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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


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

For the quarterly period ended: September 30, 2004


Commission file number: 1-11083



BOSTON SCIENTIFIC CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)


DELAWARE 04-2695240
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)


One Boston Scientific Place, Natick, Massachusetts 01760-1537
- -------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code: (508) 650-8000
--------------


---------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
----- -----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes X No
----- -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.

Shares Outstanding as
Class of September 30, 2004
----- ---------------------

Common Stock, $.01 Par Value 844,476,871

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Page 1 of 48
Exhibit Index on Page 47



TABLE OF CONTENTS
-----------------




PART I FINANCIAL INFORMATION PAGE NO.

ITEM 1. Condensed Consolidated Financial Statements ........... 3

Condensed Consolidated Balance Sheets ................. 3

Condensed Consolidated Statements of Operations ....... 5

Condensed Consolidated Statements of Cash Flows ....... 6

Notes to the Condensed Consolidated Financial
Statements............................................. 7


ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................... 21


ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk ........................................... 45


ITEM 4. Controls and Procedures ............................... 46





PART II OTHER INFORMATION

ITEM 1. Legal Proceedings ..................................... 47


ITEM 6. Exhibits .............................................. 47



SIGNATURES ................................................................. 48





2

PART I
FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)




September 30, December 31,
(in millions) 2004 2003
- ----------------------------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 1,105 $ 671
Short-term investments 437 81
Trade accounts receivable, net 846 542
Inventories 314 281
Other current assets 321 305
------------ ------------
Total current assets 3,023 1,880

Property, plant and equipment 1,551 1,337
Less: accumulated depreciation 712 593
------------ ------------
839 744


Goodwill 1,713 1,275
Other intangible assets, net 1,614 1,186
Investments 645 558
Other assets 149 56
------------ ------------
$ 7,983 $ 5,699
============ ============







See notes to the unaudited condensed consolidated financial statements.

3

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (continued)
(Unaudited)




September 30, December 31,
(in millions, except share data) 2004 2003
- ----------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Commercial paper $ 244 $ 547
Notes payable and current maturities of long-term debt 512 6
Accounts payable and accrued expenses 934 675
Other current liabilities 181 165
------------ ------------
Total current liabilities 1,871 1,393

Long-term debt 1,740 1,172
Deferred income taxes 258 151
Other long-term liabilities 109 121


Commitments and contingencies

Stockholders' equity:
Preferred stock, $ .01 par value - authorized 50,000,000
shares, none issued and outstanding
Common stock, $ .01 par value - authorized 1,200,000,000
shares, 844,476,871 shares issued at September 30, 2004;
829,764,826 shares issued at December 31, 2003 8 8
Additional paid-in capital 1,558 1,225
Treasury stock, at cost - 3,502,850 shares at
December 31, 2003 (111)
Retained earnings 2,494 1,789
Accumulated other comprehensive loss (55) (49)
------------ ------------
Total stockholders' equity 4,005 2,862
------------ ------------
$ 7,983 $ 5,699
============ ============







See notes to the unaudited condensed consolidated financial statements.

4

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)

Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
(in millions, except per share data) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------

Net sales $ 1,482 $ 876 $ 4,024 $ 2,537
Cost of products sold 309 243 964 704
------------ ------------ ------------ ------------
Gross profit 1,173 633 3,060 1,833

Selling, general and administrative expenses 504 295 1,227 858
Amortization expense 34 21 82 62
Royalties 57 15 131 40
Research and development expenses 145 113 411 324
Purchased research and development 8 64 33
Litigation-related charges 75 8 75 15
------------ ------------ ------------ ------------
815 460 1,990 1,332
------------ ------------ ------------ ------------
Operating income 358 173 1,070 501

Other income (expense):
Interest expense (19) (12) (44) (35)
Other, net 9 (3) 9 (7)
------------ ------------ ------------ ------------

Income before income taxes 348 158 1,035 459
Income taxes 90 34 270 124
------------ ------------ ------------ ------------
Net income $ 258 $ 124 $ 765 $ 335
============ ============ ============ ============

Net income per common share - basic $ 0.31 $ 0.15 $ 0.91 $ 0.41
============ ============ ============ ============

Net income per common share - assuming dilution $ 0.30 $ 0.15 $ 0.89 $ 0.40
============ ============ ============ ============





See notes to the unaudited condensed consolidated financial statements.

5

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)



Nine Months Ended
September 30,
------------------------------
(in millions) 2004 2003
- ----------------------------------------------------------------------------------------------

Cash provided by operating activities $ 1,147 $ 553

Investing activities:
Purchases of property, plant and equipment, net (201) (117)
Purchases of held-to-maturity investments (660) (58)
Maturities of held-to-maturity investments 159 36
Purchases of available-for-sale securities (23) (99)
Sales of available-for-sale securities 62
Sales of privately held equity securities 28
Acquisitions of businesses, net of cash acquired (804) (13)
Payments related to prior year acquisitions (85) (252)
Payments for acquisitions of and/or investments
in certain technologies, net (155) (139)
------------ ------------
Cash used for investing activities (1,679) (642)

Financing activities:
Net (decrease) increase in commercial paper (20) 827
Net increase (decrease) in revolving borrowings 166 (121)
Proceeds from notes payable, capital leases and
long-term borrowings, net of debt issuance costs 613 1
Purchases of common stock for treasury (570)
Proceeds from issuances of shares of common stock 208 184
------------ ------------
Cash provided by financing activities 967 321
Effect of foreign exchange rates on cash (1) 6
------------ ------------
Net increase in cash and cash equivalents 434 238
Cash and cash equivalents at beginning of period 671 260
------------ ------------

Cash and cash equivalents at end of period $ 1,105 $ 498
============ ============


Supplemental Schedule of Noncash Investing and Financing
Activities:
Payments due in connection with prior year acquisitions $ 22 $ 84





See notes to the unaudited condensed consolidated financial statements.

6

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE A - BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Boston
Scientific Corporation (Boston Scientific or the Company) have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine months ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto incorporated by reference in Boston
Scientific's Annual Report on Form 10-K for the year ended December 31, 2003.

Certain prior year's amounts have been reclassified to conform to the current
year presentation.


NOTE B - STOCK COMPENSATION ARRANGEMENTS

The Company accounts for its stock compensation arrangements under the intrinsic
value method in accordance with Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations. The
Company has adopted the disclosure-only provisions of Financial Accounting
Standards Board (FASB) Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.

If the Company had elected to recognize compensation expense for the granting of
options under stock option plans based on the fair values at the grant dates
consistent with the methodology prescribed by Statement No. 123, net income and
net income per share would have been reported as the following pro forma amounts
for the three and nine months ended September 30, 2004 and 2003:

7


Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in millions, except per share data) 2004 2003 2004 2003
- ---------------------------------------------- ---------- ---------- ---------- ----------

Net income, as reported $ 258 $ 124 $ 765 $ 335

Add: Stock-based employee compensation
expense included in net income, net of
related tax effects 1

Less: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (17) (13) (48) (39)
---------- ---------- ---------- ----------

Pro forma net income $ 241 $ 111 $ 717 $ 297
========== ========== ========== ==========

Net income per common share:
Basic:
Reported $ 0.31 $ 0.15 $ 0.91 $ 0.41
Pro forma $ 0.29 $ 0.14 $ 0.86 $ 0.36
Assuming dilution:
Reported $ 0.30 $ 0.15 $ 0.89 $ 0.40
Pro forma $ 0.28 $ 0.13 $ 0.84 $ 0.35



The fair value of the stock compensation used to calculate the pro forma net
income and earnings per share amounts above was estimated using the
Black-Scholes option pricing model.


NOTE C - COMPREHENSIVE INCOME

The following table sets forth the Company's comprehensive income for the three
and nine months ended September 30, 2004 and 2003:

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in millions) 2004 2003 2004 2003
- ---------------------------------------------- ---------- ---------- ---------- ----------

Net income $ 258 $ 124 $ 765 $ 335
Foreign currency translation adjustment 6 16 (5) 42
Net change in equity investments (25) 28 (47) 47
Net change in derivative financial instruments 8 (20) 46 (25)
---------- ---------- ---------- ----------
Comprehensive income $ 247 $ 148 $ 759 $ 399
========== ========== ========== ==========



NOTE D - EARNINGS PER SHARE

The following table sets forth the computations of basic and diluted earnings
per share:

8


Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in millions, except per share data) 2004 2003 2004 2003
- ---------------------------------------------- ---------- ---------- ---------- ----------

Basic:
Net Income $ 258 $ 124 $ 765 $ 335
Weighted average shares outstanding 843.8 818.9 838.1 820.5
Net income per common share $ 0.31 $ 0.15 $ 0.91 $ 0.41
========== ========== ========== ==========

Assuming dilution:
Net income $ 258 $ 124 $ 765 $ 335
Weighted average shares outstanding 843.8 818.9 838.1 820.5
Net effect of dilutive stock-based compensation 17.2 26.5 20.6 24.2
---------- ---------- ---------- ----------
Total 861.0 845.4 858.7 844.7

Net income per common share $ 0.30 $ 0.15 $ 0.89 $ 0.40
========== ========== ========== ==========



NOTE E - BUSINESS COMBINATIONS

On June 1, 2004, the Company completed its acquisition of 100 percent of the
fully diluted equity of Advanced Bionics Corporation (Advanced Bionics) for an
initial payment of approximately $740 million in cash, plus earn out payments
that are contingent upon Advanced Bionics reaching future performance
milestones. Advanced Bionics develops implantable microelectronic technologies
for treating numerous neurological disorders. Its neuromodulation technology
includes a range of neurostimulators (or implantable pulse generators),
programmable drug pumps and cochlear implants. The acquisition was intended to
expand the Company's technology portfolio into the implantable microelectronic
device market. The Advanced Bionics acquisition was structured to include
earnout payments that are primarily contingent on the achievement of future
performance milestones, with certain milestone payments also tied to
profitability. The performance milestones are segmented by Advanced Bionics'
four principal technology platforms (cochlear implants, implantable pulse
generators, drug pumps and bion microstimulators), each milestone with a
72-month earnout horizon from the date of the anticipated product launch. Base
earnout payments on these performance milestones approximate two and a quarter
times incremental sales for each annual period. There are also bonus earnout
payments available based on the attainment of certain aggregate sales
performance targets and a certain gross margin level. The milestones associated
with the contingent consideration must be reached in certain future periods
ranging from 2004 through 2013.

On April 2, 2004, the Company completed its acquisition of the remaining
outstanding shares of Precision Vascular Systems, Inc. (PVS) for an initial
payment of approximately $75 million in cash, plus earnout payments that are
contingent upon PVS reaching future performance milestones. PVS develops and
manufactures guidewires and microcatheter technology for use in accessing the
brain, the heart and other areas of the anatomy. The acquisition of PVS was
intended to provide the Company with expanded vascular access technology and an
expanded intellectual property portfolio.

9

Since 2001, the Company has completed twelve business combinations. All of the
combinations were completed using the purchase method of accounting. Those
completed before July 1, 2001 were accounted for under APB Opinion No. 16,
BUSINESS COMBINATIONS. Those completed after June 30, 2001 were accounted for
under FASB Statement No. 141, BUSINESS COMBINATIONS.

Certain of the Company's business combinations involve the payment of contingent
consideration. For acquisitions completed before July 1, 2001, these payments,
if and when made, are allocated to specific intangible asset categories,
including purchased research and development, with the remainder assigned to
goodwill as if the consideration had been paid as of the date of acquisition.
For acquisitions completed after June 30, 2001, these payments, if and when
made, are allocated to goodwill. Payment of the additional consideration is
generally contingent upon the acquired companies reaching certain performance
milestones, including attaining specified revenue levels, achieving product
development targets or obtaining regulatory approvals. At September 30, 2004 and
December 31, 2003, the Company had accruals for acquisition-related obligations
of approximately $22 million and $79 million, respectively. Of the accruals
recorded in 2003, $24 million was recorded as an adjustment to purchased
research and development, $9 million was recorded as an adjustment to other
identifiable intangible asset categories, net of the related deferred tax
liabilities, and the remainder was recorded as an adjustment to goodwill. The
accruals in 2004 were recorded as an adjustment to goodwill.

In addition, at September 30, 2004, the estimated maximum potential amount of
future contingent consideration (undiscounted) that the Company could be
required to make associated with its business combinations is approximately $3.2
billion, some of which may be payable in the Company's common stock. Certain
earnout payments are based on multiples of the acquired company's revenue during
the earnout period, and consequently, the total payments are not currently
determinable. However, the Company has developed an estimate of the maximum
potential contingent consideration for each of its acquisitions with an
outstanding earnout obligation. The milestones associated with the contingent
consideration must be reached in certain future periods ranging from 2004
through 2013. The estimated cumulative specified revenue level associated with
these maximum future contingent payments is approximately $7 billion.

The Company has recorded approximately $412 million of intangible assets not
subject to amortization associated with its 2004 acquisitions, which is
comprised solely of goodwill. The goodwill is not deductible for tax purposes,
and has been primarily allocated to the Company's U.S. reportable segment.

The following table summarizes the purchase price assigned to the intangible
assets subject to amortization acquired in connection with the 2004 acquisitions
and the weighted average amortization periods:

10

WEIGHTED
AVERAGE
AMOUNT AMORTIZATION
(in millions) ASSIGNED PERIOD
- ---------------------------------------------- ---------- ----------
Technology - core $ 405 20 years
Technology - developed 42 7 years
Other 10 15 years
---------- ----------
Total $ 457 19 years
========== ==========


The Company also recorded $64 million of purchased research and development, $46
million of deferred tax assets and $169 million of deferred tax liabilities in
connection with the acquisitions of Advanced Bionics and PVS. The deferred tax
assets are primarily attributable to net operating loss carryforwards. The
deferred tax liabilities mainly relate to the tax impact of amortization that is
attributable to the identified intangibles acquired in the acquisition. The
remaining net tangible assets acquired were not significant. The amounts paid
for each acquisition have been allocated to the assets acquired and liabilities
assumed based on their fair values at the dates of acquisition. The estimated
excess of purchase price over the fair value of the net tangible assets acquired
was allocated to identifiable intangible assets based on detailed valuations.
The Company's purchased research and development charges are based upon these
valuations. The valuation of purchased research and development represents the
estimated fair value at the dates of acquisition related to in-process projects.
As of the dates of acquisition, the in-process projects had not yet reached
technological feasibility and had no alternative future uses. The primary basis
for determining the technological feasibility of these projects is obtaining
regulatory approval to market the products in an applicable geographical region.
Accordingly, the value attributable to these projects, which had not yet
obtained regulatory approval, was expensed in conjunction with the acquisitions.
If the projects are not successful, or completed in a timely manner, the Company
may not realize the financial benefits expected for these projects.

The income approach was used to establish the fair values of purchased research
and development. This approach establishes fair value by estimating the
after-tax cash flows attributable to the in-process project over its useful life
and then discounting these after-tax cash flows back to a present value. Revenue
estimates were based on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected product introductions
by competitors. In arriving at the value of the in-process research and
development projects, the Company considered, among other factors, the
in-process project's stage of completion, the complexity of the work completed
as of the acquisition date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
expected introduction date and the estimated useful life of the technology. The
discount rate used to arrive at a present value as of the date of acquisition
was based on the time value of money and medical technology investment risk
factors. For the purchased research and development programs acquired in
connection with the Company's 2004 acquisitions, risk-adjusted discount rates
ranging from 18 percent to 27 percent were utilized to discount the projected
cash flows. The Company believes that the estimated purchased research and
development amounts so determined represent the fair value at the date of
acquisition and do not exceed the amount a third party would pay for the
projects.

The most significant in-process projects acquired in connection with the
Company's 2004 acquisitions include Advanced Bionics' bion(TM) microstimulator
and drug delivery pump,

11

which collectively represent approximately 77 percent of the 2004 in-process
projects value. The bion microstimulator is an implantable neurostimulation
device that may be used to treat a variety of neurological conditions, including
urge incontinence, epilepsy, sleep apnea, erectile dysfunction and migraine
headaches. The cost to complete the bion microstimulator is estimated to be
between $35 million and $45 million. The drug delivery pump is an implanted
programmable device used to treat chronic pain. The cost to complete the drug
delivery pump is estimated to be between $30 million and $40 million. As of the
date of acquisition, the products were expected to be commercially available on
a worldwide basis within three to four years.

The Company's unaudited condensed consolidated financial statements include
Advanced Bionics' and PVS' operating results from the date of acquisition. The
following unaudited pro forma information presents a summary of the consolidated
results of operations of the Company and Advanced Bionics as if the acquisition
had occurred at the beginning of each of 2003 and 2004, with pro forma
adjustments to give effect to amortization of intangible assets, an increase in
interest expense on acquisition financing and certain other adjustments together
with related tax effects:

Three Months Ended Nine Months Ended:
September 30, September 30,
(in millions, except per share data) 2003 2004 2003
- ---------------------------------------------- ---------- ---------- ----------

Net sales $ 890 $ 4,057 $ 2,569
Net income 113 733 299

Net income per share - basic $ 0.14 $ 0.87 $ 0.36
Net income per share - assuming dilution $ 0.13 $ 0.85 $ 0.35


Pro forma information is not presented for PVS, as PVS' results of operations
prior to its date of acquisition are not significant in relation to the
Company's consolidated results.


NOTE F - BORROWINGS AND CREDIT ARRANGEMENTS

During the first half of 2004, the Company refinanced its $1,200 million credit
facilities. At September 30, 2004, the Company's revolving credit facilities
totaled $2,020 million, consisting of a $1,500 million credit facility that
terminates in May 2009; a $500 million 364-day credit facility that terminates
in May 2005 and contains an option to convert into a one-year term loan maturing
in May 2006; and a $20 million uncommitted credit facility. Use of the
borrowings is unrestricted and the borrowings are unsecured.

The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $983 million and
$1,003 million of commercial paper outstanding at September 30, 2004 and
December 31, 2003, respectively, at weighted average interest rates of 1.74
percent and 1.20 percent, respectively.

In addition, the Company increased its borrowing capacity under its revolving
credit and security facility, which is secured by the Company's domestic trade
receivables, from $200 million to $400 million. The Company had approximately
$360 million and $194 million of borrowings outstanding under its revolving
credit and security facility at September 30, 2004



12

and December 31, 2003, respectively, at weighted average interest rates of 2.11
percent and 1.44 percent, respectively. During the third quarter, the Company
renewed the revolving credit and security facility for an additional 364 days
through August 2005.

The Company has the ability and intent to refinance a portion of its short-term
debt on a long-term basis through its revolving credit facilities. At September
30, 2004, the Company expects that a minimum of approximately $1,100 million of
its short-term obligations, including $739 million of commercial paper, will
remain outstanding beyond the next twelve months and, accordingly, has
classified this portion as long-term borrowings, as compared to $650 million of
short-term obligations, including $456 million of commercial paper, classified
as long-term obligations at December 31, 2003.

The Company had $500 million of senior notes outstanding at September 30, 2004
and December 31, 2003 that are due in March 2005. These notes are registered
securities, bear a semi-annual coupon of 6.625 percent and are not redeemable
prior to maturity or subject to any sinking fund requirements. The Company has
classified these notes as a current liability at September 30, 2004.

In June 2004, due to favorable market conditions, the continued increase of
non-U.S. cash balances and to support the Company's strategic growth objectives,
the Company issued $600 million of senior notes due June 2014 under a public
registration statement previously filed with the U.S. Securities and Exchange
Commission (SEC). These notes bear a semi-annual coupon of 5.45 percent, are
redeemable prior to maturity and are not subject to any sinking fund
requirements. The Company entered a fixed-to-floating interest rate swap to
hedge against changes in the fair value of these notes. The Company recorded
changes in the fair value of these notes since the inception of the interest
rate swap. Interest payments made or received under the interest rate swap
agreement are recorded as interest expense. Interest is payable at six-month
LIBOR, which was approximately 2.20 percent at September 30, 2004.

In the third quarter of 2004, the Company filed a public registration statement
with the SEC for the issuance of up to $1,500 million in various debt and equity
securities. The Company intends to issue approximately $500 million in debt
securities under this public registration statement during the fourth quarter of
2004.


NOTE G - INVENTORIES

The components of inventory consist of the following:

September 30, December 31,
(in millions) 2004 2003
- ---------------------------------------------- ---------- ----------
Finished goods $ 198 $ 175
Work-in-process 51 63
Raw materials 65 43
---------- ----------
Total $ 314 $ 281
========== ==========

13

In the second quarter of 2004, the Company recorded inventory write-downs of $43
million (pre-tax) in conjunction with the recall of certain units of the
Company's Taxus(TM) Express(2)(TM) paclitaxel-eluting coronary stent systems and
Express(2)(TM) coronary stent systems.


NOTE H - NEW ACCOUNTING STANDARDS

During the first quarter of 2004, the Company adopted FASB Interpretation No.
46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES. Interpretation No. 46 clarifies
the conditions under which the assets, liabilities and activities of another
entity should be consolidated into the financial statements of a company.
Interpretation No. 46 requires the consolidation of a variable interest entity
by a company that bears the majority of the risk of loss from the variable
interest entity's activities or is entitled to receive the majority of the
variable interest entity's residual returns. The Company's adoption of
Interpretation No. 46 had no material impact on the Company's consolidated
financial statements.


NOTE I - COMMITMENTS AND CONTINGENCIES

The interventional medicine market in which the Company primarily participates
is in large part technology driven. Physician customers, particularly in
interventional cardiology, move quickly to new products and new technologies. As
a result, intellectual property rights, particularly patents and trade secrets,
play a significant role in product development and differentiation. Intellectual
property litigation to defend or create market advantage is, however, inherently
complex and unpredictable. Furthermore, appellate courts frequently overturn
lower court patent decisions.

In addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are
parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement of not only individual cases, but of a series of pending and
potentially related and unrelated cases. In addition, although monetary and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings, and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.

Several third parties have asserted that the Company's current and former stent
systems infringe patents owned or licensed by them. Adverse outcomes in one or
more of these proceedings could limit the Company's ability to sell certain
stent products in certain jurisdictions, or reduce the Company's operating
margin on the sale of these products. In addition, damage awards related to
historical sales could be material. The Company has similarly asserted that
stent systems or other products sold by these companies infringe patents owned
or licensed by the Company.

In some cases, the claimants seek damages, as well as other relief, which, if
granted, could require significant expenditures. The Company accrues costs of
settlement, damages, and, under certain conditions, costs of defense when such
costs are probable and estimable.

14

Otherwise, such costs are expensed as incurred. If the estimate of a probable
loss is a range, and no amount within the range is more likely, the minimum
amount of the range is accrued. The Company's total accrual for
litigation-related costs as of September 30, 2004 and December 31, 2003 was
approximately $97 million and $16 million, respectively. The accrual at
September 30, 2004 included a $75 million provision for legal and regulatory
exposures recorded during the third quarter of 2004.

In management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in this Quarterly Report,
the Quarterly Reports on Form 10-Q for the quarters ended June 30, 2004 and
March 31, 2004 and the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, which, individually or in the aggregate, could have a
material effect on the financial condition, operations and/or cash flows of the
Company. Additionally, legal costs associated with asserting the Company's
intellectual property rights and defending against claims that the Company's
products infringe the intellectual property rights of others are significant.
Legal costs associated with non-patent litigation and compliance activities
continue to be substantial. Depending on the prevalence, significance and
complexity of these matters, the Company's legal provisions could be adversely
affected in the future.

LITIGATION WITH JOHNSON & JOHNSON

On October 22, 1997, Cordis Corporation (Cordis), a subsidiary of Johnson &
Johnson, filed a suit for patent infringement against the Company and SCIMED
Life Systems, Inc. (SCIMED), a subsidiary of the Company, alleging that the
importation and use of the NIR(R) stent infringes two patents owned by Cordis.
On April 13, 1998, Cordis filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's NIR(R) stent infringes two
additional patents owned by Cordis. The suits were filed in the U.S. District
Court for the District of Delaware seeking monetary damages, injunctive relief
and that the patents be adjudged valid, enforceable and infringed. A trial on
both actions was held in late 2000. A jury found that the NIR(R) stent does not
infringe three Cordis patents, but does infringe one claim of one Cordis patent
and awarded damages of approximately $324 million to Cordis. On March 28, 2002,
the Court set aside the damage award, but upheld the remainder of the verdict,
and held that two of the four patents had been obtained through inequitable
conduct in the U.S. Patent and Trademark Office. On May 16, 2002, the Court also
set aside the verdict of infringement, requiring a new trial. The case had been
stayed until October 10, 2003, pending the outcome of a related case. On October
14, 2003, Cordis filed a motion to revise and vacate the Court's decision to
grant the Company a new trial and asked the Court to enter judgment against the
Company. On February 17, 2004, Cordis' motion was denied. Summary judgment
motions are pending and trial is expected in March 2005.

15

On March 21, 1997, the Company (through its subsidiaries) filed a suit against
Johnson & Johnson (through its subsidiaries) in Italy seeking a declaration of
noninfringement for the NIR(R) stent relative to one of the European patents
licensed to Ethicon and a declaration of invalidity. A technical expert was
appointed by the Court and a hearing was held on January 30, 2002. A decision
was rendered on September 16, 2004, finding the NIR(R) stent does not infringe
the European patent licensed to Ethicon. A decision with respect to invalidity
has not yet been issued.

On August 22, 1997, Johnson & Johnson filed a suit for patent infringement
against the Company alleging that the sale of the NIR(R) stent infringes certain
Canadian patents owned by Johnson & Johnson. Suit was filed in the federal court
of Canada seeking a declaration of infringement, monetary damages and injunctive
relief. The Company has answered, denying the allegations of the complaint. A
trial was originally expected to begin in March 2004. On November 27, 2003,
Cordis requested this action be stayed and, on December 15, 2003, the Company
appealed to overturn the stay and proceed to trial. A hearing was held on
October 20, 2004, at which the Court of Appeals denied the Company's motion.

On March 30, 2000, the Company (through its subsidiary) filed suit for patent
infringement against two subsidiaries of Cordis alleging that Cordis' BX
Velocity stent delivery system infringes a published utility model owned by
Medinol Ltd. (Medinol) and exclusively licensed to the Company. The complaint
was filed in the District Court of Dusseldorf, Germany seeking monetary and
injunctive relief. A hearing was held on March 15, 2001, and on June 6, 2001,
the Court issued a written decision that Cordis' BX Velocity stent delivery
system infringes the Medinol published utility model. Cordis appealed the
decision of the German court. A hearing on the appeal originally scheduled for
April 3, 2003 was suspended until decisions are rendered in two actions pending
in the U.S. District Court of New York between Medinol and the Company. On
October 19, 2004, Medinol filed an Intervention action requesting that the Court
declare that the Company is not entitled to bring the infringement claim against
Cordis and to declare that Cordis infringes the Medinol utility model. A
preliminary hearing is scheduled for December 14, 2004.

On September 27, 2004, Boston Scientific Scimed, Inc. filed suit against a
German subsidiary of Johnson & Johnson alleging the Cypher(TM) drug-eluting
stent infringes a European patent owned by the Company. The suit was filed in
Mannheim, Germany seeking monetary and injunctive relief. A hearing is scheduled
for April 1, 2005.

On October 15, 2004, Boston Scientific Scimed, Inc. filed suit against a German
subsidiary of Johnson & Johnson alleging the Cypher drug-eluting stent infringes
a German utility model owned by the Company. The suit was filed in Mannheim,
Germany seeking monetary and injunctive relief. A hearing is scheduled for April
1, 2005.

LITIGATION WITH MEDTRONIC, INC.

On August 13, 1998, Medtronic AVE, Inc. (Medtronic AVE), a subsidiary of
Medtronic, Inc. (Medtronic), filed a suit for patent infringement against the
Company and SCIMED alleging that the Company's

16

NIR(R) stent infringes two patents owned by Medtronic AVE. The suit was filed in
the U.S. District Court for the District of Delaware seeking injunctive and
monetary relief. On May 25, 2000, Medtronic AVE amended the complaint to include
a third patent. Cross-motions for summary judgment were filed and hearings were
held on October 21 and 22, 2004. A decision has not been issued. Trial is
expected to begin during the first quarter of 2005.

On January 15, 2004, Medtronic Vascular, Inc. (Medtronic Vascular), a subsidiary
of Medtronic, filed suit against the Company and SCIMED alleging the Company's
Express(R) coronary stent and Express(2)(TM) coronary stents infringe four U.S.
patents owned by Medtronic Vascular. The suit was filed in the District Court of
Delaware seeking monetary and injunctive relief. The Company has answered,
denying the allegations of the complaint. Cross-motions for summary judgment
were filed and hearings were held on October 21 and 22, 2004. A decision has not
yet been issued. Trial is expected to begin during the first quarter of 2005.

OTHER PATENT LITIGATION

On July 28, 2000, Dr. Tassilo Bonzel filed a complaint naming certain of the
Company's Schneider Worldwide subsidiaries and Pfizer Inc. (Pfizer) and certain
of its affiliates as defendants, alleging that Pfizer failed to pay Dr. Bonzel
amounts owed under a license agreement involving Dr. Bonzel's patented
Monorail(TM) technology. The suit was filed in the District Court for the State
of Minnesota seeking monetary relief. On September 26, 2001, Dr. Bonzel and the
Company reached a contingent settlement involving all but one claim asserted in
the complaint. The contingency has been satisfied and the settlement is now
final. On December 17, 2001, the remaining claim was dismissed without prejudice
with leave to refile the suit in Germany. Dr. Bonzel filed an appeal of the
dismissal of the remaining claim. On July 29, 2003, the Appellate Court affirmed
the lower court's dismissal, and on October 24, 2003, the Minnesota Supreme
Court denied Dr. Bonzel's petition for further review. On March 26, 2004, Dr.
Bonzel filed a similar complaint against the Company, certain of its
subsidiaries and Pfizer in the Federal District Court for the District of
Minnesota. The Company and its subsidiaries answered, denying the allegations of
the complaint. The Company filed a motion to dismiss the case and a hearing on
the motion was held on August 27, 2004. On November 2, 2004, the Court granted
the Company's motion and the case was dismissed with prejudice.

On September 27, 2004, the Company and Target Therapeutics, Inc. (Target) filed
suit for patent infringement against Micrus Corporation alleging that certain
detachable embolic coil devices infringe two U.S. patents exclusively licensed
to Target. The complaint was filed in the U.S. District Court for the Northern
District of California seeking monetary and injunctive relief.

On November 4, 2004, Applied Hydrogel Technology (AHT) and Dr. Lih-Bin Shih
filed a complaint against Medluminal Systems, Inc., InterWest Partners, the
Company and three individuals alleging that certain of Medluminal's products
infringe a patent owned by AHT. The complaint also includes claims of
misappropriation of trade secrets and conversion against the Company and certain
of the other defendants. The suit was filed in the U.S. District Court for the
Southern District of California seeking monetary and injunctive relief. The
Company has not yet answered, but intends to vigorously deny the allegations of
the complaint.

17

LITIGATION RELATING TO ADVANCED NEUROMODULATION SYSTEMS, INC.

On April 21, 2004, Advanced Neuromodulation Systems, Inc. (ANSI) filed suit
against Advanced Bionics Corporation (Advanced Bionics), a subsidiary of the
Company, alleging that its Precision(TM) spinal cord stimulation system
infringes a U.S. patent owned by ANSI. The suit also includes allegations of
misappropriation of trade secrets and tortious interference with a contract. The
suit was filed in the U.S. District Court for the Eastern District of Texas and
seeks monetary and injunctive relief. Advanced Bionics has answered, denying the
allegations of the complaint. On June 25, 2004, Advanced Bionics filed a motion
to dismiss and a request for transfer of venue to California. On August 6, 2004,
Advanced Bionics moved to send the trade secret claims and tortious interference
proceedings to arbitration. On August 12, 2004, ANSI amended its complaint to
include two additional patents. On October 20, 2004, Advanced Bionics' motion to
dismiss was denied, but its motion requesting the case be transferred and sent
to arbitration is still pending.

On October 20, 2004, ANSI filed a complaint against Advanced Bionics and a
former employee of ANSI now working at Advanced Bionics. The suit includes
allegations of breach of contract and misappropriation of trade secrets against
the employee, tortious interference against Advanced Bionics, and conversion and
civil conspiracy against both defendants. The suit was filed in the District
Court of Collin County, Texas seeking monetary damages and temporary and
permanent injunctive relief. Advanced Bionics has not yet answered, but intends
to vigorously defend the allegations in the complaint.

LITIGATION WITH MEDINOL LTD.

On January 21, 2003, Medinol Ltd. (Medinol) filed suit against several of the
Company's international subsidiaries in the District Court of The Hague, The
Netherlands seeking cross-border, monetary and injunctive relief covering The
Netherlands, Austria, Belgium, the United Kingdom, Ireland, Switzerland, Sweden,
Spain, France, Portugal and Italy, alleging the Company's Express stent
infringes four European patents owned by Medinol. A hearing was held on October
10, 2003, and a decision was rendered on December 17, 2003 finding the Company
infringes one patent. The Court, however, granted no cross-border relief. The
Company appealed the finding and filed nullity actions against one of the
patents in Ireland, France, Italy, Spain, Sweden, Portugal, and Switzerland. On
March 31, 2004, the European Patent Office declared this patent invalid. The
Court's injunction and damages order have been dismissed. Medinol appealed the
Court's decision with respect to the remaining three patents seeking an
expedited review of the claims by the Court. On June 9, 2004, Medinol filed a
kort geding proceeding against the Company's same international subsidiaries
alleging that the sale of the Express and TAXUS coronary stent systems infringe
one of the patents on appeal from the 2003 suit. The suit was filed in the
District Court of The Hague, The Netherlands seeking preliminary injunctive
relief. On August 5, 2004, the Court denied Medinol's request for preliminary
injunctive relief.

On April 22, 2002, Medinol filed suit against Boston Scientific Medizintechnik
GmbH (GmbH), a German subsidiary of the Company, alleging that the Company's
Express stent infringes certain German patents and utility models owned by
Medinol. The suit was filed in Dusseldorf, Germany. Hearings were held in May
2003, and on June 24, 2003, the German court found that

18

the Express(R) stent infringes one German patent and one utility model asserted
by Medinol and enjoined sales in Germany. The Company has appealed and a hearing
on the appeal is scheduled to begin in January 2005. On March 31, 2004, the
European Patent Office declared the patent invalid. A hearing on the validity of
the utility model is also scheduled for January 2005, and a hearing on the
merits is scheduled for February 22, 2005.

DEPARTMENT OF JUSTICE INVESTIGATION

In October 1998, the Company recalled its NIR ON(R) Ranger(TM) with Sox(TM)
coronary stent delivery system following reports of balloon leaks. Since
November 1998, the U.S. Department of Justice has been conducting an
investigation primarily regarding: the shipment, sale and subsequent recall of
the NIR ON(R) Ranger(TM) with Sox(TM) stent delivery system; aspects of the
Company's relationship with Medinol, the vendor of the stent; and related
events. The Company has been advised that it is a target of the federal grand
jury investigation, but that no final decision has been made as to whether any
potential charges would be brought. Two senior officials had also been advised
that they were targets of the investigation, but counsel for the individuals
have reported to the Company the receipt of letters from the government
declining prosecution. Although the Company has contested certain procedural
matters related to the conduct of the investigation, the Company has agreed to
extend the applicable statute of limitations, which may result in the
investigation continuing into early 2005 or beyond. There can be no assurance
that the investigation will result in an outcome favorable to the Company, that
charges would not be brought, or that the Company would not agree to a further
extension of the statute. The Company believes that it acted responsibly and
appropriately.

PRODUCT LIABILITY CLAIMS

The Company is substantially self-insured with respect to general and product
liability claims. In the normal course of its business, product liability claims
are asserted against the Company. The Company accrues anticipated costs of
litigation and loss for product liability claims based on historical experience,
or to the extent they are probable and estimable. Losses for claims in excess of
the limits of purchased insurance are recorded in earnings at the time and to
the extent they are probable and estimable. The Company's accrual for product
liability claims is $13 million and $15 million at September 30, 2004 and
December 31, 2003, respectively. Product liability claims against the Company
will likely be asserted in the future related to events not known to management
at the present time. The absence of significant third-party insurance coverage
increases the Company's exposure to unanticipated claims or adverse decisions.
However, based on product liability losses experienced in the past, the election
to become substantially self-insured is not expected to have a material impact
on future operations.

Management believes that the Company's risk management practices, including
limited insurance coverage, are reasonably adequate to protect against
anticipated general and product liability losses. However, unanticipated
catastrophic losses could have a material adverse impact on the Company's
financial position, results of operations and liquidity.


NOTE J - SEGMENT REPORTING

The Company has four reportable operating segments based on geographic regions:
the United States, Europe, Japan and Inter-Continental. Each of the Company's
reportable segments

19

generates revenue from the sale of minimally invasive medical devices. The
reportable segments represent an aggregate of operating divisions. Sales and
operating results of reportable segments are based on internally derived
standard foreign exchange rates, which may differ from year to year and do not
include inter-segment profits. The segment information presented for 2003 sales
and operating results has been restated based on the Company's standard foreign
exchange rates used for 2004. Because of the interdependence of the reportable
segments, the operating profit as presented may not be representative of the
geographic distribution that would occur if the segments were not
interdependent.

(in millions) United States Europe Japan Inter-Continental Total
- ------------------------------------------------------ ---------- ---------- ---------- ---------- ----------

Three months ended September 30, 2004
Net sales $ 979 $ 216 $ 144 $ 121 $ 1,460
Operating income allocated to reportable segments 514 106 80 50 750

Three months ended September 30, 2003
Net sales $ 481 $ 167 $ 144 $ 94 $ 886
Operating income allocated to reportable segments 170 79 81 40 370

Nine months ended September 30, 2004
Net sales $ 2,499 $ 643 $ 449 $ 352 $ 3,943
Operating income allocated to reportable segments 1,234 316 262 156 1,968

Nine months ended September 30, 2003
Net sales $ 1,442 $ 480 $ 424 $ 230 $ 2,576
Operating income allocated to reportable segments 536 220 241 88 1,085



The following table sets forth a reconciliation of the totals reported for the
reportable segments to the applicable line items in the unaudited condensed
consolidated financial statements for the three and nine months ended September
30, 2004 and 2003:

Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
(in millions) 2004 2003 2004 2003
- ------------------------------------------------------------- ---------- ---------- ---------- ----------

Net sales:
Total net sales for reportable segments $ 1,460 $ 886 $ 3,943 $ 2,576
Foreign exchange 22 (10) 81 (39)
---------- ---------- ---------- ----------
$ 1,482 $ 876 $ 4,024 $ 2,537
========== ========== ========== ==========
Income before income taxes:
Total operating income allocated to reportable segments $ 750 $ 370 $ 1,968 $ 1,085
Manufacturing operations (91) (76) (261) (223)
Corporate expenses and foreign exchange (116) (105) (388) (313)
Purchased research and development (8) (64) (33)
Litigation-related charges (75) (8) (75) (15)
Retirement plan enhancement (110) (110)
---------- ---------- ---------- ----------
358 173 1,070 501
Other income (expense), net (10) (15) (35) (42)
---------- ---------- ---------- ----------
$ 348 $ 158 $ 1,035 $ 459
========== ========== ========== ==========


The operating results for the three and nine months ended September 30, 2004
included a $110 million ($71 million after-tax) enhancement to the Company's
401(k) retirement plan.

20

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

OVERVIEW

Boston Scientific Corporation (Boston Scientific or the Company) is a worldwide
developer, manufacturer and marketer of medical devices that are used in a broad
range of interventional medical specialties. The Company's mission is to improve
the quality of patient care and the productivity of health care delivery through
the development and advocacy of less-invasive medical devices and procedures.
This is accomplished through the continuing refinement of existing products and
procedures and the investigation and development of new technologies that can
reduce risk, trauma, cost, procedure time and the need for aftercare. The
Company's approach to innovation combines internally developed products and
technologies with those obtained externally through strategic acquisitions and
alliances.

The Company's products are used in a broad range of interventional medical
specialties, including interventional cardiology, peripheral interventions,
vascular surgery, neurovascular intervention, electrophysiology, endoscopy,
oncology, urology and gynecology.


RESULTS OF OPERATIONS

FINANCIAL SUMMARY

THREE MONTHS ENDED SEPTEMBER 30, 2004

Net sales for the three months ended September 30, 2004 were $1,482 million as
compared to $876 million for the three months ended September 30, 2003, an
increase of 69 percent. Excluding the favorable impact of $32 million of foreign
currency fluctuations, net sales increased 66 percent. The reported net income
for the three months ended September 30, 2004 was $258 million, or $0.30 per
share (diluted), as compared to $124 million, or $0.15 per share, for the three
months ended September 30, 2003. The reported results for the three months ended
September 30, 2004 included after-tax charges of $146 million, or $0.17 per
share, consisting of a $75 million provision for legal and regulatory exposures
and a $71 million enhancement to the Company's 401(k) retirement plan. The
reported results for the three months ended September 30, 2003 included
after-tax charges of $13 million, or $0.02 per share, consisting of $8 million
in purchased research and development costs attributable to acquisitions and a
$5 million charge related to product liability settlements.

NINE MONTHS ENDED SEPTEMBER 30, 2004

Net sales for the nine months ended September 30, 2004 were $4,024 million as
compared to $2,537 million for the nine months ended September 30, 2003, an
increase of 59 percent. Excluding the favorable impact of $120 million due to
foreign currency

21

fluctuations, net sales increased approximately 54 percent. The reported net
income for the nine months ended September 30, 2004 was $765 million, or $0.89
per share (diluted), as compared to $335 million, or $0.40 per share, for the
nine months ended September 30, 2003. The reported results for the nine months
ended September 30, 2004 included after-tax charges of $210 million, or $0.24
per share, consisting of a $75 million provision for legal and regulatory
exposures, a $71 million enhancement to the Company's 401(k) retirement plan and
purchased research and development costs of $64 million attributable to the
Company's recent acquisitions. The reported results for the nine months ended
September 30, 2003 included after-tax charges of $45 million, or $0.05 per
share, consisting of purchased research and development costs of $33 million
attributable to acquisitions and $12 million of charges related to litigation.

The results for the nine months ended September 30, 2004 also included the net
impact of the recalls of certain units of the Company's Taxus(TM) Express(2)(TM)
paclitaxel-eluting coronary stent systems and Express(2)(TM) coronary stent
systems. In conjunction with the recalls, during the second quarter of 2004, the
Company recorded a $43 million ($33 million after-tax) write-down of inventory.
In addition, during the second quarter of 2004, the Company established a sales
returns reserve; substantially all of the sales returns reserve was reversed in
the third quarter of 2004 upon the replacement of recalled units to customers.

NET SALES
The following tables provide worldwide net sales by region and relative change
on an as reported and constant foreign currency basis for the three and nine
months ended September 30, 2004 and 2003:
















22


Three Months Ended
September 30, Change
---------------------------------------------------------------
As Reported Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------------ ------------ ------------ ------------

DOMESTIC $ 979 $ 481 104% 104%

Europe 236 166 42% 30%
Japan 144 136 6% 0%
Inter-Continental 123 93 32% 28%
------------ ------------ ------------ ------------
INTERNATIONAL 503 395 27% 19%

------------ ------------ ------------ ------------
WORLDWIDE $ 1,482 $ 876 69% 66%
============ ============ ============ ============





Nine Months Ended
September 30, Change
---------------------------------------------------------------
As Reported Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------------ ------------ ------------ ------------

DOMESTIC $ 2,499 $ 1,442 73% 73%

Europe 707 476 49% 35%
Japan 456 396 15% 6%
Inter-Continental 362 223 62% 53%
------------ ------------ ------------ ------------
INTERNATIONAL 1,525 1,095 39% 28%

------------ ------------ ------------ ------------
WORLDWIDE $ 4,024 $ 2,537 59% 54%
============ ============ ============ ============



23


United States (U.S.) revenues increased primarily due to $502 million and $1,068
million in sales of the TAXUS stent system during the three and nine months
ended September 30, 2004, respectively. The Company launched the TAXUS stent
system in the U.S. late in the first quarter of 2004. The increase was offset by
declines in bare metal stent revenue of approximately $32 million and $129
million during the three and nine months ended September 30, 2004, respectively,
as physicians continued to convert interventional procedures from bare metal to
drug-eluting stent technology, including the TAXUS stent system. The Company
estimates that, as of September 30, 2004, physicians have converted
approximately 85 percent of the stents used in interventional procedures in the
U.S. from bare metal stent systems to drug-eluting stent systems, as compared to
approximately 50 percent at December 31, 2003. In addition, U.S. revenue
increased during the three and nine months ended September 30, 2004 due to sales
growth in each of the Company's U.S. divisions and due to net sales from its
recent acquisitions.

International revenues increased primarily due to $138 million and $385 million
in sales for the three and nine months ended September 30, 2004, respectively,
of the TAXUS stent system in the Company's Europe and Inter-Continental markets
as compared to $64 million and $103 million, respectively, in the same periods
in the prior year. The TAXUS stent system was launched in these markets late in
the first quarter of 2003. Physicians in these markets have adopted drug-eluting
stent technology more gradually than physicians in the U.S. primarily due to the
timing of local reimbursement and funding levels. The Company estimates that, as
of September 30, 2004, physicians have converted approximately 30 percent and 40
percent of the stents used in interventional procedures in the Company's Europe
and Inter-Continental markets, respectively, from bare metal stent systems to
drug-eluting stent systems. The Company believes these adoption rates will
continue to increase during the remainder of 2004 and 2005. The increase in
international revenues was also attributable to sales of approximately $10
million and $50 million of the Express(2) coronary stent system in Japan during
the three and nine

24

months ended September 30, 2004, respectively. The Express(2) coronary stent
system was launched in Japan in the first quarter of 2004. During the second
quarter of 2004, one of the Company's competitors launched its drug-eluting
stent in Japan. Until the Company launches its drug-eluting stent in Japan,
which the Company expects will occur in the second half of 2006, its Japan
coronary stent business will be subject to significant market share pressure.

Worldwide coronary stent sales increased approximately 405 percent and 333
percent, respectively, to $686 million and $1,622 million for the three and nine
months ended September 30, 2004, respectively, as compared to the same periods
in the prior year. The increase was primarily due to $640 million and $1,453
million in sales of the TAXUS stent system for the three and nine months ended
September 30, 2004, respectively, as compared to $64 million and $103 million in
the same periods in the prior year.

The Company's international operating regions and divisions are managed on a
constant currency basis, while market risk from changes in currency exchange
rates is managed at the corporate level and is reflected in operating results.

The following tables provide worldwide net sales by division and relative change
on an as reported and constant foreign currency basis for the three and nine
months ended September 30, 2004 and 2003:










25


Three Months Ended
September 30, Change
---------------------------------------------------------------
As Reported Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------------ ------------ ------------ ------------

Cardiovascular $ 1,107 $ 544 103% 98%
Electrophysiology 32 27 19% 16%
Neurovascular 60 55 9% 4%
------------ ------------ ------------ ------------
CARDIOVASCULAR 1,199 626 92% 86%

Oncology 46 43 7% 4%
Endoscopy 157 147 7% 3%
Urology 66 60 10% 11%
------------ ------------ ------------ ------------
ENDOSURGERY 269 250 8% 5%

Neuromodulation 14 N/A N/A
------------ ------------ ------------ ------------
WORLDWIDE $ 1,482 $ 876 69% 66%
============ ============ ============ ============



Nine Months Ended
September 30, Change
---------------------------------------------------------------
As Reported Constant
(in millions) 2004 2003 Currency Basis Currency Basis
------------ ------------ ------------ ------------

Cardiovascular $ 2,922 $ 1,578 85% 79%
Electrophysiology 95 82 16% 13%
Neurovascular 186 161 16% 10%
------------ ------------ ------------ ------------
CARDIOVASCULAR 3,203 1,821 76% 70%

Oncology 137 122 12% 8%
Endoscopy 474 429 10% 6%
Urology 189 165 15% 13%
------------ ------------ ------------ ------------
ENDOSURGERY 800 716 12% 8%

Neuromodulation 21 N/A N/A
------------ ------------ ------------ ------------
WORLDWIDE $ 4,024 $ 2,537 59% 54%
============ ============ ============ ============


GROSS PROFIT
The following table provides a summary of gross profit for the three and nine
months ended September 30, 2004 and 2003:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------------ ------------------------------------------------------
2004 2003 2004 2003
-------------------------- -------------------------- -------------------------- --------------------------
(in millions) $ % of Net Sales $ % of Net Sales $ % of Net Sales $ % of Net Sales
- ------------- ---------- -------------- ---------- -------------- ---------- -------------- ---------- --------------

Gross Profit 1,173 79.1 633 72.3 3,060 76.0 1,833 72.3


The increase in gross profit during the three months ended September 30, 2004
was primarily due to an approximately 720 basis point increase as a result of
shifts in the Company's product sales mix toward higher margin products,
primarily sales of drug-

26

eluting coronary stents in the U.S. The increase in gross profit as a percentage
of net sales was partially offset by approximately 50 basis points during the
three months ended September 30, 2004 attributable to decreases in average
selling prices relative to the same period in the prior year.

The increase in gross profit during the nine months ended September 30, 2004 was
primarily due to an approximately 640 basis point increase as a result of shifts
in the Company's product sales mix toward higher margin products, primarily
sales of drug-eluting coronary stents in the U.S. The increase in gross profit
as a percentage of net sales was partially offset by approximately 140 basis
points related to $57 million in inventory write-downs, attributable to the
recalls of coronary stent systems of $43 million recorded in the second quarter
of 2004 and the write-down of TAXUS inventory of $14 million recorded in the
first quarter of 2004 due to shelf-life dating. In addition, gross profit as a
percentage of net sales was reduced by approximately 50 basis points
attributable to other period expenses primarily associated with increased
investments in the Company's manufacturing capabilities.

OPERATING EXPENSES
The following table provides a summary of certain operating expenses for the
three and nine months ended September 30, 2004 and 2003:

Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------- -------------------------------------
2004 2003 2004 2003
----------------- ----------------- ----------------- -----------------
% of Net % of Net % of Net % of Net
(in millions) $ Sales $ Sales $ Sales $ Sales
- -------------------------------------------- ------- -------- ------- -------- ------- -------- ------- --------

Selling, general and administrative expenses 504 34.0 295 33.7 1,227 30.5 858 33.8
Amortization expense 34 2.3 21 2.4 82 2.0 62 2.4
Royalties 57 3.8 15 1.7 131 3.3 40 1.6
Research and development expenses 145 9.8 113 12.9 411 10.2 324 12.8


SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES
For the three months ended September 30, 2004, the increase in SG&A expenses as
a percentage of net sales was primarily attributable to the $110 million
(pre-tax) enhancement to the Company's 401(k) retirement plan. For the nine
months ended September 30, 2004, the decrease in SG&A expenses as a percentage
of net sales was primarily attributable to the significant increase in net sales
as compared to the same period in the prior year.

For the three and nine months ended September 30, 2004, the increase in SG&A
expenses was primarily attributable to the $110 million enhancement to the
Company's 401(k) retirement plan; approximately $35 million and $115 million,
respectively, in additional marketing programs, increased headcount and higher
sales force commission expense, primarily attributable to the TAXUS stent
program, and, to a lesser degree, to support the Company's other product
franchises; and approximately $10 million and $30 million, respectively, in
increased expense due to foreign currency fluctuations. In addition, SG&A
expenses included operating expenses of approximately $15 million and $20
million for the three and nine months ended September 30, 2004, respectively,
associated with the Company's recent acquisition of Advanced Bionics Corporation
(Advanced Bionics).

27

AMORTIZATION EXPENSE
The increase in amortization expense in the three and nine months ended
September 30, 2004 was primarily attributable to the amortization of intangible
assets from the acquisitions of Advanced Bionics and Precision Vascular Systems
(PVS). Amortization relating to these two acquisitions was $7 million and $10
million during the three and nine months ended September 30, 2004, respectively.
In addition, during the third quarter of 2004, the Company recorded a $5 million
pre-tax write-down of intangible assets associated with passive stent coating
technology that the Company acquired as part of the Inflow Dynamics, Inc.
(Inflow) acquisition, which was consummated in 2003. Company management
determined during the third quarter of 2004 that the Company's future use of
this technology would be significantly reduced. The Company does not believe
that the write-downs of these assets will have a material impact on future
operations.

ROYALTIES
The increase in royalties for the three and nine months ended September 30, 2004
was due to increased sales of royalty-bearing products, primarily sales of the
TAXUS stent system. Royalties attributable to sales of the Company's TAXUS stent
system increased by approximately $40 million and $90 million for the three and
nine months ended September 30, 2004, respectively, as compared to the same
periods in the prior year. The Company continues to enter into strategic
technological alliances, some of which include royalty commitments.

Angiotech Pharmaceuticals, Inc. recently announced the termination of certain
co-exclusive rights to patents previously granted to a third party. Pursuant to
the Company's license agreement, Angiotech has offered the Company exclusive
rights to these patents in the coronary field of use. Assuming the Company
elects to acquire these exclusive rights, the Company would pay a slightly
increased royalty rate in the coronary field of use, inclding the Company's
TAXUS stent system.

RESEARCH AND DEVELOPMENT EXPENSES
The increase in research and development expenses reflects spending on new
product development programs as well as regulatory compliance and clinical
research. During the three and nine months ended September 30, 2004, the Company
continued to invest heavily in its research and development efforts. Research
and development expenses increased by approximately $10 million and $15 million
primarily due to investments in the Company's next generation stent platforms
during the three and nine months ended September 30, 2004, respectively, as
compared to the same periods in the prior year. In addition, research and
development expenses included approximately $10 million and $15 million for the
three and nine months ended September 30, 2004, respectively, associated with
the Company's recent acquisition of Advanced Bionics. The remainder of the
growth in research and development spending reflects investments to enhance the
Company's clinical and regulatory infrastructure and provide additional funding

28

for research and development on next generation and novel technology offerings
across multiple programs and divisions.

INTEREST EXPENSE AND OTHER, NET
Interest expense was $19 million and $12 million for the three months ended
September 30, 2004 and 2003, respectively, and $44 million and $35 million for
the nine months ended September 30, 2004 and 2003, respectively. The increase in
interest expense for the three and nine months ended September 30, 2004 was
primarily due to the increase in average debt levels, which was partially offset
by a decrease in average rates on the Company's floating rate debt obligations.

Other, net, was income of $9 million and expense of $3 million for the three
months ended September 30, 2004 and 2003, respectively, and was income of $9
million and expense of $7 million for the nine months ended September 30, 2004
and 2003, respectively. The increase in other, net was primarily due to an
increase in interest income of $6 million and $8 million for the three and nine
months ended September 30, 2004, respectively, as compared to the same periods
in the prior year. Interest income increased due to growth in overseas cash
balances and the Company continuing to invest in held-to-maturity securities
with higher returns. Other, net was also impacted by an increase of $6 million
in foreign currency transaction gains for the three months ended September 30,
2004 as compared to the same period in the prior year. In addition, included in
other, net for the nine months ended September 30, 2004 were realized gains of
$32 million related to sales of investments and write-downs of $25 million
related to other than temporary declines in the book value of certain
investments in privately held entities. The Company does not believe that these
write-downs of assets will have a material impact on future operations.

TAX RATE
The Company's reported tax rate was 26 percent and 22 percent for the three
months ended September 30, 2004 and 2003, respectively. The increase in the
Company's reported tax rate was due to charges that were incurred in the third
quarter of 2004 that are taxed at different rates than the Company's effective
tax rate. In addition, during the third quarter of 2003, the Company reduced its
estimate of the effective tax rate for the year, excluding the impact of net
special charges and credits, to 25 percent from 27 percent. The effect of this
cumulative adjustment was a significant reduction in the reported tax rate for
the third quarter of 2003.

The Company's reported tax rate was 26 percent and 27 percent for the nine
months ended September 30, 2004 and 2003, respectively. The decrease in the
Company's reported tax rate was due primarily to more revenue being generated
from products manufactured in lower tax jurisdictions and the favorable
settlement of foreign audits during the nine months ended September 30, 2004, as
compared to the same period in the prior year. The decrease was partially offset
by an increase in charges that are taxed at different rates than the Company's
effective tax rate for the nine months ended September 30, 2004 as compared to
the same period in the prior year.

29

Management currently estimates that the 2004 effective tax rate, excluding net
special charges, will be approximately 24 percent. However, the effective tax
rate could be impacted positively or negatively by geographic changes in the
manufacturing of products sold by the Company or by business acquisitions.

The Company had recognized net deferred tax liabilities aggregating $29 million
at September 30, 2004 and net deferred tax assets aggregating $94 million at
December 31, 2003. The change in the Company's deferred tax accounts is
primarily due to the intangible assets obtained in connection with the
acquisitions of Advanced Bionics and PVS. In light of the Company's historical
financial performance, the Company believes that its deferred tax assets will be
substantially recovered.

PURCHASED RESEARCH AND DEVELOPMENT
The Company's purchased research and development charges recorded during the
nine months ended September 30, 2004 related to the acquisitions of Advanced
Bionics and PVS.

On June 1, 2004, the Company completed its acquisition of 100 percent of the
fully diluted equity of Advanced Bionics for an initial payment of approximately
$740 million in cash, plus earn out payments that are contingent upon Advanced
Bionics reaching future performance milestones. Advanced Bionics develops
implantable microelectronic technologies for treating numerous neurological
disorders. Its neuromodulation technology includes a range of neurostimulators
(or implantable pulse generators), programmable drug pumps and cochlear
implants. The acquisition was intended to expand the Company's technology
portfolio into the implantable microelectronic device market. The Advanced
Bionics acquisition was structured to include earnout payments that are
primarily contingent on the achievement of future performance milestones, with
certain milestone payments also tied to profitability. The performance
milestones are segmented by Advanced Bionics' four principal technology
platforms (cochlear implants, implantable pulse generators, drug pumps and bion
microstimulators), each milestone with a 72-month earnout horizon from the date
of the anticipated product launch. Base earnout payments on these performance
milestones approximate two and a quarter times incremental sales for each annual
period. There are also bonus earnout payments available based on the attainment
of certain aggregate sales performance targets and a certain gross margin level.
The milestones associated with the contingent consideration must be reached in
certain future periods ranging from 2004 through 2013.

On April 2, 2004, the Company completed its acquisition of the remaining
outstanding shares of PVS for an initial payment of approximately $75 million in
cash, plus earnout payments that are contingent upon PVS reaching future
performance milestones. PVS develops and manufactures guidewires and
microcatheter technology for use in accessing the brain, the heart and other
areas of the anatomy. The acquisition of PVS was intended to provide the Company
with expanded vascular access technology and an expanded intellectual property
portfolio.

30

The Company's unaudited condensed consolidated financial statements include
Advanced Bionics' and PVS' operating results from the date of acquisition. See
Note E of the unaudited condensed consolidated financial statements for pro
forma information that presents a summary of the consolidated results of
operations of the Company and Advanced Bionics as if the acquisition had
occurred at the beginning of each of 2003 and 2004. Pro forma information is not
presented for PVS, as PVS' results of operations prior to its date of
acquisition are not significant in relation to the Company's consolidated
results.

The amounts paid for each acquisition have been allocated to the assets acquired
and liabilities assumed based on their fair values at the dates of acquisition.
The estimated excess of purchase price over the fair value of the net tangible
assets acquired was allocated to identifiable intangible assets based on
detailed valuations. The Company's purchased research and development charges
are based upon these valuations. The valuation of purchased research and
development represents the estimated fair value at the dates of acquisition
related to in-process projects. As of the dates of acquisition, the in-process
projects had not yet reached technological feasibility and had no alternative
future uses. The primary basis for determining the technological feasibility of
these projects is obtaining regulatory approval to market the products in an
applicable geographical region. Accordingly, the value attributable to these
projects, which had not yet obtained regulatory approval, was expensed in
conjunction with the acquisitions. If the projects are not successful, or
completed in a timely manner, the Company may not realize the financial benefits
expected for these projects.

The income approach was used to establish the fair values of purchased research
and development. This approach establishes fair value by estimating the
after-tax cash flows attributable to the in-process project over its useful life
and then discounting these after-tax cash flows back to a present value. Revenue
estimates were based on estimates of relevant market sizes, expected market
growth rates, expected trends in technology and expected product introductions
by competitors. In arriving at the value of the in-process research and
development projects, the Company considered, among other factors, the
in-process project's stage of completion, the complexity of the work completed
as of the acquisition date, the costs already incurred, the projected costs to
complete, the contribution of core technologies and other acquired assets, the
expected introduction date and the estimated useful life of the technology. The
discount rate used to arrive at a present value as of the date of acquisition
was based on the time value of money and medical technology investment risk
factors. For the purchased research and development programs acquired in
connection with the Company's 2004 acquisitions, risk-adjusted discount rates
ranging from 18 percent to 27 percent were utilized to discount the projected
cash flows. The Company believes that the estimated purchased research and
development amounts so determined represent the fair value at the date of
acquisition and do not exceed the amount a third party would pay for the
projects.

The most significant in-process projects acquired in connection with the
Company's 2004 acquisitions include Advanced Bionics' bion(TM) microstimulator
and drug delivery pump, which collectively represent approximately 77 percent of
the 2004 in-process projects value. The bion microstimulator is an implantable
neurostimulation device that may be used to treat a variety of neurological
conditions, including urge incontinence, epilepsy, sleep apnea, erectile
dysfunction and migraine headaches. The cost to complete

31

the bion microstimulator is estimated to be between $35 million and $45 million.
The drug delivery pump is an implanted programmable device used to treat chronic
pain. The cost to complete the drug delivery pump is estimated to be between $30
million and $40 million. As of the date of acquisition, the products were
expected to be commercially available on a worldwide basis within three to four
years.

The Company's research and development projects acquired in connection with its
previous business combinations are generally progressing in line with the
estimates set forth in the Company's 2003 Annual Report on Form 10-K. The
Company expects to continue to pursue these research and development efforts and
believes it has a reasonable chance of completing the projects.

OUTLOOK

For the three months ended September 30, 2004, the Company increased its revenue
by 69 percent, its reported net income by 108 percent and its operating cash
flow by 188 percent relative to the three months ended September 30, 2003. For
the nine months ended September 30 2004, the Company increased its revenue by 59
percent, its reported net income by 128 percent and its operating cash flow by
107 percent relative to the nine months ended September 30, 2003. This
significant growth was primarily due to sales of the Company's TAXUS stent
system that was approved for sale in the U.S. on March 4, 2004. The Company
estimates that the 2004 worldwide coronary stent market will approach $4.7
billion, and may exceed $5 billion in 2005. The Company believes it can maintain
and expand its position within this market for a variety of reasons, including
its years of scientifically rigorous research and development, the results of
its TAXUS clinical trials, the combined strength of the components of its
technology, its overall market leadership, and its sizeable interventional
cardiology sales force. In addition, in order to capitalize on this opportunity,
the Company has made significant investments in its sales, clinical, marketing
and manufacturing capabilities.

On July 2, the Company announced the voluntary recall of approximately 200 TAXUS
Express(2) coronary stent systems, due to characteristics in the delivery
catheters that have the potential to impede balloon deflation during a coronary
angioplasty procedure. Further analysis and investigation of the TAXUS stent
system and the Express(2) coronary stent system, both of which share the same
delivery catheter, revealed that certain additional production lots exhibited
these same characteristics. As a result, on July 16, the Company announced that
it was voluntarily expanding the recall. The expanded recall involved
approximately 85,000 TAXUS stent systems and approximately 11,000 Express(2)
stent systems. On August 5, as a result of ongoing monitoring, the Company
announced that it was further expanding the recall to include approximately
3,000 additional TAXUS stent systems. The additional stent systems remained
within the parameters of the July 16 action. As a result of its investigation
made in conjunction with the recalls, the Company has implemented reviews of its
manufacturing process, additional inspections, and an FDA-approved modification
to the manufacturing process for these products. The Company believes these
measures have been and continue to be effective in reducing the occurrence of
balloon non-deflation.

32

In connection with the events described above, the Company recorded a sales
returns reserve of $35 million and an inventory write-down of $43 million during
the second quarter of 2004. The sales returns reserve was established for all
customer-owned inventory that was subject to the recalls. Substantially all of
the sales returns reserve was reversed in the third quarter of 2004 upon the
replacement of recalled units to customers. The inventory write-down related to
inventory on consignment (i.e., Company-owned) and inventory on hand at the
Company's facilities that was subject to the recalls. The recalled inventory was
placed into quarantine when received and will be scrapped when permitted by the
FDA. No sales of the quarantined inventory are expected to occur.

In October 2004, the FDA indicated that it did not anticipate seeking further
regulatory action regarding the recalls. Exiting the third quarter of 2004, the
Company's TAXUS sales volume exceeded pre-recall levels and the Company had
substantially restored inventory levels to meet market demand.

The worldwide coronary stent market is dynamic and highly competitive with
significant market share volatility. A material decline in the Company's
coronary stent revenue would likely have a material adverse impact on the future
operating results of the Company. The most significant variables impacting the
size of the coronary stent market and the Company's position within this market
include:

o the adoption rate of drug-eluting stent technology;
o reimbursement policies;
o the timing of new competitive launches;
o the average selling prices of drug-eluting stent systems;
o delayed or limited regulatory approvals;
o unexpected variations in clinical results or product performance;
o continued physician acceptance;
o the availability of inventory to meet customer demand;
o the average number of stents used per procedure;
o third-party intellectual property; and
o the outcome of litigation.

Inconsistent clinical data from ongoing or future trials conducted by the
Company, or additional clinical data presented by the Company's competitors, may
impact the Company's position in and share of the drug-eluting stent market.

Physicians have rapidly adopted drug-eluting technology in the U.S. The Company
believes that the more gradual adoption rates in Europe and Inter-Continental
markets as compared to the U.S. are primarily due to the timing of local
reimbursement and funding levels. A more gradual physician adoption rate may
limit the number of procedures in which the technology may be used and the price
at which institutions may be willing to purchase the technology.

33

The Company's drug-eluting stent system is currently one of only two
drug-eluting products in the market. In late 2004, the Company's principal
existing competitor in the drug-eluting stent market indicated that it now has
the capability to increase its available supply of drug-eluting stents, which
may result in additional market share and average selling price pressure. In
addition, the Company expects its share of the drug-eluting stent market as well
as unit prices to be adversely impacted as additional competitors enter the
drug-eluting stent market, which the Company anticipates during 2005
internationally and during 2006 in the U.S. The Company anticipates launching
its next generation drug-eluting stent product, the Taxus(TM) Liberte(TM)
coronary stent system, in certain international markets in 2005 and in the U.S.
in 2006, subject to regulatory approval.

During the second quarter of 2004, one of the Company's competitors launched its
drug-eluting stent in Japan. Until the Company launches its drug-eluting stent
in Japan, it is likely that its Japan coronary stent business will be subject to
significant market share pressure. During the third quarter of 2004, the Company
determined that it will need to conduct a small clinical trial using the TAXUS
stent system with the antiplatelet therapy Ticlid (R) (ticlopidine
hydrochloride) prior to regulatory approval of the TAXUS stent system in Japan.
The Company currently expects to launch the TAXUS stent system in Japan in the
second half of 2006.

The manufacture of the TAXUS stent system involves the integration of multiple
technologies and complex processes. Expected inventory levels may be impacted by
significant favorable or unfavorable changes in forecasted demand and
disruptions associated with the TAXUS manufacturing process. In addition,
variability in expected demand may result in excess or expired inventory
positions and additional future inventory charges.

Further, there continues to be significant intellectual property litigation in
the coronary stent market. The Company is currently involved in a number of
legal proceedings with its competitors, including Johnson & Johnson, Medtronic
and Medinol Ltd. There can be no assurance that an adverse outcome in one or
more of these proceedings would not impact the Company's ability to meet its
objectives in the market. See the notes to the unaudited condensed consolidated
financial statements contained in this Quarterly Report, the Quarterly Reports
on Form 10-Q for the quarters ended June 30, 2004 and March 31, 2004 and the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 for a
description of these legal proceedings.

Since early 2001, the Company has consummated several business acquisitions.
Management believes it has developed a sound plan to integrate these businesses.
However, the failure to integrate these businesses successfully could impair the
Company's ability to realize the strategic and financial objectives of these
transactions. In connection with these acquisitions and other strategic
alliances, the Company has acquired numerous in-process research and development
platforms. As the Company continues to undertake strategic initiatives, it is
reasonable to assume that it will acquire additional in-process research and
development platforms.

34

On September 24, 2004, the Company announced that Advanced Bionics was
voluntarily recalling worldwide all unimplanted CLARION(R) and HiResolution(R)
cochlear implant systems. The devices are being recalled due to the potential
presence of moisture in the internal circuitry, which can cause the device to
stop functioning. In early November, Advanced Bionics resumed worldwide
distribution of its HiResolution cochlear implant systems. The financial impact
of this recall during the third quarter of 2004 was not material to the
consolidated results of the Company. In conjunction with the recall, the Company
evaluated the intangible assets obtained in connection with the acquisition of
Advanced Bionics and determined that there was no impairment.

In addition, the Company has entered a significant number of strategic alliances
with privately held and publicly traded companies. Many of these alliances
involve equity investments by the Company. The Company enters these strategic
alliances to broaden its product technology portfolio and to strengthen and
expand the Company's reach into existing and new markets. The success of these
alliances is an important element of the Company's growth strategy. However, the
full benefit of these alliances is often dependent on the strength of the other
companies' underlying technology. The inability to achieve regulatory approvals,
competitive product offerings, or litigation related to this technology may,
among other factors, prevent the Company from realizing the benefit of these
alliances. The Company regularly reviews its investments to determine whether
these investments are impaired. If so, the carrying value is written down to
fair value in the period identified. The Company's exposure to loss related to
its strategic alliances is generally limited to its equity investments, notes
receivable and intangible assets associated with these alliances.

The Company has experienced dramatic growth in its revenues and earnings since
the launch of the TAXUS stent system in the U.S. market late in the first
quarter of 2004. Beginning in the second quarter of 2005, the Company expects
revenue and earnings growth to normalize to industry and the Company's
historical levels. The Company expects to continue to invest significantly in
its drug-eluting stent program to achieve sustained worldwide market leadership
positions. Further, the Company anticipates increasing its focus and spending on
internal research and development and other programs in addition to its TAXUS
drug-eluting stent technology. The Company will continue to seek market
opportunities and growth through investments in strategic alliances and
acquisitions. Potential future acquisitions, including companies with whom the
Company currently has strategic alliances, may be dilutive to the Company's
earnings and may require additional financing, depending on their size and
nature.

International markets are also being affected by economic pressure to contain
reimbursement levels and health care costs. The Company's profitability from its
international operations may be limited by risks and uncertainties related to
economic conditions in these regions, foreign currency fluctuations, regulatory
and reimbursement approvals, competitive offerings, infrastructure development,
rights to intellectual property and the ability of the Company to implement its
overall business strategy. Any significant changes in the competitive,
political, regulatory, reimbursement or economic environment where the Company
conducts international operations may have a material impact on revenues and
profits, especially in Japan, given its high profitability relative to its
contribution to the Company's revenues. Further, the trend in countries around
the world, including Japan, toward more stringent regulatory requirements for
product clearance, changing reimbursement

35

models, and more vigorous enforcement activities has generally caused or may
cause medical device manufacturers to experience more uncertainty, greater risk
and higher expenses. In addition, the Company is required to renew regulatory
approvals in certain international jurisdictions, which may require additional
testing and documentation. A decision not to dedicate sufficient resources, or
the failure to renew these approvals timely, may limit the Company's ability to
market its full line of products within these jurisdictions.

These factors may impact the rate at which the Company can grow. However,
management believes that it continues to position the Company to take advantage
of opportunities that exist in the markets it serves.














36

LIQUIDITY AND CAPITAL RESOURCES

The following table provides key performance indicators used by management to
assess the liquidity of the Company for the nine months ended September 30, 2004
and 2003:
Nine Months Ended
September 30,
---------------------------
(in millions) 2004 2003
- ------------------------------------------ ------------ ------------
Cash provided by operating activities $ 1,147 $ 553
Cash used for investing activities 1,679 642
Cash provided by financing activities 967 321
EBITDA(1) $ 1,260 $ 627


EBITDA for the nine months ended September 30, 2004 and 2003 included pre-tax
charges of $249 million and $48 million, respectively. These pre-tax charges
included the enhancement to the Company's 401(k) retirement plan, purchased
research and development costs attributable to acquisitions and certain
provisions for legal and regulatory exposures.

OPERATING ACTIVITIES
The increase in cash generated by operating activities was primarily
attributable to the increase in EBITDA offset by changes in operating assets and
liabilities. The increase in EBITDA in the nine months ended September 30, 2004
as compared to the same period in the prior year was primarily due to the first
quarter launch of the TAXUS stent system in the U.S. and sales of the TAXUS
stent system in the Company's Europe and Inter-Continental markets. A portion of
the cash generated from TAXUS sales was invested in the Company's sales,
clinical and manufacturing capabilities and in other research and development
projects.

- --------------------------------------------------------------------------------
(1) The following table provides a reconciliation between EBITDA and net income
for the nine months ended September 30, 2004 and 2003:


- --------------------------------------------------- --------------------------
Nine Months Ended
- --------------------------------------------------- --------------------------
September 30,
- --------------------------------------------------- --------------------------
(in millions) 2004 2003
- --------------------------------------------------- ------------ ------------
Net income $ 765 $ 335
- --------------------------------------------------- ------------ ------------
Income taxes 270 124
- --------------------------------------------------- ------------ ------------
Interest expense 44 35
- --------------------------------------------------- ------------ ------------
Interest income (12) (4)
- --------------------------------------------------- ------------ ------------
Depreciation and amortization 193 137
- --------------------------------------------------- ------------ ------------
EBITDA $ 1,260 $ 627
- --------------------------------------------------- ------------ ------------

Management uses EBITDA to assess operating performance and believes it may
assist users of the financial statements in analyzing the underlying trends in
the Company's business over time. Users of the Company's financial statements
should consider this non-GAAP financial information in addition to, not as a
substitute for, or as superior to, financial information prepared in accordance
with GAAP.

37

Significant cash flow effects from operating assets and liabilities in the nine
months ended September 30, 2004 included decreases in cash flow of approximately
$290 million attributable to accounts receivable, and increases in cash flow of
approximately $300 million attributable to accounts payable and accrued
expenses. The increase in trade accounts receivable was primarily due to sales
growth, where payment is not due until the fourth quarter of 2004. The increase
in accounts payable and accrued expenses was primarily the result of the
enhancement to the Company's 401(k) retirement plan; litigation-related charges;
royalties attributable to sales growth of royalty-bearing products; and an
increase in employee-related accruals.

INVESTING ACTIVITIES
The Company made capital expenditures of $201 million during the nine months
ended September 30, 2004 as compared to $117 million for the same period in the
prior year. The increase in capital expenditures was primarily due to spending
of $45 million related to the purchase of an office complex in the U.S. during
the nine months ended September 30, 2004. The remainder of the increase was
attributable to capital spending to further enhance the Company's manufacturing
and distribution capabilities. The Company expects to incur capital expenditures
of approximately $100 million during the remainder of 2004, which includes
additional investments in the Company's facility network both in the U.S. and
abroad.

During 2004, the Company continued to invest in securities with maturity dates
that exceeded 90 days to benefit from higher returns. During the nine months
ended September 30, 2004, the Company purchased approximately $516 million of
held-to-maturity investments with maturity dates between 91 days and 365 days.
The investments consisted primarily of six month time deposits, and
approximately $159 million of the investments matured during the period. In
addition, during the nine months ended September 30, 2004, the Company purchased
approximately $144 million in held-to-maturity investments with maturity dates
of greater than 365 days. The Company's investing activities during the nine
months ended September 30, 2004 also included $90 million of cash proceeds from
sales of privately held and publicly traded equity securities; $804 million of
payments attributable to the current year acquisitions, net of cash acquired;
$85 million of acquisition-related payments primarily associated with Embolic
Protection, Inc. and Inflow; and $178 million of payments for strategic
alliances with both privately held and publicly traded entities.

FINANCING ACTIVITIES
During the nine months ended September 30, 2004, the Company received proceeds
from borrowings of $759 million. Proceeds from debt issuances were used
principally to fund the acquisitions of Advanced Bionics and PVS, and other
strategic alliances. In addition, during the nine months ended September 30,
2004, the Company received proceeds of $208 million in connection with the
issuance of shares of its common stock pursuant to its stock option and employee
stock purchase plans as compared to $184 million for the same period in the
prior year.

38

The Company's cash and cash equivalents primarily relate to non-U.S. operations.
The repatriation of cash balances from certain of the Company's non-U.S.
operations could have adverse tax consequences; however, those balances are
generally available without legal restrictions to fund ordinary business
operations. During 2003, the Company determined that it is likely to repatriate
cash from certain non-U.S. operations; the repatriated cash available for use
will be net of the related provisions for taxes.

Legislation was passed during the fourth quarter that would permit U.S.
corporations to repatriate earnings of foreign subsidiaries at a reduced rate of
tax of 5.25 percent versus 35 percent. The Company is currently assessing its
cash repatriation strategy in light of this legislation.

In the fourth quarter of 2004, the Company obtained approval from the Board of
Directors to repurchase up to 50 million shares of the Company's common stock at
prevailing market prices from time to time on the open market or in privately
negotiated transactions. The new authorization supplements approximately 23
million shares remaining under previous share repurchase authorizations.
Repurchased shares will be made available for issuance under the Company's
equity incentive plans and for general corporate purposes, including
acquisitions and strategic alliances. The share repurchase program will be
funded by the Company's available cash and credit facilities. During October of
2004, the Company repurchased approximately 6 million shares at an aggregate
cost of approximately $200 million.

BORROWINGS AND CREDIT ARRANGEMENTS

September 30, December 31,
(in millions) 2004 2003
- ------------------------------------------------------------------------------------------

Commercial paper $ 983 $ 1,003
Notes payable and current maturities of long-term debt 512 6
Long-term debt-other 1,001 716
Gross debt 2,496 1,725
Cash, cash equivalents, short-term and long-term
held-to-maturity investments 1,686 752
Net debt(2) $ 810 $ 973


(2) This metric represents total debt less cash, cash equivalents, short-term
and long-term held-to-maturity investments.


During the first half of 2004, the Company refinanced its $1,200 million credit
facilities. At September 30, 2004, the Company's revolving credit facilities
totaled $2,020 million, consisting of a $1,500 million credit facility that
terminates in May 2009; a $500 million 364-day credit facility that terminates
in May 2005 and contains an option to convert into a one-year term loan maturing
in May 2006; and a $20 million uncommitted credit facility. Use of the
borrowings is unrestricted and the borrowings are unsecured.

The revolving credit facilities provide borrowing capacity and support the
Company's commercial paper. The Company had approximately $983 million and
$1,003 million of commercial paper outstanding at September 30, 2004 and
December 31, 2003, respectively, at weighted average interest rates of 1.74
percent and 1.20 percent, respectively.

39

In addition, the Company increased its borrowing capacity under its revolving
credit and security facility, which is secured by the Company's domestic trade
receivables, from $200 million to $400 million. The Company had approximately
$360 million and $194 million of borrowings outstanding under its revolving
credit and security facility at September 30, 2004 and December 31, 2003,
respectively, at weighted average interest rates of 2.11 percent and 1.44
percent, respectively. During the third quarter, the Company renewed the
revolving credit and security facility for an additional 364 days through August
2005.

The Company has the ability and intent to refinance a portion of its short-term
debt on a long-term basis through its revolving credit facilities. At September
30, 2004, the Company expects that a minimum of approximately $1,100 million of
its short-term obligations, including $739 million of commercial paper, will
remain outstanding beyond the next twelve months and, accordingly, has
classified this portion as long-term borrowings, as compared to $650 million of
short-term obligations, including $456 million of commercial paper, classified
as long-term obligations at December 31, 2003.

The Company had $500 million of senior notes outstanding at September 30, 2004
and December 31, 2003 that are due in March 2005. These notes are registered
securities, bear a semi-annual coupon of 6.625 percent and are not redeemable
prior to maturity or subject to any sinking fund requirements. The Company has
classified these notes as a current liability at September 30, 2004.

In June 2004, due to favorable market conditions, the continued increase of
non-U.S. cash balances and to support the Company's strategic growth objectives,
the Company issued $600 million of senior notes due June 2014 under a public
registration statement previously filed with the U.S. Securities and Exchange
Commission (SEC). These notes bear a semi-annual coupon of 5.45 percent, are
redeemable prior to maturity and are not subject to any sinking fund
requirements. The Company entered a fixed-to-floating interest rate swap to
hedge against changes in the fair value of these notes. The Company recorded
changes in the fair value of these notes since the inception of the interest
rate swap. Interest payments made or received under the interest rate swap
agreement are recorded as interest expense. Interest is payable at six-month
LIBOR, which was approximately 2.20 percent at September 30, 2004.

In the third quarter of 2004, the Company filed a public registration statement
with the SEC for the issuance of up to $1,500 million in various debt and equity
securities. The Company intends to issue approximately $500 million in debt
securities under this public registration statement during the fourth quarter of
2004.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
Since 2001, the Company has completed twelve business combinations. All of the
combinations were completed using the purchase method of accounting. Those
completed before July 1, 2001 were accounted for under Accounting Principles

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Board Opinion No. 16, BUSINESS COMBINATIONS. Those completed after June 30, 2001
were accounted for under Financial Accounting Standards Board (FASB) Statement
No. 141, BUSINESS COMBINATIONS.

Certain of the Company's business combinations involve the payment of contingent
consideration. For acquisitions completed before July 1, 2001, these payments,
if and when made, are allocated to specific intangible asset categories,
including purchased research and development, with the remainder assigned to
goodwill as if the consideration had been paid as of the date of acquisition.
For acquisitions completed after June 30, 2001, these payments, if and when
made, are allocated to goodwill. Payment of the additional consideration is
generally contingent upon the acquired companies reaching certain performance
milestones, including attaining specified revenue levels, achieving product
development targets or obtaining regulatory approvals. At September 30, 2004 and
December 31, 2003, the Company had accruals for acquisition-related obligations
of approximately $22 million and $79 million, respectively. Of the accruals
recorded in 2003, $24 million was recorded as an adjustment to purchased
research and development, $9 million was recorded as an adjustment to other
identifiable intangible asset categories, net of the related deferred tax
liabilities, and the remainder was recorded as an adjustment to goodwill. The
accruals in 2004 were recorded as an adjustment to goodwill.

In addition, at September 30, 2004, the estimated maximum potential amount of
future contingent consideration (undiscounted) that the Company could be
required to make associated with its business combinations is approximately $3.2
billion, some of which may be payable in the Company's common stock. Certain
earnout payments are based on multiples of the acquired company's revenue during
the earnout period, and consequently, the total payments are not currently
determinable. However, the Company has developed an estimate of the maximum
potential contingent consideration for each of its acquisitions with an
outstanding earnout obligation. The milestones associated with the contingent
consideration must be reached in certain future periods ranging from 2004
through 2013. The estimated cumulative specified revenue level associated with
these maximum future contingent payments is approximately $7 billion.

LEGAL MATTERS

The interventional medicine market in which the Company primarily participates
is in large part technology driven. Physician customers, particularly in
interventional cardiology, move quickly to new products and new technologies. As
a result, intellectual property rights, particularly patents and trade secrets,
play a significant role in product development and differentiation. Intellectual
property litigation to defend or create market advantage is, however, inherently
complex and unpredictable. Furthermore, appellate courts frequently overturn
lower court patent decisions.

In addition, competing parties frequently file multiple suits to leverage patent
portfolios across product lines, technologies and geographies and to balance
risk and exposure between the parties. In some cases, several competitors are

41

parties in the same proceeding, or in a series of related proceedings, or
litigate multiple features of a single class of devices. These forces frequently
drive settlement of not only individual cases, but of a series of pending and
potentially related and unrelated cases. In addition, although monetary and
injunctive relief is typically sought, remedies and restitution are generally
not determined until the conclusion of the proceedings, and are frequently
modified on appeal. Accordingly, the outcomes of individual cases are difficult
to time, predict or quantify and are often dependent upon the outcomes of other
cases in other geographies.

Several third parties have asserted that the Company's current and former stent
systems infringe patents owned or licensed by them. Adverse outcomes in one or
more of these proceedings could limit the Company's ability to sell certain
stent products in certain jurisdictions, or reduce the Company's operating
margin on the sale of these products. In addition, damage awards related to
historical sales could be material. The Company has similarly asserted that
stent systems or other products sold by these companies infringe patents owned
or licensed by the Company.

In some cases, the claimants seek damages, as well as other relief, which, if
granted, could require significant expenditures. The Company accrues costs of
settlement, damages, and, under certain conditions, costs of defense when such
costs are probable and estimable. Otherwise, such costs are expensed as
incurred. If the estimate of a probable loss is a range, and no amount within
the range is more likely, the minimum amount of the range is accrued. The
Company's total accrual for litigation-related costs as of September 30, 2004
and December 31, 2003 was approximately $97 million and $16 million,
respectively. The accrual at September 30, 2004 included a $75 million provision
for legal and regulatory exposures recorded during the third quarter of 2004.

In management's opinion, the Company is not currently involved in any legal
proceeding other than those specifically identified in this Quarterly Report,
the Quarterly Reports on Form 10-Q for the quarters ended June 30, 2004 and
March 31, 2004 and the Company's Annual Report on Form 10-K for the year ended
December 31, 2003, which, individually or in the aggregate, could have a
material effect on the financial condition, operations and/or cash flows of the
Company. Additionally, legal costs associated with asserting the Company's
intellectual property rights and defending against claims that the Company's
products infringe the intellectual property rights of others are significant.
Legal costs associated with non-patent litigation and compliance activities
continue to be substantial. Depending on the prevalence, significance and
complexity of these matters, the Company's legal provisions could be adversely
affected in the future.

PRODUCT LIABILITY CLAIMS
The Company is substantially self-insured with respect to general and product
liability claims. In the normal course of its business, product liability claims
are asserted against the Company. The Company accrues anticipated costs of
litigation and loss for product liability claims based on historical experience,
or to the extent they are probable and estimable. Losses for claims in excess of
the limits of purchased insurance are recorded in earnings at the time and to
the extent they are probable and estimable. The

42

Company's accrual for product liability claims was $13 million and $15 million
at September 30, 2004 and December 31, 2003, respectively. Product liability
claims against the Company will likely be asserted in the future related to
events not known to management at the present time. The absence of significant
third-party insurance coverage increases the Company's exposure to unanticipated
claims or adverse decisions. However, based on product liability losses
experienced in the past, the election to become substantially self-insured is
not expected to have a material impact on the Company's future operations.

Management believes that the Company's risk management practices, including
limited insurance coverage, are reasonably adequate to protect against
anticipated general and product liability losses. However, unanticipated
catastrophic losses could have a material adverse impact on the Company's
financial position, results of operations and liquidity.

CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

This report contains forward-looking statements. The Company desires to take
advantage of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995 and is including this statement for the express purpose of
availing itself of the protections of the safe harbor with respect to all
forward-looking statements. Forward-looking statements discussed in this report
include, but are not limited to, statements with respect to, and the Company's
performance may be affected by:

o volatility in the coronary stent market, competitive offerings and the
timing of receipt of regulatory approvals to market existing and
anticipated drug-eluting stent technology and other coronary and
peripheral stent platforms;
o the Company's ability to continue significant growth in revenue, gross
profit, earnings and cash flow resulting from the sale of the TAXUS
drug-eluting stent system in the U.S., to launch the TAXUS stent
system in Japan in the second half of 2006, and to launch the next
generation drug-eluting stent system, TAXUS Liberte, in certain
international markets in 2005 and in the U.S. in 2006;
o the continued availability of the TAXUS stent system in sufficient
quantities and mix, the Company's ability to prevent disruptions to
its TAXUS manufacturing processes and to maintain or replenish
inventory levels consistent with forecasted demand around the world;
o the impact of new drug-eluting stents on the size of the coronary
stent market, distribution of share within the coronary stent market
in the U.S. and around the world and average selling prices;
o the overall performance of and continued physician confidence in
drug-eluting stents and the results of drug-eluting stent clinical
trials undertaken by the Company or its competitors;
o continued growth in the rate of physician adoption of drug-eluting
stent technology in the Company's Europe and Inter-Continental
markets;
o the Company's ability to capitalize on the opportunity in the
drug-eluting stent market for continued growth in revenue and earnings
and to maintain and expand its worldwide market leadership positions
through reinvestment in the Company's drug-eluting stent program;

43

o the Company's ability to take advantage of its position as one of two
early entrants in the U.S. drug-eluting stent market, to anticipate
competitor products as they enter the market and to take advantage of
opportunities that exist in the markets it serves;
o the ability of the Company to manage inventory levels, accounts
receivable and gross margins relating to the Company's TAXUS stent
system and to react effectively to worldwide economic and political
conditions;
o the Company's ability to develop products and technologies
successfully in addition to its TAXUS drug-eluting stent technology;
o the Company's ability to successfully complete planned clinical trials
and to develop and launch products on a timely basis within cost
estimates, including the successful completion of in-process projects
from purchased research and development;
o the Company's ability to manage research and development and other
operating expenses in light of expected revenue growth over the next
twelve months;
o the Company's ability to achieve benefits from its increased focus on
internal research and development and its ability to capitalize on
opportunities across its businesses;
o the Company's ability to integrate the acquisitions and other
strategic alliances it has consummated since early 2001;
o the timing, size and nature of strategic initiatives, market
opportunities and research and development platforms available to the
Company and the ultimate cost and success of these initiatives;
o the Company's ability to maintain a 24 percent effective tax rate,
excluding net special charges, during 2004 and to substantially
recover its deferred tax assets;
o the ability of the Company to meet its projected cash needs over the
next twelve months, to maintain borrowing flexibility and to renew or
refinance its borrowings beyond the next twelve months;
o the Company's ability to fund its share repurchase program from
available cash and credit facilities;
o the Company's ability to access the public debt market and to issue
debt or equity securities on terms reasonably acceptable to the
Company;
o risks associated with international operations including compliance
with local legal and regulatory requirements;
o the potential effect of foreign currency fluctuations and interest
rate fluctuations on revenues, expenses and resulting margins;
o the effect of litigation, risk management practices including
self-insurance, and compliance activities on the Company's loss
contingency, legal provision and cash flow;
o the impact of stockholder, patent, product liability, Medinol Ltd. and
other litigation, as well as the ultimate outcome of the U.S.
Department of Justice investigation; and
o risks associated with regulatory compliance, quality systems standards
and complaint-handling.

44

Several important factors, in addition to the specific factors discussed in
connection with each forward-looking statement individually, could affect the
future results and growth rates of the Company and could cause those results and
rates to differ materially from those expressed in the forward-looking
statements contained in this report. These additional factors include, among
other things, future economic, competitive, reimbursement and regulatory
conditions, new product introductions, demographic trends, third-party
intellectual property, financial market conditions and future business decisions
of the Company and its competitors, all of which are difficult or impossible to
predict accurately and many of which are beyond the control of the Company.
Therefore, the Company wishes to caution each reader of this report to consider
carefully these factors as well as the specific factors discussed with each
forward-looking statement in this report and as disclosed in the Company's
filings with the Securities and Exchange Commission. These factors, in some
cases, have affected, and in the future (together with other factors) could
affect, the ability of the Company to implement its business strategy and may
cause actual results to differ materially from those contemplated by the
statements expressed in this report.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company had currency derivative instruments outstanding in the notional
amount of $3,856 million and $1,724 million at September 30, 2004 and December
31, 2003, respectively. The Company recorded $53 million of assets and $36
million of liabilities to recognize the fair value of these instruments at
September 30, 2004, compared to $15 million of assets and $84 million of
liabilities to recognize the fair value of these instruments at December 31,
2003. A 10 percent appreciation in the U.S. dollar's value relative to the
hedged currencies would increase the derivative instruments' fair value by $143
million and $105 million at September 30, 2004 and December 31, 2003,
respectively. A 10 percent depreciation in the U.S. dollar's value relative to
the hedged currencies would decrease the derivative instruments' fair value by
$154 million and $128 million at September 30, 2004 and December 31, 2003,
respectively. Any increase or decrease in the fair value of the Company's
currency exchange rate sensitive derivative instruments would be substantially
offset by a corresponding decrease or increase in the fair value of the hedged
underlying asset, liability or cash flow.

The Company's earnings and cash flow exposure to interest rates consists of
fixed and floating rate debt instruments that are denominated primarily in U.S.
dollars and Japanese yen. The Company uses interest rate derivative instruments
to manage its exposure to interest rate movements and to reduce borrowing costs
by converting floating rate debt into fixed rate debt or fixed rate debt into
floating rate debt. The Company had interest rate derivative instruments
outstanding in the notional amount of $1,100 million and $500 million at
September 30, 2004 and December 31, 2003, respectively. The Company recorded
assets of $38 million to reflect the fair values of these instruments on the
Company's consolidated balance sheet at September 30, 2004, compared to an
immaterial amount at December 31, 2003. A 100 basis point increase in global
interest rates would decrease the derivative instruments' fair value by $51
million at September 30, 2004, compared to $7 million at December 31, 2003. A

45

100 basis point decrease in global interest rates would increase the derivative
instruments' fair value by $56 million at September 30, 2004, compared to $7
million at December 31, 2003. Any increase or decrease in the fair value of the
Company's interest rate sensitive derivative instruments would be substantially
offset by a corresponding decrease or increase in the fair value of the hedged
underlying liability.


ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's President and
Chief Executive Officer and Senior Vice President - Finance & Administration and
Chief Financial Officer, evaluated the effectiveness of the Company's disclosure
controls and procedures as of September 30, 2004 pursuant to Rule 13a-15(b) of
the Exchange Act. Disclosure controls and procedures ensure that material
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and
ensure that such material information is accumulated and communicated to the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. Based on their evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that as of September 30, 2004, the Company's
disclosure controls and procedures were effective. It should be noted that any
system of controls is designed to provide reasonable, but not absolute,
assurances that the system will achieve its stated goals.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the quarter ended September 30, 2004, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.







46

PART II
OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

Note I - Commitments and Contingencies to the Company's unaudited condensed
consolidated financial statements contained elsewhere in this Quarterly Report
is incorporated herein by reference.



ITEM 6. EXHIBITS

Exhibits
--------
10.1 Form of Amendment #5 to Credit and Security Agreement
dated as of August 13, 2004

10.2 Form of Third Amendment to the Boston Scientific
Corporation 401(k) Retirement Savings Plan (Exhibit 99.1,
Current Report on Form 8-K filed on September 30, 2004)

31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

32.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, President and Chief Executive
Officer

32.2 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, Senior Vice President and
Chief Financial Officer






47

SIGNATURE
---------

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on November 9, 2004.




BOSTON SCIENTIFIC CORPORATION



By: /s/ Lawrence C. Best
--------------------------------
Name: Lawrence C. Best
Title: Chief Financial Officer and
Senior Vice President -
Finance and Administration




















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