D. and Advanced Cardiovascular Systems,
Inc. (1)
10.16 First Amendment to Amended License Agreement dated as of
January 1, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.17 Second Amendment to Amended License Agreement dated as of
January 13, 1992 between Paul Yock, M.D. and Advanced
Cardiovascular Systems, Inc. (1)
10.18 Agreement dated as of January 31, 1994 between E. I. DuPont de
Nemours and Company, Cardiac Pacemakers, Inc. and Eli Lilly
and Company. (1)
10.19 Agreement dated as of July 1, 1994 between E. I. DuPont de
Nemours and Company, Minco Products, Inc., Cardiac Pacemakers,
Inc. and Eli Lilly and Company. (1)
10.20 Override Agreement between Motorola, Inc., Cardiac Pacemakers,
Inc. and Eli Lilly and Company. (1)
10.21 Material Supply Agreement dated as of January 1, 1995 between
Dow Corning Corporation and Cardiac Pacemakers, Inc. (2)
10.22 Purchase Contract dated as of January 1, 1991 between Wilson
Greatbatch Ltd. and Cardiac Pacemakers, Inc. (1)
10.23 Purchase Contract Extension between Wilson Greatbatch Ltd. and
Cardiac Pacemakers, Inc., effective as of January 1, 1996. (2)
10.24 Exclusive License Agreement dated as of January 30, 1973
between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.25 Amendment to Exclusive License Agreement dated as of January
10, 1975 between Medrad, Inc. and Mieczyslaw Mirowski. (1)
10.26 First Addendum to the Exclusive License Agreement dated as of
June 17, 1974 between Medrad, Inc. and Mieczyslaw Mirowski.
(1)
10.27 Second Addendum to the Exclusive License Agreement dated as of
April 11, 1975 between Medrad, Inc. and Mieczyslaw Mirowski.
(1)

28

10.28 Third Addendum to the Exclusive License Agreement dated as of
December 22, 1976 between Medrad, Inc. and Mieczyslaw
Mirowski. (1)
10.29 Fourth Addendum to the Exclusive License Agreement dated as of
January 1, 1979 between Medrad, Inc. and Mieczyslaw Mirowski.
(1)
10.30 Fifth Addendum to the Exclusive License Agreement dated as of
June 24, 1981 between Medrad, Inc. and Mieczyslaw Mirowski.
(1)
10.31 Sixth Addendum to the Exclusive License Agreement dated as of
September 16, 1983 between Medrad, Inc., Mieczyslaw Mirowski,
Medrad/Intec., Inc. and Intec Systems, Inc. (1)
10.32 Guidant Corporation 1994 Stock Plan, as amended. (3) #
10.33 Guidant Corporation Economic Value Added (EVA) Bonus Plan
dated January 1, 1995. (2) #
10.34 Stock Purchase Agreement dated as of October 31, 1994 between
Eli Lilly and Company and Advanced Cardiovascular Systems,
Inc. (1)
10.35 Standard Form Office Lease dated December 27, 1994 between
Zell/Merrill Lynch Real Estate Opportunity Partners Limited
Partnership II and the Company. (4)
10.36 Guidant Corporation Change in Control Plan for Select
Employees. (5)
10.37 Credit Agreement dated as of January 8, 1996 among the
Company, certain banks and Morgan Guaranty Trust Company of
New York, as agent. (6)
10.38 Agreement and Plan of Merger, dated as of October 5, 1997, as
amended November 14, 1997, among the Company, Ski Acquisition
Corp. and EndoVascular Technologies, Inc. (7)
11.1 Computation of Earnings Per Share. *
13.1 Annual Report to Shareholders for the year ended December 31,
1997 (portions incorporated by reference into this Form 10-K).
*
21.1 Subsidiaries of the Registrant. *
23.1 Consent of Independent Auditors. *
27.1 Financial Data Schedule. *
27.2 Restated Financial Data Schedule. *
27.3 Restated Financial Data Schedule. *
27.4 Restated Financial Data Schedule. *
27.5 Restated Financial Data Schedule. *
27.6 Restated Financial Data Schedule. *
27.7 Restated Financial Data Schedule. *
99.1 Factors Affecting Future Operating Results. *

- ------------
(1) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on Form
S-1, File No. 33-83934.
(2) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
(3) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Annual Report on Form 10-K for
the fiscal year December 31, 1996.
(4) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1994.
(5) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 1995.
(6) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on Form
S-3, File No. 333-00014.
(7) Incorporated herein by reference to the identical exhibit
filed as part of the Company's Registration Statement on Form
S-4, File No. 333-06363.

* Filed herewith.
# Management compensation plan.

29

(b) Reports on Form 8-K

On December 30, 1997, the Company filed a Report on Form 8-K
reporting the completion of the Company's acquisition of
EndoVascular Technologies, Inc. The Report included the
Company's quarterly Consolidated Statements of Income restated
for the acquisition of EndoVascular Technologies, Inc. for the
three months ended September 30, 1997 and 1996, June 30, 1997
and 1996, March 31, 1997 and 1996, for the nine months ended
September 30, 1997 and 1996, for the three months ended December
31, 1996, and for the year ended December 31, 1996 and
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.

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.

Guidant Corporation

By s/James M. Cornelius
--------------------------
James M. Cornelius,
Chairman of the Board

March 16, 1998

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.

SIGNATURE TITLE DATE
- --------------------------------------------------------------------------

s/James M. Cornelius Chairman of the Board March 16, 1998
- ------------------------ and Director (principal
James M. Cornelius executive officer)

s/Ronald W. Dollens President, Chief Executive March 16, 1998
- ----------------------- Officer and Director
Ronald W. Dollens (principal executive officer)

s/Keith E. Brauer Vice President, Finance and March 16, 1998
- ----------------------- Chief Financial Officer
Keith E. Brauer (principal financial officer)

s/Roger Marchetti Corporate Controller and March 16, 1998
- ----------------------- Chief Accounting Officer
Roger Marchetti (principal accounting officer)

s/Kim B. Clark, Ph.D. Director March 16, 1998
- -----------------------
Kim B. Clark, Ph.D.

s/Maurice A. Cox, Jr. Director March 16, 1998
- -----------------------
Maurice A. Cox, Jr.

30

s/Enrique C. Falla Director March 16, 1998
- -----------------------
Enrique C. Falla

s/J.B. King Director March 16, 1998
- -----------------------
J.B. King

s/Susan B. King Director March 16, 1998
- -----------------------
Susan B. King

s/J. Kevin Moore Director March 16, 1998
- -----------------------
J. Kevin Moore

s/Mark Novitch, M.D. Director March 16, 1998
- -----------------------
Mark Novitch, M.D.

s/Eugene L. Step Director March 16, 1998
- -----------------------
Eugene L. Step

s/Ruedi E. Wager Director March 16, 1998
- -----------------------
Ruedi E. Wager, Ph.D.

31

Guidant Corporation and Subsidiaries

Schedule II. Valuation and Qualifying Accounts
(in millions)

Col. A Col. B Col. C Col. D Col. E
Balance at Charges Balance at
Beginning and End of
Description of Period Expenses Deductions(1) Period
- ----------- ---------- ----------- ------------- ------
Year Ended December 31, 1995
Allowance for inventory
obsolescence $ 9.0 $17.7 $ (20.4) $ 6.3
Allowance for doubtful
accounts 4.5 1.7 (0.5) 5.7
----- ----- ------- -----
Totals $13.5 $19.4 $(20.9) $12.0
===== ===== ======= =====

Year Ended December 31, 1996
Allowance for inventory
obsolescence $ 6.3 $29.6 $(12.9) $23.0
Allowance for doubtful
accounts 5.7 2.3 (0.6) 7.4
----- ----- ------- -----
Totals $12.0 $31.9 $(13.5) $30.4
===== ===== ======= =====

Year Ended December 31, 1997
Allowance for inventory
obsolescence $23.0 $14.7 $(11.9) $25.8
Allowance for doubtful
accounts 7.4 5.4 (3.6) 9.2
----- ----- ------- -----
Totals $30.4 $20.1 $(15.5) $35.0
===== ===== ======= =====

(1) Write-offs of obsolete units or uncollectible accounts.

F-1

Exhibit List

13.1 Annual Report to Shareholders for the Year Ended
December 31, 1997 (portions incorporated by reference)
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
27.4 Restated Financial Data Schedule
27.5 Restated Financial Data Schedule
27.6 Restated Financial Data Schedule
27.7 Restated Financial Data Schedule
99.1 Factors Possibly Affecting Future Operating Results