<PAGE>   1
 
                                                                    EXHIBIT 13.1
 
      PORTIONS OF ANNUAL REPORT TO STOCKHOLDERS INCORPORATED BY REFERENCE
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
 
<TABLE>
<CAPTION>
                                               1996        1995       1994       1993       1992
                                             ---------   --------   --------   --------   --------
                                               (IN THOUSANDS EXCEPT PER SHARE AND EMPLOYEE DATA)
<S>                                          <C>         <C>        <C>        <C>        <C>
OPERATING RESULTS FOR THE YEAR:
Net sales..................................  $  54,942   $126,922   $105,616   $ 25,116   $  9,479
Cost of sales..............................     48,774     55,960     45,947     17,029      5,039
                                                ------     ------     ------     ------     ------
  Gross profit.............................      6,168     70,962     59,669      8,087      4,440
Operating Expenses:
  Research and development.................     30,796     27,716     23,334     12,940      8,399
  Selling, general and administrative......     38,100     36,513     28,947     12,974      4,487
  Intellectual property settlements........         --         --         --     18,600         --
                                                ------     ------     ------     ------     ------
     Total operating expenses..............     68,896     64,229     52,281     44,514     12,886
Income (loss) from operations..............    (62,728)     6,733      7,388    (36,427)    (8,446)
Other income, net..........................      2,747      3,275      1,591      3,111      1,405
Income (loss) before provision for income
  taxes....................................    (59,981)    10,008      8,979    (33,316)    (7,041)
Provision for income taxes.................         --      1,000         --         --         --
                                                ------     ------     ------     ------     ------
Net income (loss)..........................    (59,981)     9,008      8,979    (33,316)    (7,041)
Net income (loss) per share................  $   (2.89)  $   0.43   $   0.44   $  (1.85)  $  (0.48)
Shares used in per share calculation.......     20,752     20,853     20,611     17,992     14,606
FINANCIAL POSITION AT JUNE 30:
Working capital............................  $  30,486   $ 86,207   $ 80,268   $ 33,321   $ 74,355
Total assets...............................     73,461    130,339    116,764     75,415     84,825
Accumulated deficit........................   (104,961)   (44,980)   (53,988)   (62,967)   (29,651)
Stockholders' equity.......................  $  53,960   $112,344   $101,373   $ 47,601   $ 80,242
ADDITIONAL INFORMATION:
Number of employees........................        548        511        500        355        157
Capital spending...........................  $   9,071   $ 13,415   $ 10,713   $ 10,457   $  5,451
</TABLE>
 
     The comparability of the above data is affected by the receipt of PMA
approval for the Cadence system on April 30, 1993, a charge of $18.6 million
relating to intellectual property settlements during fiscal 1993, a follow-on
stock offering in September 1993 and PMA approval of competitors' defibrillator
in March 1995. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
 
                                        1
<PAGE>   2
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     Since its inception, the Company and its subsidiaries have engaged in the
design, development, manufacture and sale of implantable defibrillators and
related products. In April 1993, the United States Food and Drug Administration
("FDA") approved the Company's premarket approval application ("PMA") for
commercial release of the Cadence V-100 system. In July 1994, the FDA approved
the Company's PMA supplement for the Cadence V-110 system, a smaller, lighter
version of the Cadence V-100. In December 1995, the FDA approved a PMA
supplement for the Cadet V-115 defibrillator system for abdominal implantation
only. In May 1996, the FDA approved a PMA supplement to label the Cadet V-115
for pectoral implantation. Also in May 1996, the FDA approved a PMA Application
for the TVL transvenous lead system. The Cadet V-115 is smaller and lighter than
the Cadence V-100 and V-110 implantable defibrillators but has the same or
improved functional and performance characteristics. During June 1996, the
Company submitted a PMA supplement for the Contour(TM) V-145 defibrillator
system. The Contour V-145 is designed to be smaller and lighter than the Cadet
V-115 implantable defibrillator and have the same functional and performance
characteristics. In July 1996, the Company submitted a PMA supplement for the
high voltage can versions of the Cadet and the Contour.
 
     In March 1995, the FDA approved the commercial release of new
defibrillators manufactured by Cardiac Pacemakers, Inc. ("CPI"), a subsidiary of
Guidant Corporation and Medtronic, Inc. ("Medtronic") which are small enough to
allow pectoral implantation, rather than abdominal implantation, in suitable
patients. Until receipt of regulatory approval relating to the Cadet in May
1996, the Company could not offer an implantable defibrillator labeled for
pectoral implantation in patients in the United States. Commercial release of
pectorally implantable defibrillators significantly increased competition in the
implantable defibrillator market and resulted in a significant decline in the
Company's market share and sales of the Company's products. The Company now has
products, the Cadet and Contour, which it believes are competitive; however,
there can be no assurance that the Company's products will compete successfully
with products currently manufactured by others or future products under
development by competitors which have new features, such as dual chamber and
rate-responsive pacing capabilities. In addition, while the Contour has been
commercially released in Europe, it has not yet been approved by the FDA for
commercial release in the U.S.
 
     Medtronic and CPI have regulatory approval of and are commercially
marketing single lead transvenous lead systems. In May 1996, the Company began
marketing the TVL transvenous lead system, a dual lead system. Some physicians
prefer a single lead system due to the perceived ease of implanting such a
system as compared to a dual lead system. The Company is engaged in clinical
trials of single lead transvenous defibrillation lead systems and must receive
regulatory approval prior to commercialization. There can be no assurance as to
when or whether the Company will receive regulatory approval for these systems.
To date, a large percentage of the Company's sales of defibrillators have been
at the direction of physicians who used the Company's defibrillators in
combination with commercially available transvenous lead systems supplied by the
Company's competitors. Therefore, there can be no assurance that physicians will
purchase transvenous lead systems for which the Company obtains regulatory
approval. In particular, physicians preferring single lead systems may choose to
continue to combine competitors' transvenous leads with the Company's
defibrillators, at least until such time as the Company obtains PMA approval for
its single lead systems. Furthermore, there can be no assurance that
manufacturers of competing transvenous lead systems will not attempt to
discourage or prevent use of their leads with the Company's defibrillators
through product labeling, availability, pricing or other means. In general,
unless the FDA-approved labeling includes use with any transvenous lead system
sold by its competitors, the FDA or other government agencies may take further
actions, including restrictions on reimbursement, to restrict the combination of
the Company's defibrillators with such transvenous lead systems. Such actions
could make the Company's defibrillators, including both the Cadet and the
Contour, less attractive to physicians and could therefore have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
                                        2
<PAGE>   3
 
     The Company incurred net losses from its inception in January 1985 through
the year ended June 30, 1993, incurred net losses from the fourth quarter of
fiscal 1995 through fiscal 1996, currently expects to incur a net loss for the
first quarter of fiscal 1997 and may incur a net loss for the first half of
fiscal 1997. If regulatory approval to market the Contour in the United States
is not obtained on a timely basis or at all, the Company's results of operations
will be adversely affected. Results of operations have varied and may continue
to fluctuate significantly from quarter to quarter and will depend upon numerous
factors including timing of regulatory approvals, market acceptance of the
Company's products, introductions of new products with advanced features by the
Company or its competitors, technological advances in the treatment of
arrhythmias, the outcome of intellectual property litigation and competition.
 
     The segment of the medical device market that includes implantable
defibrillators has been characterized by extensive litigation regarding patents
and other intellectual property rights. The Company has resolved intellectual
property disputes to date through licensing arrangements, when appropriate and
on terms it believes to be commercially reasonable. Under certain agreements,
Ventritex pays royalties based on commercial sales of implantable defibrillator
systems. The Company anticipates that such royalties will continue for future
implantable defibrillator systems developed by the Company. Additionally, the
agreements do not include all patents that may be issued to the licensors, thus
future patent disputes with these companies are possible. Certain of these
licenses contain significant restrictions that may have the effect of preventing
or substantially impeding an acquisition of, change-of-control of, or certain
minority investments in, the Company. Such restrictions include the possible
termination of various licenses to the Company and the requirement that the
Company make a substantial payment to one of the licensors upon such event.
Intermedics, Inc. has filed claims against the Company for patent infringement
which are still pending, and there can be no assurance that other parties will
not institute additional litigation against the Company.
 
     The foregoing statements regarding the Company's defibrillators,
transvenous lead systems and the period of time for which the Company expects to
incur additional losses are forward-looking and involve risks and uncertainties,
such as those noted above, which could cause actual results of the Company to
differ materially.
 
RESULTS OF OPERATIONS
 
  Net Sales
 
     Net sales for fiscal 1996 were $54.9 million, compared to $126.9 million
during fiscal 1995 and $105.6 million in fiscal 1994. The fiscal 1996 decrease
of $72.0 million, or 57%, reflects lower unit shipments and average unit pricing
as compared to fiscal 1995 due primarily to the introduction by the Company's
principal competitors of defibrillators capable of being implanted pectorally.
Fiscal 1996 unit shipments decreased approximately 55% from fiscal 1995 levels
and average unit prices decreased approximately 3%. As compared to the third
quarter of fiscal 1996, unit shipments in the fourth quarter increased
approximately 30% and average unit prices increased approximately 4% due to
regulatory approval for pectoral implantation of the Cadet. Sales in fiscal 1995
increased compared to fiscal 1994 as a result of increased unit shipments. Sales
of defibrillators provided substantially all of the Company's revenues in these
periods. A majority of the Company's sales in each period were to hospitals at
the request of physicians who used Ventritex defibrillators in combination with
a competitor's transvenous defibrillation lead systems. Sales invoiced in
foreign currencies are less than 5% of total net sales. The Company currently
does not hedge the risk of currency exchange rate fluctuations.
 
  Gross Profit
 
   
     Gross profit for fiscal 1996 was $6.2 million compared to $71.0 million in
fiscal 1995 and $59.7 million in fiscal 1994. Gross margin (gross profit as a
percent of net sales) was approximately 11% for fiscal 1996, as compared to
approximately 56% in both fiscal 1995 and 1994. However, the gross margin was
41% for the fourth quarter of fiscal 1996, reflecting the somewhat stronger
sales in the fourth quarter. The decrease in gross profit from fiscal 1995 to
fiscal 1996 reflects substantial reductions in unit shipments, increased
provisions for excess and obsolete inventory, decreased production levels and
lower average unit pricing in the current fiscal year. The increase in gross
profit from fiscal 1994 to fiscal 1995 was primarily due to increases in sales
volume
    
 
                                        3
<PAGE>   4
 
   
and lower per-unit component costs, partially offset by increases in royalty
expenses, increased spending to establish leads manufacturing capability and
increased provisions for product obsolescence.
    
 
   
     Fiscal 1996 cost of sales includes a provision of $17.1 million for
potentially excess inventory and cancellation of purchase commitments for
components. These provisions resulted from the rapid adoption of competitors'
defibrillators that allow pectoral, rather than abdominal, implantation in
suitable patients and the approval of additional competitive defibrillator
systems labeled for pectoral implantation (see "Overview"). Despite these new
product introductions, the Company's view was that its then-current products
were still competitive in certain market segments and that the majority of
inventory on hand would be realized. The Company closely monitored sales trends
and internal sales estimates were adjusted when the pace of market share erosion
became known. At such times, the Company evaluated the impact of the revised
sales data on inventory reserves. All inventory suitable only for abdominal
implantation in excess of forecasted units to be sold was fully reserved. Many
of the components used in manufacture of products have long lead times from
suppliers and are available only from a single source. Consequently, the Company
is often obligated to enter into long-term supply contracts. In line with normal
practice, when management realized the existence of excess purchase commitments,
significant efforts were made to cancel commitments, convert dollar commitments
to other components which could be utilized on new models and reschedule and
delay deliveries. For any component with quantities on firm order in excess of
anticipated need, a reserve was established for anticipated net cancellation
costs. Of the $17.1 million in provisions, $14.1 million was recorded in the
first half of fiscal year 1996.
    
 
   
     During the first half of fiscal 1996, in anticipation of regulatory
approval, the Company began production of its Cadet V-115 defibrillator system
and TVL transvenous lead system, and initially experienced shortages of certain
critical components due to manufacturing yield problems at its suppliers. As a
result, supplies of the Cadet V-115 defibrillator system were limited. There can
be no assurance that future production problems will not be encountered in
producing the Cadet, expanding production of the Contour and the TVL or
establishing production of other new products currently under development.
Failure to manufacture new or existing products on a timely and cost effective
basis could result in substantial unanticipated expenses, delays in the
commercial availability of such products, and could have a material adverse
effect on the Company's business, financial condition and results of operations.
    
 
     Gross margins have fluctuated historically due to variations in production
volume, manufacturing efficiencies, product obsolescence, new product
introductions by the Company or its competitors, royalty rates, warranty
expense, component price fluctuations, competitive pricing, and other factors.
Gross profits may fluctuate in the future in both dollar amount and as a
percentage of net sales due to these and other factors, including component part
availability, regulatory actions and changes in reimbursement policies by either
government or private insurance companies.
 
     At June 30, 1996, the Company has provided a reserve for potentially excess
or obsolete inventory and believes that no loss will be incurred upon its
disposition. There can be no assurance, however, that the actual sales will not
differ materially from the sales forecast in the near term. The foregoing
statements regarding the Company's defibrillators, transvenous lead systems,
gross profits and sufficiency of inventory reserves are forward-looking and
involve risks and uncertainties, such as those noted above, which could cause
actual results of the Company to differ materially.
 
  Operating Expenses
 
     Operating expenses were $68.9 million in fiscal 1996 compared to $64.2
million in fiscal 1995 and $52.3 million in fiscal 1994.
 
     Research and development expenditures increased approximately 11% to $30.8
million in fiscal 1996, compared to $27.7 million in fiscal 1995 and $23.3
million in fiscal 1994. The increase in spending during fiscal 1996 was
primarily due to costs associated with early production stages of the Cadet
defibrillator system in addition to design costs for Contour, transvenous lead
systems and future products. The Company's research and development expenses
relate to various research, product and process development, clinical trial and
 
                                        4
<PAGE>   5
 
quality assurance activities. Ventritex plans to continue to invest in research
and development and expects such expenses to continue to increase in dollar
amount in the future.
 
     Selling, general and administrative expenses increased to $38.1 million in
fiscal 1996 from $36.5 million in fiscal 1995 and $28.9 million in fiscal 1994.
The increase for fiscal 1996 reflects increases in amortization costs of
external equipment to support defibrillators (which are supplied to customers on
long-term loan, typically at no charge, in accordance with industry practice)
and the expenses of a direct operating subsidiary in Germany formed in fiscal
1996. These increases were partially offset by decreases in compensation
expense, commission expenses as a result of decreased revenues as discussed
above, insurance expense, software system implementation costs and the impact of
provisions for potential doubtful accounts. Management incentive bonuses were
not accrued, and provisions for potential doubtful accounts were not booked in
fiscal 1996, while such accruals and provisions were booked in fiscal 1995.
Legal expenses decreased approximately $0.3 million from fiscal 1995 to fiscal
1996, but are expected to increase significantly in future periods as the
Intermedics litigation moves beyond jurisdictional matters. Fiscal 1995 expenses
were greater than those of fiscal 1994 due to increased staffing and associated
expenses, amortization costs of external equipment, costs associated with
implementation of a new software system, research grants and donations,
insurance expense and costs related to unit sales volume increase.
 
  Other Income
 
     Other income, consisting primarily of interest income, was $2.7 million in
fiscal 1996 compared to $3.3 million and $1.6 million in fiscal 1995 and fiscal
1994, respectively. Fluctuations in interest income reflect changes in invested
cash balances and interest rates.
 
  Income Taxes
 
     The Company has established a valuation allowance for deferred tax assets
resulting from operating losses incurred in fiscal 1996 and fiscal 1994;
accordingly no tax benefits were recorded in such years. For fiscal 1995, the
provision for income taxes was 10% of pre-tax income, reflecting the benefit
from the utilization of tax net operating loss carryforwards.
 
FLUCTUATIONS IN OPERATING RESULTS; PROFITABILITY UNCERTAIN; VOLATILITY OF STOCK
PRICE
 
     The Company incurred net losses from its inception in January 1985 through
the year ended June 30, 1993, incurred net losses from the fourth quarter of
fiscal 1995 through fiscal 1996, expects to incur a net loss for the first
quarter of fiscal 1997 and may incur a net loss for the first half of fiscal
1997. If regulatory approval to market the Contour in the United States is not
obtained on a timely basis or at all, the Company's results of operations will
be adversely affected. There can be no assurance that the FDA will approve the
Contour for marketing in the U.S. on a timely basis, if at all. Results of
operations have varied and may continue to fluctuate significantly from quarter
to quarter and will depend upon numerous factors including timing of regulatory
approvals, market acceptance of the Company's products, introductions of new
products with advanced features by the Company or its competitors, technological
advances in the treatment of arrhythmias, the outcome of intellectual property
litigation and competition. Sales have fluctuated significantly in the past,
especially in fiscal 1995 and fiscal 1996, as competitors introduced products
with advanced features. The Company's gross margins will be dependent on
production volumes, manufacturing efficiencies, royalties under patent license
agreements, warranty expense, component price fluctuations, competitive pricing,
varying product sales mix and other factors. There can be no assurance that
gross margins will improve in the future. In addition, a significant portion of
the Company's operating expenses are relatively fixed in nature and planned
expenditures are based, in part, on anticipated orders. Any inability to adjust
spending quickly enough to compensate for revenue shortfalls may magnify the
adverse impact of such revenue shortfall on the Company's results of operations.
Furthermore, there can be no assurance that the Company will achieve
profitability in the future or that profitability, if achieved, will be
sustained.
 
     The market price of the Company's Common Stock has been and is likely to
continue to be highly volatile. In addition, the stock market and the medical
technology sector in particular have from time to time
 
                                        5
<PAGE>   6
 
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. Factors such as fluctuations in
the Company's operating results, shortfalls in revenue or earnings from levels
expected by securities analysts, new product introductions by the Company or its
competitors, announcements of technological innovations or new products by the
Company or its competitors, governmental regulation, developments with respect
to patents or proprietary rights and litigation relating thereto, public concern
as to the safety of products developed by the Company or others and general
market conditions may have a significant adverse effect on the market price of
the Common Stock.
 
     Substantially all of the shares of Common Stock held by current
stockholders of the Company are eligible for immediate sale in the public
market, subject in some cases to the public information, manner of sale, volume
limitation and notice of sale provisions of federal securities laws. Future
sales of such shares could lead to a decline in the market price of the Common
Stock.
 
     The foregoing statements regarding the Company's operating results are
forward-looking and involve risks and uncertainties, such as those noted above,
which could cause actual results of the Company to differ materially.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Cash and equivalents and short-term investments totaled $22.6 million at
June 30, 1996, compared to $73.9 million at June 30, 1995. The decrease of $51.3
million reflects cash used in operations of $43.1 million and investments in
capital equipment and leasehold improvements of $9.1 million partially offset by
proceeds from exercise of stock options and an employee stock purchase plan of
$1.6 million.
 
     In view of current and anticipated capacity requirements, the Company
expects capital expenditures of approximately $6.0 million in fiscal 1997,
compared with $9.1 million in fiscal 1996 and $13.4 million in fiscal 1995.
Fiscal 1997 capital expenditures are expected to be made principally in
connection with the purchase of new equipment.
 
     The Company's liquidity and capital requirements will depend on numerous
factors, including the extent to which the Company's existing and future
products gain market acceptance, the duration and magnitude of operating losses,
FDA regulatory actions, changes in health care reimbursement policies and
intellectual property litigation to which the Company is or may become a party.
In August 1996, the Company completed a public offering of $57.5 million
aggregate principal amount of 5 3/4% Convertible Subordinated Notes due August
15, 2001. The Company believes that its existing cash, cash equivalents and
short-term investment balances, combined with cash forecasted to be generated
from operations, will be sufficient to meet its capital requirements for the
foreseeable future. Should fiscal 1997 results of operations fall significantly
short of forecasted levels, the Company could consider either seeking additional
capital or restructuring its operations. In addition, the Company may use other
means of financing, including the issuance of equity securities or debt, if
necessary or financially advantageous. The foregoing statements regarding the
sufficiency of the Company's capital resources to meet its liquidity needs are
forward-looking and involve risk and uncertainties, such as those noted above,
which could cause actual results of the Company and the period of time for which
such capital resources are sufficient to differ materially.
 
                                        6
<PAGE>   7
 
                                VENTRITEX, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                               JUNE 30,
                                                                        ----------------------
                                                                          1996          1995
                                                                        ---------     --------
<S>                                                                     <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents...........................................  $   9,299     $ 34,942
  Short-term investments..............................................     13,254       39,006
  Accounts receivable, net of allowance for doubtful accounts of
     $484.............................................................     10,658       11,376
  Inventories.........................................................     15,427       17,103
  Prepaid expenses....................................................      1,030        1,242
  Other current assets................................................        319          533
                                                                        ---------     --------
     Total current assets.............................................     49,987      104,202
Equipment and leasehold improvements, net.............................     22,655       26,119
Other assets..........................................................        819           18
                                                                        ---------     --------
          Total assets................................................  $  73,461     $130,339
                                                                        =========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................................  $   8,027     $  3,541
  Accrued employee compensation.......................................      2,548        4,879
  Accrued royalties...................................................      1,869        2,200
  Accrued warranty....................................................      1,721        1,647
  Other accrued expenses..............................................      4,409        4,801
  Deferred other income...............................................        927          927
                                                                        ---------     --------
          Total current liabilities...................................     19,501       17,995
Commitments and contingencies
Stockholders' equity:
  Preferred stock, par value $.001, 5,000 shares authorized, none
     issued and outstanding...........................................         --           --
  Common stock, par value $.001, 35,000 shares authorized, 20,878
     shares and 20,643 shares issued and outstanding in 1996 and 1995,
     respectively.....................................................         21           21
  Additional paid-in capital..........................................    158,900      157,303
  Accumulated deficit.................................................   (104,961)     (44,980)
                                                                        ---------     --------
          Total stockholders' equity..................................     53,960      112,344
                                                                        ---------     --------
          Total liabilities and stockholders' equity..................  $  73,461     $130,339
                                                                        =========     ========
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                        7
<PAGE>   8
 
                                VENTRITEX, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Net sales..................................................  $ 54,942     $126,922     $105,616
Cost of sales..............................................    48,774       55,960       45,947
                                                             --------     --------     --------
  Gross profit.............................................     6,168       70,962       59,669
Operating expenses:
  Research and development.................................    30,796       27,716       23,334
  Selling, general and administrative......................    38,100       36,513       28,947
                                                             --------     --------     --------
     Total operating expenses..............................    68,896       64,229       52,281
                                                             --------     --------     --------
       Income (loss) from operations.......................   (62,728)       6,733        7,388
Other income (expense)
Interest income............................................     2,804        3,366        1,548
  Interest expense.........................................        --           (8)         (42)
  Other income (expense)...................................       (57)         (83)          85
                                                             --------     --------     --------
     Other income, net.....................................     2,747        3,275        1,591
                                                             --------     --------     --------
Income (loss) before provision for income taxes............   (59,981)      10,008        8,979
Provision for income taxes.................................        --        1,000           --
                                                             --------     --------     --------
Net income (loss)..........................................  $(59,981)    $  9,008     $  8,979
                                                             ========     ========     ========
Net income (loss) per share................................  $  (2.89)    $   0.43     $   0.44
Shares used in per share calculation.......................    20,752       20,853       20,611
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                        8
<PAGE>   9
 
                                VENTRITEX, INC.
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                       COMMON STOCK                     RECEIVABLE
                                   --------------------     PAID IN        FROM       ACCUMULATED
                                   SHARES      AMOUNT       CAPITAL    STOCKHOLDERS     DEFICIT        TOTAL
                                   ------     ---------     --------   ------------   -----------     --------
<S>                                <C>        <C>           <C>        <C>            <C>             <C>
Balance at June 30, 1993.........  18,144     $ 110,580           --       $(12)       $ (62,967)     $ 47,601
Sales of common stock............    494          1,966           --         12               --         1,978
Sale of common stock in follow-on
  public offering, net of
  underwriting discounts and
  issuance costs of $2,844.......  1,450         42,815           --         --               --        42,815
Net income.......................     --             --           --         --            8,979         8,979
                                   ------     ---------     --------       ----        ---------      --------
Balance at June 30, 1994.........  20,088       155,361           --         --          (53,988)      101,373
Sales of common stock............    555          1,963           --         --               --         1,963
Reincorporation in Delaware......     --       (157,303)     157,303         --               --            --
Net income.......................     --             --           --         --            9,008         9,008
                                   ------     ---------     --------       ----        ---------      --------
Balance at June 30, 1995.........  20,643            21      157,303         --          (44,980)      112,344
Sales of common stock............    235             --        1,597                          --         1,597
Net loss.........................     --             --           --         --          (59,981)      (59,981)
                                   ------     ---------     --------       ----        ---------      --------
Balance at June 30, 1996.........  20,878     $      21     $158,900         --        $(104,961)     $ 53,960
                                   ======     =========     ========       ====        =========      ========
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                        9
<PAGE>   10
 
                                VENTRITEX, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                    YEAR ENDED JUNE 30,
                                                             ----------------------------------
                                                               1996         1995         1994
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
Increase (decrease) in cash and cash equivalents
Operating activities:
  Net income (loss)........................................  $(59,981)    $  9,008     $  8,979
  Adjustments to reconcile net income (loss) to net cash
     provided by (used in) operating activities:
     Depreciation and amortization.........................    12,487        8,204        3,964
     Loss from disposal of equipment.......................        48          168           --
     Changes in operating assets and liabilities:
       Accounts receivable.................................       718        6,146      (10,020)
       Inventories.........................................     1,676        6,043       (2,913)
       Prepaid expenses and other current assets...........       426          217       (1,188)
       Accounts payable, accrued warranty, and other
          accrued expenses.................................     4,168        3,269        1,196
       Accrued employee compensation.......................    (2,331)         736        2,364
       Accrued royalties...................................      (331)      (1,331)       2,741
       Accrued intellectual property settlements...........        --           --      (18,600)
                                                             --------     --------     --------
          Net cash provided by (used in) operating
            activities.....................................   (43,120)      32,460      (13,477)
 
Investing activities:
  Purchase of short-term investments.......................   (37,623)     (83,293)     (35,551)
  Proceeds from maturities of short-term investments.......    63,375       67,472       12,366
  Acquisition of equipment and leasehold improvements......    (9,071)     (13,415)     (10,713)
  Change in other assets...................................      (801)          11           (5)
                                                             --------     --------     --------
          Net cash provided by (used in) investing
            activities.....................................    15,880      (29,225)     (33,903)
Financing activities:
  Proceeds from follow-on common stock offering, net.......        --           --       42,815
  Proceeds from sales of common stock......................     1,597        1,963        1,978
  Principal payments under capital lease obligations.......        --          (70)        (124)
                                                             --------     --------     --------
          Net cash provided by financing activities........     1,597        1,893       44,669
Increase (decrease) in cash and cash equivalents...........   (25,643)       5,128       (2,711)
Cash and cash equivalents at beginning of year.............    34,942       29,814       32,525
                                                             --------     --------     --------
Cash and cash equivalents at end of year...................  $  9,299     $ 34,942     $ 29,814
                                                             ========     ========     ========
Supplemental Cash Flow Information
Cash paid for:
  Interest.................................................  $     --     $      8     $     42
  Income taxes.............................................  $     65     $    689     $     --
</TABLE>
 
                 See Notes to Consolidated Financial Statements
 
                                       10
<PAGE>   11
 
                                VENTRITEX, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Business and Organization -- Ventritex, Inc., a Delaware corporation, and
its wholly-owned subsidiaries (the Company) designs, develops, manufactures and
sells implantable defibrillators and related products for the treatment of
ventricular tachycardia and ventricular fibrillation. Implantable defibrillators
are generally purchased by hospitals upon the recommendation of
electrophysiologists. The principal markets for the Company's products are the
United States and Europe.
 
     The implantable defibrillator market is characterized by rapid
technological change and intense competition. As a result of the commercial
release by competitors of pectorally implantable defibrillators in 1995, the
Company experienced a significant decline in market share and revenues during
fiscal 1996, resulting in a net loss of $60 million. The Company believes that
its recently approved products and products currently awaiting regulatory
approval will lead to increased revenues and improved cash flows from
operations. If the Company experiences delays in new product approvals or
significant shortfalls in results of operations from forecasted levels, the
Company could consider either seeking additional capital or restructuring its
operations.
 
     The Company believes that its existing cash, cash equivalents and
short-term investment balances, combined with cash forecasted to be generated
from operations, will be sufficient to meet capital requirements through at
least fiscal 1997. In addition, the Company intends to issue convertible debt
during the first quarter of fiscal 1997, which offering, if successfully
completed, will provide sufficient capital for the foreseeable future. Should
fiscal 1997 results of operations fall significantly short of forecasted levels
and should the convertible debt offering not be completed as anticipated, the
Company would be required to restructure its operations in order to preserve
liquidity. Such restructuring could include delaying product development
efforts, reducing or delaying capital expenditures, reducing personnel related
costs, and other similar actions. In addition, the Company may use other means
of financing, including the issuance of equity securities or debt, if necessary
or financially advantageous.
 
     The Company has entered into licensing arrangements which require the
payment of royalties on sales of defibrillators. Certain of these licenses
contain significant restrictions that may have the effect of preventing or
substantially impeding an acquisition of, change-of-control of, or minority
investment in, the Company.
 
     The Company's products include components that must meet strict quality
standards. The Company currently has sole source supply arrangements for a
number of critical components. Although management believes that alternative
sources of supply are available for most components and subcontracted
manufacturing services, the time required to locate and qualify other suppliers
could cause a delay in manufacturing that may be financially disruptive to the
Company.
 
     Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. The market for implantable defibrillator is subject to rapid
technological change and obsolescence of inventory. Any product developed by the
Company that gains approval from the United States Food and Drug Administration
will have to compete for market acceptance and market share. An important factor
in such competition may be the timing of market introduction of competitive
products. Management has developed a sales forecast based upon the expected
timing of regulatory approval and market acceptance of its products and those of
competitors. At June 30, 1996, the Company has provided a reserve for
potentially excess or obsolete inventory and believes that no loss will be
incurred upon its disposition. There can be no assurance, however, that the
actual sales will not differ materially from the sales forecast in the near
term.
 
     Basis of Presentation -- The accompanying consolidated financial statements
include the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The functional
currency for the Company's foreign subsidiaries is the U.S. dollar. The Company
currently
 
                                       11
<PAGE>   12
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
does not hedge the risk of currency exchange rate fluctuations. Foreign currency
losses were $46,000, $14,000, and $8,000 for the fiscal years ended June 30,
1996, 1995 and 1994, respectively.
 
     Cash Equivalents -- The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
 
     Investments -- The Company invests in short-term debt securities consisting
of commercial paper with maturities of less than twelve months and overnight
deposits (including repurchase agreements for which, due to their short term
nature, the Company normally does not take possession of the underlying
securities). Due to the short duration to maturity, the cost basis of these
securities materially approximates their fair market value. By policy, all
investments have a minimum short-term investment rating of A-1 or P-1. As of
June 30, 1996, one investment represented 24% of total investments; this
investment matured in July 1996. No other issuer represented greater than 12% of
total investments.
 
     The Company classifies all investments as "available-for-sale".
Available-for-sale securities are carried at fair value based upon quoted market
prices, with the unrealized gains and losses (if significant) reported in a
separate component of stockholders' equity.
 
     Inventories -- Inventories are valued at the lower of cost (first-in,
first-out method) or market.
 
     Equipment and Leasehold Improvements -- Equipment, including capital
equipment leases, and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Equipment is depreciated by the
straight-line method over estimated useful lives of three to seven years.
Leasehold improvements are amortized by the straight-line method over the
shorter of the life of the related asset or the term of the lease. Depreciation
expense includes amortization of capital leases and leasehold improvements. The
Company periodically reviews the useful lives of specific property and equipment
based upon changes in technology and products. In fiscal 1996, as a result of
such a review, the Company recorded additional depreciation expense of $3.0
million related to certain equipment.
 
     Other Assets -- At June 30, 1996, other assets is comprised primarily of an
$800,000 note receivable from an officer of the Company. The note bears interest
at 5.33%, is due in April 1998 and is secured by shares of the Company's stock
held by the officer and other assets. The carrying value of the note materially
approximates its fair value based on a discounted cash flow analysis.
 
     Warranty -- The Company warrants its implantable defibrillators for three
years or 100 high voltage capacitor charges. A provision for future warranty
costs is recorded based on management estimates.
 
     Revenue Recognition -- Revenue from sales of the Company's products is
recognized upon receipt of a purchase order and shipment of the product.
 
     Net Income (Loss) Per Share -- Net income (loss) per share is computed
using the weighted average number of shares of common stock outstanding and
common equivalent shares, if dilutive.
 
     Accounting for Long-Lived Assets -- In 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," which standardizes the accounting practices for the
recognition and measurement of impairment losses on certain long-lived assets.
The Company will adopt Statement No. 121 in the first quarter of fiscal 1997
and, based on current circumstances, does not believe the effect of adoption
will be material.
 
     Stock-Based Compensation -- The Company accounts for stock options under
Accounting Principles Board No. 25. In 1995, the FASB issued Statement of
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Under
this standard, the Company will provide expanded disclosures reflecting the
amount of compensation expense related to stock-based compensation, including
pro forma net income and earnings per share, beginning in fiscal 1997.
 
                                       12
<PAGE>   13
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 2:  SHORT-TERM INVESTMENTS
 
     Short-term investments, at amortized cost, which approximate fair value,
are comprised of the following:
 
<TABLE>
<CAPTION>
                                                                            JUNE 30,
                                                                      --------------------
                                                                       1996         1995
                                                                      -------     --------
                                                                         (IN THOUSANDS)
    <S>                                                               <C>         <C>
    Overnight deposits..............................................  $ 1,639     $ 12,155
    Overnight repurchase agreements.................................    5,670       13,990
    U.S. government obligations.....................................    3,521           --
    Commercial paper................................................    9,733       41,470
                                                                      -------     --------
      Total available-for-sale investments..........................   20,563       67,615
      Less cash equivalent investments..............................   (7,309)     (28,609)
                                                                      -------     --------
    Short-term investments..........................................  $13,254     $ 39,006
                                                                      =======     ========
</TABLE>
 
     During the years ended June 30, 1996 and 1995, there were no sales prior to
maturity and therefore no realized gains or losses.
 
NOTE 3:  CONSOLIDATED BALANCE SHEET COMPONENTS
 
     Certain balance sheet components are as follows:
 
<TABLE>
<CAPTION>
                                                                           JUNE 30,
                                                                     ---------------------
                                                                       1996         1995
                                                                     --------     --------
                                                                        (IN THOUSANDS)
    <S>                                                              <C>          <C>
    Inventories:
      Raw materials................................................  $  7,895     $  4,698
      Work-in-process..............................................     3,091        8,121
      Finished goods...............................................     4,441        4,284
                                                                     --------     --------
                                                                     $ 15,427     $ 17,103
                                                                     ========     ========
    Property, plant, and equipment:
      Equipment....................................................  $ 44,347     $ 34,660
      Leasehold improvements.......................................     7,182        7,077
      Construction in process......................................       978        2,099
                                                                     --------     --------
                                                                       52,507       43,836
    Less: accumulated depreciation and amortization................   (29,852)     (17,717)
                                                                     --------     --------
                                                                     $ 22,655     $ 26,119
                                                                     ========     ========
</TABLE>
 
NOTE 4:  STOCKHOLDERS' EQUITY
 
  Stock Option Plans and Stock Purchase Plan
 
     Under the 1995 Stock Option Plan, the Company may grant incentive stock
options and non-statutory stock options to employees and consultants. Options
may be granted to purchase common stock at exercise prices that will be no less
than the fair market value of the stock at the grant date, as determined by the
Board of Directors, and with terms of five to ten years. The options generally
become exercisable over four years from the date of grant.
 
     Under the Director Option Plan, non-employee directors of the Company
("Outside Directors") receive nondiscretionary, automatic option grants
exercisable for 15,000 shares upon their initial election to the Board
 
                                       13
<PAGE>   14
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
of Directors and on July 1 of each year thereafter exercisable for 5,000 shares,
provided that the first such automatic grant on July 1, 1996 will be exercisable
for 7,500 shares. Options granted to Outside Directors have a term of ten years
from the date of grant and have an exercise price equal to the closing price of
the Company's common stock on the last trading day prior to the date of the
grant. Initial options to Outside Directors become exercisable ratably over 36
months and subsequent annual grants become exercisable ratably over twelve
months.
 
     The following is a summary of activity during fiscal 1994, 1995 and 1996
under all of the Company's plans:
 
<TABLE>
<CAPTION>
                                                                                                AGGREGATE
                                  SHARES AVAILABLE     SHARES SUBJECT     EXERCISE PRICE      EXERCISE PRICE
                                     FOR GRANT           TO OPTIONS          PER SHARE        (IN THOUSANDS)
                                  ----------------     --------------     ---------------     --------------
<S>                               <C>                  <C>                <C>                 <C>
Balance at June 30, 1993........         37,388           1,933,409       $ 0.40 - $37.75        $ 19,965
  Authorized....................        900,000                  --             --                     --
  Granted.......................       (445,609)            445,609       $17.25 - $43.87          11,857
  Exercised.....................             --            (450,354)      $ 0.40 - $29.50          (1,126)
  Canceled......................         75,329             (75,329)      $ 0.47 - $43.87          (1,184)
                                     ----------           ---------       ---------------         -------
Balance at June 30, 1994........        567,108           1,853,335       $ 0.40 - $43.87        $ 29,512
  Authorized....................      1,900,000                  --             --                     --
  Granted.......................       (829,077)            829,077       $14.06 - $28.75          18,054
  Exercised.....................             --            (491,836)      $ 0.47 - $26.00            (854)
  Canceled......................        136,447            (136,447)      $ 0.40 - $43.87          (3,348)
  Plan shares expired...........       (199,128)                 --             --                     --
                                     ----------           ---------       ---------------         -------
Balance at June 30, 1995........      1,575,350           2,054,129       $ 1.00 - $43.87        $ 43,364
  Authorized....................             --                  --             --                     --
  Granted.......................     (1,009,845)          1,009,845       $15.63 - $21.50          16,243
  Exercised.....................             --            (153,870)      $ 1.00 - $17.25            (416)
  Canceled......................        198,500            (198,500)      $ 1.00 - $43.87          (4,995)
  Plan shares expired...........       (149,298)                 --             --                     --
                                     ----------           ---------       ---------------         -------
Balance at June 30, 1996........        614,707           2,711,604       $ 1.00 - $43.87        $ 54,196
                                     ==========           =========       ===============         =======
</TABLE>
 
     At June 30, 1996, 1,093,616 of the options outstanding were exercisable. At
June 30, 1995, 796,540 of the options outstanding were exercisable.
 
     The Company has a 1991 Employee Stock Purchase Plan for which a total of
325,000 shares of common stock have been authorized for issuance. Eligible
employees may invest up to 10% of compensation through payroll deductions and
purchase shares of the Company's stock at 85% of fair market value at specified
dates. The Company has issued 206,732 shares since inception of the plan,
including 80,808 shares during the fiscal year ended June 30, 1996.
 
  Stockholder Rights Plan
 
     Under the Company's Stockholder Rights Plan, one preferred share purchase
right (a "Right") is attached to each share of common stock of the Company. Each
Right will entitle stockholders to purchase 1/1000 of a share of Series A
participating preferred stock of the Company, a designated series of preferred
stock for which each 1/1000 of a share has economic attributes and voting rights
equivalent to one share of the Company's common stock, at an exercise price of
$100. The Rights only become exercisable in certain limited circumstances
involving acquisitions of or tender offers for 15% or more of the Company's
capital stock. For a
 
                                       14
<PAGE>   15
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
limited period of time after the announcement of any such acquisition or offer,
the Rights are redeemable at a price of $.01 per Right. After becoming
exercisable, in certain more limited circumstances, each Right entitles its
holder to purchase for $100 an amount of common stock of the Company, or in
certain circumstances, securities of the acquiror, having a then current market
value equal to $200. The Rights expire on August 16, 2004.
 
NOTE 5:  LEASE AND PURCHASE COMMITMENTS
 
     The Company leases facilities and equipment under noncancelable lease
agreements. Future minimum lease payments at June 30, 1996 were as follows:
 
<TABLE>
<CAPTION>
                                                                OPERATING LEASES
                                                                ----------------
                                                                 (IN THOUSANDS)
                <S>                                             <C>
                1997..........................................       $1,451
                1998..........................................        1,516
                1999..........................................        1,505
                2000..........................................          798
                                                                     ------
                Total minimum lease payments..................       $5,270
                                                                     ======
</TABLE>
 
     The Company leases its facilities under non-cancelable lease agreements
that extend through December 2000. Rental expense totaled approximately
$1,377,000, $1,351,000 and $1,033,000 for fiscal years ended June 30, 1996, 1995
and 1994, respectively.
 
     At June 30, 1996, the Company had approximately $7,000,000 in
non-cancelable commitments with suppliers to provide components in the normal
course of business.
 
NOTE 6:  INCOME TAXES
 
     The provision for income tax consists of the following:
 
<TABLE>
<CAPTION>
                                                               1996        1995       1994
                                                              -------     ------     ------
                                                                     (IN THOUSANDS)
    <S>                                                       <C>         <C>        <C>
    Current
      Federal...............................................  $    --     $  349     $   --
      State.................................................       --        651         --
                                                               ------     ------     ------
                                                              $    --     $1,000     $   --
                                                               ======     ======     ======
</TABLE>
 
     The reconciliation of income tax provision (benefit) computed at the U.S.
federal statutory rate to the provision for income taxes is as follows:
 
<TABLE>
<CAPTION>
                                                             1996        1995        1994
                                                           --------     -------     -------
                                                                    (IN THOUSANDS)
    <S>                                                    <C>          <C>         <C>
    Tax provision (benefit) at U.S. statutory............  $(20,394)    $ 3,503     $ 3,053
    State taxes net of federal benefit...................        --         423          --
    Utilization of tax net operating loss
      carryforwards......................................                (6,835)         --
    Valuation allowance for deferred tax assets..........    20,394       3,793      (3,053)
    Other................................................        --         116          --
                                                              -----       -----       -----
                                                           $     --     $ 1,000     $    --
                                                              =====       =====       =====
</TABLE>
 
                                       15
<PAGE>   16
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows:
 
<TABLE>
<CAPTION>
                                                                           JUNE 30,
                                                                     ---------------------
                                                                       1996         1995
                                                                     --------     --------
                                                                        (IN THOUSANDS)
    <S>                                                              <C>          <C>
    Deferred tax assets:
      Net operating loss carryforwards.............................  $ 33,960     $ 17,408
      Tax credit carryforwards.....................................     3,418        3,347
      Accrued liabilities..........................................     2,612        2,666
      Inventory reserves...........................................     8,168        6,247
      Capitalized research and development costs...................     2,027        2,761
      Other........................................................     2,601        1,252
                                                                       ------       ------
                                                                       52,786       33,681
      Valuation allowance..........................................  $(52,786)    $(33,681)
                                                                       ------       ------
                                                                     $     --     $     --
                                                                       ======       ======
</TABLE>
 
     Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation
allowance, in an amount equal to the net deferred tax assets as of June 30, 1996
and 1995, has been established to reflect these uncertainties.
 
     Approximately $10,238,000 of the deferred tax assets subject to the
valuation allowance at June 30, 1996 relates to the tax benefits of stock option
deductions. These benefits, when realized, will be credited directly to
stockholders' equity and will not reduce the provision for income taxes. The
change in valuation allowance was a net increase of $19,105,000 and $1,028,000
for fiscal years 1996 and 1995, respectively.
 
     At June 30, 1996, the Company has net operating loss and research and
development tax credit carryforwards for federal tax purposes of approximately
$99,882,000 and $2,806,000, respectively, that will expire through 2011 if not
utilized. In addition, the Company has a federal minimum tax credit carryover of
$454,000 and a California investment tax credit carryforward of $240,000.
 
NOTE 7:  LITIGATION
 
     The Company is currently in litigation with one of its competitors,
Intermedics, Inc. In response to threats from Intermedics, the Company filed a
declaratory judgment action in the United States District Court in the Northern
District of California in January 1993, asking the court to declare that certain
patents which Intermedics had asserted were being infringed by the Company were,
in fact, invalid, unenforceable or not infringed. Intermedics then filed several
actions in the United States District Court in the Southern District of Texas
alleging infringement by the Company of nine Intermedics patents. Initially,
this litigation was focused on procedural issues relating to whether the dispute
would be tried in California or Texas. On October 12, 1994, the United States
District Court for the Northern District of California denied Intermedics motion
to transfer Ventritex's pending suits to Texas and granted Ventritex's motion to
enjoin Intermedics from further prosecution of its aforementioned suits in
Texas. The United States District Court for the Southern District of Texas
thereafter issued an order transferring to California all of the Texas cases
which Intermedics had served upon Ventritex. The Court has indicated that the
trial in connection with the above described actions will begin May 5, 1997.
 
     The Company filed a further action in the Northern District of California
in July 1993 seeking a declaratory judgment that the patents that Intermedics
has asserted against the Company are not infringed by Ventritex, are invalid and
are unenforceable. This action, which was filed against Intermedics, its parent
and
 
                                       16
<PAGE>   17
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
affiliate companies, SulzerMedica and Sulzer, Inc., seeks damages based upon
claims for antitrust law violations, malicious prosecution, conspiracy and
breach of contract. Intermedics, SulzerMedica and Sulzer, Inc. have moved to
stay or dismiss the Company's damage claims, and the Court ordered that certain
of these claims be dismissed without prejudice and that others be stayed pending
determination of other issues in the parties' various lawsuits.
 
     In the above actions, Intermedics seeks judgments against Ventritex for
damages, attorneys fees and injunctive relief. It is expected that Intermedics
will, during the course of the litigation, seek to obtain various types of
pretrial relief which include, but are not limited to, summary judgments,
dismissals of Ventritex's claims and preliminary injunctions. In January 1995,
Intermedics filed a motion for partial summary judgment and for issuance of a
preliminary injunction based on alleged infringement of one of its patents.
Ventritex vigorously contested these motions and requested the United States
Patent and Trademark Office to conduct a reexamination of claim 28 of
Intermedics U.S. Patent No. 4,880,005 upon which these motions are based. The
Court denied Intermedics' partial summary judgment motion, and, as a result,
Intermedics' preliminary injunction request was withdrawn. The Patent Office, on
May 28, 1996, issued a second final rejection of claim 28 of the 4,880,005
patent. Intermedics subsequently requested reconsideration of the final
rejection. As a result of this reconsideration, on August 5, 1996 the United
States Patent and Trademark Office reissued the 4,880,005 patent with claim 28
intact. The Company believes that Intermedics will make renewed efforts to
obtain partial summary judgment and a preliminary injunction. On June 6, 1996,
Intermedics filed with the United States Patent and Trademark Office a request
for reexamination of U.S. Patent No. 4,830,006 and on June 7, 1996, Intermedics
filed a request for reexamination of U.S. Patent No, 4,913,145. Both patents are
being asserted by Intermedics against the Company. The requests are based on
references identified by Ventritex as being pertinent to the patents in response
to discovery requests by Intermedics.
 
     Since the Company brought a declaratory relief action against Intermedics
in January 1993, Intermedics has filed suits against the Company's two principal
competitors, Medtronic and CPI, alleging infringement of several of the same
patents which it has asserted against the Company. None of these actions has yet
been set for trial.
 
     In addition to its patent infringement claims, Intermedics had previously
alleged trade secret misappropriation and related acts by the Company and two of
its officers, who were formerly employees of Intermedics. In this lawsuit, the
Company filed counterclaims against Intermedics for infringement of two of
Ventritex's patents. These counterclaims are still pending. Certain of the trade
secret misappropriation and related claims were tried in 1992 before a United
States District Court jury in San Francisco. The jury returned a unanimous
verdict in favor of the Company and its officers and found that Intermedics had
acted in bad faith in continuing to pursue the trade secret misappropriation
claims. The Court set aside the bad faith portion of the verdict based on
Intermedics claim of an erroneous jury instruction. A new trial on the bad faith
issue has been ordered, but no trial date has been set. The judgment dismissed
all of Intermedics trade secret claims against the Company and its officers and
was affirmed on appeal.
 
     In addition to the above-mentioned litigation, the Company is also involved
in other litigation in the normal course of business. Although an adverse
determination in the Intermedics proceedings or in other litigation or
administrative proceedings could have a material adverse effect on the Company,
based upon the nature of the claims made and the investigation completed to
date, the Company believes the outcome of the described actions will not have a
material adverse effect on the financial position or results of operations of
the Company.
 
NOTE 8:  EMPLOYEE BENEFIT PLAN
 
     The Company sponsors an employee salary deferral plan that allows voluntary
contributions by employees after completion of six months of service. Eligible
employees may elect to contribute from 2% to 15% of their respective
compensation, and the Company at its discretion may elect to make matching
contributions. During
 
                                       17
<PAGE>   18
 
                                VENTRITEX, INC.
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
fiscal 1995, the Company matched 50% of the first 6% of an employee's
contributions to a maximum of $1,000 per calendar year. In fiscal 1996, the
Company continued to match an employee's contribution on the same basis to a
maximum of 50% of the annual limits on salary deferrals established by tax
regulations. The Company's fiscal 1995 and 1996 contributions under this plan
were approximately $419,000 and $659,000, respectively.
 
NOTE 9:  CONCENTRATION OF CREDIT RISK
 
     The Company sells primarily to hospitals. In the fiscal year ended June 30,
1996, one customer accounted for 10% of net sales. In the fiscal years ended
June 30, 1995 and 1994, no customer accounted for more than 10% of sales. The
Company performs ongoing credit evaluations of its customers, but does not
require collateral. The Company maintains reserves for potential credit losses,
and to date such losses have been within management's expectations.
 
NOTE 10:  SUBSEQUENT EVENT
 
     On August 21, 1996, the Company completed a public offering of $57,500,000
of 5 3/4% Convertible Subordinated Notes due August 15, 2001. The Notes are
convertible at any time prior to maturity, unless previously redeemed or
repurchased, into shares of common stock of the Company at a conversion rate of
58.1818 shares per $1,000 principal amount of the Notes, subject to adjustment
in certain circumstances. The Notes are redeemable in whole or in part at the
Company's option at any time on or after August 16, 1999.
 
                                       18
<PAGE>   19
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Stockholders
Ventritex, Inc.
 
     We have audited the accompanying consolidated balance sheets of Ventritex,
Inc. as of June 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Ventritex, Inc. at June 30, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
 
                                          /s/  ERNST & YOUNG LLP
Palo Alto, California
July 25, 1996, except as to Note 10,
for which the date is August 21, 1996
 
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