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Guidant Corp · 10-K · For 12/31/03 · EX-13

Filed On 2/25/04 9:47pm ET · SEC File 1-13388 · Accession Number 950137-4-1244

  As Of               Filer                 Filing     As/For/On Docs:Pgs              Issuer               Agent

 2/26/04  Guidant Corp                      10-K       12/31/03   12:110                                    Bowne of Chicago...01/FA

Annual Report · Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K        Annual Report                                       HTML    160K 
 2: EX-10.22    Economic Value Added and Milestone Bonus Plan          9     26K 
 3: EX-10.27    Executive Deferred Bonus Plan                         17     45K 
 4: EX-12       Statement of Computation of Ratio of Earnings          1      8K 
 5: EX-13       Portions of the Company's 2003 Annual Report          54    327K 
 6: EX-21       Subsidiaries of the Registrant                         2±    10K 
 7: EX-23       Consent of Independent Auditors                        1     10K 
 8: EX-31.1     Certification                                          2±    11K 
 9: EX-31.2     Certification                                          2±    11K 
10: EX-32.1     Certification                                          1      7K 
11: EX-32.2     Certification                                          1      7K 
12: EX-99       Factors Possibly Affecting Future Op. Results          2     13K

EX-13 · Portions of the Company's 2003 Annual Report
Exhibit Table of Contents

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			Alternative Formats (RTF, XML, et al.) December 31 Regulatory and Other Matters X Technologies, Inc
1	1st Page
20	Regulatory and Other Matters
24	December 31
33	X Technologies, Inc

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                                                                      EXHIBIT 13

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

Guidant Corporation provides innovative, therapeutic medical solutions of       
distinctive value for customers, patients and healthcare systems around the     
world. Guidant's lifesaving medical technologies are designed to extend the     
lives and improve the quality of life of millions of patients suffering from    
life-threatening cardiac and vascular disease. Approximately 12,000 employees   
develop, manufacture and market the Company's medical devices in nearly 100     
countries, with key operations in the US, Europe and Asia. As used herein, the  
terms "the Company" and "Guidant" mean Guidant Corporation and its consolidated 
subsidiaries.                                                                   

THE OPPORTUNITY                                                                 

Cardiovascular disease is the leading cause of death for both men and women in  
the US today and claims more lives each year than the next five leading causes  
of death combined. Within cardiovascular disease, Guidant develops, manufactures
and markets products that focus on the treatment of coronary arrhythmias, heart 
failure, coronary artery disease and biliary and artery disease including:      

o        Implantable defibrillator systems used to detect and treat abnormally  
      fast heart rhythms (tachycardia) that could result in sudden cardiac
      death (SCD), including implantable cardiac resynchronization therapy
defibrillator (CRT-D) systems used to treat heart failure     

o        Implantable pacemaker systems used to manage slow or irregular heart   
        rhythms (bradycardia), including implantable cardiac resynchronization
therapy pacemaker (CRT-P) systems used to treat heart failure 

o        Coronary stent systems for the treatment of coronary artery disease    

o        Angioplasty systems including dilatation catheters, intravascular      
   radiotherapy systems and related accessories for the treatment of
coronary artery disease                                       

o        Cardiac surgery systems for the treatment of coronary artery disease   
       and biliary, peripheral and carotid systems used to treat biliary and
artery disease                                                

The population that could be served by Guidant's products is large. More than 13
million Americans are currently suffering from coronary artery disease with     
approximately 1.6 million Americans treated each year with a minimally invasive 
coronary intervention or coronary bypass surgery. Over 63% of all cardiac deaths
in the US are due to SCD (approximately 460,000 cases each year) and more       
Americans die from SCD than from lung cancer, breast cancer and AIDS combined.  
In the US alone, more than five million people are currently suffering from     
heart failure and 550,000 new cases are diagnosed annually.                     

The need for treatment of cardiovascular disease is growing as populations of   
developed nations become older and risk factors increase. People over 65 have   
six times the risk of developing cardiovascular disease and heart failure.      
Hypertension, affecting more than 90 million people in the US alone and growing 
at a rate exceeding 5 million new cases per year, doubles the risk. Obesity,    
affecting 30% of the US population and growing at 4% a year, increases the risk 
by 25 to 50%. And diabetes, growing at up to 10% annually in the US, increases  
the risk by 2- to 8-fold.                                                       

Guidant has a unique opportunity to serve this rapidly growing market with its  
life-saving, life-improving systems. People at risk for SCD or who suffer from  
heart failure are significantly underserved. Currently, implantable             
defibrillator therapy reaches only a fraction of the recipients who would       
benefit from it. One example of this is the significant gender disparity in the 
diagnosis and treatment of cardiovascular disease. While more women than men die
from SCD, women account for only about 20% of implantable                       

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defibrillator recipients. Guidant Reaches Out To Women (GROW) is just one of the
Company's many educational programs targeted to improving physician and consumer
awareness about cardiovascular health and treatment.                            

Over the past ten years, Guidant has been a leader in advancements in clinical  
science for the treatment of cardiovascular disease. Guidant was the first      
company to provide heart patients with cardiac resynchronization and            
defibrillator therapy to protect them from the extremely fast heart rhythms that
can lead to SCD. The mortality benefit for heart failure patients and/or heart  
attack survivors was proven in landmark clinical trials sponsored by Guidant,   
such as the Multicenter Automatic Defibrillator Implantation Trial (MADIT), the 
MADIT II clinical trial and the Comparison of Medical Therapy, Pacing, and      
Defibrillation in Chronic Heart Failure Clinical Trial (COMPANION). The         
COMPANION clinical trial results demonstrated a significant reduction in the    
combined outcome of all-cause hospitalization or mortality. As Guidant-sponsored
clinical studies continue to demonstrate the benefits of these advanced         
technologies, the case for broader and earlier intervention builds.             

Guidant's technological expertise, close working relationships with             
physicians/customers and the healthcare community, and strong support of        
clinical science all contribute to the Company's capacity for innovation. This  
is manifested in technological advancements, continual, iterative product       
improvements, and in the leveraging of Guidant technologies for new             
applications. Over the past four years, half of the Company's revenues have come
from products less than twelve months old.                                      

Operating in markets where substantial innovation is mandatory requires strong  
discipline. Sustained growth and superior returns over the long term have       
required and will require consistent execution in product development, sustained
market presence and market development, and active management of cost structures
and incentive systems. A key to this discipline is Guidant's continued success  
at educating the medical community on findings from clinical trials that have   
broadened the patient population that can be served by Guidant's products. These
are all critical in maintaining the resourcefulness to innovate and the         
resiliency to meet competitive challenges.                                      

2003 OVERVIEW                                                                   

The Company's performance in 2003 illustrates both resourcefulness and          
resiliency, as Guidant's product and market development efforts helped secure a 
year of remarkable growth in its largest product line, implantable defibrillator
systems, while making substantial progress in addressing the challenge and      
opportunity of drug eluting stents.                                             

In 2003, the Company's total sales grew 17% to $3.7 billion. This growth was    
driven, in substantial part, by 48% growth to $1.5 billion in sales of          
implantable defibrillator systems. Implantable defibrillators, implanted under  
the skin through a small incision near the collarbone, monitor every single     
heartbeat and deliver electrical energy to stop dangerously rapid and irregular 
heartbeats and return the heart to normal rhythm.                               

Guidant's product and market development efforts helped drive the growth in     
implantable defibrillator system sales. Over the course of 2003, the Company    
introduced seven new defibrillator products in the US and built upon its 2002 US
launch of CRT-D systems for the treatment of heart failure. The market grew,    
among other things, in response to findings from the MADIT II clinical trial,   
sponsored by Guidant. MADIT II demonstrated implantable defibrillator benefits  
for heart attack survivors with compromised heart function, and allowed patients
to be identified without invasive testing. Positive results of the MADIT II     
study helped secure expanded labeling and enhanced reimbursement for Guidant    
devices.                                                                        

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While the growth of the implantable defibrillator market during 2003 was        
extraordinary, the Company believes that additional opportunity for substantial 
growth continues. Key variables include those that were evident during 2003: the
ability to make continuing incremental product improvements, to promote and     
benefit from clinical evidence demonstrating the benefits of earlier and broader
device intervention, to secure appropriate reimbursement for use of the devices,
and to otherwise meet the substantial competition to innovate and sell that     
exists in the Company's markets. Guidant expects double-digit implantable       
defibrillator market growth to continue in 2004, albeit at a slower pace        
compared to 2003, due in part to the substantial growth in the market           
experienced in 2003.                                                            

The development of drug eluting stents presents another revolutionary           
opportunity in the treatment of cardiovascular disease. Coronary stents are mesh
tubes or coils mounted on catheters that can be advanced from an incision in a  
patient's leg up to a blocked coronary artery. The stent is deployed in the     
coronary artery by inflating the balloon on which it is mounted and pressing the
plaque against the wall of the artery. The stent is left in place as scaffolding
to hold the artery open. Guidant has long been the market leader in metallic    
coronary stent sales.                                                           

The value of stent therapy has been substantially enhanced by drug eluting      
stents, which are coated with chemical compounds designed to prevent excessive  
cell re-growth at the site of stent placement. During 2003, a competitor        
introduced the first drug eluting stent in the US market, and Guidant estimates 
that drug eluting stent penetration was approximately 53% of the US stent market
at year-end. Drug eluting stents sell at a substantial premium to metallic      
stents, due in part to significant future healthcare savings expected by        
patients receiving the device. Reimbursement has been secured for their use, and
customers have adopted the technology, generally leading to declining sales of  
metallic stents. Guidant estimates that the worldwide market for drug eluting   
stents will exceed $5 billion in 2006.                                          

The Company remains focused on the stent market and expects to introduce a      
Guidant drug eluting stent in Europe in 2005, with its first US launch in 2006. 
Guidant is advancing multiple stent platforms and polymers (which bind the drug 
to the stent) with the intent of introducing a competitive first-generation     
everolimus eluting stent system, while developing a second-generation product in
parallel. Meanwhile, Guidant has agreed to co-promote with Cordis Corporation   
(Cordis) the CYPHER(TM) Sirolimus-eluting Coronary Stent in the US. (Previous   
and current development efforts are further described in 2003 Operating Results 
and Note 4 to the Consolidated Financial Statements.)                           

Guidant continues to maintain approximately 50% of the US metallic stent market 
and has introduced a premium-valued cobalt chromium metallic stent. While drug  
eluting stents have reduced US end-user coronary stent sales by 30% to $402.2   
million in 2003, all other coronary stent sales have grown by 28% to $441.5     
million in 2003. Guidant expects end-user metallic coronary stent sales to      
continue to decline as additional drug eluting stent competitors enter the      
market and the therapy is further adopted by physicians.                        

Despite continued pressure on the metallic stent market, Guidant expects sales  
in 2004 to grow modestly compared to sales levels in 2003 due to anticipated    
sales growth in all other combined product lines. Guidant's sales mix shifted   
toward implantable defibrillators and away from US end-user coronary stents in  
2003, and Guidant expects this trend to continue in 2004.                       

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2003 OPERATING RESULTS                                                          

[Graphics Omitted:  2003 Sales By Product, Sales, and 2003 Sales by Geography]  

SALES SUMMARY                                                                   

                                                        [Enlarge/Download Table]

                                                    2003                             2002                        
                                      --------------------------------  --------------------------------         
(In millions)                            US         INT'L.     TOTAL       US        INT'L.      TOTAL    GROWTH 
                                      --------    --------    --------  --------    --------    --------  ------ 
                                                                                                                 
Implantable defibrillator systems     $1,210.7    $  278.0    $1,488.7  $  821.7    $  185.1    $1,006.8     48% 
Pacemaker systems                        431.7       251.8       683.5     413.7       222.9       636.6      7% 
Coronary stent systems                   463.2       380.5       843.7     628.5       292.4       920.9     (8%)
Angioplasty systems                      250.1       227.5       477.6     227.9       202.6       430.5     11% 
Cardiac surgery, biliary, peripheral                                                                             
   and carotid systems                   165.3        40.0       205.3     138.4        27.4       165.8     24% 
                                      --------    --------    --------  --------    --------    --------         
                                      $2,521.0    $1,177.8    $3,698.8  $2,230.2    $  930.4    $3,160.6     17% 
                                      ========    ========    ========  ========    ========    ========         

SALES                                                                           

Guidant reported $3,698.8 million worldwide net sales for the year ended        
December 31, 2003, representing 17% sales growth compared to 2002. Growth in    
unit volume and price increases favorably impacted sales by 12% and 1%. The     
impact of fluctuations in foreign currency exchange rates increased sales by    
$131.2 million or 4%. Sales growth was driven by 48% growth in implantable      
defibrillator systems sales, which accounted for 40% of Guidant's 2003 worldwide
sales. This growth was partially offset by an 8% decrease in coronary stent     
system sales primarily due to the launch of competitive drug eluting stents in  
Europe and the US in 2003.                                                      

Implantable Defibrillator Systems                                               

Worldwide sales of these systems for 2003 were $1,488.7 million, up $481.9      
million or 48% over 2002. US implantable defibrillator system sales climbed 47% 
to $1,210.7 million, while international sales of $278.0 million were up 50%    
over the prior year, 30% in constant currency. Implantable defibrillator system 
sales include sales of CRT-D systems. Implantable defibrillator system sales    
were driven by:                                                                 

o        Growth of the implantable defibrillator market following announcement  
       of the MADIT II clinical trial results - This landmark clinical trial
   was sponsored by Guidant and demonstrated that a broader group of
patients would benefit from implantable defibrillator therapy.

o        Strong market acceptance for CRT-D systems - Guidant's first CRT-D     
       system received US Food and Drug Administration (FDA) approval in May
      2002. Guidant has subsequently introduced four new systems. The most
   recent system, the CONTAK(R) RENEWAL 4 CRT-D, received Conformite
    Europeene (CE) Mark approval in October 2003. The CONTAK RENEWAL 3
CRT-D received FDA approval in July 2003.                     

o        Positive market acceptance of the VITALITY(TM) family of implantable   
     defibrillator systems - VITALITY AVT received FDA approval in March
  2003 and VITALITY DS(R) received FDA approval in September 2003.
         Additionally, VITALITY EL and VITALITY AVT FAST CHARGE were launched in
the US in October 2003.                                       

In June 2003, the Centers for Medicare & Medicaid Services (CMS) announced its  
intent to expand national reimbursement coverage for the use of implantable     
defibrillators for patients with a previous heart attack, left ventricular      
ejection fraction of less than or equal to 30%, and ventricular heart beat (QRS)
duration greater than 120 milliseconds. This patient group represents a         
sub-population of the MADIT II clinical                                         

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trial. The CMS decision, which was effective October 1, 2003, will help assure  
the availability of Guidant implantable defibrillator therapy to a larger       
population of patients and extend uniform national coverage to the landmark     
MADIT I clinical trial population. Additionally, in August 2003, CMS approved   
Guidant's proposal for a new hospital inpatient diagnosis related group (DRG)   
for implantable defibrillator therapy and CRT-D therapy for heart failure       
patients. This change means higher payments to healthcare providers in          
recognition of the increased costs of treating this patient group. The new DRG  
was effective October 1, 2003.                                                  

Presented results of the Guidant-sponsored COMPANION clinical trial demonstrated
20% reduction in combined all-cause death and hospitalization by adding         
Guidant's CRT systems to optimal drug therapy and 36% reduction in all-cause    
mortality for Guidant's CRT-D systems for patients with advanced heart failure. 
In December 2003, Guidant submitted an application that contained a subset of   
the COMPANION data seeking to obtain FDA approval to make certain additional    
claims for its CRT devices. After consultation with the FDA, the Company has    
decided that it will now resubmit the filing with a fuller set of the COMPANION 
data by the third quarter of 2004 to seek a broader range of new claims for its 
CRT devices.                                                                    

The National Heart, Lung and Blood Institute's Sudden Cardiac Death in Heart    
Failure Trial (SCD-HeFT) has been completed, and the results are expected to be 
presented by the end of the first quarter of 2004. SCD-HeFT is designed to      
further evaluate the benefits of implantable defibrillators in patients with    
heart failure. CMS has indicated that it may consider the SCD-HeFT results as   
evidence to further expand reimbursement coverage for implantable               
defibrillators. The results of SCD-HeFT may have a material impact on the trend 
of implantable defibrillator sales.                                             

Pacemaker Systems                                                               
Worldwide pacemaker system sales were $683.5 million in 2003 compared to $636.6 
million in 2002, representing 7% growth. Sales in the US totaled $431.7 million,
4% over 2002. International pacemaker system sales grew 13% to $251.8 million,  
and were consistent with 2002 sales on a constant currency basis. Pacemaker     
system sales include sales of CRT-P systems and were driven by:                 

       o        Continued acceptance of the INSIGNIA(TM) family of pacemaker
systems                                     

                o        FDA approval of INSIGNIA ENTRA Pacemaker Systems in
the first quarter of 2003 

               o        European launch of INSIGNIA Ultra and INSIGNIA AVT
                    Pacemaker Systems in the third quarter of 2003

        o        Broad acceptance of Guidant's second-generation CRT-P system,
                  the CONTAK RENEWAL TR 2, launched in the third quarter of 2003
in Europe                                   

    o        Significant additions to the cardiac rhythm management US
sales force                                 

Additionally, in January 2004, Guidant announced FDA approval of its CONTAK     
RENEWAL TR CRT-P System.                                                        

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Coronary Stent Systems                                                          

Worldwide coronary stent system sales in 2003 were $843.7 million, a decrease of
8% compared to 2002 sales of $920.9 million. Total US coronary stent system     
sales were $463.2 million ($402.2 million to US end-users) in 2003 compared to  
$628.5 million ($575.5 million to US end-users) in 2002. Coronary stent system  
sales in the US include sales of stent delivery systems (dilatation catheters)  
to Cordis. The decline of total US coronary stent system sales was primarily    
driven by increasing penetration of competitive drug eluting stents in the US.  
The Company expects that drug eluting stent penetration will continue in both US
and international markets. An additional competitive entry to the US drug       
eluting stent market is expected in the first quarter of 2004, which will likely
increase the penetration rate through the end of 2004. US end-user coronary     
stent system sales (which exclude the sales to Cordis) in 2003 accounted for    
less than 11% of Guidant's worldwide revenues compared to 18% in 2002. In       
February 2004, Guidant entered into an agreement with Cordis to co-promote      
Cordis' CYPHER(TM) Sirolimus-eluting Coronary Stent. The agreement grants       
Guidant immediate entry into the US drug eluting stent market and expands       
Cordis' access to Guidant stent delivery systems. Guidant will receive          
commissions from Cordis, which will be reported as stent revenue. Guidant's drug
eluting stent program, which utilizes the drug everolimus, will not be impacted 
by the agreement with Cordis.                                                   

International sales of coronary stent systems in 2003 grew 30% (18% in constant 
currency) to $380.5 million compared to $292.4 million in 2002, primarily       
attributable to unit volume growth in Japan. Competitor launches of metallic    
and/or drug eluting stents in Japan during 2004 could reduce this growth.       
Guidant's agreement with Cordis includes a separate arrangement that may permit 
future co-promotion in Japan.                                                   

Worldwide average pricing for Guidant's metallic stents remained stable compared
to 2002 and from the third to the fourth quarter of 2003. Price stability       
resulted from the acceptance of Guidant's premium-valued cobalt chromium        
MULTI-LINK(TM) VISION(TM) Coronary Stent System and favorable geographic mix,   
offset by modest declines in worldwide stainless steel stent prices.            

Coronary stent system sales include:                                            

       o        MULTI-LINK VISION Coronary Stent System in Europe since June
2003 and in the US since August 2003        

       o        MULTI-LINK ZETA(TM) Coronary Stent System launched in the US
                  in September 2002 - International acceptance continues despite
          competitive drug eluting stent therapy and competitive
launches of new metallic stents.            

    o        MULTI-LINK TRI-STAR(TM) Coronary Stent System launched in
          Japan in the fourth quarter of 2001 and the MULTI-LINK
              PENTA(TM) Coronary Stent System launched in Japan in March
2003                                        

         o        MULTI-LINK PIXEL(TM) Coronary Stent System, launched in the US
                 in 2001, designed to treat small-diameter vessels in patients
       presenting with abrupt or threatened abrupt closure

       o        MULTI-LINK ULTRA(TM) Coronary Stent System designed to treat
      large-diameter vessels, launched in the US in 2000

Angioplasty Systems                                                             

Angioplasty system sales totaled $477.6 million in 2003 compared to $430.5      
million in 2002, representing 11% growth. Key product sales were driven by the  
Rapid-Exchange (RX) CROSSSAIL(TM) and Over-The-Wire (OTW) OPENSAIL(TM) Coronary 
Dilatation Catheters.                                                           

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Cardiac Surgery, Biliary, Peripheral and Carotid Systems                        

Worldwide sales of cardiac surgery, biliary, peripheral and carotid systems     
totaled $205.3 million in 2003 compared to $165.8 million in 2002, representing 
24% growth. Sales were driven by:                                               

o        VASOVIEW(R) Endoscopic Vessel Harvesting System      

      o        ACROBAT(TM) Off-Pump System and HEARTSTRING(TM) Anastomotic
Facilitator                                 

    o        .035 Biliary Platforms: DYNALINK(R) Self-Expanding Stent,
         OMNILINK(R) Balloon Expandable Stent and AGILTRAC(TM)
Peripheral Dilatation Catheter              

       o        RX ACCULINK(TM) Carotid Stent System in Europe including the
RX ACCUNET(TM) Embolic Protection System    

COST OF PRODUCTS SOLD                                                           

Cost of products sold was $903.8 million in 2003 compared to $762.8 million in  
2002, representing 24.4% of net sales compared to 24.1% in 2002. Cost of        
products sold as a percentage of sales increased in 2003 compared to 2002 due to
previously discussed changes in product sales mix and the impact of foreign     
currency hedge losses, partially offset by increased manufacturing efficiencies.
The foreign currency hedge losses recorded in cost of products sold partially   
offset the increase in sales caused by the weakening US dollar and served to    
mitigate the net impact of foreign currency fluctuations on net earnings.       
Additionally, in the fourth quarter of 2003, the Company recorded $11.0 million 
of expense related primarily to scrap of work-in-process and finished goods     
inventory containing a specific third-party-supplied component.                 

RESEARCH AND DEVELOPMENT                                                        

Innovation is essential to Guidant's success. It is one of the primary bases of 
competition in Guidant's markets. The Company works to introduce new products,  
enhance the effectiveness and ease of use of existing products and expand the   
applications for its products. Guidant continued to invest aggressively in      
research and development in 2003. Research and development expense was $518.4   
million in 2003, or 14.0% of net sales, compared to $415.5 million in 2002, or  
13.1% of net sales. Significant investments in research and development in 2003 
included:                                                                       

o        Drug eluting stent research and development          

    o        Advanced Patient Management(TM) applications, designed to
                enable physicians to monitor patient heart function remotely
and automatically                           

o        Clinical trials to support the benefits of cardiac   
                resynchronization therapy devices for treating heart failure

    o        Development of next-generation devices for cardiac rhythm
management and cardiac surgery products     

Important research and development milestones in 2003 included:                 

o        COMPANION Clinical Trial - Prospective, multi-center,
             randomized study of patients with advanced heart failure.
                  Presented results of the COMPANION clinical trial demonstrated
                 a 20% reduction in the primary endpoint of combined all-cause
                death and hospitalization by adding Guidant's CRT systems to
         optimal drug therapy and a 36% reduction in all-cause
         mortality for Guidant's CRT-D systems. Results of the
           COMPANION trial continue on track for publication in an
            upcoming issue of a major peer-reviewed medical journal.

       o        DECREASE HF Clinical Trial - Heart failure study designed to
            demonstrate the safety and effectiveness of the flexible
               pacing modes offered in Guidant's newest CRT-D systems that
began in March 2003.                        

        o        CONTAK RENEWAL 3 AVT Clinical Trial - Study designed to study
                 the effect of device therapy in patients who suffer from both
                 heart failure and atrial arrhythmias that began enrollment in
                 November 2003. Atrial arrhythmias affect as many as one-third
               of the nearly five million people in the US who suffer with
      heart failure. There are no commercially available

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              cardiac resynchronization therapy devices on the US market
     today designed to provide therapy for this common
co-morbidity.                               

o        FUTURE I and II Clinical Trials - Studies that       
               evaluate the safety of an everolimus eluting coronary stent
                 utilizing a bioabsorbable drug-delivery coating compared to a
               metallic stent platform in previously untreated lesions. In
               June 2003, a FUTURE I milestone was achieved with the final
                six-month adjudicated clinical data results showing the MACE
                (Major Adverse Cardiac Events) rate as equal to or less than
             the metallic stent in the control arm. In September 2003,
                 Guidant announced favorable six-month results from the FUTURE
               II clinical trial, which corroborated the FUTURE I results.
              FUTURE II six-month results met the trial's primary safety
                endpoint with a 4.8% MACE rate and 0% in-stent restenosis in
                  the everolimus eluting stent arm. The everolimus eluting stent
                 reduced in-stent tissue proliferation compared to the control
           arm. FUTURE I twelve-month results were also announced,
                 confirming the results of the six-month data. Guidant expects
                to first enter the European market with a Guidant everolimus
            eluting stent in 2005 and the US market in 2006. Guidant
                  recently filed with European regulatory authorities the second
                module of the application to support the CHAMPION Everolimus
Eluting Stent System CE Mark approval.      

         o        European PIXEL Clinical Trial - Study designed to evaluate the
                performance of Guidant's MULTI-LINK PIXEL Small Vessel Stent
               System. The clinical trial compared the restenosis rates of
                patients with first-time lesions whose vessels were expanded
       with a balloon catheter prior to stent implantation
              (pre-dilatation) versus those who received direct stenting
                 with a MULTI-LINK PIXEL stent. Guidant announced in July 2003
                 that the study demonstrated six-month restenosis rates of 25%
                 for the patients in the pre-dilatation group, compared to 16%
    for those patients who received direct stenting.

  o        Acculink for Revascularization of Carotids in High Risk
                 Patients (ARCHeR) Clinical Trial - Study designed to evaluate
                the safety and effectiveness of carotid artery stenting as a
              minimally invasive alternative for treating carotid artery
                  disease in patients ineligible for surgery or at high surgical
           risk. The Company announced positive preliminary 30-day
               results in March 2003. In September 2003, Guidant completed
               enrollment in its third clinical trial designed to evaluate
   carotid stenting, the ARCHeR RX Clinical Trial.

In addition to funding internal research and development efforts, Guidant also  
invests in early-stage technologies through equity investments, acquisitions,   
and other investment and collaborative vehicles.                                

IN-PROCESS RESEARCH AND DEVELOPMENT (IPRD)                                      

Guidant recorded pre-tax IPRD charges of $83.7 million in 2003 in business      
combinations for the portion of the purchase price representing the value of    
technologies relating to products that have not received FDA approval and have  
no alternative future use, excluding the value of core and developed            
technologies. (See further information on business combinations in Note 4 to the
Consolidated Financial Statements.) 2003 IPRD charges included:                 

        o        MediVas LLC (MediVas) - In September 2003, Guidant acquired a
             subsidiary of MediVas, including the right to use certain
                bioabsorbable polymer technologies. Guidant recorded a $35.2
        million IPRD charge in connection with the purchase.

         o        Biosensors International (Biosensors) - In March 2003, Guidant
              purchased certain assets of Biosensors' everolimus eluting
              stent program, resulting in $20.5 million of IPRD. In June
                2003, a milestone related to the positive six-month clinical
               data results of FUTURE I was achieved, resulting in an IPRD
charge of $10.1 million.                    

  o        Bioabsorbable Vascular Solutions (BVS) - In March 2003,
                  Guidant purchased the majority interest in BVS, an early-stage
           developer of bioabsorbable stents, resulting in a $16.0
                million IPRD charge. The project is expected to be completed
                and the products to be commercially available on a worldwide
           basis in four to seven years, with an estimated cost to
             complete of approximately $50.0 million to $75.0 million.

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2002 pre-tax IPRD charges totaled $54.9 million and included:                   

  o        Novartis Pharma AG and Novartis AG (Novartis) - Guidant
          recorded a pre-tax IPRD charge of $35.6 million for an
              exclusive license from Novartis granting Guidant rights to
                utilize the drug, everolimus, in drug eluting stents for the
              treatment of coronary and peripheral vascular diseases and
providing Guidant the right to sublicense.  

         o        Cardiac Intelligence Corporation (CIC) - In December 2002, the
                  Company completed its acquisition of CIC for $19.3 million for
        a portfolio of intellectual property in the field of
                  ambulatory, remote, wireless monitoring of the heart functions
               of patients, including those implanted with devices such as
                 pacemakers, defibrillators and resynchronization devices. The
                  Company anticipates commercial availability of this technology
               on a worldwide basis within 2 to 3 years, with an estimated
            cost to complete of approximately $20.0 million to $40.0
million.                                    

The assets gained through the Novartis, MediVas and Biosensors acquisitions are 
key components of Guidant's drug eluting stent program. Guidant expects to first
enter the European market with a Guidant everolimus eluting stent in 2005 and   
the US market in 2006. It is estimated that this project will cost approximately
$250.0 million to $300.0 million from 2004 through completion to achieve        
commercial viability in the US.                                                 

The Company continues to move forward with the acquired research and development
projects discussed above. There have been no significant changes from the       
estimates used in the original valuations.                                      

SALES, MARKETING AND ADMINISTRATIVE                                             

Sales, marketing and administrative expenses were $1,198.9 million in 2003, an  
increase of $248.2 million or 26.1% compared to 2002. Spending as a percentage  
of sales increased to 32.4% in 2003 compared to 30.1% in 2002 driven primarily  
by sales growth, resulting in increased sales commissions, and continued        
expansion of the US sales force, including field clinical personnel in the US   
who support clinicians.                                                         

Total expenses increased by $53.5 million as a result of restricted stock grants
made under the 2003 performance-based equity compensation program, including    
accelerated vesting based upon the attainment of Company share price            
appreciation targets. These expenses were classified in the income statement    
consistent with the functional area of related employees. Approximately         
two-thirds of the share price appreciation targets were achieved and expensed in
2003. The final share price appreciation target was achieved in January 2004.   

INTEREST                                                                        

Guidant recognized $6.3 of net interest income in 2003 compared to $1.3 million 
of net interest expense in 2002. This $7.6 million change was driven by a lower 
average outstanding debt balance during 2003 and increased interest income due  
to larger balances in short-term cash investments. Additionally, the Company    
incurred lower interest rates on long-term notes in 2003 compared to 2002 due to
two interest rate swap agreements with notional amounts totaling $350.0 million 
in 2003 versus one interest rate swap agreement totaling $175.0 million in 2002.

ROYALTIES                                                                       

Net royalty expense totaled $63.9 million in 2003 compared to $54.0 million in  
2002. Net royalty expense included royalty income of less than $1.0 million in  
both years presented. Royalty expense is incurred for sales of certain          
implantable defibrillator systems and stent delivery systems. The $9.9 million  
increase in 2003 was primarily due to increased sales of implantable            
defibrillator systems. A                                                        

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patent covering certain implantable defibrillator products expired in December  
2003, which will modestly reduce royalty expense incurred in the near future.   

AMORTIZATION                                                                    

Amortization expense was $20.9 million in 2003 compared to $12.6 million in     
2002. The increase of $8.3 million was primarily driven by Guidant's acquisition
of X-Technologies, Inc. in June 2003. A portion of the purchase price was       
allocated to the intangible assets related to the FDA-approved FX miniRAIL(TM)  
Dilatation Catheter.                                                            

OTHER EXPENSES                                                                  

Net other expenses were $7.7 million in 2003 and were comprised primarily of    
equity investment write-offs and losses on foreign exchange contracts. Net other
expenses were $12.6 million in 2002, comprised primarily of fixed asset and     
equity investment write-offs and losses on foreign exchange contracts. There    
were no significant income items reflected in these line items in 2003 or 2002. 

LITIGATION                                                                      

The Company recorded $422.8 million in net litigation expense in 2003 primarily 
comprised of a $425.7 million expense related to the arbitration decision       
involving Cordis. In 2002, Guidant recorded a net legal benefit of $137.1       
million resulting from a $158.2 million award against Medtronic, Inc., partially
offset by other minor settlements. See also Part II, Item I, "Legal             
Proceedings."                                                                   

INCOME TAX                                                                      

Income tax expense for 2003 and 2002 was $59.5 million and $250.6 million,      
resulting in effective income tax rates of 12.3% and 27.3%. During 2003, the    
Company reached agreement with US and foreign tax authorities with respect to   
various issues in the examination of tax years 1996-2000. The Company adjusted  
its previous estimate for accrued taxes by $30.0 million in the fourth quarter  
of 2003 to reflect the resolution of these audits. In December 2003, the US     
Internal Revenue Service (IRS) proposed adjustments to certain previously filed 
tax returns. The Company believes it has meritorious defenses of its tax filings
and will vigorously defend them at the IRS appellate level or through litigation
in the courts. While no assurance can be provided as to the ultimate resolution 
of outstanding tax issues, the positions taken by the IRS are not expected to   
have a significant impact on the effective tax rate in future periods. The      
Company has accrued for all probable liabilities resulting from tax assessments 
by tax authorities. Following is a reconciliation of income taxes at the US     
federal statutory rate to the Company's effective income tax rate:              

                                                                [Download Table]

                                                                   2003      2002  
                                                                 -------   ------- 
                                                                                   
Income from continuing operations before income tax ............ $ 485.0   $ 918.7 
                                                                 =======   ======= 
Income tax expense at the US federal statutory rate of 35% ..... $ 169.8   $ 321.5 
State income taxes, net of federal tax benefit .................     4.2      12.8 
Effect of international operations .............................   (93.3)    (90.0)
Research credit ................................................   (13.9)    (10.0)
Benefit from export incentives .................................    (8.3)     (9.3)
Nondeductible IPRD .............................................    18.9       7.1 
Reduction of income tax accruals due to tax audit resolution ...   (30.0)       -- 
Other, net .....................................................    12.1      18.5 
                                                                 -------   ------- 
Income tax expense ............................................. $  59.5   $ 250.6 
                                                                 =======   ======= 

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DISCONTINUED OPERATIONS                                                         

In June 2003, Guidant's Board of Directors approved a plan to dispose of the    
ANCURE ENDOGRAFT System product line to treat abdominal aortic aneurysms (AAA)  
due to continuing financial losses, limited prospects for the Company's AAA     
product line and the impact of the Department of Justice investigation. (See    
also Note 16 to the Consolidated Financial Statements.) In December 2003,       
Guidant's Board of Directors ratified a plan to discontinue Guidant's operations
in Brazil due to unfavorable business conditions and poor operating performance.
The disposal plans include the termination of normal activity, abandonment of   
property and equipment, product returns, collection of receivables and          
settlement of liabilities. Guidant has written down long-lived assets to fair   
value and recorded inventory and accounts receivable at net realizable value.   

The accompanying consolidated financial statements and notes reflect the results
of operations and financial position of AAA and Brazil as discontinued          
operations for all periods presented. Net loss from discontinued operations     
includes proceeds from the sale of internally developed intangible assets,      
charges related to the impairment of certain long-lived assets, inventory       
write-downs, customer returns, litigation settlements and accruals for employee 
severance and lease commitments expensed in 2003. Guidant has incurred $95.2    
million of losses through December 31, 2003. In December 2003, Guidant granted  
Cook Incorporated (Cook) a covenant not to sue related to Cook's manufacture and
distribution of their endovascular graft products in exchange for $20.0 million.
The proceeds were recorded in discontinued operations. The accrual for the      
ANCURE-related investigation of $30.0 million at December 31, 2002, was         
increased to $92.0 million in March 2003 and settled in June 2003 for $92.4     
million. See Part II, Item I for additional information concerning related      
litigation.                                                                     

DISCONTINUED OPERATIONS SUMMARY FOR AAA PRODUCT LINE AND BRAZIL OPERATIONS      

                                                        [Enlarge/Download Table]

                                                          2003         2002         2001    
                                                       -----------  -----------  -----------
                                                                                            
(In millions)                                                                               
Net sales                                              $      18.2  $      79.0  $      66.0
Loss from discontinued operations before income taxes        127.8         79.5         60.5
Net loss from discontinued operations                         95.2         56.3         39.4

2002 OPERATING RESULTS                                                          

[GRAPHICS OMITTED:  2002 SALES BY PRODUCT, 2002 SALES BY GEOGRAPHY]             

SALES SUMMARY                                                                   

                                                        [Enlarge/Download Table]

                                                    2002                              2001                      
                                      --------------------------------  --------------------------------        
(In millions)                            US         INT'L.      TOTAL      US         INT'L.     TOTAL    GROWTH
                                      --------    --------    --------  --------    --------    --------  ------
                                                                                                                
Implantable defibrillator systems     $  821.7    $  185.1    $1,006.8  $  573.2    $  143.4    $  716.6    40% 
Pacemaker systems                        413.7       222.9       636.6     378.2       204.5       582.7     9% 
Coronary stent systems                   628.5       292.4       920.9     584.5       226.7       811.2    14% 
Angioplasty systems                      227.9       202.6       430.5     203.6       199.9       403.5     7% 
Cardiac surgery, biliary, peripheral                                                                            
   and carotid systems                   138.4        27.4       165.8     104.5        23.1       127.6    30% 
                                      --------    --------    --------  --------    --------    --------        
                                      $2,230.2    $  930.4    $3,160.6  $1,844.0    $  797.6    $2,641.6    20% 
                                      ========    ========    ========  ========    ========    ========        

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SALES                                                                           

Guidant reported worldwide net sales of $3,160.6 million for 2002, an increase  
of $519.0 million or 20% compared to 2001. Growth in unit volume and            
fluctuations in foreign currency exchange rates increased net sales by 19% and  
1% with no significant impact from price changes. Guidant experienced           
double-digit growth across all major product groups and geographies driven by   
new product launches and enhanced distribution capability. US sales in 2002 were
$2,230.2 million, representing 21% growth, while international sales were $930.4
million, representing 17% growth.                                               

Implantable Defibrillator Systems                                               

Worldwide sales of implantable defibrillator systems for 2002 were $1,006.8     
million, up $290.2 million or 40% over 2001, primarily driven by unit volume    
growth. US implantable defibrillator system sales climbed 43% to $821.7 million,
while international sales of $185.1 million were up 29% over the prior year.    
Implantable defibrillator system sales were driven by:                          

     o        MADIT II clinical trial's positive impact on the worldwide
implantable defibrillator market            

   o        CONTAK CD/EASYTRAK CRT-D System, approved by the FDA and
launched in the US in May 2002              

        o        CONTAK CD 2 CRT-D System, approved by the FDA and launched in
the US in October 2002                      

o        Continued acceptance of Guidant's PRIZM(R) family of 
implantable defibrillator systems           

     o        Next generation VITALITY Implantable Defibrillator System,
launched in Europe in October 2002          

Pacemaker Systems                                                               

Worldwide pacemaker system sales were $636.6 million in 2002 compared to $582.7 
million in 2001, representing 9% growth. Sales in the US totaled $413.7 million,
representing 9% growth over 2001. The European market drove international sales 
of $222.9 million, representing 9% growth over the prior year. Pacemaker system 
sales were driven by the global launch of the INSIGNIA family of pacemakers in  
June 2002.                                                                      

Coronary Stent Systems                                                          

Worldwide coronary stent system revenues were $920.9 million in 2002 compared to
$811.2 million in 2001, representing 14% growth. Sales of coronary stent systems
in the US were $628.5 million in 2002 compared to $584.5 million in the prior   
year. International sales of coronary stent systems grew 29% over the prior year
to $292.4 million. Sales of coronary stent systems during 2002 were driven by:  

      o        Continued acceptance of the MULTI-LINK PENTA Coronary Stent
System launched in the US in June 2001      

     o        Fourth quarter 2001 US launch of MULTI-LINK PIXEL Coronary
Stent System                                

      o        September 2002 FDA approval and US launch of the MULTI-LINK
ZETA Coronary Stent System                  

    o        Strength of European sales due to the introduction of the
                  MULTI-LINK ZETA in May 2002 despite competitors' introductions
                 of drug eluting stent therapy and a new metallic stent in the
second quarter of 2002                      

  o        Sales growth in Japan from Guidant's MULTI-LINK TRISTAR
                Coronary Stent System launched in the fourth quarter of 2001

Angioplasty Systems                                                             

Angioplasty system sales totaled $430.5 million in 2002 compared to $403.5      
million in 2001. Sales included the RX CROSSSAIL and OTW OPENSAIL Coronary      
Dilatation Catheters.                                                           

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Cardiac Surgery, Biliary, Peripheral and Carotid Systems                        

Worldwide sales of cardiac surgery, biliary, peripheral and carotid systems     
totaled $165.8 million in 2002 compared to $127.6 million in 2001, representing 
30% growth. Sales were driven by:                                               

      o        VASOVIEW 5 Endoscopic Vessel Harvesting System, launched in
the US in March 2002                        

      o        AXIUS(TM) Vacuum 2 Stabilizers for performing beating heart
surgery, launched in the US in February 2002

         o        DYNALINK Self Expanding Biliary Stent System, RX HERCULINK(TM)
                PLUS Biliary Stent System and AGILTRAC Peripheral Dilatation
Catheter                                    

     o        Increase in US cardiac surgery sales force and noncoronary
stent sales force                           

COST OF PRODUCTS SOLD                                                           

Cost of products sold was $762.8 million in 2002, or 24.1% of net sales,        
compared to $623.3 million in 2001, or 23.6% of net sales. Cost of products sold
as a percentage of net sales was relatively unchanged as a result of offsetting 
fluctuations. The impact of unfavorable foreign exchange hedge results and      
reduced vascular intervention sales mix was offset almost entirely by pricing   
and volume associated with implantable defibrillator market growth and          
operational efficiencies.                                                       

RESEARCH AND DEVELOPMENT                                                        

Research and development expense was $415.5 million in 2002, or 13.1% of net    
sales, compared to $362.3 million in 2001, or 13.7% of net sales. Significant   
investments in research and development in 2002 included:                       

o        Drug eluting stent research and development          

o        Advanced Patient Management applications             

     o        Clinical trials to support the benefits of CRT devices for
treating heart failure                      

    o        Development of next-generation devices for cardiac rhythm
management and cardiac surgery products     

IN-PROCESS RESEARCH AND DEVELOPMENT                                             

Guidant recorded pre-tax IPRD charges of $54.9 million in 2002 as described in  
detail earlier. Pre-tax IPRD charges in 2001 totaled $15.0 million for          
non-approved embolic protection device technology purchased from Metamorphic    
Surgical Devices, LLC. (See further information on business combinations in Note
4 to the Consolidated Financial Statements.)                                    

SALES, MARKETING AND ADMINISTRATIVE                                             

Sales, marketing and administrative expenses were $950.7 million in 2002, an    
increase of $162.1 million or 20.6% compared to 2001, primarily due to sales    
growth and continued expansion of the sales force. Guidant controlled spending  
as a percentage of sales - 30.1% in 2002 versus 29.9% in 2001.                  

INTEREST                                                                        

Net interest expense totaled $1.3 million in 2002 compared to $29.2 million in  
2001. This $27.9 million decrease was driven by a lower average outstanding debt
balance, increased interest income due to larger balances in short-term cash    
investments, and lower interest rates on borrowings in 2002 compared to 2001, in
part due to a $175.0 million interest rate swap agreement entered into in 2002  
covering half of the Company's $350.0 million long-term notes. Guidant was in a 
net interest income position for the first time in the fourth quarter of 2002.  

                                                                              13

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ROYALTIES                                                                       

Net royalties expense totaled $54.0 million in 2002 compared to $41.6 million in
2001. Net royalty expense included royalty income of less than $1.0 million in  
both years presented. The $12.4 million increase was primarily due to increased 
sales of implantable defibrillator systems.                                     

AMORTIZATION                                                                    

Amortization expense for goodwill and other intangible assets was $12.6 million 
for 2002, a decrease of $29.8 million compared to 2001. This decrease in        
amortization expense was primarily due to the elimination of goodwill           
amortization on January 1, 2002, as directed by Statement of Financial          
Accounting Standards (SFAS) 142, Goodwill and Other Intangible Assets.          

OTHER EXPENSES                                                                  

Net other expenses were $12.6 million in 2002, comprised primarily of fixed     
asset and equity investment write-offs and losses on foreign exchange contracts.
There were no significant income items reflected in this line item in 2002. Net 
other expenses totaled $4.0 million in 2001, comprised of $8.1 million of       
write-offs of fixed assets, equity investments and intangible assets, partially 
offset by $2.4 million in foreign exchange contract gains.                      

LITIGATION                                                                      

Guidant recorded a net litigation benefit of $137.1 million in 2002 resulting   
from a $158.2 million award against Medtronic, Inc., partially offset by other  
minor settlements. In 2001, Guidant recorded a net litigation benefit of $10.0  
million from awards against Boston Scientific of $19.5 million and Medtronic of 
$6.6 million offset by a settlement with Cordis of $16.1 million. See also Part 
II, Item I, "Legal Proceedings."                                                

COOK CHARGE                                                                     

Guidant recognized $60.6 million of expense in 2002 as a result of the          
termination of the Cook Group Inc. merger agreement including a $50.0 million   
contractually-defined termination payment plus accrued interest, $6.6 million   
nonsaleable, nonreturnable Cook inventory and $3.8 million in other             
merger-related expenses. Expense was recorded upon termination of the merger    
agreement.                                                                      

FOUNDATION CONTRIBUTION                                                         

Guidant made contributions to the Guidant Foundation totaling $40.0 million in  
2002 and $10.0 million in 2001. Guidant Foundation is a non-profit organization 
that has common management with Guidant. Guidant Foundation provides financial  
support and grants to non-profit organizations for charitable and educational   
programs that improve the quality of life for people who are at risk for or     
suffer from cardiovascular disease. Guidant Foundation also provides financial  
support to non-profit organizations in the communities where Guidant operates in
the US. Contributions are made possible by the profits of Guidant; however,     
Guidant is not required to make contributions to the Foundation, except for     
amounts pledged.                                                                

RESTRUCTURING                                                                   

Guidant recorded a $14.0 million charge for the restructuring of biliary and    
peripheral product line operations approved by Guidant's Board of Directors in  
May 2002. The charge primarily relates to the termination of Guidant's          
involvement in certain peripheral product clinical trials.                      

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SPECIAL PRODUCT CHARGE                                                          

In March 2001, Guidant recorded $7.5 million in expenses for the field action   
related to the PRIZM Implantable Defibrillator System. The field action         
concerned a specific memory component in the first-generation device. Field     
inventory that contained the memory component was returned to the Company and a 
software solution was designed to noninvasively return functionality to any     
affected implanted device.                                                      

INCOME TAX                                                                      

Income tax expense for 2002 and 2001 was $250.6 million and $204.3 million,     
resulting in income tax rates of 27.3% and 28.1%. Following is a reconciliation 
of income taxes at the US federal statutory rate to the Company's effective     
income tax rate:                                                                

                                                                [Download Table]

                                                                   2002      2001  
                                                                 -------   ------- 
                                                                                   
Income from continuing operations before income tax ............ $ 918.7   $ 727.7 
                                                                 =======   ======= 
Income tax expense at the US federal statutory rate of 35% ..... $ 321.5   $ 254.7 
State income taxes, net of federal tax benefit .................    12.8      10.1 
Effect of international operations .............................   (91.0)    (63.3)
Research credit ................................................   (10.0)    (10.9)
Benefit from export incentives .................................    (9.3)     (8.1)
Nondeductible IPRD .............................................     7.1        -- 
Other, net .....................................................    19.5      21.8 
                                                                 -------   ------- 
Income tax expense ............................................. $ 250.6   $ 204.3 
                                                                 =======   ======= 

LIQUIDITY AND FINANCIAL CONDITION                                               

                                                                [Download Table]

                                                     2003         2002  
                                                  ---------    ---------
                                                                        
Dollars in millions, except per share data                              
Cash and cash equivalents(1)                      $ 1,468.2    $ 1,014.8
Working capital                                   $ 2,017.5    $ 1,437.4
Current ratio                                       2.9:1.0      2.7:1.0
Net cash position(2)                              $   519.9    $   656.6
Shareholders' equity per common share(3)          $    8.68    $    7.59
Days receivable outstanding(4)                           78           69
Inventory turnover                                     2.59         2.79

(1)      A substantial portion of cash and cash equivalents is indefinitely     
invested in Guidant's non-US subsidiaries.                    

(2)      Net cash position is the sum of cash and cash equivalents and          
short-term investments less total debt.                       

(3)      Amount represents total shareholders' equity divided by weighted       
average shares outstanding-diluted.                           

(4)      Days receivable outstanding remained within Guidant's historical range.
    Increase in 2003 was due to the increased mix of international and
    cardiac rhythm management product sales that historically have had
longer payment practices.                                     

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SUMMARY OF CASH FLOWS                                                           

                                                                [Download Table]

                                             2003       2002       2001   
                                           --------   --------   -------- 
                                                                          
(In millions)                                                             
Net cash provided by (used in):                                           
  Operating activities                     $  406.8   $1,044.2   $  682.5 
  Investing activities                       (392.5)    (219.6)    (181.7)
  Financing activities                        380.6     (353.2)    (217.5)
  Effect of exchange rate changes on cash      58.5      105.6       (8.5)
                                           --------   --------   -------- 
Net increase in cash and cash equivalents  $  453.4   $  577.0   $  274.8 
                                           ========   ========   ======== 

2003/2002                                                                       

Net cash provided by operating activities decreased by $637.4 million in 2003   
primarily due to:                                                               

    o        $154.0 million decrease in net income in 2003 compared to
2002, adjusted for non-cash items           

         o        $110.3 million decrease in income taxes payable in 2003 due to
               lower net income and a $30.0 million adjustment made in the
fourth quarter of 2003                      

        o        Decrease in other liabilities including 2003 payments of 2002
                 accruals for a $50.0 million termination fee to Cook, a $30.0
                  million ANCURE litigation accrual (remaining ANCURE litigation
           of $62.4 million accrued and paid in 2003), and a $14.0
                million payment to Guidant Foundation ($40.0 million accrued
in 2003).                                   

Net cash used in investing activities increased by $172.9 million in 2003       
primarily due to:                                                               

    o        $63.6 million for the acquisition of X Technologies, Inc.

   o        $108.2 million increase in net additions of property and
              equipment and other assets, including the termination of a
        lease and purchase of the related land and buildings

 o        $35.2 million for the purchase of a MediVas subsidiary

     o        $27.6 million for the asset purchase and related milestone
payment to Biosensors                       

   o        $10.0 million for the purchase of Bioabsorbable Vascular
Solutions                                   

Net cash provided by financing activities was $380.6 million in 2003, compared  
to net cash used of $353.2 million in 2002, a change of $733.8 million due to:  

        o        $579.1 million increase in borrowings in 2003 compared to net
payments of $393.1 million in 2002          

         o        $106.7 million increase in issuances of common stock for stock
option exercises                            

partially offset by:                        

o        $73.7 million in dividend payments in 2003           

o        $271.4 million increase in repurchase of common stock
                including $250.0 million related to the previously announced
                  stock buy-back program of 4.7 million shares and $21.4 million
               related to shares withheld from restricted stock recipients
   upon vesting to satisfy related tax obligations

The effect of exchange rate changes on cash decreased $47.1 million in 2003     
compared to 2002, primarily due to decreasing Euro cash holdings in 2003        
compared to 2002.                                                               

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2002/2001                                                                       

Net cash provided by operating activities increased $361.7 million in 2002      
primarily due to:                                                               

         o        $86.1 million increase in net income in 2002 compared to 2001,
adjusted for non-cash items                 

  o        Increase in other liabilities including a $50.0 million
             termination fee to Cook incurred in 2002, paid in 2003; a
        $40.0 million increase in the payable to the Guidant
                Foundation; a $30.0 million ANCURE litigation accrual; and a
$28.5 million increase in accrued royalties 

       o        Increase in accounts payable and accruals primarily due to a
higher bonus accrual for fiscal year 2002   

Net cash used in investing activities increased $37.9 million in 2002 primarily 
due to:                                                                         

      o        $43.2 million increase related to payments made to Novartis
and Cardiac Intelligence Corporation        

partially offset by:                        

  o        $15.7 million decrease in net additions of property and
       equipment and other assets in 2002 compared to 2001

Net cash used in financing activities increased $135.7 million in 2002 primarily
due to:                                                                         

o        $348.0 million increase in debt payments             

partially offset by:                        

    o        $199.6 million decrease in the repurchase of common stock

The effect of exchange rate changes on cash increased $114.1 million in 2002    
compared to 2001 primarily due to the strengthening of the Euro and Guidant's   
increasing asset base offshore.                                                 

COMMITMENTS                                                                     

Scheduled payments at December 31, 2003, for long-term debt, other noncurrent   
liabilities and operating leases include the following:                         

                                                                [Download Table]

                              LESS THAN                                             
SCHEDULED PAYMENTS:             1 YEAR   1-3 YEARS  4-5 YEARS  THEREAFTER    TOTAL  
                              ---------  ---------  ---------  ----------   --------
                                                                                    
(In millions)                                                                       

Long-term debt                 $  250.0  $  698.3         --         --    $  948.3 
Other noncurrent liabilities         --     101.8   $    2.6   $   61.7       166.1 
Operating leases                   33.0      52.6       24.0        3.4       113.0 
                               --------  --------   --------   --------    -------- 
                               $  283.0  $  852.7   $   26.6   $   65.1    $1,227.4 
                               ========  ========   ========   ========    ======== 

At December 31, 2003, the Company had outstanding borrowings of $948.3 million  
at a weighted average interest rate of 1.89%, including bank borrowings,        
commercial paper, $350.0 million principal balance in long-term notes due in    
2006 and interest rate swap agreements valued at $6.9 million. Bank borrowings  
represent short-term uncommitted credit facilities with commercial banks. The   
commercial paper borrowings are supported by two credit facilities aggregating  
$800.0 million. There are currently no outstanding borrowings under these       
facilities. The Company classified $250.0 million as short-term debt at December
31, 2003. The Company believes that cash and cash equivalent balances will be   
adequate to fund maturities of short-term borrowings, obligations to make       
interest payments on its debt and other anticipated operating cash needs for    
2004, including planned capital expenditures of approximately $180.0 million in 
2004.                                                                           

                                                                              17

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Certain of Guidant's acquisitions involve contingent consideration. Payment of  
the additional consideration is generally contingent upon reaching              
performance-related milestones, including specified revenue levels, product     
development targets or regulatory approvals or filings. At December 31, 2003,   
Guidant's accrual for milestone obligations totaled $10.8 million and will be   
paid during the next three years. In addition, future undiscounted contingent   
consideration for performance-related milestones on acquisitions of up to $498.2
million could be paid through 2010, depending on when and if milestones are     
attained. Potential milestone payments under existing agreements during the next
12 months range from $2.5 million to $202.8 million. The Company continues to   
evaluate business development opportunities, which may generate additional      
payments.                                                                       

MARKET RISK DISCLOSURES                                                         

The overall objective of Guidant's financial risk management policy is to reduce
the potential negative earnings effect from the impact of fluctuating foreign   
currencies and interest rates. The primary feature of Guidant's risk management 
philosophy is that all hedging activity must be designed to reduce financial    
risks associated with commercial and financial transactions that arise in the   
ordinary course of business. Guidant utilizes foreign exchange forward contracts
and interest rate swap agreements to minimize the impact of fluctuating foreign 
currencies and interest rates. The contracts are initiated within the guidelines
of documented corporate risk management policies. Guidant does not use financial
instruments for speculative or trading activities.                              

FOREIGN EXCHANGE RISK                                                           

Due to Guidant's commitment to a global presence and customer support, the      
Company conducts a portion of its business in various foreign currencies        
(primarily the currencies of Europe and Asia) and, as a result, a portion of    
revenues and earnings are exposed to changes in foreign exchange rates. Such    
exposures arise from transactions denominated in foreign currencies, primarily  
intercompany loans and cross-border intercompany purchases of inventory, as well
as from the translation of results of operations from outside the US. The       
Company seeks to manage its foreign exchange risk in part through operational   
means, including managing local currency assets in relation to local currency   
liabilities.                                                                    

Foreign exchange risk is also managed through the use of foreign exchange       
contracts. The fair value of all foreign exchange contracts outstanding was     
($46.8) million and ($31.3) million at December 31, 2003 and 2002. An analysis  
was prepared to estimate the sensitivity of the fair value of all foreign       
exchange contracts to hypothetical 10% favorable and unfavorable changes in     
exchange rates at December 31, 2003 and 2002. The results of the estimation,    
which may vary from actual results, are as follows:                             

                                                                [Download Table]

                                           FAIR VALUE OF      
                                    FOREIGN EXCHANGE CONTRACTS
                                    --------------------------
                                       2003            2002   
                                    ---------       ----------
                                                              
(In millions)                                                 
 10% adverse rate movement            ($ 97.4)      ($106.0)  
 At year-end rates                    ($ 46.8)      ($ 31.3)  
 10% favorable rate movement          $   3.8       $  43.5   

Any gains and losses in fair value of foreign exchange contracts would be       
largely offset by losses and gains on underlying transactions or anticipated    
transactions. These offsetting gains and losses are not reflected in the above  
table.                                                                          

                                                                              18

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INTEREST RATE RISK                                                              

The Company's financial instruments are exposed to interest rate risk. During   
2003, Guidant had two interest rate swap agreements to modify the interest      
characteristic of the principal amount of its long-term notes so that the       
interest payable on long-term notes effectively becomes variable and thus       
matches the variable interest rate received from its cash. Accordingly, interest
rate fluctuations impact the fair value of the Company's long-term notes        
outstanding, which are offset by corresponding changes in the fair value of the 
interest rate swap agreements. Since the Company is in a net cash position, the 
interest rate swap agreements reduce exposure to floating rate risk. An analysis
of the impact on the Company's interest rate sensitive financial instruments to 
a hypothetical 10% change in short-term interest rates compared to interest     
rates at year end showed no significant impact on earnings or cash. The fair    
value of the interest rate swap agreements was $6.9 million at December 31,     
2003.                                                                           

SIGNIFICANT ACCOUNTING POLICIES                                                 

It is important to understand Guidant's accounting policies in order to         
understand its financial statements. In preparing the financial statements in   
accordance with generally accepted accounting principles, management must often 
make estimates and assumptions that affect the reported amounts of assets,      
liabilities, revenues, expenses and related disclosures at the date of the      
financial statements and during the reporting period. Some of those judgments   
can be subjective and complex. Consequently, actual results could differ from   
those estimates. The accounting policies that are most subject to important     
estimates or assumptions include those described below. See Note 2 to the       
Consolidated Financial Statements for further description of these items.       

Guidant continually evaluates the accounting policies and estimates it uses to  
prepare the consolidated financial statements. In cases where management        
estimates are used, they are based on historical experience, information from   
third-party professionals and various other assumptions believed to be          
reasonable.                                                                     

Inventory Reserves - The Company values its inventory at the lower of cost      
(first-in, first-out method) or market. Reserves are estimated for excess, slow 
moving and obsolete inventory as well as inventory with a carrying value in     
excess of its net realizable value. Write-offs are recorded when product is     
destroyed. The Company reviews inventory on hand at least quarterly and records 
provisions for excess and obsolete inventory based on several factors, including
current assessment of future product demand, anticipated release of new products
into the market, historical experience and product expiration. The Company's    
industry is characterized by rapid product development and frequent new product 
introductions. Uncertain timing of product approvals, variability in product    
launch strategies, product recalls and variation in product utilization all     
impact the estimates related to excess and obsolete inventory.                  

Product Warranties - Provisions for estimated expenses related to product       
warranties are recorded at the time the products are sold. Estimates for        
warranty costs are calculated based primarily upon historical warranty          
experience, but may include assumptions related to anticipated changes in       
warranty costs and failure rates. Assumptions and historical warranty experience
are evaluated on at least a quarterly basis to determine the continued          
appropriateness of such assumptions. Warranty cost accruals are adjusted from   
time to time when warranty claim experience differs from estimates.             

Valuation of Purchased In-Process Research and Development (IPRD), Goodwill and 
Other Intangible Assets - When a business combination occurs, the purchase price
is allocated based upon the fair value of tangible assets, intangible assets,   
IPRD and goodwill. The Company recognizes IPRD in business combinations for the 
portion of the purchase price allocated to the appraised value of in-process    
technologies, defined as those technologies relating to products that have not  
received FDA                                                                    

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approval and have no alternative future use. The portion assigned to in-process 
technologies excludes the value of core and developed technologies, which are   
recognized as intangible assets when purchased. Valuations require the use of   
significant estimates. The amount of the purchase price allocated to IPRD is    
determined by estimating future cash flows of the technology and discounting net
cash flows back to present values. The Company considers, among other things,   
the projects' stage of completion, complexity of the work completed as of the   
acquisition date, costs already incurred, projected costs to complete,          
contribution of core technologies and other acquired assets, 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 is based on
the time value of money and medical technology investment risk. Goodwill        
represents the excess of cost over fair value of identifiable net assets of the 
business acquired and the amount allocated to IPRD. The methodologies used in   
arriving at these estimates are in accordance with accepted valuation methods.  

Income Taxes - All income tax amounts reflect the use of the liability method.  
Under this method, deferred tax assets and liabilities are determined based on  
the expected future tax consequences of temporary differences between the       
carrying amounts of assets and liabilities for financial and income tax         
reporting purposes.                                                             

Guidant operates in multiple tax jurisdictions with different tax rates and must
determine the allocation of income to each of these jurisdictions based on      
estimates and assumptions. In the normal course of business, the Company will   
undergo scheduled reviews by taxing authorities regarding the amount of taxes   
due. These reviews include questions regarding the timing and amount of         
deductions and the allocation of income among various tax jurisdictions. Tax    
reviews often require an extended period of time to resolve and may result in   
income tax adjustments if changes to the allocation are required between        
jurisdictions with different tax rates.                                         

Legal Proceedings and Other Loss Contingencies - The Company is subject to      
various legal proceedings, many involving routine litigation incidental to the  
business. Other matters contain allegations that are not routine and involve    
compensatory, punitive or treble damage claims, or claims for injunctive relief 
related to alleged infringement of a third party's patents, or seek declarations
affecting the validity of the Company's patents. Litigation outcomes are not    
within the Company's complete control, are often very difficult to predict and  
often are resolved over long periods of time. Estimating probable losses        
requires the analysis of multiple possible outcomes that often depend on        
judgments about potential actions by third parties. Contingencies are recorded  
in the consolidated financial statements, or otherwise disclosed, in accordance 
with SFAS 5, Accounting for Contingencies.                                      

REGULATORY AND OTHER MATTERS                                                    

Government and private sector programs designed to reduce healthcare costs,     
including coverage and payment policies, pricing regulations, competitive       
pricing and various types of managed-care arrangements, exist in the US and in  
many other countries where the Company does business. Government and private    
policies and programs require healthcare providers to put significant emphasis  
on the delivery of more cost-effective medical therapies. After the Company     
develops a promising new product and receives regulatory approval to sell it,   
the Company may find limited demand for it until the Company obtains            
reimbursement approval from private and governmental third party payors. While  
the Company is actively involved in the policy dialogue concerning cost         
containment, uncertainty as to the outcome of current and prospective           
legislative and regulatory initiatives and further changes in the marketplace   
preclude the Company from predicting the impact on future operating results.    

                                                                              20

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Further, many hospitals and other customers of medical device manufacturers have
formed large purchasing groups to enhance purchasing power and become more      
cost-effective in the delivery of healthcare. The medical device industry has   
also consolidated rapidly to offer a broader range of products to these         
purchasers. Transactions with these purchasing groups are often more            
significant, more complex, and involve more long-term contracts than in the     
past. Purchasing groups' enhanced purchasing power may further increase the     
pressure on product pricing.                                                    

In addition to payor cost pressure, the Company also faces intense competition  
in its highly dynamic markets. A substantial portion of the Company's revenues  
is derived from products less than a year old. Continued success requires       
sustained excellence in product development, approval, production and marketing,
particularly in rapidly developing fields like drug eluting stents and          
treatments for heart failure. An interruption at any step in the process can    
significantly affect operating results.                                         

The Company's products are subject to extensive regulation in the US by the FDA,
by certain state authorities and internationally by foreign governmental        
authorities. The Company must obtain specific approval or clearance from the FDA
before it can market products in the US. Similar requirements also exist in     
certain foreign jurisdictions. The process of obtaining such approvals or       
clearances can be onerous and costly and typically requires the Company to      
demonstrate new product safety and efficacy. There is no assurance that all     
approvals and clearances sought by the Company will be granted on a timely      
basis, if at all.                                                               

Further, regulatory oversight includes stringent ongoing requirements, including
restrictions relating to products in the market, quality system regulations and 
delivery of Company products, particularly when government-funded reimbursement 
is sought. If the FDA, the US Department of Health and Human Services (HHS) or  
other regulators believe that a company is not in compliance with applicable    
regulations, substantial sanctions can be imposed. The various US and           
international regulators can, among other things, issue warning letters, issue  
recall orders, institute proceedings to detain or seize products, impose        
operating restrictions, enjoin future violations, assess civil penalties,       
recommend criminal prosecution or seek exclusion from participation as a        
supplier of products to beneficiaries covered by government reimbursement.      

The regulatory environment is subject to rapid developments. For example, HHS   
regulations that affect the way the Company's products are sold are evolving    
quickly. Similarly, the Japanese Ministry of Health, Labor and Welfare (MHLW)   
will begin to transition some of its approval oversight responsibilities to a   
new agency during the first quarter of 2004, which introduces uncertainty       
concerning product approvals and interactions concerning products on the market.
Changes in domestic and foreign regulations, regulatory oversight and           
enforcement policies can substantially impact the Company's operations.         

The operations of the Company, like those of other medical device companies,    
involve the use of substances regulated under environmental laws, primarily in  
manufacturing and sterilization processes. While it is difficult to quantify,   
the Company believes that the ongoing impact of compliance with environmental   
protection laws and regulations will not have a material impact on the Company's
financial position or results of operations.                                    

The Company operates in an industry susceptible to significant legal claims. At 
any given time, the Company generally is involved as both a plaintiff and       
defendant in a number of patent infringement actions. Patent litigation can     
result in significant royalty or other payments or result in injunctions that   
can prevent the sale of products. The Company also is subject to product        
liability claims, including class actions from time to time. See Note 16 to the 
Consolidated Financial Statements for additional information.                   

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FIELD ACTIONS                                                                   

From time to time, the Company initiates field actions with respect to          
market-released products. These actions may include product recalls or          
communications with a significant number of physicians about a product or       
labeling issue. The scope of such actions can range from very minor issues      
affecting a small number of units to more significant actions. The Company      
conducted the following field actions since the Company's last filing on Form   
10-Q.                                                                           

In November 2003, certain manufacturing lots of the VASOVIEW 5 Endoscopic Vessel
Harvesting System were recalled due to an occasional malfunction of the toggle  
on the electrocautery scissors component of the system. The Company notified    
the FDA and took appropriate corrective action to address the issue and resumed 
shipment of the VASOVIEW 5 System in November.                                  

In January and February 2004, the Company communicated to field personnel and   
physicians that it had filed and received FDA approval for labeling changes     
including downward revisions of longevity estimates from approximately 10% to   
25% for certain implantable defibrillator products. The revised longevity       
estimates remain competitive within the industry. The communication also noted  
that the improved battery life test modeling that developed these revised       
estimates indicated that newer generation implantable defibrillators are        
expected to meet their predicted longevities. Existing warranty accruals are    
appropriate.                                                                    

CAUTIONARY FACTORS                                                              

Certain statements made in this Annual Report (including the President's letter)
are forward-looking, including accounting estimates, expectations with respect  
to announced transactions, statements concerning pricing and sales trends, drug 
eluting stent development, recovery of tax assets and the outcome of other tax  
matters, capital expenditures, cash flows, costs of research programs, the      
timing of discontinued operations and the timing of product developments. The   
statements are based on assumptions about many important factors, including     
assumptions concerning:                                                         

     o        The development of the coronary stent market: Drug eluting
                 stents present a significant growth opportunity; however, the
                earlier introduction of drug eluting stents by the Company's
                  competitors has substantially affected the market for metallic
             coronary stents and will continue to impact the Company's
financial results.                          

       o        The effects of operating in a highly regulated industry, the
                necessity for appropriate reimbursement of therapies and the
              significance of legal claims in Guidant's industry, all as
              further described above in "Regulatory and Other Matters."

    o        Product development and production factors (including the
               uncertainties associated with clinical trials), competitive
           factors (including the introduction of new products and
                  alternative therapies), business development factors, internal
                 factors (including the retention of key employees and changes
                in business strategies) and others, all as further described
                in Exhibit 99 to the Company's filing on Form 10-K, which is
incorporated herein by reference.           

Actual results may differ materially. The Company does not undertake to update  
its forward-looking statements.                                                 

                                                                              22

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 GUIDANT CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME
In millions, except per share data

                                                        [Enlarge/Download Table]

                                                                            YEAR ENDED DECEMBER 31          
                                                                  ----------------------------------------- 
                                                                     2003            2002            2001   
                                                                  ---------       ---------       --------- 
                                                                                                            
Net sales ....................................................... $ 3,698.8       $ 3,160.6       $ 2,641.6 
Cost of products sold ...........................................     903.8           762.8           623.3 
                                                                  ---------       ---------       --------- 
      Gross profit ..............................................   2,795.0         2,397.8         2,018.3 
Research and development ........................................     518.4           415.5           362.3 
Purchased in-process research and development ...................      83.7            54.9            15.0 
Sales, marketing and administrative .............................   1,198.9           950.7           788.6 
Interest, net ...................................................      (6.3)            1.3            29.2 
Royalties, net ..................................................      63.9            54.0            41.6 
Amortization ....................................................      20.9            12.6            42.4 
Other, net ......................................................       7.7            12.6             4.0 
Litigation, net .................................................     422.8          (137.1)          (10.0)
Foundation contribution .........................................        --            40.0            10.0 
Cook charge .....................................................        --            60.6              -- 
Restructuring charge ............................................        --            14.0              -- 
Special product charge ..........................................        --              --             7.5 
                                                                  ---------       ---------       --------- 
Income from continuing operations before income taxes ...........     485.0           918.7           727.7 
Income taxes ....................................................      59.5           250.6           204.3 
                                                                  ---------       ---------       --------- 
Income from continuing operations ...............................     425.5           668.1           523.4 
Loss from discontinued operations, net of income taxes ..........     (95.2)          (56.3)          (39.4)
                                                                  ---------       ---------       --------- 
Net income ...................................................... $   330.3       $   611.8       $   484.0 
                                                                  =========       =========       ========= 
Earnings per share--basic                                                                                   
      Income from continuing operations ......................... $    1.39       $    2.21       $    1.74 
      Loss from discontinued operations, net of income taxes ....     (0.31)          (0.18)          (0.13)
                                                                  ---------       ---------       --------- 
      Net income ................................................ $    1.08       $    2.03       $    1.61 
                                                                  =========       =========       ========= 
Earnings per share--diluted                                                                                 
      Income from continuing operations ......................... $    1.36       $    2.18       $    1.71 
      Loss from discontinued operations, net of income taxes ....     (0.30)          (0.18)          (0.13)
                                                                  ---------       ---------       --------- 
      Net income ................................................ $    1.06       $    2.00       $    1.58 
                                                                  =========       =========       ========= 
Dividends declared per common share ............................. $    0.24              --              -- 
                                                                  =========       =========       ========= 

See Notes to Consolidated Financial Statements.                                 

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 GUIDANT CORPORATION
 CONSOLIDATED BALANCE SHEETS
In millions, except share data

                                                                [Download Table]

                                                              DECEMBER 31     
                                                        ----------------------
                                                          2003          2002  
                                                        --------      --------
                                                                              
                       ASSETS                                                 
CURRENT ASSETS                                                                
Cash and cash equivalents ........................      $1,468.2      $1,014.8
Short-term investments ...........................            --          10.3
Accounts receivable, net of allowances                                        
        of $24.0 (2003) and $29.5 (2002) .........         832.3         689.1
Inventories ......................................         402.9         295.7
Deferred income taxes ............................         313.2         210.0
Prepaid expenses and other current assets ........          57.7          63.1
Current assets of discontinued operations ........           5.6          20.2
                                                        --------      --------
        Total Current Assets .....................       3,079.9       2,303.2
OTHER ASSETS                                                                  
Goodwill, net of allowances                                                   
      of $157.9 (2003) and $157.7 (2002) .........         512.9         514.0
Other intangible assets, net of allowances                                    
      of $82.3 (2003) and $60.3 (2002) ...........         162.2          93.2
Deferred income taxes ............................           0.9          53.9
Investments ......................................          55.1          46.8
Sundry ...........................................          60.9          50.4
Other assets of discontinued operations ..........           0.2          11.5
                                                        --------      --------
        Total Other Assets .......................         792.2         769.8
Property and equipment, net ......................         768.0         643.1
                                                        --------      --------
        Total Assets .............................      $4,640.1      $3,716.1
                                                        ========      ========

                                                                              24

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 GUIDANT CORPORATION
 CONSOLIDATED BALANCE SHEETS
In millions, except share data

                                                                [Download Table]

                                                               DECEMBER 31      
                                                        ----------------------- 
                                                          2003           2002   
                                                        --------       -------- 
                                                                                

           LIABILITIES AND SHAREHOLDERS' EQUITY                                 
CURRENT LIABILITIES                                                             

Accounts payable .................................      $   86.1       $   68.4 
Employee compensation ............................         199.4          188.9 
Other liabilities ................................         309.5          309.8 
Income taxes payable .............................         197.2          248.3 
Short-term debt ..................................         250.0            6.8 
Current liabilities of discontinued operations ...          20.2           43.6 
                                                        --------       -------- 

        Total Current Liabilities ................       1,062.4          865.8 

NONCURRENT LIABILITIES                                                          

Long-term debt ...................................         698.3          361.7 
Other ............................................         166.1          166.8 
                                                        --------       -------- 
        Total Noncurrent Liabilities .............         864.4          528.5 

COMMITMENTS AND CONTINGENCIES ....................            --             -- 

SHAREHOLDERS' EQUITY                                                            
Preferred stock:                                                                
        Authorized shares: 50,000,000                                           
        Issued shares:  none .....................            --             -- 
Common stock, no par value:                                                     
        Authorized shares: 1,000,000,000                                        
        Issued shares: 312,129,000 (2003)                                       
                       308,992,000 (2002) ........         301.5          226.1 

Additional paid-in capital .......................         242.4          200.7 

Retained earnings ................................       2,258.9        2,002.3 

Deferred cost, ESOP ..............................         (17.1)         (24.2)

Unearned compensation ............................         (25.2)            -- 

Treasury stock, at cost:                                                        
        Shares: 3,158,000 (2003)                                                
                2,388,000 (2002) .................       (171. 2)         (92.0)
Accumulated other comprehensive income ...........         124.0            8.9 
                                                        --------       -------- 
        Total Shareholders' Equity ...............       2,713.3        2,321.8 
                                                        --------       -------- 
        Total Liabilities and Shareholders' Equity      $4,640.1       $3,716.1 
                                                        ========       ======== 

See Notes to Consolidated Financial Statements.                                 

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 GUIDANT CORPORATION
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
In millions, except share data

                                                        [Enlarge/Download Table]

                                                                                                                        DEFERRED   
                                                            COMMON STOCK               ADDITIONAL                      COST, ESOP  
                                                     -----------------------------       PAID-IN       RETAINED        ----------- 
                                                     ISSUED SHARES      AMOUNT           CAPITAL       EARNINGS         SHARES     
                                                     -------------   -------------   -------------   -------------     ----------- 
                                                                                                                                   
DECEMBER 31, 2000                                      308,476,000   $       214.9   $       167.8   $       906.5      (5,308,000)

Comprehensive income:                                                                                                              
  Net income                                                                                                 484.0                 
   Other comprehensive loss, net of tax:                                                                                           
      Currency translation adjustments                                                                                             
      Minimum pension liability                                                                                                    
      Unrealized gain on foreign exchange contracts                                                                                

   Other comprehensive loss                                                                                                        

Comprehensive income                                                                                                               

Issuance of common stock under stock plans                 543,000            11.2           (30.4)                                
Repurchase of common stock                                                                                                         
ESOP transactions                                                                             25.2                         730,000 
Tax benefits from employee stock options                                                      19.9                                 
                                                     -------------   -------------   -------------   -------------   ------------- 
DECEMBER 31, 2001                                      309,019,000           226.1           182.5         1,390.5      (4,578,000)

Comprehensive income:                                                                                                              
  Net income                                                                                                 611.8                 
   Other comprehensive gain, net of tax:                                                                                           
      Currency translation adjustments                                                                                             
      Minimum pension liability                                                                                                    
      Unrealized loss on foreign exchange contracts                                                                                

   Other comprehensive gain                                                                                                        

Comprehensive income                                                                                                               

Issuance/cancellation of common stock                                                                                              
  under stock plans                                        (27,000)                         (10.2)                                 
Stock issued through Employee Stock Purchase Plan                                            (3.9)                                 
Repurchase of common stock                                                                                                         
ESOP transactions                                                                            27.3                          951,000 
Tax benefits from employee stock options                                                      5.0                                  
                                                     -------------   -------------   -------------   -------------   ------------- 
DECEMBER 31, 2002                                      308,992,000           226.1          200.7           2002.3      (3,627,000)

Comprehensive income:                                                                                                              
  Net income                                                                                                 330.3                 
   Other comprehensive gain, net of tax:                                                                                           
      Currency translation adjustments                                                                                             
      Minimum pension liability                                                                                                    
      Unrealized loss on foreign exchange contracts                                                                                

   Other comprehensive gain                                                                                                        

Comprehensive income                                                                                                               

Issuance of common stock under stock plans               2,637,000            60.9          (36.6)                                 
Stock issued through Employee Stock Purchase Plan          500,000            14.5           (2.4)                                 
Repurchase of common stock                                                                                                         
Cash dividends                                                                                               (73.7)                
Unearned compensation                                                                                                              
ESOP transactions                                                                            37.9                        1,059,000 
Tax benefits from employee stock plans                                                       42.8                                  
                                                     -------------   -------------   -------------   -------------   ------------- 
DECEMBER 31, 2003                                      312,129,000   $       301.5   $       242.4   $     2,258.9      (2,568,000)
                                                     =============   =============   =============   =============   ============= 



                                                      DEFERRED                                        ACCUMULATED                  
                                                     COST, ESOP                                         OTHER                      
                                                     ------------      TREASURY         UNEARNED     COMPREHENSIVE                 
                                                       AMOUNT           STOCK         COMPENSATION   INCOME/(LOSS)     TOTAL       
                                                     --------------  -------------    ------------   -------------   ----------    
                                                                                                                                   
DECEMBER 31, 2000                                    ($       35.4)             --              --   ($       70.3)    $  1,183.5  

Comprehensive income:                                                                                                              
  Net income                                                                                                               484.0   
   Other comprehensive loss, net of tax:                                                                                           
      Currency translation adjustments                                                                       (15.9)                
      Minimum pension liability                                                                               (2.6)                
      Unrealized gain on foreign exchange contracts                                                           15.0                 
                                                                                                          --------                 
   Other comprehensive loss                                                                                                 (3.5)  
                                                                                                                        --------   
Comprehensive income                                                                                                       480.5   
                                                                                                                        --------   
Issuance of common stock under stock plans                            $        51.0                                         31.8   
Repurchase of common stock                                                   (200.0)                                      (200.0)  
ESOP transactions                                               4.9                                                         30.1   
Tax benefits from employee stock options                                                                                    19.9   
                                                      -------------   -------------    ------------  -------------    ----------   
DECEMBER 31, 2001                                             (30.5)         (149.0)             --          (73.8)      1,545.8   

Comprehensive income:                                                                                                              
  Net income                                                                                                               611.8   
   Other comprehensive gain, net of tax:                                                                                           
      Currency translation adjustments                                                                       118.1                 
      Minimum pension liability                                                                              (15.8)                
      Unrealized loss on foreign exchange contracts                                                          (19.6)                
                                                                                                          --------                 
   Other comprehensive gain                                                                                                 82.7   
                                                                                                                        --------   
Comprehensive income                                                                                                       694.5   
                                                                                                                        --------   
Issuance/cancellation of common stock                                                                                              
  under stock plans                                                            37.6                                         27.4   
Stock issued through Employee Stock Purchase Plan                              19.8                                         15.9   
Repurchase of common stock                                                     (0.4)                                       (0.4)   
ESOP transactions                                               6.3                                                        33.6    
Tax benefits from employee stock options                                                                                    5.0    
                                                      -------------   -------------    ------------    -----------     ----------  
DECEMBER 31, 2002                                             (24.2)          (92.0)             --            8.9        2,321.8  

Comprehensive income:                                                                                                              
  Net income                                                                                                               330.3   
   Other comprehensive gain, net of tax:                                                                                           
      Currency translation adjustments                                                                       132.6                 
      Minimum pension liability                                                                               (4.9)                
      Unrealized loss on foreign exchange contracts                                                          (12.6)                
                                                                                                            ------                 
   Other comprehensive gain                                                                                                115.1   
                                                                                                                        --------   
Comprehensive income                                                                                                       445.4   
                                                                                                                        --------   
Issuance of common stock under stock plans                                    185.4                                        209.7   
Stock issued through Employee Stock Purchase Plan                               7.2                                         19.3   
Repurchase of common stock                                                   (271.8)                                      (271.8)  
Cash dividends                                                                                                             (73.7)  
Unearned compensation                                                                 ($       25.2)                       (25.2)  
ESOP transactions                                               7.1                                                         45.0   
Tax benefits from employee stock plans                                                                                      42.8   
                                                      -------------   -------------    ------------    -----------     ----------  
DECEMBER 31, 2003                                     ($       17.1)  ($      171.2)  ($       25.2)   $     124.0     $  2,713.3  
                                                      =============   =============   =============    ===========     ==========  

See Notes to Consolidated Financial Statements.                                 

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 GUIDANT CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 In millions

                                                        [Enlarge/Download Table]

                                                                          YEAR ENDED DECEMBER 31        
                                                                     ---------------------------------- 
                                                                       2003         2002         2001   
                                                                     --------     --------     -------- 
                                                                                                        
OPERATING ACTIVITIES                                                                                    
    Net income ..................................................... $  330.3     $  611.8     $  484.0 
        ADJUSTMENTS TO RECONCILE NET INCOME TO CASH                                                     
           PROVIDED BY OPERATING ACTIVITIES:                                                            
        Depreciation ...............................................    129.8        114.4         97.1 
        Amortization of goodwill and other intangible assets .......     20.9         13.2         43.9 
        Provision for inventory and accounts receivable losses .....     59.3         72.7         72.4 
        Purchased in-process research and development ..............     83.7         55.2         15.0 
        Deferred income taxes ......................................    (63.0)       (45.0)       (14.9)
        Compensation earned under restricted stock and ESOP ........    101.8         36.7         34.3 
        Other noncash, net .........................................     19.9        (22.3)        18.8 
                                                                     --------     --------     -------- 
                                                                        682.7        836.7        750.6 
        CHANGES IN OPERATING ASSETS AND LIABILITIES:                                                    
        Receivables ................................................    (76.6)       (63.1)       (72.9)
        Inventories ................................................   (123.2)       (80.1)      (106.2)
        Prepaid expenses and other current assets ..................    (13.5)       (22.5)        (8.2)
        Accounts payable and accrued liabilities ...................     25.2         89.3         (7.3)
        Income taxes payable .......................................    (11.5)        98.8         84.7 
        Other liabilities ..........................................    (76.3)       185.1         41.8 
                                                                     --------     --------     -------- 

NET CASH PROVIDED BY OPERATING ACTIVITIES ..........................    406.8      1,044.2        682.5 

INVESTING ACTIVITIES                                                                                    

        Investment purchases .......................................    (15.8)       (22.8)       (10.3)
        Sale/maturity of investments ...............................     13.2          8.9          6.8 
        Additions of property and equipment, net ...................   (249.3)      (141.1)      (149.1)
        Additions of other assets, net .............................     (2.2)       (10.4)       (18.1)
        Purchase of in-process research and development ............    (74.8)       (54.2)       (11.0)
        Acquisition of business, net of cash acquired ..............    (63.6)          --           -- 
                                                                     --------     --------     -------- 

NET CASH USED FOR INVESTING ACTIVITIES .............................   (392.5)      (219.6)      (181.7)

FINANCING ACTIVITIES                                                                                    

        Increase (decrease) in borrowings, net .....................    579.1       (393.1)       (45.1)
        Issuance of common stock under stock plans and other                                            
          capital transactions .....................................    147.0         40.3         27.6 
        Dividends paid .............................................    (73.7)          --           -- 
        Repurchase of common stock .................................   (271.8)        (0.4)      (200.0)
                                                                     --------     --------     -------- 

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES ...............    380.6       (353.2)      (217.5)

Effect of Exchange Rate Changes on Cash ............................     58.5        105.6         (8.5)
                                                                     --------     --------     -------- 

NET INCREASE IN CASH AND CASH EQUIVALENTS ..........................    453.4        577.0        274.8 

Cash and Cash Equivalents at Beginning of Year .....................  1,014.8        437.8        163.0 
                                                                     --------     --------     -------- 

CASH AND CASH EQUIVALENTS AT END OF YEAR ........................... $1,468.2     $1,014.8     $  437.8 
                                                                     ========     ========     ======== 

See Notes to Consolidated Financial Statements.                                 

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 GUIDANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In millions, except per share data

NOTE 1 - BUSINESS AND NATURE OF OPERATIONS                                      

Guidant Corporation pioneers lifesaving technology for millions of cardiac and  
vascular patients worldwide. Guidant develops, manufactures and markets the     
following products and services that enable less-invasive care for some of      
life's most threatening medical conditions:                                     

     o        Implantable defibrillator systems used to detect and treat
          abnormally fast heart rhythms (tachycardia), including
               implantable cardiac resynchronization therapy defibrillator
(CRT-D) systems used to treat heart failure 

         o        Implantable pacemaker systems used to manage slow or irregular
              heart rhythms (bradycardia), including implantable cardiac
               resynchronization therapy pacemaker (CRT-P) systems used to
treat heart failure                         

      o        Coronary stent systems for the treatment of coronary artery
disease                                     

o        Angioplasty systems including dilatation catheters,  
                  intravascular radiotherapy systems and related accessories for
the treatment of coronary artery disease    

       o        Cardiac surgery systems for the treatment of coronary artery
               disease and biliary, peripheral and carotid systems used to
treat biliary and artery disease            

Guidant has principal operations in the US, Europe and Asia. The Company markets
its products in nearly 100 countries through a direct sales force in the US and 
a combination of direct sales representatives and independent distributors in   
international markets. As used herein, the terms "the Company" and "Guidant"    
mean Guidant Corporation and its consolidated subsidiaries.                     

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES                                        

PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the   
accounts of Guidant and all of its wholly owned subsidiaries. Significant       
intercompany transactions and balances have been eliminated.                    

REVENUE RECOGNITION Guidant sells products through a direct sales force in the  
US and a combination of direct sales representatives and independent            
distributors in international markets. A significant portion of revenue is      
generated from inventory carried by Guidant's sales representatives and         
consigned inventory held by customers, which is recognized as revenue upon      
notification of implant or product usage. All other revenue transactions are    
recorded upon transfer of title and risk of loss to customers. There are no     
remaining obligations that affect the customer's final acceptance of the sale   
upon transfer of title. Estimated sales returns, discounts and rebates are      
recorded as a reduction of sales when the related revenue is recognized. The    
Company provides credit to its customers in the normal course of business and   
maintains an allowance for doubtful customer accounts. Actual losses are charged
to this allowance when incurred.                                                

RESEARCH AND DEVELOPMENT Research and development costs are charged to expense  
as incurred. In-process research and development (IPRD) is recognized in        
business combinations for the portion of the purchase price allocated to the    
appraised value of in-process technologies, defined as those technologies       
relating to products that have not received FDA approval and have no alternative
future use, consistent with Statement of Financial Accounting Standards (SFAS)  
2, Accounting for Research and Development Costs, and Financial Accounting      
Standards Board Interpretation 4, Applicability of SFAS 2 to Business           
Combinations. The portion assigned to in-process technologies excludes the value
of core and developed technologies, which are recognized as intangible assets   
when purchased. Valuations require the use of significant estimates. The amount 
of the purchase price allocated to IPRD is determined by discounting the        
estimated amount of future net cash flows from the technology to its present    
value. The discount rate used is determined at the time of the acquisition and  
includes, among other things, consideration of the assessed risk of the project 
not being developed to a stage of commercial feasibility.                       

FOREIGN CURRENCY TRANSLATION Sales and expenses denominated in foreign          
currencies are translated at average exchange rates in effect during the year.  
Assets and liabilities of foreign operations are translated into US dollars     
using the exchange rates in effect at year end. Foreign currency transaction    
gains and losses are included in the consolidated statements of income as       
"other, net." Adjustments arising from the translation of net assets located    
outside the US (gains and losses) are shown as a component of accumulated other 
comprehensive income.                                                           

RISK MANAGEMENT CONTRACTS The Company recognizes all derivative financial       
instruments in the consolidated financial statements at fair value in accordance
with SFAS 133, Accounting for Derivative Instruments and Hedging Activities. The
Company employs foreign exchange forward contracts and interest rate swap       
agreements to manage its earnings exposure to fluctuations in foreign currency  
exchange rates and interest                                                     

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 GUIDANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                            

rates. Forward contracts hedging forecasted transactions are designated as cash 
flow hedges and recorded as assets or liabilities at fair value. Changes in the 
forward contracts' fair value are recognized in accumulated other comprehensive 
income until they are recognized in earnings at the time the forecasted         
transaction occurs. If the forecasted transaction does not occur, or it becomes 
probable that it will not occur, the gain or loss on the related hedge is       
recognized in earnings at that time. The ineffective portion of a contract's    
change in fair value is immediately recognized in earnings. These gains and     
losses are classified in the income statement consistent with the accounting    
treatment of the item being hedged. Forward contracts hedging specific foreign  
currency denominated assets or liabilities are recorded at their fair value with
the related gains and losses included in "other, net" on the income statement.  
Results of these forward contracts offset in full or in part the gains and      
losses from the mark to market of the underlying balance sheet exposure. Guidant
has interest rate swap agreements that are designated and qualify as fair value 
hedges and meet the short-cut method requirements of SFAS 133. As a result,     
changes in the fair value of the interest rate swap agreements are offset by    
changes in the fair value of the long-term notes. These changes are reported in 
interest expense; accordingly, no net gain or loss is recognized in earnings.   

CASH AND CASH EQUIVALENTS All highly liquid investments with original maturities
of three months or less are considered to be cash equivalents. These investments
are valued at cost, which approximates fair value.                              

INVESTMENTS Investments in debt and equity securities that have readily         
determinable fair values are classified and accounted for as available-for-sale 
or held-to-maturity. Held-to-maturity investments consist principally of        
government debt securities that management has the intent and ability to hold   
until maturity. These securities are carried at amortized cost.                 
Available-for-sale securities are carried at fair value with unrealized gains   
and losses recorded as a separate component of accumulated other comprehensive  
income. Realized gains are calculated based on the specific identification      
method and recorded in "other, net" on the income statement. All other          
investments are accounted for under the cost or equity method and are written   
off upon identification of declines in value that are other than temporary.     

INVENTORIES Inventories are stated at the lower of cost, (first-in, first-out   
method) or market. Reserves are estimated for excess, slow moving and obsolete  
inventory as well as inventory with a carrying value in excess of its net       
realizable value. Write-offs are recorded when product is destroyed. The Company
reviews inventory on hand at least quarterly and records provisions for excess  
and obsolete inventory based on several factors, including current assessment of
future product demand, anticipated release of new products into the market,     
historical experience and product expiration. There have been no significant    
sales of inventory for which a provision was previously established and         
provisions and write-offs have historically had a strong correlation.           
Inventories at December 31 consisted of the following:                          

                                                                [Download Table]

                                    2003       2002 
                                  -------    -------
                                                    
Finished products ............    $ 173.9    $ 133.6
Work in process ..............       81.5       58.0
Raw materials and supplies ...      147.5      104.1
                                  -------    -------

                                  $ 402.9    $ 295.7
                                  =======    =======

The increase in inventories was primarily due to cardiac rhythm management      
products driven by the market growth of implantable defibrillators, a management
decision to carry increased levels of certain key components and inventories    
associated with Guidant's growing US sales force.                               

GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill represents the excess of cost over
fair value of identifiable net assets of businesses acquired. Other intangible  
assets consist primarily of purchased technology and patents. Goodwill is tested
for impairment annually, or more frequently as impairment indicators arise. The 
test for impairment involves the use of estimates related to the fair values of 
Guidant's four reporting units based on projected undiscounted cash flows. If   
the fair value is calculated to be less than the carrying amount, an impairment 
charge is recorded in the period identified. Other intangible assets are        
amortized using the straight-line method over their estimated useful lives, of  
which periods of up to eight years remain.                                      

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 GUIDANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                            

PROPERTY AND EQUIPMENT Property and equipment are stated at historical cost.    
Additions and improvements are capitalized. Expenditures for maintenance and    
repairs are charged to expense as incurred. Depreciation is computed by the     
straight-line method at rates intended to depreciate the cost of assets over    
their estimated useful lives ranging from 3 to 40 years. Property and equipment 
at December 31 consisted of the following:                                      

                                                                [Download Table]

                                     2003        2002
                                 --------    --------
                                                     
Land ........................    $   44.6    $   33.0
Buildings ...................       397.1       340.2
Equipment ...................       874.0       749.6
Construction in progress ....       118.5        70.6
                                 --------    --------

                                  1,434.2     1,193.4
Less allowances for depreciation    666.2       550.3
                                 --------    --------
                                 $  768.0    $  643.1
                                 ========    ========

LONG-LIVED ASSETS Management periodically reviews the carrying amount of        
property and equipment and other intangible assets to assess potential          
impairment whenever events or changes in circumstances indicate that their      
carrying amount may not be recoverable. The determination includes evaluation of
factors such as current market value, future asset utilization, business        
climate, and future cash flows expected to result from the use of the related   
assets. The Company's policy is to use undiscounted cash flows in assessing     
potential impairment and to record an impairment loss in the period when it is  
determined that the carrying amount of the asset may not be recoverable.        

PRODUCT WARRANTIES Provisions for estimated expenses related to product         
warranties are recorded at the time the products are sold. Estimates for        
warranty costs are calculated based primarily upon historical warranty          
experience, but may include assumptions related to anticipated changes in       
warranty costs and failure rates. A summary of the changes in the product       
warranty activity is as follows:                                                

                                                                [Download Table]

                                           2003        2002 
                                        -------     ------- 
                                                            
January 1 ..........................    $  18.8     $  20.2 
Provisions for product warranties ..       12.3         5.0 
Settlements during the period ......       (8.8)       (6.4)
                                        -------     ------- 
December 31 ........................    $  22.3     $  18.8 
                                        =======     ======= 

INCOME TAXES All income tax amounts reflect the use of the liability method.    
Under this method, deferred tax assets and liabilities are determined based on  
the expected future tax consequences of temporary differences between the       
carrying amounts of assets and liabilities for financial and income tax         
reporting purposes.                                                             

EARNINGS PER SHARE Earnings per share-basic is computed by dividing net income  
by the weighted average common shares outstanding during the year. Earnings per 
share-diluted represents net income divided by the sum of the weighted average  
common shares outstanding plus potential dilutive instruments such as stock     
options and unvested restricted stock. The effect of stock options on earnings  
per share-diluted is determined through the application of the treasury stock   
method, whereby proceeds received by the Company based on assumed exercises are 
hypothetically used to repurchase the Company's common stock at the average     
market price during the period. Stock options that would have an anti-dilutive  
effect on earnings per share are excluded from the calculations.                

                                                                              30

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GUIDANT CORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                            

STOCK-BASED COMPENSATION The Company has adopted the disclosure-only provisions 
of SFAS 123, Accounting for Stock-Based Compensation, as amended by SFAS 148,   
Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, 
the Company accounts for stock-based compensation under Accounting Principles   
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related     
interpretations, using the intrinsic value method. The following table          
illustrates the effect on net income and earnings per share if the Company had  
applied the fair value recognition provisions of SFAS 123 to all stock-based    
employee compensation. The fair value was estimated as of the grant date using  
the Black-Scholes option-pricing model, the attribution method and the          
assumptions described in Note 5. The Black-Scholes option-pricing model does not
consider the non-traded nature of employee stock options, nor the restrictions  
on trading, the lack of transferability or a vesting period. If the model took  
these items into consideration, the resulting estimate for fair value of the    
stock option could be different. The pro forma impact on net income assumes a   
forfeiture rate of approximately 10%. These pro forma amounts may not be        
representative of the effects on reported net income for future years due to the
uncertainty of stock option grant volume and potential changes in assumptions   
driven by market factors.                                                       

                                                                [Download Table]

                                                         2003      2002      2001
                                                     --------  --------  --------
                                                                                 
Reported net income (1) ............................ $  330.3  $  611.8  $  484.0
Deduct: Total stock option employee compensation                                 
  expense, net of tax ..............................     64.3      94.8     119.0
                                                     --------  --------  --------
Pro forma net income ............................... $  266.0  $  517.0  $  365.0
                                                     ========  ========  ========
Earnings per share:                                                              
  Basic--as reported ............................... $   1.08  $   2.03  $   1.61
                                                     ========  ========  ========
  Basic--pro forma ................................. $   0.87  $   1.71  $   1.21
                                                     ========  ========  ========
  Diluted--as reported ............................. $   1.06  $   2.00  $   1.58
                                                     ========  ========  ========
  Diluted--pro forma ............................... $   0.85  $   1.69  $   1.19
                                                     ========  ========  ========

(1) Reported amounts include expense associated with the restricted stock       
awards. See Note 5 for additional information.                                  

USE OF ESTIMATES Preparation of the consolidated financial statements in        
conformity with generally accepted accounting principles in the US requires     
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements. Actual results could differ from these   
estimates.                                                                      

RECLASSIFICATIONS Certain prior year amounts in the consolidated financial      
statements have been reclassified to conform to the current year presentation.  
In June 2003, the Company announced that it would dispose of the ANCURE         
ENDOGRAFT System product line to treat abdominal aortic aneurysms (AAA). The    
Company also approved a plan to discontinue operations in Brazil in December    
2003. The AAA product line and Brazil operations are reflected as discontinued  
operations for all periods presented.                                           

NEW ACCOUNTING PRONOUNCEMENTS SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, was issued in April 2003 and amends and     
clarifies financial accounting and reporting for derivative instruments,        
including certain derivative instruments embedded in other contracts and for    
hedging activities under SFAS 133, Accounting for Derivative Instruments and    
Hedging Activities. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,    
2003. Upon adoption, SFAS 149 did not have a material impact on the Company's   
results of operations or financial condition.                                   

SFAS 150, Accounting for Certain Financial Instruments with Characteristics of  
both Liabilities and Equity, was issued in May 2003. SFAS 150 established       
standards for classification and measurement of certain financial instruments   
with characteristics of both liabilities and equity. SFAS 150 was effective for 
financial instruments entered into or modified after May 31, 2003, and          

                                                                              31

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 GUIDANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)                            

was otherwise effective October 1, 2003. Upon adoption, SFAS 150 did not have a 
material impact on the Company's results of operations or financial condition.  

In December 2003, the Financial Accounting Standards Board issued a revision to 
SFAS 132, Employers' Disclosures about Pensions and Other Postretirement        
Benefits. SFAS 132, as revised, requires additional and more frequent           
disclosures about the assets, obligations, cash flows and net periodic benefit  
costs of defined benefit pension plans and other postretirement benefit plans.  
Guidant adopted SFAS 132, as revised, in December 2003, resulting in additional 
disclosures in all periods presented in this report. The adoption of SFAS 132,  
as revised, did not have a material impact on the Company's results of          
operations or financial position.                                               

In December 2003, the Securities and Exchange Commission released Staff         
Accounting Bulletin (SAB) 104, Revenue Recognition. SAB 104 clarifies existing  
guidance regarding revenue recognition. The adoption of SAB 104 did not have a  
material impact on the Company's financial position or results of operations.   

NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS                                   

In accordance with the Company's adoption of SFAS 142, Goodwill and Other       
Intangible Assets, $105.0 million of other intangibles were reclassified to     
goodwill on January 1, 2002. The net book value of these assets on that date was
$89.1 million. The reclassification was primarily related to the assembled work 
force obtained in conjunction with the Intermedics acquisition in February 1999.
There were no material changes to goodwill as a result of acquisitions,         
dispositions or translation during 2003. If the non-amortization provisions of  
SFAS 142 had been adopted for all periods presented, reported net income in 2001
would have increased by $29.8 million and earnings per share would have         
increased by $0.10.                                                             

Goodwill at December 31 consisted of the following:                             

                                                                [Download Table]

                                                2003       2002
                                             -------    -------
                                                               
Intermedics, Inc. .......................    $ 342.9    $ 345.2
Advanced Cardiovascular Systems, Inc. ...      102.1      102.1
InControl, Inc. .........................       53.9       53.9
Other ...................................       14.0       12.8
                                             -------    -------
                                             $ 512.9    $ 514.0
                                             =======    =======

Other intangible assets at December 31 consisted of the following:              

                                                        [Enlarge/Download Table]

                                                                         ACCUMULATED  CARRYING
                                                         ORIGINAL COST  AMORTIZATION    VALUE 
                                                         -------------  ------------  --------
                                                                                              
2003                                                                                          
Intermedics, Inc. .....................................     $  28.0       $  13.8      $  14.2
X Technologies, Inc. ..................................        88.7           6.8         81.9
Other licensed technologies and distribution agreements       127.8          61.7         66.1
                                                            -------       -------      -------
                                                            $ 244.5       $  82.3      $ 162.2
                                                            =======       =======      =======
2002                                                                                          
Intermedics, Inc. .....................................     $  28.0       $  11.0      $  17.0
Other licensed technologies and distribution agreements       125.5          49.3         76.2
                                                            -------       -------      -------
                                                            $ 153.5       $  60.3      $  93.2
                                                            =======       =======      =======

Excluding goodwill and intangible assets reclassified to goodwill, amortization 
expense of intangible assets was $20.9 million, $12.6 million and $10.6 million 
for the years ended December 31, 2003, 2002 and 2001. The annual estimated      
amortization expense for intangible assets for the five-year period ending      
December 31, 2008, ranges from $25.0 million to $30.0 million.                  

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 GUIDANT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - BUSINESS COMBINATIONS AND OTHER PURCHASE TRANSACTIONS                  

MEDIVAS LLC In September 2003, Guidant acquired a subsidiary of MediVas LLC     
(MediVas), including rights to certain bioabsorbable polymer technologies. The  
agreement provided Guidant with an exclusive worldwide license to these         
bioabsorbable polymer products, related pre-clinical and clinical data, and     
intellectual property for use with drugs in the "rolimus" family, as well as a  
non-exclusive license for use with other drugs. Guidant recorded a $35.2 million
IPRD charge in connection with the purchase, since technological feasibility of 
the project had not been attained and the research had no alternative future    
uses. MediVas may receive additional milestone payments over the course of      
clinical development and receive royalties on future sales of licensed products 
utilizing MediVas' technology.                                                  

BIOSENSORS INTERNATIONAL In March 2003, the Company completed its acquisition of
certain assets of Biosensors International's (Biosensors) everolimus eluting    
stent program, including an exclusive worldwide license to Biosensors' polymer  
formulation technology in the field of everolimus eluting stents and a          
nonexclusive license to use this technology with other drugs in drug eluting    
stents. Additionally, Guidant acquired the option of manufacturing and          
commercializing the stent platform used in the FUTURE I and FUTURE II clinical  
trials. Guidant recorded a $20.5 million IPRD charge in connection with the     
purchase, since technological feasibility of the project had not been attained  
and the research had no alternative future uses. In June 2003, Guidant recorded 
a $10.1 million IPRD charge as a result of the achievement of a performance     
milestone related to positive six-month clinical data of the everolimus eluting 
stent trial, FUTURE I. Biosensors may receive additional milestone payments over
the course of clinical development and upon CE Mark approval and receive        
royalties on future sales of products utilizing Biosensors' technology.         

NOVARTIS PHARMA AG AND NOVARTIS AG In March 2002, Guidant entered into an       
agreement with Novartis Pharma AG and Novartis AG (Novartis) that provided      
Guidant a co-exclusive worldwide license to use everolimus in drug eluting      
stents. As a result, the Company recorded a charge of $6.5 million related to   
the value of the IPRD. In September 2002, the parties expanded the license to   
make Guidant's rights exclusive and to provide Guidant the right to sublicense. 
Under the agreement, Novartis will receive milestone payments and a royalty on  
sales of Guidant products utilizing the drug. A milestone payment of $29.1      
million was made in December 2002 and was recorded as IPRD.                     

The assets gained through the Novartis, MediVas and Biosensors acquisitions are 
key components of Guidant's drug eluting stent program. The Company expects to  
first enter the European market with a Guidant everolimus eluting stent in 2005 
and the US market in 2006.                                                      

BIOABSORBABLE VASCULAR SOLUTIONS In March 2003, Guidant acquired the majority   
interest in Bioabsorbable Vascular Solutions (BVS) for $10.0 million. BVS is    
developing vascular stent platforms designed to be absorbed by tissue following 
the restoration of blood flow in patients with coronary artery disease. Guidant 
has the option to purchase the remaining interest for $6.0 million beginning in 
January 2004 and is required to purchase it if certain conditions are met.      
Guidant recorded a $16.0 million IPRD charge in March 2003 in connection with   
the purchase of the majority interest and a related milestone payment, since    
technological feasibility of the project had not been attained and the research 
had no alternative future uses. The project is expected to be completed and the 
products to be commercially available on a worldwide basis in four to seven     
years. Guidant may make milestone payments over the course of clinical          
development.                                                                    

X TECHNOLOGIES, INC. In June 2003, Guidant acquired X Technologies, Inc., the   
manufacturer of the FDA-approved FX miniRAIL(TM) Dilatation Catheter, a device  
for the treatment of coronary artery disease. Guidant paid $60.0 million in cash
and forgave a $4.5 million extension of credit. The purchase price was allocated
to the acquired assets and liabilities based upon fair market values, including 
$88.7 million to intangible assets related to developed technology and the      
related deferred tax liability of $32.8 million. Guidant may make additional    
payments upon future satisfaction of sales performance criteria. These payments 
will be allocated to the fair value of the intangibles, with any amounts paid   
above fair value of identifiable intangibles recorded as goodwill, when the     
amount of the contingent payments is determinable.                              

CARDIAC INTELLIGENCE CORPORATION In December 2002, the Company completed its    
acquisition of Cardiac Intelligence Corporation (CIC) for $19.3 million. This   
acquisition will supplement Guidant's Advanced Patient Management applications, 
with a portfolio of intellectual property in the field of ambulatory, remote,   
wireless monitoring of the heart functions of patients, including those         
implanted with devices such as pacemakers, defibrillators and resynchronization 
devices. The Company anticipates commercial availability of this technology on a
worldwide basis within 2 to 3 years. The entire purchase price was recorded as  
IPRD.                                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4 - BUSINESS COMBINATIONS AND OTHER PURCHASE TRANSACTIONS (CONTINUED)      

METAMORPHIC SURGICAL DEVICES, LLC In October 2001, Guidant entered into an      
agreement with Metamorphic Surgical Devices, LLC to purchase technology         
pertaining to the development of embolic protection devices. As a result, the   
Company recorded a charge of $15.0 million related to the value of the IPRD.    

The income approach was used to establish the fair values of IPRD. This approach
establishes fair value by estimating the after-tax cash flows attributable to   
the in-process project over its useful life and discounting these after-tax cash
flows to 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. The Company considered, among other things, the   
projects' stage of completion, complexity of the work completed as of the       
acquisition date, costs already incurred, projected costs to complete,          
contribution of core technologies and other acquired assets, 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. For the IPRD 
recorded in 2003, risk-adjusted discount rates ranging from 13 percent to 25    
percent were utilized to discount the projected cash flows. The Company believes
that the estimated purchased research and development amounts recorded represent
fair value at the date of the acquisition. The Company continues to move forward
with the acquired research and development projects discussed above. There have 
been no significant changes from the estimates used in the original valuations. 

Certain of Guidant's acquisitions involve contingent consideration. Payment of  
the additional consideration is generally contingent upon reaching              
performance-related milestones, including specified revenue levels, product     
development targets or regulatory approvals or filings. At December 31, 2003,   
Guidant's accrual for milestone obligations totaled $10.8 million and will be   
paid during the next three years. In addition, future undiscounted contingent   
consideration for performance-related milestones on acquisitions of up to $498.2
million could be paid through 2010, depending on when and if milestones are     
attained. Potential milestone payments under existing agreements during the next
12 months range from $2.5 million to $202.8 million. The Company continues to   
evaluate business development opportunities, which may generate additional      
payments.                                                                       

The operating results of all acquisitions are included in the Company's         
consolidated financial statements from the date of each acquisition.            

NOTE 5 - STOCK PLANS                                                            

The Company may periodically grant nonqualified stock options and restricted    
stock grants to outside members of its Board of Directors and consultants and   
may grant incentive stock options, nonqualified stock options, performance      
shares and restricted stock grants to employees, including executive officers of
the Company. Grants to employees are consistent with Guidant's commitment to    
recognize and reward employees and enable them to participate as shareholders.  

There were no broad-based employee stock option grants in 2003 and 2002. The    
Company made a special grant of stock options on approximately 11.0 million     
shares in July 2001 covering all eligible Guidant employees in lieu of          
broad-based employee stock options grants in 2002. This grant was in addition to
the January 2001 grant of options to management employees on approximately 9.0  
million shares.                                                                 

Stock options are granted at 100% of the fair value of the underlying stock at  
the date of grant and have 10-year terms. The stock options granted to outside  
directors typically vest and become fully exercisable at the next annual        
meeting. The majority of other stock options granted by the Company vest and    
become fully exercisable three to five years from the date of grants or vest in 
increments over three to five years.                                            

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - STOCK PLANS (CONTINUED)                                                

Stock option activity is summarized below:                                      

                                                        [Enlarge/Download Table]

                                        2003                          2002                          2001              
                            ------------------------------ ---------------------------- ------------------------------
                                         WEIGHTED AVERAGE              WEIGHTED AVERAGE               WEIGHTED AVERAGE
                              OPTIONS     EXERCISE PRICE    OPTIONS     EXERCISE PRICE    OPTIONS      EXERCISE PRICE 
                            -----------  ----------------  ----------  ---------------- -----------   ----------------
                                                                                                                      
Outstanding at January 1     49,836,773       $38.38       52,113,348       $38.41       35,078,541       $37.64      
Granted                         885,878        38.53        1,152,811        36.10       20,698,411        38.47      
Exercised                    (4,531,773)       27.99         (963,959)       25.31       (1,884,060)       14.76      
Cancelled                    (1,350,344)       43.55       (2,465,427)       43.26       (1,779,544)       49.31      
                             ----------                    ----------                    ----------                   
Outstanding at December 31   44,840,534       $39.30       49,836,773       $38.38       52,113,348       $38.41      

Exercisable at December 31   29,670,014       $38.84       26,458,259       $35.31       18,848,329       $30.38      

                                                        [Enlarge/Download Table]

                       OPTIONS OUTSTANDING                                         OPTIONS EXERCISABLE      
--------------------------------------------------------------------------  --------------------------------
                                        WEIGHTED AVERAGE                                                    
                                            REMAINING                                                       
   RANGE OF                                 CONTRACTUAL   WEIGHTED AVERAGE                  WEIGHTED AVERAGE
EXERCISE PRICES         OUTSTANDING        LIFE (YEARS)   EXERCISE PRICE    EXERCISABLE      EXERCISE PRICE 
---------------         -----------     ----------------  ----------------  -----------     ----------------
                                                                                                            
$3.63 - $10.00            1,408,729             1.7          $ 7.22           1,408,729          $ 7.22     
$10.01 - $17.00           2,231,725             2.8           11.02           2,231,725           11.02     
$17.01 - $30.00             767,332             4.5           23.40             638,270           22.13     
$30.01 - $39.00          18,315,804             6.1           32.13          10,955,387           32.68     
$39.01 - $71.00          22,116,944             6.1           50.70          14,435,903           51.64     
                         ----------                                          ----------                     
                         44,840,534             5.8          $39.30          29,670,014          $38.84     

The per-share weighted average fair value of stock options granted in 2003, 2002
and 2001 was $12.00, $14.47 and $16.48. The fair value was estimated as of the  
grant date using the Black-Scholes option-pricing model with the following      
weighted average assumptions:                                                   

                                                                [Download Table]

                           2003         2002         2001     
                         -------      -------      -------    
                                                              
Risk-free interest rate      3.0%         4.0%         5.1%   
Dividend yield               .60%          --           --    
Volatility factor           37.0%        38.9%        38.5%   
Option life              3 - 7 YEARS  3 - 7 years  3 - 7 years

In February 2003, Guidant's Board of Directors authorized the issuance of       
approximately 2.3 million restricted shares of common stock (US) and restricted 
stock units (outside the US) to over 2,000 employees. Restricted stock awards   
are expensed ratably over the vesting period. Restricted stock awards granted to
certain executive officers were scheduled to vest over six years. Awards granted
to other employees were scheduled to vest over three years. Grants may vest     
earlier upon a qualifying disability, death, retirement or change in control.   
This grant includes a performance element that allowed vesting to accelerate    
when certain Guidant share price performance measures were met. Specifically,   
1/3 of the general grants vested upon achievement of 25%, 50% and 75%           
appreciation of the 60-day moving average stock price from the date of grant    
($34.37 on February 18, 2003). Portions of the executive officer grants         
accelerated from six years to three years under this same performance measure.  
Guidant recorded $78.7 million of unearned compensation in conjunction with this
grant, representing the fair value of restricted stock awards on the date of    
grant. Approximately two-thirds of the share price appreciation targets were    
achieved and expensed in 2003. The first performance measure was met in July    
2003 and the second measure was met in December 2003. The final share price     
appreciation target was achieved in January 2004. Unearned compensation will be 
recognized as compensation expense ratably over the remaining vesting periods.  
The related compensation expense totaled $53.5 million for the year ended       
December 31, 2003.                                                              

The Company introduced its Employee Stock Purchase Plan in 2001. This plan      
allows employees to contribute up to 10% of their wages toward the purchase of  
the Company's common stock at the end of each four-month purchase period.       
Employees purchase shares of Guidant common stock for 85% of the average of the 
reported high and low sales prices on the first or last day of the purchase     
period, whichever price is lower.                                               

There were approximately 10.1 million additional shares available for grant     
under the Company's stock plans on December 31, 2003.                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5 - STOCK PLANS (CONTINUED)                                                

The Company has a shareholder rights plan that entitles all shareholders to a   
preferred stock purchase right. The rights will expire on October 17, 2004,     
unless redeemed earlier by the Company. The purchase rights entitle shareholders
to purchase from the Company 1/400 of a share of Series A Preferred Stock at an 
exercise price of $10.88. The Company may redeem the rights for $0.0025 per     
right up to and including the 10th business day after the date of a public      
announcement that a person or group of affiliated or associated persons         
(Acquiring Person) has acquired ownership of common stock having 10% or more of 
the Company's general voting power (Stock Acquisition Date). The plan provides  
that, if the Company is acquired in a business combination at any time after a  
Stock Acquisition Date, generally each holder of a right will be entitled to    
purchase at the exercise price a number of the acquiring company's shares having
a market value of twice the exercise price. The plan also provides that in the  
event of certain other business combinations, certain self-dealing transactions,
or the acquisition by an Acquiring Person of stock having 15% or more of the    
Company's general voting power, generally each holder of a right will be        
entitled to purchase at the exercise price a number of shares of the Company's  
common stock having a market value of twice the exercise price. Any rights      
beneficially owned by an Acquiring Person shall not be entitled to the benefit  
of the adjustments with respect to the number of shares described above.        

NOTE 6 - EARNINGS PER SHARE                                                     

The following table sets forth the computation of earnings per share:           

                                                        [Enlarge/Download Table]

                                                             2003       2002       2001  
                                                          --------   --------   -------- 
                                                                                         
Income from continuing operations                         $  425.5   $  668.1   $  523.4 
Loss from discontinued operations, net of income taxes       (95.2)     (56.3)     (39.4)
                                                          --------   --------   -------- 
Net income                                                $  330.3   $  611.8   $  484.0 
                                                          ========   ========   ======== 
EARNINGS PER SHARE - BASIC                                                               
Income from continuing operations                         $   1.39   $   2.21   $   1.74 
Loss from discontinued operations, net of income taxes       (0.31)     (0.18)     (0.13)
                                                          --------   --------   -------- 
Net income                                                $   1.08   $   2.03   $   1.61 
                                                          ========   ========   ======== 
EARNINGS PER SHARE - DILUTED                                                             
Income from continuing operations                         $   1.36   $   2.18   $   1.71 
Loss from discontinued operations, net of income taxes       (0.30)     (0.18)     (0.13)
                                                          --------   --------   -------- 
Net income                                                $   1.06   $   2.00   $   1.58 
                                                          ========   ========   ======== 
Weighted average common shares outstanding                  305.10     301.74     300.86 
Effect of dilutive stock options and unvested restricted                                 
   stock awards                                               7.42       4.25       5.36 
                                                          --------   --------   -------- 
Weighted average common shares outstanding                                               
   and assumed conversions                                  312.52     305.99     306.22 
                                                          ========   ========   ======== 

Total options outstanding at December 31, 2003, 2002 and 2001 were 44.8 million,
49.8 million and 52.1 million. Earnings per share-diluted includes 26.5 million,
19.2 million and 28.1 million stock options for the years ended December 31,    
2003, 2002 and 2001. Stock options whose exercise price per share was greater   
than their average market value per share were excluded from the calculation of 
earnings per share-diluted because including them would have had an             
anti-dilutive impact.                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7 - BORROWINGS                                                             

The Company's outstanding borrowings on December 31 consisted of:               

                                                                [Download Table]

                            2003         2002 
                          -------      -------
                                              
Long-term notes           $ 355.7      $ 361.7
Commercial paper            584.9           --
Bank borrowings               7.7          6.8
                          -------      -------
Total borrowings            948.3        368.5
Less short-term debt        250.0          6.8
                          -------      -------
Long-term debt            $ 698.3      $ 361.7
                          =======      =======

On February 11, 1999, the Company issued seven-year, 6.15% long-term notes with 
a $350.0 million principal amount due in 2006. At December 31, 2003, Guidant had
interest rate swap agreements on these notes with a notional amount of $350.0   
million, converting the fixed interest rate to a variable interest rate indexed 
to LIBOR. Interest rate fluctuations impact the fair value of the long-term     
notes, which are offset by corresponding changes in the fair value of the       
interest rate swap agreements. At December 31, 2003, the interest rate swap     
agreements increased long-term notes by $6.9 million.                           

At December 31, 2003, the Company had a $400.0 million credit facility that     
permits borrowings through August 2004 and a $400.0 million credit facility that
permits borrowings through August 2007. There are currently no outstanding      
borrowings under these arrangements, which carry a variable market rate of      
interest. Commercial paper classified as long-term debt represents the amount   
Guidant expects to replace with additional issuances of commercial paper upon   
maturity in the current year. Restrictive covenants in the borrowing agreements 
include consolidations, mergers, certain sales of assets, maintenance of certain
financial performance measures and limitations on subsidiary borrowings.        
Commitment fees were not material in 2003 or 2002.                              

At December 31, 2003, long-term debt was comprised of the long-term notes,      
including the market value of the interest rate swap agreements, and commercial 
paper. Commercial paper borrowings increased in 2003 due primarily to           
acquisitions, asset purchases and common stock repurchased in accordance with   
the stock buy-back program. At December 31, 2002, long-term debt was comprised  
of the long-term notes, including the market value of the interest rate swap    
agreements. The weighted average interest rate on borrowings outstanding at     
December 31, 2003, including the effect of the interest rate swap agreements,   
was 1.89% compared to 3.94% at December 31, 2002. The primary reason for the    
decrease in the weighted average interest rate was due to the commercial paper  
balances outstanding as of December 31, 2003, which have lower interest rates   
than the long-term notes. Interest expense, which approximates cash payments of 
interest on borrowings, was $17.2 million, $23.9 million and $47.0 million in   
2003, 2002 and 2001.                                                            

NOTE 8 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)                          

Components of Accumulated Other Comprehensive Income (Loss) are as follows:     

                                                                [Download Table]

                                             2003          2002          2001  
                                           -------       -------       ------- 
                                                                               
Currency translation adjustments           $ 177.5       $  44.9       ($ 73.2)
Unrealized gain (loss) on foreign                                              
   exchange contracts                        (27.0)        (14.4)          5.2 
Minimum pension liability                    (26.5)        (21.6)         (5.8)
                                           -------       -------       ------- 
                                           $ 124.0       $   8.9       ($ 73.8)
                                           =======       =======       ======= 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 9 - LEASES                                                                 

Guidant leases various manufacturing and office facilities and certain equipment
under operating leases. Total future minimum lease commitments are as follows:  

                                                                [Download Table]
                                      
2004                            $ 33.0
2005                              29.5
2006                              23.1
2007                              12.6
2008                              11.4
Thereafter                         3.4
                                ------
                                $113.0
                                ======

Rent expense for all leases, including contingent rentals that were not         
material, amounted to approximately $39.8 million, $32.9 million and $34.7      
million for 2003, 2002 and 2001.                                                

NOTE 10 - INCOME TAXES                                                          

Following is a summary of income before income taxes of US and international    
operations:                                                                     

                                                                [Download Table]

                 2003      2002     2001 
               -------   -------  -------
                                         
US             ($165.0)  $ 415.8  $ 308.8
International    650.0     502.9    418.9
               -------   -------  -------
               $ 485.0   $ 918.7  $ 727.7
               =======   =======  =======

Following is the composition of income tax expense:                             

                                                                [Download Table]

                                                          2003      2002      2001  
                                                        -------   -------   ------- 
                                                                                    
Current:                                                                            
      Federal ......................................... ($ 10.0)  $ 201.1   $ 127.2 
      State ...........................................    12.2      19.7      19.4 
      Foreign .........................................   110.1      76.4      66.0 
                                                        -------   -------   ------- 
           Total current expense ......................   112.3     297.2     212.6 
Deferred:                                                                           
      Federal .........................................   (25.9)    (25.2)     (0.8)
      State ...........................................   (22.1)    (19.4)     (7.5)
      Foreign .........................................    (4.8)     (2.0)       -- 
                                                        -------   -------   ------- 
           Total deferred tax benefit .................   (52.8)    (46.6)     (8.3)
                                                        -------   -------   ------- 
Income tax expense .................................... $  59.5   $ 250.6   $ 204.3 
                                                        =======   =======   ======= 

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NOTE 10 - INCOME TAXES (CONTINUED)                                              

Deferred tax assets and liabilities reflect the future tax consequences of      
events that have already been recognized in the consolidated financial          
statements or income tax returns. At December 31, deferred tax assets and       
liabilities consisted of the following:                                         

                                                        [Enlarge/Download Table]

                                                                       2003      2002  
                                                                     -------   ------- 
                                                                                       
Deferred tax assets:                                                                   
      Inventory and product-related reserves ....................... $ 194.0   $ 125.5 
      Net operating loss, capital loss, and credit carryforwards ...    45.4      27.0 
      Accrued liabilities ..........................................   124.0      93.7 
      Acquisition of intangible assets .............................    61.7      65.7 
                                                                     -------   ------- 
                                                                       425.1     311.9 
      Valuation allowances .........................................   (12.6)     (3.9)
                                                                     -------   ------- 
           Total deferred tax assets ...............................   412.5     308.0 
Deferred tax liabilities:                                                              
      Property and equipment .......................................   (97.7)    (43.6)
      Other ........................................................    (0.7)     (0.5)
                                                                     -------   ------- 
           Total deferred tax liabilities ..........................   (98.4)    (44.1)
                                                                     -------   ------- 
Deferred tax assets, net ........................................... $ 314.1   $ 263.9 
                                                                     =======   ======= 

Following is a reconciliation of the effective income tax rate:                 

                                                        [Enlarge/Download Table]

                                                                     2003     2002     2001  
                                                                    ------   ------   ------ 
                                                                                             
US federal statutory income tax rate ..............................   35.0%    35.0%    35.0%
Increase (decrease) in tax rate resulting from:                                              
    State income taxes, net of federal tax benefit ................    0.9      1.4      1.4 
    Effect of international operations ............................  (19.2)    (9.8)    (8.7)
    Research credit ...............................................   (2.9)    (1.1)    (1.5)
    Benefit from export incentives ................................   (1.7)    (1.0)    (1.1)
    Nondeductible IPRD ............................................    3.9      0.8       -- 
    Reversal of income tax accruals due to tax audit resolution ...   (6.2)      --       -- 
    Other, net ....................................................    2.5      2.0      3.0 
                                                                    ------   ------   ------ 
Effective income tax rate .........................................   12.3%    27.3%    28.1%
                                                                    ======   ======   ====== 

US federal and state deferred income taxes have not been recorded that would    
result from future remittances of undistributed earnings of foreign subsidiaries
- $2,474.0 million at December 31, 2003 - because such earnings are intended to 
be indefinitely reinvested in these foreign operations. Additional US tax       
liabilities would be incurred should the Company remit a portion of these       
earnings.                                                                       

At December 31, 2003, approximately $76.0 million of federal, state and foreign 
tax losses and $24.3 million of federal and state credits were available for    
carryforward. The federal and state carryforwards are subject to valuation      
allowances and certain restrictions. The losses and credits generally expire    
within a period of 4 to 15 years. At December 31, 2003, $7.9 million of capital 
losses were available for carryforward. The carryforward is subject to a        
valuation allowance and expires December 31, 2005. In view of the consistent    
profitability of its past operations, the Company believes that the deferred tax
assets will be substantially recovered and that no significant additional       
valuation allowances are necessary.                                             

Income taxes paid were $121.7 million, $172.8 million and $127.6 million in     
2003, 2002 and 2001.                                                            

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - EMPLOYEE BENEFIT PLANS                                                

EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLAN Guidant has a defined contribution    
savings plan that covers its eligible US employees. The plan includes both an   
employee savings component (savings plan) and an employee stock ownership       
component (Employee Stock Ownership Plan or "ESOP"). The purpose of the plan is 
to provide additional financial security to employees during retirement.        

Participants in the plan may elect to contribute, on a before-tax basis, a      
certain percent of their annual salaries. Participants' contributions may not be
invested in Guidant common stock. The Company matches a portion of these        
employee contributions with Guidant common stock. In addition, the Company      
contributes Guidant common stock to the ESOP in a fixed percentage of employees'
annual base pay, regardless of the employee contribution.                       

The Company makes its matching and fixed contributions to the plan's ESOP       
component. This internally leveraged ESOP acquired approximately 9.0 million    
shares of newly issued Guidant common stock at a cost of approximately $60.0    
million ($6.68 per share) in September 1995. Common shares held by the ESOP are 
allocated among participants' accounts on a periodic basis until these shares   
are exhausted (approximately 2006, assuming the year-end price per share of     
Guidant common stock of $60.20 remains constant). At December 31, 2003, the ESOP
held approximately 6.4 million shares allocated to employee accounts and 2.6    
million unallocated shares. The cost of shares held by the ESOP and not yet     
allocated to employees is reported as a reduction of shareholders' equity.      
Allocated shares of the ESOP are charged to expense based on the fair value of  
the shares transferred and are treated as outstanding in the computation of     
earnings per share. Compensation expense under these plans was $44.1 million,   
$33.8 million and $30.3 million for 2003, 2002 and 2001.                        

RETIREMENT PLANS The Company sponsors the Guidant Retirement Plan, a frozen     
noncontributory defined benefit plan. The Company's funding policy for the      
Guidant Retirement Plan is consistent with US employee benefit and tax-funding  
regulations. The Company does not expect to make a contribution to the Guidant  
Retirement Plan in 2004. Guidant Retirement Plan assets, which are maintained in
a trust, consist primarily of equity and fixed income instruments. The Company  
also sponsors the Guidant Excess Benefit Plan-Retirement, a nonqualified,       
unfunded plan for certain of its officers and key employees. In addition, US and
Puerto Rico employees of the Company are eligible to receive specified          
Company-paid healthcare retirement benefits under a plan established in 2000.   
The Company uses a December 31 measurement date for its plans. Following is a   
summary of these plans:                                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)                                    

                                                        [Enlarge/Download Table]

                                                             GUIDANT          GUIDANT EXCESS BENEFIT  HEALTHCARE RETIREMENT
                                                          RETIREMENT PLAN         PLAN-RETIREMENT         BENEFIT PLAN     
                                                        -------------------   ----------------------  ---------------------
                                                         2003        2002        2003        2002       2003        2002   
                                                        -------     -------   ---------     --------  --------     --------
                                                                                                                           
ACCUMULATED BENEFIT OBLIGATION DECEMBER 31 ...........  $  73.6     $  61.7     $  27.7     $  24.2    $  18.1     $  15.0 
Change in Projected Benefit Obligation                                                                                     
   Projected benefit obligation at beginning of year .  $  64.8     $  56.5     $  26.0     $  26.1    $  15.0     $  12.6 
   Service cost ......................................       --          --          --          --        1.8         1.6 
   Interest cost .....................................      4.4         4.1         1.8         1.7        1.0         0.9 
   Benefits paid .....................................     (1.4)       (1.2)       (0.9)       (0.8)      (0.3)       (0.2)
   Actuarial loss ....................................      6.9         5.4         2.2         1.5        0.6         0.1 
   Settlement ........................................       --          --          --        (2.5)        --          -- 
                                                        -------     -------     -------     -------    -------     ------- 
Projected benefit obligation at end of year ..........  $  74.7     $  64.8     $  29.1     $  26.0    $  18.1     $  15.0 
                                                        =======     =======     =======     =======    =======     ======= 

CHANGE IN PLAN ASSETS                                                                                                      
   Plan assets at fair value at beginning of year ....  $  55.2     $  60.8          --          --         --          -- 
   Actual gain (loss) on plan assets .................      9.9        (4.4)         --          --         --          -- 
   Company contributions ..............................      --          --     $   0.9     $   4.3    $   0.3     $   0.2 
   Benefits paid .....................................     (1.4)       (1.2)       (0.9)       (0.8)      (0.3)       (0.2)
   Settlement ........................................       --          --          --        (3.5)        --          -- 
                                                        -------     -------     -------     -------    -------     ------- 
Plan assets at fair value at end of year .............  $  63.7     $  55.2          --          --         --          -- 
                                                        =======     =======     =======     =======    =======     ======= 

FUNDED STATUS OF THE PLAN                                                                                                  
   Projected benefits in excess of plan assets .......   ($11.0)      ($9.6)     ($29.1)     ($26.0)    ($18.1)     ($15.0)
   Unrecognized net loss .............................     34.1        30.9        10.3         8.4        0.6          -- 
   Unrecognized prior service cost ...................       --          --         6.6         7.8        6.5         7.1 
                                                        -------     -------     -------     -------    -------     ------- 
Prepaid/(accrued) pension cost .......................  $  23.1     $  21.3      ($12.2)      ($9.8)    ($11.0)      ($7.9)
                                                        =======     =======     =======     =======    =======     ======= 

AMOUNTS RECOGNIZED IN CONSOLIDATED BALANCE SHEET                                                                           
   Prepaid benefit cost ..............................       --          --          --          --         --          -- 
   Accrued benefit liability .........................    ($9.9)      ($6.5)     ($27.7)     ($24.2)    ($11.0)      ($7.9)
   Intangible asset ..................................       --          --         6.6         7.8         --          -- 
   Deferred tax asset ................................     12.1        10.3         3.3         2.5         --          -- 
   Accumulated other comprehensive income ............     20.9        17.5         5.6         4.1         --          -- 
                                                        -------     -------     -------     -------    -------     ------- 
Net amount recognized ................................  $  23.1     $  21.3      ($12.2)      ($9.8)    ($11.0)      ($7.9)
                                                        =======     =======     =======     =======    =======     ======= 

PERIODIC BENEFIT COST                                                                                                      
   Service cost ......................................       --          --          --          --    $   1.8     $   1.6 
   Interest cost .....................................  $   4.4     $   4.1     $   1.8     $   1.7        1.0         0.9 
   Expected return on plan assets ....................     (6.5)       (7.6)         --          --         --          -- 
   Amortization of unrecognized net loss .............      0.3          --         0.3         1.1         --          -- 
   Amortization of unrecognized prior service cost ...       --          --         1.2         1.2        0.6         0.6 
   Settlement loss ...................................       --          --          --         0.9         --          -- 
                                                        -------     -------     -------     -------    -------     ------- 
Net periodic benefit cost ............................    ($1.8)      ($3.5)    $   3.3     $   4.9    $   3.4     $   3.1 
                                                        =======     =======     =======     =======    =======     ======= 

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NOTE 11 - EMPLOYEE BENEFIT PLANS (CONTINUED)                                    

The weighted average assumptions used to determine benefit obligations at       
December 31 and net periodic benefit costs for the years then ended are as      
follows:                                                                        

                                                        [Enlarge/Download Table]

                                                   GUIDANT          GUIDANT EXCESS BENEFIT  HEALTHCARE RETIREMENT
                                                RETIREMENT PLAN         PLAN-RETIREMENT          BENEFIT PLAN    
                                              -------------------   ----------------------  ---------------------
                                               2003        2002        2003        2002       2003        2002   
                                              -------     -------   ---------     --------  --------     --------
                                                                                                                 
ASSUMPTIONS - BENEFIT OBLIGATIONS                                                                                
Discount rate ...............................    6.25%       6.90%       6.25%       6.90%      6.25%       6.90%
Expected return on plan assets ..............    8.75%       8.75%         --          --         --          -- 
Rate of compensation increase ...............    5.90%       5.90%       5.90%       5.90%        --          -- 
Healthcare cost trend rate .................       --          --          --          --       7.00%       7.00%

ASSUMPTIONS - NET PERIODIC BENEFIT COST                                                                          
Discount rate ...............................    6.90%       7.25%       6.90%       7.25%      6.90%       7.25%
Expected return on plan assets ..............    8.75%      10.50%         --          --         --          -- 
Rate of compensation increase ...............    5.90%       5.90%       5.90%       5.90%        --          -- 
Healthcare cost trend rate .................       --          --          --          --       7.00%       7.00%

The principal long-term determinant of a portfolio's investment return is its   
asset allocation. The Guidant Retirement Plan allocation is heavily weighted    
towards growth assets (90%) versus fixed income (10%). In addition, active      
management strategies have added value relative to passive benchmark returns.   
The expected long-term rate of return assumption is based on the mix of assets  
in the plan, the long-term earnings expected to be associated with each asset   
class, and the additional return expected through active management. This       
assumption is periodically benchmarked against peer plans.                      

The amortization of prior service cost is determined using a straight-line      
amortization of the cost over the average remaining service period of employees 
expected to receive benefits under the Plan. The assumed healthcare cost trend  
rate can have a significant effect on the amounts reported for healthcare       
plans. A one-percentage point change in assumed healthcare cost trend rates     
does not significantly impact the service cost, interest cost, or projected     
benefit obligation disclosed for the Healthcare Retirement Benefit Plan.        
The Guidant Retirement Plan weighted average asset allocations at December 31,  
2003 and 2002, by asset category, are as follows:                               

                                                                [Download Table]

ASSET CATEGORY ......................   2003    2002 
                                        ----    ---- 
                                                     
Equity and equity-like securities ...     77%     85%
Debt securities .....................      9%     10%
Real estate .........................      2%      3%
Other ...............................     12%      2%
                                        ----    ---- 
Total ...............................    100%    100%
                                        ====    ==== 

The allocation strategy for the Guidant Retirement Plan comprises approximately 
85% to 95% growth investments and 5% to 15% fixed-income investments. Within the
growth investment classification, the plan asset strategy encompasses equity and
equity-like instruments that are expected to represent approximately 75% of our 
plan asset portfolio of both public and private market investments. The largest 
component of these equity and equity-like instruments is public equity          
securities that are well diversified and invested in US and international       
companies. The remaining 15% of the growth investment classification is         
represented by other alternative growth investments. The alternative assets,    
comprised of real estate, private market and hedge fund instruments provide an  
important source of diversified, value-added return.                            

Certain employees outside the US participate in retirement plans maintained by  
the Company. Expenses for the employees participating in these plans have not   
been included in the preceding table. Expenses attributable to the employees at 
these locations are included in the results of operations and totaled $11.4     
million, $6.5 million and $5.4 million in 2003, 2002 and 2001.                  

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NOTE 12 - SEGMENT INFORMATION                                                   

The Company manages its business on the basis of one reportable segment: the    
development, manufacture and marketing of therapeutic medical technologies for  
the treatment of cardiovascular and vascular diseases. Guidant's chief operating
decision makers use consolidated results to make operating and strategic        
decisions. See Note 1 for a brief description of the Company's business.        

GEOGRAPHIC INFORMATION                                                          

                                                                [Download Table]

                          2003        2002        2001  
                        --------    --------    --------
                                                        
Net Sales (1):                                          
US .................    $2,521.0    $2,230.2    $1,844.0
International ......     1,177.8       930.4       797.6
                        --------    --------    --------
                        $3,698.8    $3,160.6    $2,641.6
                        ========    ========    ========

(1) Revenues are attributed to countries based on location of the customer.     

                                                                [Download Table]

                              2003       2002 
                            -------    -------
                                              
Long-lived Assets:                            
US .....................    $ 679.7    $ 559.6
International ..........       88.3       83.5
                            -------    -------

                            $ 768.0    $ 643.1
                            =======    =======

CLASSES OF SIMILAR PRODUCTS                                                     

                                                                [Download Table]

                                                   2003        2002        2001 
                                                --------    --------    --------
                                                                                
Net Sales:                                                                      
Implantable defibrillator systems ..........    $1,488.7    $1,006.8    $  716.6
Pacemaker systems ..........................       683.5       636.6       582.7
Coronary stent systems .....................       843.7       920.9       811.2
Angioplasty systems ........................       477.6       430.5       403.5
Cardiac surgery, biliary, peripheral and                                        
  carotid systems ..........................       205.3       165.8       127.6
                                                --------    --------    --------
                                                $3,698.8    $3,160.6    $2,641.6
                                                ========    ========    ========

No single customer represented more than 10% of the Company's consolidated      
sales.                                                                          

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NOTE 13 - FINANCIAL INSTRUMENTS                                                 

In the normal course of business, operations of the Company are exposed to      
fluctuations in currency values and short-term interest rates. The Company's    
objective is to reduce earnings volatility associated with these fluctuations to
allow management to focus on core business issues. Accordingly, the Company     
addresses these risks through a controlled program of risk management that      
includes the use of derivative financial instruments. The Company's derivative  
activities are initiated within the guidelines of documented corporate risk     
management policies. The Company does not enter into any derivative transactions
for speculative or trading purposes.                                            

FOREIGN EXCHANGE RISK MANAGEMENT A portion of the Company's cash flows is       
derived from transactions denominated in foreign currencies (principally the    
currencies of Europe and Asia). The US dollar value of transactions denominated 
in foreign currencies fluctuates as the US dollar strengthens or weakens        
relative to these foreign currencies. In order to reduce the uncertainty of     
foreign exchange rate movements on transactions denominated in foreign          
currencies, the Company enters into derivative financial instruments in the form
of foreign exchange forward contracts with major financial institutions. These  
forward contracts, which typically mature within one year, are designed to hedge
anticipated foreign currency transactions, primarily intercompany inventory     
purchases. These contracts also hedge intercompany loans, payables and          
receivables. The Company's foreign exchange contracts do not subject it to      
material risk due to exchange rate movements, because gains and losses on these 
contracts offset losses and gains on the assets, liabilities and transactions   
being hedged.                                                                   

No components of the contracts are excluded in the measurement of hedge         
effectiveness. The critical terms of the foreign exchange contracts are the same
as the underlying forecasted transactions; therefore, changes in the fair value 
of the foreign exchange contracts should be highly effective in offsetting      
changes in the expected cash flows from the forecasted transactions. No gains or
losses related to ineffectiveness of cash flow hedges were recognized in        
earnings during 2003, 2002 and 2001. Unrealized gains/(losses) on foreign       
exchange contracts of ($41.3) million, ($20.9) million and $6.2 million, net of 
taxes of $14.3 million, $6.5 million and $1.0 million, were included as a       
component of accumulated other comprehensive income in 2003, 2002 and 2001. The 
Company anticipates that all gains and losses in accumulated other comprehensive
income related to foreign exchange contracts will be reclassified into earnings 
by January 2005.                                                                

INTEREST RATE RISK MANAGEMENT The Company uses interest rate swap agreements to 
manage its exposure to interest rate movements and to reduce borrowing costs.   
The Company's debt is composed of fixed-rate, long-term notes and variable-rate,
short-term bank borrowings. Guidant manages this risk by using interest rate    
swap agreements to convert fixed-rate debt to variable-rate debt. The Company   
had interest rate swap agreements outstanding with a notional amount of $350.0  
and $175.0 million at December 31, 2003 and 2002. Accordingly, interest rate    
fluctuations impact the fair value of long-term notes outstanding, which are    
offset by corresponding changes in the fair value of the interest rate swap     
agreements. The fair value of the interest rate swap agreements was recorded    
within "Sundry" and "Other Noncurrent Liabilities" on the consolidated balance  
sheets, and was offset by identical balances in long-term notes.                

CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the
Company to credit risk consist principally of interest-bearing investments,     
foreign exchange contracts, trade receivables and interest rate swap agreements.
The Company maintains cash and cash equivalents, investments, and certain other 
financial instruments with various major financial institutions or in           
high-credit quality commercial paper. The Company performs periodic evaluations 
of the relative credit standing of these financial institutions and companies   
and limits the amount of credit exposure with any one institution. Cash and cash
equivalents include interest-bearing investments with maturities of three months
or less. These investments consist primarily of A-1 and P-1 or better rated     
financial instruments and counterparties. Hospitals and other healthcare        
providers account for a substantial portion of the trade receivables. Collateral
for these receivables is generally not required. The risk associated with this  
concentration is limited due to the large number of accounts and their          
geographic dispersion. The Company monitors the creditworthiness of customers to
which it grants credit terms in the normal course of business.                  

The Company is exposed to credit-related losses in the event of nonperformance  
by counterparties to financial instruments, but management believes this credit 
risk is limited by periodically reviewing the creditworthiness of the           
counterparties to the transactions.                                             

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NOTE 13 - FINANCIAL INSTRUMENTS (CONTINUED)                                     

FINANCIAL INSTRUMENTS The fair value of cash and cash equivalents, receivables, 
short-term debt and commercial paper approximate their carrying value due to    
their short-term maturities. The cost and estimated fair values of the Company's
other significant financial instruments are as follows:                         

                                                                [Download Table]

                                             2003                2002         
                                                   FAIR                  FAIR 
                                         COST     VALUE       COST      VALUE 
                                        ------    ------     ------    ------ 
                                                                              
ASSETS                                                                        
   Available-for-sale securities ...    $  0.5    $  0.2     $  0.5    $  0.1 
   Held-to-maturity securities .....       0.1       0.1       10.4      10.3 
   Other investments ...............      54.8      54.8       46.7      46.7 
LIABILITIES                                                                   
   Long-term notes .................    $355.7    $374.2     $361.7    $390.1 
FOREIGN EXCHANGE CONTRACTS .........        --    ($46.8)        --    ($31.3)
INTEREST RATE SWAP AGREEMENTS ......        --    $  6.9         --    $ 13.5 

The Company determines fair values primarily based on quoted market values. A   
reasonable estimate of fair value was made using available market and financial 
information for long-term investments having no quoted market prices and        
accounted for on the cost basis. The fair value of long-term debt was based on  
the current market rates for debt of similar maturity. The estimated fair values
of foreign exchange contracts and interest rate swap agreements were calculated 
using pricing models used widely in financial markets and included all foreign  
exchange contracts regardless of hedge designation. The estimates presented on  
long-term financial instruments are not necessarily indicative of the amounts   
that would be realized in a current market exchange.                            

NOTE 14 - DISCONTINUED OPERATIONS                                               

In June 2003, Guidant's Board of Directors approved a plan to dispose of the    
ANCURE ENDOGRAFT System product line to treat abdominal aortic aneurysms (AAA)  
due to continuing financial losses, limited prospects for the Company's AAA     
product line and the impact of the Department of Justice investigation. In      
December 2003, Guidant's Board of Directors ratified a plan to discontinue      
Guidant's operations in Brazil due to unfavorable business conditions and poor  
operating performance. The disposal plans include the termination of normal     
activity, abandonment of property and equipment, product returns, collection of 
receivables and settlement of liabilities. Guidant has written down long-lived  
assets to fair value and recorded inventory and accounts receivable at net      
realizable value.                                                               

In accordance with SFAS 144, Accounting for the Impairment or Disposal of       
Long-Lived Assets, both disposals represent discontinued operations.            
Accordingly, the accompanying consolidated financial statements and notes       
reflect the results of operations and financial position of the AAA product line
and the Brazil operations as discontinued operations for all periods presented. 
Net loss from discontinued operations includes proceeds from the sale of        
internally developed intangible assets, charges related to the impairment of    
certain long-lived assets, inventory write-downs, customer returns, litigation  
settlements and accruals for employee severance and lease commitments expensed  
in 2003. In December 2003, Guidant granted Cook Incorporated (Cook) a covenant  
not to sue related to Cook's manufacture and distribution of their endovascular 
graft products in exchange for $20.0 million. The proceeds were recorded in     
discontinued operations.                                                        

At December 31, 2003, and December 31, 2002, there were $5.8 million and $31.7  
million in assets and $20.2 million and $43.6 million in liabilities related to 
the AAA product line and Brazil operations. Assets are primarily comprised of   
accounts receivable, inventory and property, plant and equipment. Liabilities   
primarily include accruals for severance, product returns and lease commitments 
expensed in 2003. Liabilities also include the accrual for the ANCURE-related   
investigation of $30.0 million at December 31, 2002, which was increased to     
$92.0 million in March 2003 and settled in June 2003 for $92.4 million.         

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NOTE 14 - DISCONTINUED OPERATIONS (CONTINUED)                                   

The following summarizes financial information for the AAA product line and     
Brazil operations for the years ended December 31 (in millions):                

                                                        [Enlarge/Download Table]

                                                            2003           2002           2001     
                                                        -------------  -------------  -------------
                                                                                                   
Net sales                                               $        18.2  $        79.0  $        66.0
Loss from discontinued operations before income taxes .         127.8           79.5           60.5
Net loss from discontinued operations                            95.2           56.3           39.4

NOTE 15 - OTHER TRANSACTIONS                                                    

GUIDANT FOUNDATION In 2002 the Company contributed $40.0 million to the Guidant 
Foundation. Guidant Foundation is a non-profit organization that has common     
management with Guidant. Guidant Foundation provides financial support and      
grants to non-profit organizations for charitable and educational programs that 
improve the quality of life for people who are at risk for or suffer from       
cardiovascular disease. Guidant Foundation also provides financial support to   
non-profit organizations in the communities where Guidant operates in the US.   
Contributions are made possible by the profits of Guidant; however, Guidant is  
not required to make contributions to the Foundation, except for amounts        
pledged. Amounts payable to Guidant Foundation at December 31, 2003 and 2002    
were $31.0 million and $45.0 million, representing the balances remaining from  
pledges made of $40.0 million in 2002 and $10.0 million in 2001.                

COOK CHARGE In July 2002, Guidant entered into an agreement to acquire Cook     
Group Incorporated (Cook) in a stock-for-stock transaction, subject to          
satisfaction of certain clinical and legal conditions relating to the ACHIEVE   
Drug Eluting Coronary Stent System. The clinical conditions included positive   
results from the US clinical study, DELIVER, which compared the                 
paclitaxel-coated ACHIEVE Drug Eluting Coronary Stent System manufactured by    
Cook Incorporated to Guidant's MULTI-LINK PENTA Coronary Stent System. On       
January 2, 2003, the Company announced that a preliminary analysis of the       
clinical results indicated that the primary target vessel failure (TVF) endpoint
of the study would not be met, although there was a trend toward improvement in 
TVF in the treatment arm of the study. Based on this information, the conditions
outlined in the merger agreement with Cook were not expected to be satisfied and
the merger agreement was subsequently terminated in January 2003. A $60.6       
million charge was recorded in 2002 relating to a $50.0 million termination fee 
plus accrued interest, $6.6 million non-saleable, non-returnable Cook inventory 
and $3.8 million of other merger-related expenses.                              

RESTRUCTURING Guidant's Board of Directors approved a plan to restructure the   
biliary and peripheral product line operations in May 2002. A charge of $14.0   
million was recorded, which includes the termination of Guidant's involvement in
certain peripheral product clinical trials, work force reductions, facility     
reductions and certain other related costs. At December 31, 2003, a liability of
approximately $5.0 million remains related to product clinical trials required  
to be paid over the next 5 years.                                               

LITIGATION SETTLEMENTS Litigation settlements for 2003 are described in Note 16.
In 2002 the Company recorded a $137.1 net litigation benefit primarily from a   
$158.2 million award plus interest and costs against Medtronic, Inc. In 2001,   
Guidant recorded a net litigation benefit of $10.0 million from awards against  
Boston Scientific Corporation of $19.5 million and Medtronic, Inc. of $6.6      
million offset by a settlement with Cordis Corporation of $16.1 million.        

NOTE 16 - CONTINGENCIES                                                         

The Company is involved in patent, product liability, shareholder and other     
legal proceedings that arise in the course of the Company's business. The       
Company records a liability when a loss is considered probable and the amount   
can be reasonably estimated. If the reasonable estimate of a probable loss is a 
range, and no amount within the range is a better estimate, the lower end of the
range is accrued. If a loss is not probable or a probable loss cannot be        
reasonably estimated, no liability is recorded.                                 

Patent and other proprietary rights are essential to the Company's business.    
Significant litigation concerning patents and products is pervasive in the      
Company's industry. Patent claims include challenges to the coverage and        
validity of the Company's patents on products or processes as well as           
allegations that the Company's products infringe patents held by competitors or 
other third parties. Although the Company believes that it has valid defenses to
these challenges with respect to material patents, there can be no assurance as 
to the outcome of these matters, and a loss in any of these cases could result  
in a loss of patent protection or the ability to market products, which could   
lead to a significant loss of sales, or otherwise materially affect future      
results of operations.                                                          

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NOTE 16 - CONTINGENCIES  (CONTINUED)                                            

Losses in the matters below are not considered probable or cannot be reasonably 
estimated. Accordingly, the Company has not recorded reserves for these matters.
While the liability of the Company in connection with the claims cannot be      
estimated with any certainty, the outcome of these legal proceedings, except as 
specifically identified below, is not expected to have a material adverse effect
on the Company's consolidated financial position, although the resolution in any
reporting period of one or more of these matters could have a significant impact
on the Company's results of operations for that period. While the Company       
believes that it has valid defenses in these matters, litigation is inherently  
uncertain, excessive verdicts do occur, and the Company may in the future incur 
material judgments or enter into material settlements of claims.                

On August 19, 2003, an arbitration panel entered a final ruling that the        
Company's MULTI-LINK DUET Coronary Stent System infringes certain claims under  
patents owned by Cordis Corporation (Cordis), a subsidiary of Johnson & Johnson.
As a result, the Company made a payment of $425.0 million to Cordis in the      
fourth quarter of 2003. The Company accrued the amount of the award in the      
second quarter of 2003.                                                         

On February 24, 2004, the Company announced that it had agreed with Cordis to   
settle all outstanding litigation between the companies without material cash   
payment. The settlement was announced as part of a broader agreement to         
co-promote Cordis' CYPHER Sirolimus-eluting Coronary Stent and to cross license 
certain additional patents. The settlement resolves a pending arbitration       
initiated in the first quarter of 2002 asserting the Company's Lau patents, as  
well as other outstanding claims of Cordis relating to stent design.            

On February 20, 2004, the Company announced that it had agreed with Boston      
Scientific Corporation (Boston Scientific) to settle all outstanding litigation 
between the companies without material cash payment. The settlement resolves a  
number of cases filed in October and December 2002 in the Northern District of  
California relating to coronary stents, coronary stent delivery systems and     
dilatation catheters. In addition to settling the cases, the companies agreed to
cross license patents in a number of specified technology areas.                

On February 18, 1998, Arterial Vascular Engineering, Inc. (now known as         
Medtronic Vascular) filed suit against the Company's subsidiary, Advanced       
Cardiovascular Systems, Inc. (ACS), in the District Court for Delaware alleging 
that the sale of MULTI-LINK family of coronary stent systems infringes the      
Boneau patents owned by Medtronic Vascular. The suit is consolidated with a suit
by ACS alleging infringement by Medtronic Vascular of the Company's Lau stent   
patents. The Medtronic Vascular complaint also alleges misappropriation of trade
secrets and breach of a confidentiality agreement by ACS. In the lawsuit,       
Medtronic Vascular is seeking injunctive relief, co-ownership of the Lau        
patents, monetary damages and a ruling that the ACS stent patents asserted      
against Medtronic Vascular are invalid. Pretrial matters are scheduled through  
2004, with trial set in the first quarter of 2005. This suit is one of a number 
of suits brought by Medtronic Vascular under the Boneau patents against all     
substantial participants in the stent market. The claims are wide-ranging and   
cover the Company's products broadly. Accordingly, while potential liability    
cannot be estimated with any certainty, an adverse outcome could have a material
impact on results of operations or consolidated financial position.             

On June 15, 2000, Medtronic, Inc. (Medtronic) filed a declaratory judgment      
action against the Company and its Cardiac Pacemakers, Inc. (CPI) subsidiary in 
the District Court for Minnesota requesting that the court rule that Medtronic  
does not infringe certain of CPI's patents for atrial fibrillation technology or
that the patents are not valid. Subsequently, the Company asserted additional   
patents related to atrial fibrillation technology against Medtronic in the same 
court. Currently, eight patents are being asserted against Medtronic in this    
consolidated litigation. Pretrial matters are scheduled into the second half of 
2004.                                                                           

On March 6, 2002, Pacesetter, Inc. (Pacesetter), a subsidiary of St. Jude       
Medical, Inc. (St. Jude), filed suit against the Company's subsidiaries, CPI and
Guidant Sales Corporation (GSC), in the Central District of California alleging 
that CPI and GSC have infringed a number of Pacesetter patents covering various 
features of pacemakers and implantable defibrillators. On the Company's motion, 
the case was transferred to the District Court for Minnesota. Pacesetter is     
seeking injunctive relief, monetary damages and attorney fees. Currently four   
patents are at issue. Pacesetter has sought reexamination of two of the patents.
On the Company's motion, the litigation has been stayed pending the completion  
of the reexaminations.                                                          

On April 14, 2003, Medinol Ltd. filed suit against the Company and its ACS      
subsidiary in the Southern District of New York alleging that the sale of the   
Company's MULTI-LINK ZETA and MULTI-LINK PENTA Coronary Stent Systems infringe  
five Medinol patents related to stent design. The complaint seeks injunctive    
relief and monetary damages. Pretrial matters are scheduled through most of     
2004.                                                                           

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NOTE 16 - CONTINGENCIES  (CONTINUED)                                            

On June 12, 2003, the Company announced that its subsidiary, EndoVascular       
Technologies, Inc. (EVT), had entered into a plea agreement with the US         
Department of Justice relating to a previously disclosed investigation regarding
the ANCURE ENDOGRAFT System for the treatment of abdominal aortic aneurysms,    
which included payments totaling $92.4 million in 2003. At the time of the EVT  
plea, the Company had outstanding fourteen suits alleging product liability     
related causes of action relating to the ANCURE System. During the third        
quarter, the Company settled eleven of the suits that predated the EVT plea for 
an amount recorded in the third quarter of 2003 that is not material to the     
Company. Subsequent to the EVT plea, the Company has been served with           
approximately thirty additional individual complaints, and more such suits may  
be filed. A consolidated class action complaint covering ANCURE recipients is   
also pending in the Northern District of California. These cases generally      
allege that plaintiffs died or suffered other injuries as a result of purported 
defects in the device or the accompanying warnings and labeling. The complaints 
seek damages, including punitive damages, and equitable relief. An additional   
complaint includes state-law allegations of unfair trade and business practices 
relating to sales of the product. While the Company maintains insurance that may
serve to reduce the Company's exposure with respect to these claims, one of the 
Company's carriers, Allianz Insurance Company (Allianz), has filed suit in the  
Circuit Court, State of Illinois, County of DuPage, seeking to rescind or       
otherwise deny coverage, and additional carriers have sought to intervene in the
case. The Company also has initiated suit against certain of its carriers,      
including Allianz, in the Superior Court, State of Indiana, County of Marion, in
order to preserve the Company's rights to coverage. The Company will continue to
pursue coverage, and, as described above, continues to make progress in managing
its product liability exposure with respect to the ANCURE System.               

Also following the EVT plea, the Company has been served with securities class  
action and shareholder derivative complaints relating to the ANCURE System. A   
consolidated securities class action, which names as defendants the Company, EVT
and certain of their current and former officers, is pending in the Southern    
District of Indiana. Generally, it is alleged that during all or a portion of   
the period from June 23, 1999, through June 12, 2003, public statements by the  
Company relating to the ANCURE System were false and misleading. Damages are    
sought on behalf of persons who purchased or otherwise acquired Company shares  
during that period. The Company has filed a motion to dismiss the case, which   
motion is expected to be fully briefed in the second quarter of 2004.           

The derivative suits relating to the ANCURE system currently are pending in the 
Southern District of Indiana and in the Superior Court of the State of Indiana, 
County of Marion. The suits, purportedly filed on behalf of the Company,        
generally allege that the Company's directors breached their fiduciary duties by
taking improper steps or failing to take steps to prevent the ANCURE and EVT    
related matters described above. The complaints seek damages and other equitable
relief. The state court suits have been stayed in favor of the federal action.  
The Company has filed a motion to dismiss the federal action, which motion is   
expected to be fully briefed in the second quarter of 2004.                     

On August 29, 2003, Medtronic filed a declaratory judgment action in the        
District Court for Delaware against the Company, GSC, Eli Lilly and Company     
(Lilly), and Mirowski Family Ventures L.L.C. (Mirowski), challenging its        
obligation to pay royalties to Mirowski on certain devices by alleging the      
invalidity of certain claims of US patent RE 38,119 ('119), which patent relates
to cardiac resynchronization therapy and bi-ventricular pacing therapy. The '119
patent is exclusively licensed to the Company as part of a broader license      
covering Mirowski patents and is sublicensed to Medtronic. The parties have     
agreed to an expedited proceeding with limited scope.                           

On February 2, 2004, the Company, GSC, CPI and Mirowski filed a declaratory     
judgment action in the District Court for Delaware against St. Jude and         
Pacesetter alleging that their Epic HF, Atlas HF, and Frontier 3x2 devices will 
infringe the '119 patent (described in the prior paragraph) when those devices  
are approved for sale in the US.                                                

On February 24, 2004, the Company's CPI subsidiary filed a patent infringement  
action in the District Court of Minnesota against St. Jude and Pacesetter       
alleging that their Quicksite over-the-wire pacing lead has infringed US Patent 
No. 5,755,766/Reexamination Certificate No. 5,755,766 C1 ("the '766 Patent").   

Anna Mirowski, Lilly and two Company subsidiaries, GSC and CPI, are plaintiffs  
in a patent infringement suit originally filed against St. Jude and its         
affiliates in November 1996 in the District Court in Indianapolis. The suit     
alleges that St. Jude's defibrillator products infringe patents licensed to CPI.
In July 2001, a jury found that two of the licensed patents were valid and that 
St. Jude had infringed one, a patent that expired in March 2001. The jury       
awarded damages of $140.0 million against St. Jude. The Company did not record a
gain given the uncertainty remaining as to the ultimate resolution. On February 
13, 2002, the court, in ruling on a number of post-trial motions, reversed each 
of the three-jury findings above, along with the jury award. The court awarded  
St. Jude certain post-trial fees and costs (in an immaterial amount), along with
contingent expenses and                                                         

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attorney fees upon any retrial of the case if a retrial is required following   
any appeal of the court's rulings. Cross appeals are pending in the Federal     
Circuit Court of Appeals.                                                       

NOTE 17 - SUBSEQUENT EVENTS                                                     

On February 9, 2004, Guidant acquired AFx, inc., a manufacturer of microwave    
surgical cardiac ablation medical devices. Guidant paid $45.0 million in cash   
and forgave a $5.8 million extension of credit. The purchase price was allocated
to the acquired assets and liabilities based upon fair market values, including 
$25.0 million in IPRD for technology that had not reached technological         
feasibility and had no alternative use and $37.0 million to intangible assets   
related to proven technology. A deferred tax liability was also recorded for the
tax effect of the intangible asset. A risk-adjusted discount rate of 22.5% was  
applied to the cash flows in order to value the IPRD. Guidant may make          
additional payments upon future satisfaction of regulatory, clinical and sales  
performance criteria. These payments will be allocated to the fair value of the 
intangibles, with any amounts paid above fair value of identifiable intangibles 
recorded as goodwill, when the amount of the contingent payments is             
determinable.                                                                   

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NOTE 18 - SELECTED QUARTERLY INFORMATION (UNAUDITED)                            

The following table summarizes the Company's operating results by quarter:      

                                                        [Enlarge/Download Table]

                                                                       2003                                2002                     
                                                    ---------------------------------------  -------------------------------------- 
                                                     FOURTH    THIRD     SECOND     FIRST     FOURTH    THIRD    SECOND     FIRST   
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
                                                                                                                                    
Net sales ......................................... $  951.4  $  933.7  $  940.8   $  872.9  $  878.3  $  809.9  $  783.2  $  689.2 
Cost of products sold .............................    237.7     222.8     231.3      212.0     206.2     198.4     197.4     160.8 
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
      Gross profit ................................    713.7     710.9     709.5      660.9     672.1     611.5     585.8     528.4 
Research and development ..........................    133.1     141.4     130.3      113.6     116.8     101.9      99.6      97.2 
Purchased in-process research and development .....       --      35.2      12.0       36.5      48.4        --        --       6.5 
Sales, marketing and administrative ...............    324.9     302.4     299.9      271.7     260.2     241.9     237.0     211.6 
Interest, net .....................................     (1.2)     (1.2)     (2.5)      (1.4)     (2.6)     (0.5)      1.0       3.4 
Royalties, net ....................................     15.7      17.0      16.8       14.4      15.3      13.8      13.7      11.2 
Amortization ......................................      8.9       5.3       3.4        3.3       3.1       3.3       3.1       3.1 
Other, net ........................................      2.3      (0.3)      0.4        5.3       5.8       5.4      (0.6)      2.0 
Litigation, net ...................................       --        --     422.8         --        --        --    (137.1)       -- 
Foundation contribution ...........................       --        --        --         --        --        --      40.0        -- 
Cook charge .......................................       --        --        --         --      60.6        --        --        -- 
Restructuring charge ..............................       --        --        --         --        --        --      14.0        -- 
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
Income (loss) from continuing operations                                                                                            
   before income taxes ............................    230.0     211.1    (173.6)     217.5     164.5     245.7     315.1     193.4 
Income taxes ......................................     30.0      64.0     (93.5)      59.0      39.3      66.5      93.4      51.4 
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
      Income (loss) from continuing operations .... $  200.0  $  147.1  ($  80.1)  $  158.5  $  125.2  $  179.2  $  221.7  $  142.0 
Income (loss) from discontinued operations,                                                                                         
   net of income taxes ............................      4.9     (18.0)    (17.0)     (65.1)    (32.8)     (4.1)    (16.9)     (2.5)
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
      Net income (loss) ........................... $  204.9  $  129.1  ($  97.1)  $   93.4  $   92.4  $  175.1  $  204.8  $  139.5 
                                                    ========  ========  ========   ========  ========  ========  ========  ======== 

Earnings per share--basic                                                                                                           
   Income (loss) from continuing operations ....... $   0.65  $   0.48  ($  0.26)  $   0.52  $   0.41  $   0.59  $   0.74  $   0.47 
   Income (loss) from discontinued operations,                                                                                      
      net of income taxes .........................     0.02     (0.06)    (0.06)     (0.21)    (0.10)    (0.01)    (0.06)    (0.01)
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
   Net income (loss) .............................. $   0.67  $   0.42  ($  0.32)  $   0.31  $   0.31  $   0.58  $   0.68  $   0.46 

Earnings per share--diluted                                                                                                         
   Income (loss) from continuing operations ....... $   0.63  $   0.47  ($  0.26)  $   0.51  $   0.41  $   0.59  $   0.72  $   0.46 
   Income (loss) from discontinued operations,                                                                                      
      net of income taxes .........................     0.02     (0.06)    (0.06)     (0.21)    (0.10)    (0.02)    (0.05)    (0.01)
                                                    --------  --------  --------   --------  --------  --------  --------  -------- 
   Net income (loss) .............................. $   0.65  $   0.41  ($  0.32)  $   0.30  $   0.31  $   0.57  $   0.67  $   0.45 
Weighted average common shares outstanding                                                                                          
   Basic ..........................................   306.07    306.64    304.52     303.20    302.63    302.09    301.48    300.76 
   Diluted ........................................   315.33    314.96    304.52     308.03    305.01    305.40    306.22    307.32 
Common stock prices                                                                                                                 
   High ........................................... $  60.37  $  51.50  $  44.51   $  37.82  $  32.89  $  38.50  $  42.84  $  51.00 
   Low ............................................ $  44.95  $  44.26  $  35.51   $  29.11  $  25.00  $  27.10  $  28.70  $  37.30 

All financial information reflects the AAA product line and Brazil operations as
discontinued operations.                                                        

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Guidant Corporation                                                             
SELECTED CONSOLIDATED FINANCIAL DATA                                            
In millions, except per share and other data                                    

                                                        [Enlarge/Download Table]

YEAR ENDED DECEMBER 31                             2003(1)       2002(2)         2001(3)        2000(4)        1999(5)  
                                               -------------  -------------  -------------  -------------  -------------
                                                                                                                        
OPERATIONS:                                                                                                             
Net sales ...................................  $     3,698.8  $     3,160.6  $     2,641.6  $     2,464.7  $     2,330.5
Cost of products sold .......................          903.8          762.8          623.3          571.2          559.9
                                               -------------  -------------  -------------  -------------  -------------
          Gross profit ......................        2,795.0        2,397.8        2,018.3        1,893.5        1,770.6
Research and development ....................          518.4          415.5          362.3          333.0          305.2
Purchased in-process research and development           83.7           54.9           15.0             --           49.0
Sales, marketing and administrative .........        1,198.9          950.7          788.6          700.6          674.4
Income from continuing operations ...........  $       425.5  $       668.1  $       523.4  $       386.3  $       352.8
Earnings per share--basic:                                                                                              
   Income from continuing operations ........  $        1.39  $        2.21  $        1.74  $        1.28  $        1.17
Earnings per share--diluted:                                                                                            
   Income from continuing operations ........  $        1.36  $        2.18  $        1.71  $        1.25  $        1.13
Weighted average common shares outstanding:                                                                             
   Basic ....................................         305.10         301.74         300.86         301.10         300.51
   Diluted ..................................         312.52         305.99         306.22         310.11         310.89
Cash dividends declared per share (6) .......  $        0.24             --             --             --             --

                                                        [Enlarge/Download Table]

DECEMBER 31                                       2003            2002            2001            2000            1999      
                                              -------------   -------------   -------------   -------------   ------------- 
                                                                                                                            
FINANCIAL POSITION:                                                                                                         
Working capital ............................. $     2,017.5   $     1,437.4   $       759.2   $       453.1   $       177.6 
Current ratio ...............................         2.9:1           2.7:1           2.0:1           1.6:1           1.2:1 
Capital expenditures, net ...................         249.3           141.1           149.1           159.9           175.1 
Total assets ................................       4,640.1         3,716.1         2,916.8         2,521.4         2,250.2 
Borrowings ..................................         948.3           368.5           760.0           808.9           880.8 
Borrowings as a percentage of                                                                                               
   total capitalization .....................          25.9%           13.7%           33.0%           40.6%           50.4%
Shareholders' equity ........................       2,713.3         2,321.8         1,545.8         1,183.5           867.3 
Book value per share ........................ $        8.68   $        7.59   $        5.05   $        3.82   $        2.79 

OTHER DATA:                                                                                                                 
Effective income tax rate ...................          12.3%           27.3%           28.1%           37.3%           38.1%
Full-time employee equivalents ..............        13,578          12,540          12,076          10,452           9,157 
Common shareholders of record ...............         5,356           5,790           5,866           5,797           6,151 

All financial information reflects the AAA product line and Brazil operations as
discontinued operations.                                                        

(1) Net income and earnings per share-diluted (EPS) include:                    

   o        $35.2 million in-process research and development (IPRD)
           recorded in conjunction with the acquisition of certain
       bioabsorbable polymer technologies from MediVas LLC

 o        $32.5 million IPRD primarily related to the Biosensors
              acquisition and the achievement of a performance milestone
            related to the six-month clinical data of the everolimus
eluting stent trial, FUTURE I               

o        $16.0 million IPRD recorded in conjunction with the  
                acquisition of a majority interest in Bioabsorbable Vascular
Solutions                                   

        o        $422.8 million net litigation charge primarily related to the
     arbitration decision involving Cordis Corporation

o        $168.3 million tax impact of items described above   

(2) Net income and EPS include:                                                 

    o        $35.6 million IPRD for an exclusive license from Novartis
               Pharma AG and Novartis AG for the right to utilize the drug
everolimus in drug eluting stents           

o        $19.3 million IPRD recorded in conjunction with the  
   acquisition of Cardiac Intelligence Corporation

         o        $137.1 million net litigation benefit resulting primarily from
          a $158.2 million award plus interest and costs against
Medtronic, Inc.                             

o        $40.0 million contribution to the Guidant Foundation 

 o        $60.6 million termination payment and related expenses
                 associated with the termination of the Cook Group Inc. merger
agreement                                   

        o        $14.0 million for the restructuring of biliary and peripheral
product line operations                     

o        $4.9 million tax impact of items described above     

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(3)      Net income and EPS include:                                            

   o        $15.0 million IPRD related to the acquisition of embolic
          protection device technology from Metamorphic Surgical
Devices, LLC                                

        o        $7.5 million of expenses associated with the first-generation
   PRIZM(R) Implantable Defibrillator field action

o        $8.3 million tax impact of items described above     

(4)      Net income and EPS include:                                            

  o        $127.0 million related to the write-off of an option to
                  acquire exclusive rights to certain experimental therapies for
               the treatment of heart failure under development by Impulse
Dynamics (tax impact - $9.8 million)        

(5)      Net income and EPS include:                                            

        o        $31.1 million related to transition pay for manufacturing and
               nonmanufacturing personnel of Intermedics and the impact of
          purchase accounting valuation adjustments required for
inventory acquired from Sulzer Medica, Ltd  

o        $49.0 million IPRD recorded in conjunction with the  
acquisition of Intermedics                  

    o        $21.9 million merger-related costs in connection with the
acquisition of CardioThoracic Systems, Inc. 

o        $20.2 million contribution to Guidant Foundation     

       o        $13.6 million other income in connection with one-time gains
               on an equity investment, net of the loss on the sale of the
general surgery product line                

        o        Adjustments to the tax provision for a change in the tax code
related to net operating loss carryforwards 

        o        Cumulative effect of a change in accounting principle, net of
taxes of $3.3 million                       

o        $42.1 million tax impact of items described above    

(6)      On February 17, 2004, Guidant's Board of Directors declared a first    
        quarter 2004 dividend of $0.10 per common share outstanding to be paid
March 15, 2004, to shareholders of record on March 1, 2004.   

See Notes to the Consolidated Financial Statements for further description of   
these items.                                                                    

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REPORT OF MANAGEMENT

The management of Guidant Corporation is responsible for the integrity and      
objectivity of the accompanying financial statements and related information.   
The consolidated financial statements have been prepared in accordance with     
accounting principles generally accepted in the US and include amounts based on 
judgments and estimates by management.                                          

Management maintains a system of internal accounting controls designed to       
provide reasonable assurance that assets are safeguarded and transactions are   
properly recorded and executed in accordance with management's authorization.   
The design, monitoring and revision of the system of internal accounting        
controls involves, among other things, management's judgments with respect to   
the relative cost and expected benefits of specific control measures. The       
effectiveness of the control system is supported by the selection, retention and
training of qualified personnel, an organizational structure that provides an   
appropriate division of responsibility and formalized procedures. The system of 
internal accounting controls is periodically reviewed and modified in response  
to changing conditions. An internal audit staff regularly monitors, on a        
worldwide basis, the adequacy and effectiveness of internal accounting controls.

In addition to the system of internal accounting controls, management maintains 
corporate policy guidelines that help monitor proper overall business conduct,  
possible conflicts of interest, compliance with laws and confidentiality of     
proprietary information. The guidelines are documented in the Guidant Code of   
Business Conduct and are reviewed on a periodic basis with members of management
worldwide.                                                                      

The Audit Committee of the Board of Directors, consisting solely of outside     
directors, appoints the independent auditors and receives and reviews the       
reports submitted by them. The Audit Committee meets several times during the   
year with management, the internal auditors and the independent auditors to     
discuss audit activities, internal controls and financial reporting matters. The
internal auditors and the independent auditors have full and free access to the 
Audit Committee.                                                                

/S/ Ronald W. Dollens                                                           
--------------------------------------                                          
President and Chief Executive Officer                                           

/S/ Keith E. Brauer                                                             
--------------------------------------                                          
Vice President, Finance and Chief Financial Officer                             

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REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders                                             
Guidant Corporation                                                             

We have audited the accompanying consolidated balance sheets of Guidant         
Corporation and Subsidiaries as of December 31, 2003 and 2002, and the related  
consolidated statements of income, shareholders' equity and cash flows for each 
of the three years in the period ended December 31, 2003. These financial       
statements are the responsibility of the Company's management. Our              
responsibility is to express an opinion on these financial statements based on  
our audits.                                                                     

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

In our opinion, the financial statements referred to above present fairly, in   
all material respects, the consolidated financial position of Guidant           
Corporation and Subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for each of the three years in 
the period ended December 31, 2003, in conformity with accounting principles    
generally accepted in the United States.                                        

/S/ Ernst & Young LLP                                                           

Indianapolis, Indiana                                                           
January 26, 2004, except for Notes 16 and 17 as to which the date is            
February 24, 2004                                                               

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Dates Referenced Herein and Documents Incorporated By Reference

		Referenced-On Page
This 10-K Filing	Date	First	Last	Other Filings

	2/18/98	47
	2/11/99	37		8-K, SC 13G/A
	6/23/99	48
	6/15/00	47
	12/31/00	26		10-K
	12/31/01	26	36	10-K
	1/1/02	14	32
	2/13/02	48
	3/6/02	47
	12/31/02	11	54	10-K
	1/2/03	46		8-K
	2/18/03	35		4/A
	4/14/03	47
	5/31/03	31
	6/12/03	48
	6/30/03	31		10-Q, 8-K
	8/19/03	47
	8/29/03	48		4
	10/1/03	5	32
For The Period Ended	12/31/03	4	54	4, 5
	1/26/04	54		4
	2/2/04	48
	2/9/04	49		4
	2/17/04	52		4, SC 13G
	2/20/04	47
	2/24/04	47	54	4
Filed On / Filed As Of	2/26/04			3, 4
	3/1/04	52
	3/15/04	52
	10/17/04	36
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Guidant Corp · 10-K · For 12/31/03 · EX-13

Filed On 2/25/04 9:47pm ET · SEC File 1-13388 · Accession Number 950137-4-1244

Annual Report · Form 10-KFiling Table of Contents

EX-13 · Portions of the Company's 2003 Annual ReportExhibit Table of Contents

Dates Referenced Herein and Documents Incorporated By Reference

Annual Report · Form 10-K
Filing Table of Contents

EX-13 · Portions of the Company's 2003 Annual Report
Exhibit Table of Contents